©Vietnam Development Forum, 2007

Contact:
Vietnam Development Forum
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Phone: 84-4-936 2633 / Fax: 84-4-936 2634
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Vietnam Development Forum Tokyo
National Graduate Institute for Policy Studies (GRIPS)
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The authors would like to thank Professor Donna Amoroso and Ms. Patricia
Decker of the Academic Writing Center of GRIPS for their excellent and timely
work on English editing for the book, and all assistants of the GRIPS Development Forum (GDF) for their tireless supports and encouragements in the preparation of the manuscript, as well as in several related administrative work.

CONTENTS

Introduction and Summary

Chapter 1⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯iVietnam Development Forum

Supporting Industries in Vietnam from the
Perspective of Japanese Manufacturing Firms ⋯⋯⋯⋯⋯1
Vietnam Development Forum

Chapter 2

Supporting Industries: A Review of Concepts
and Development

Chapter 3⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯27
Nguyen Thi Xuan Thuy

Quantitative Analysis of the Procurement Structureof Supporting Industries in ASEAN 4, Republic of Korea,
and Japan

Chapter 4⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯51
Toshiyuki Baba

Designing and Managing Supporting Industry
Databases⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯⋯65
Junichi MoriIntroduction and Summary

Vietnam is one of the best performing developing countries in theworld. Economic growth has been recorded at about 8 percent during the past
decade, during which the industrial sector has played an increasing role in both
value and employment creation. Swift changes in economic structure haveattracted an increasing flow of foreign investments, particularly in the manufacturing sector, which in turn has helped Vietnam to promote higher economic
growth. Moreover, under globalization with fiercer competition, both foreign
and local enterprises in Vietnam need to improve their international competitiveness through good business connections. Given this need, supporting industries are becoming extremely important to the business strategies of the foreign
manufacturing enterprises, especially assemblers, in Vietnam. The demand of
the foreign enterprises in Vietnam for good local suppliers has necessitatedmore comprehensive industrial policies in developing these industries.
However, supporting industries in Vietnam have not been fully developed; they are just at the early stages of development. This limits business
opportunities for the foreign-invested enterprises, specifically assemblers,
because it is costly and time-consuming for them to find good local suppliers.
In this context, conducting studies and proposing policy actions for the development of the supporting industries in Vietnam is an urgent task. This book is
published for these purposes. It contains four papers, each addressing a different topic on the current situation of Vietnam’s supporting industries and international experiences in developing these industries. These papers were presented and commented on in a number of workshops and conferences held insideand outside Vietnam. It is the hope of the editor that the contents of this bookwill extend beyond those directly involved in the related field of research, andthat the book will provide crucial information about the current situation andpolicy directions for the development of Vietnam’s supporting industries. The
following are summaries of the papers in this book.
The first paper, written by the Vietnam Development Forum (VDF)
research team, provides an overview on the supporting industries in Vietnam
from the perspective of Japanese manufacturing firms, and then proposes a setiof policy directions to develop these industries. The analyses are based mainly
on a series of hearings between the Ministry of Industry, Vietnam (MOI) andJapanese manufacturing firms operating in Vietnam, which were held by VDF
from late February to early April 2006. There are 38 firms in the sample,
including 15 electrical and electronic firms, 14 motorbike firms, and 9 automobile firms. The existing situation of local procurement shows that the supporting
industries in Vietnam are relatively underdeveloped in comparison with othercountries in the region, such as Malaysia and Thailand. Although progress in
the local procurement ratio has been recorded, it differs significantly across thestudied sectors.
Before making detailed analyses on enhancing the growth of supporting industries in Vietnam, the paper argues that competitiveness and demand
size are two determinants for the development of these industries. Regarding
competitiveness, the paper indicates that under the standards of Japanese manufacturing, quality, cost, and delivery (QCD) are extremely important. The parts
cost in the studied sectors usually occupies 70–90 percent compared with labor
cost of less than 10 percent, so the Japanese manufacturing firms need to reducethe cost related to parts procurement, which in turn helps them to attain costcompetitiveness. To achieve this, most parts must be made in Vietnam because
importing parts from other countries will incur additional costs in transportation, storage, and handling. In addition, Japanese assemblers in Vietnam wantparts suppliers to be located close by to enable high-frequency, on-time deliveryof parts in order to minimize inventory and production lead time. To this end,
Vietnamese parts suppliers first need to improve quality and delivery of parts.
About the demand size, the paper argues that large demand size is crucial for
supporting industries because they require relatively large minimum orders toenter the market, and they are generally more capital-intensive than the final
assembly. More importantly, some supporting industries, such as molding andmetal pressing, require expensive machines, which are indivisible, and therefore
they can reduce the unit capital cost by increasing the volume of production.
Such increase needs to be guaranteed by a large demand.
Once the two factors mentioned above are attained, four additional
areas must be promoted to accelerate the growth of supporting industries inVietnam: high-quality industrial human resources, attractive tax and tariff poli-iicies, stable policy environment, and overcoming the information and perception
gaps between foreign direct investment (FDI) assemblers and Vietnamese suppliers. For instance, the majority view among Japanese firms is that high-quality industrial human resources are much more important than high-techmachines because second-hand machines operated by high-skilled workers may
be superior to brand-new machines operated by low-skilled workers. To
improve the human resources for industrial development, the paper proposes anumber of policy directions to enhance the existing training programs and promote new programs with both public and private efforts.
Along with these issues, the paper discusses other two issues, which
are also crucial for the development of supporting industries in Vietnam: industrial and safety standards, and unavailability of raw materials. Dealing withthese issues is important for meeting international standards and ensuring efficient operation.
In order to make a concrete development strategy for the supporting
industries in Vietnam, Nguyen Thi Xuan Thuy, in the second paper in the book,argues that the term “supporting industries” needs to be defined properly to suit
the socio-economic conditions of the country and the targets of industrial strategy. Therefore, her paper mainly focuses on reviewing different concepts of“supporting industries” and their development, and then proposes a definition
for Vietnam.
According to the author, although the term “supporting industries” iswidely used in many countries, it is still ambiguous and without consensus indefinition. This term is used differently in different countries, depending on theeconomic conditions and policy purposes. For instance, Thailand defines supporting industries as the enterprises that produce parts and components that areused in the final assembly processes of the automobile, machinery and electronic manufacturing industries, while the US Department of Energy defines supporting industries as those that supply materials and processes necessary toform and fabricate products before they are marketed to end-use industries.
Moreover, the term has also been changed to adapt to changes in economic conditions and policy directions of the country. For example, in the White Paper on
Economic Cooperation 1985 by Japan’s Ministry of International Trade andIndustry (MITI, now called the Ministry of Economy, Trade, and Industry—iii

METI), the term “supporting industries” was used to refer to small and medium
enterprises (SMEs) that contribute to strengthening industrial structure in Asian
countries for medium and long terms, or the SMEs that produce parts and components. However, in the New Asian Industrial Development Plan to promoteindustrial cooperation between Japan and four countries in the Association ofSoutheast Asian Nations (ASEAN 4: Indonesia, Malaysia, the Philippines, andThailand), MITI defined “supporting industries” as industries that supply thenecessary things such as raw materials, parts and capital goods for assemblytype industries.
In addition to these concepts, the paper also provides a number ofrelated concepts in order to see the different development stages of supporting
industries. Subcontracting, ancillary industries, parts and components industries, and vendors are some of these concepts.
Going further with the case of Vietnam, where the term “supporting
industries” has been used only since 2003, the paper suggests that without aclear definition of supporting industries, it is more difficult for Vietnam to haveconcrete industrial policies and strategies, and to mobilize all necessary
resources for the development of supporting industries. Based on the current
development context, the author then proposes a definition of these industries inVietnam. Furthermore, reviewing international experiences in developing supporting industries with such important policies as local content regulations, promotion of FDI into supporting industries, linkage promotion, and participationin the global production networks, the paper indicates some lessons that Vietnam can learn to foster these industries.
Using a broad definition of “supporting industries,” which refers to agroup of industries that supply the diverse parts and materials used in the production of industrial products, the third paper of the book, by Toshiyuki Baba,
aims at describing quantitatively the procurement structure of supporting industries for key manufacturing categories in Asia. The paper uses the Asian International Input-Output Tables to reveal the industrial structures that are composed of the industries in each country in the region. Three tables corresponding to 1975, 1990, and 1995 are used to analyze the industrial relations
between ASEAN 4, the Republic of Korea, and Japan with particular focus on
automotive/motorcycle and electrical/electronic industries.

iv

Providing formulas for estimating domestic direct procurement rate
(DDPR) and domestic indirect procurement rate (DIPR), the author shows thatindirect linkage effects are greater than direct linkage effects in these studied
sectors in Japan, while ASEAN 4 and the Republic of Korea have lower domestic linkage effects in comparison with Japan. According to the author, this finding can be elucidated by a possibility that lower domestic linkage effects are
due to low levels of domestic procurement.
Regarding automotive/motorcycle industries, the paper shows that in
ASEAN 4 both direct and indirect procurement rates from their own countries
were stagnantly low during 1975–1990, while they developed during
1990–1995, and dependency on Japan was greater than that on domestic
sources. This can be explained by the fact that these countries experienced
major economic expansion in the latter period. The situation for the Republic ofKorea was contrasted with that of ASEAN 4, in which both direct and indirect
procurement rates from domestic sources increased over time, while those froma major external source (Japan) declined steadily. For Japan, there was almost
no change during this 20-year period because both direct and indirect procurements were approximately 100 percent from domestic sources.
The same analysis is also used for the electrical and electronic industries. The findings imply that the foreign dependency was significant in
ASEAN 4 in the studied period. Meanwhile, domestic direct and indirect procurements in the Republic of Korea expanded in the 1975–1990 period anddeclined during the 1990s. This situation went along with an increase in foreign
procurements. For Japan, domestic sources were still significantly important,and foreign sources, particularly the US, increased steadily.
To provide a more thorough analysis on these changes of domesticbased and foreign-based procurements in the studied countries, the paper showssome possible causes, including differences in the characteristics of parts, in thequality required by the market, and in policies of each government. These differences are useful information for the policy makers in proposing their industrial development policies.
It is emphasized in the first three papers of this book that local procurement of parts and components benefits both FDI assemblers and local parts
suppliers because FDI assemblers are able to reduce additional costs, such asv

transportation and inventory, associated with imports, while local suppliers canincrease business volume and absorb updated technology through business relations with FDI assemblers. Therefore, it is commonly agreed that promoting
local procurement is a key to FDI-led industrial growth in developing countries.
Yet, most FDI assemblers in Vietnam do not have sufficient information on
where good Vietnamese parts suppliers are located in order to attain cost competitiveness through fruitful business connections with these local suppliers. To
investigate this research question, Junichi Mori presents an analysis of designing and managing databases for supporting industries in the last paper of thebook.
The author explains the importance of such databases in Vietnam.
According to various sources of information such as Japan External Trade
Organization (JETRO) (2004) and VDF (2006), FDI assemblers in Vietnam
face serious difficulties in promoting parts localization because local parts procurement in all manufacturing sectors in Vietnam was much lower than in other
ASEAN countries. More seriously, it is also costly and time-consuming for FDI
assemblers in Vietnam to find appropriate and good parts suppliers in Vietnam.
Creating databases of supporting industries is therefore urgently necessary.
To go further with designing databases for supporting industries inVietnam, the paper describes desirable characteristics of such databases. It isshown that the current yellow-page-type business directories in Vietnam cannot
provide sufficient information for FDI assemblers to find their appropriate local
partners. It is also emphasized that the main difference between databases forsupporting industries and business directories is the depth of firm-level data. To
obtain the required information, the paper then illustrates the mutual relation
between criteria of supplier selection and the required items in databases forsupporting industries.
For creating appropriate databases that can meet the demand of FDI
assemblers, the author provides useful information about databases of supporting industries in Japan. Among many others, Okaya City database andMonozukuri-net are excellent examples. To create such databases, various related issues need to be considered thoroughly. For instance, motivating SMEs toparticipate in the databases requires such important activities as good publicprivate partnerships, intensive company visits, and business matching services.

vi

We hope that this book will help the readers understand more thoroughly the current status of the supporting industries in Vietnam. If VDF cancontribute its mite to promote development of Vietnam’s supporting industries,
we will be more than happy.

Tokyo, March 2007
Vietnam Development Forumvii

Chapter 1
Supporting Industries in Vietnam from the Perspective of Japanese Manufacturing Firms
Vietnam Development ForumIn early 2006, the Vietnam Development Forum (VDF) organized aseries of hearings between the Ministry of Industry (MOI) and Japanese manufacturing firms operating in Vietnam1. Through these hearings, the MOI team,which was drafting the supporting industry master plan, directly exchanged
information and views with the concerned Japanese firms.
The targeted sectors were Japanese assemblers and parts suppliers
belonging to electrical goods and electronics, motorbikes, and automobiles2.
These were important sectors for the development of supporting industries, aswell as the sectors specifically mentioned in the Japan-Vietnam Joint Initiative.
We sent letters to all Japanese FDI firms operating in Vietnam in these sectors,
which numbered 55. Among them, we were able to hear from 32 firms, which
included 15 electrical and electronics firms, 14 motorbike firms, and 9 automobile firms3. By region, 19 firms were located in the North and 13 firms werelocated in the South. In addition, we visited one Vietnamese assembler, twoVietnamese parts suppliers, and one Taiwanese parts supplier, all of which hadbusiness relations with Japanese assemblers. We also heard opinions of Japanese industrial experts.
Hearings were conducted from late February to early April 2006.
Intensive hearings were organized in the week of March 6 in the North, and inParticipants from VDF were Kenichi Ohno (project co-leader), Mai The Cuong, Ngo Duc Anh,
Junichi Mori, Pham Truong Hoang, and Kohei Mishima. Participants from MOI were Nguyen
Anh Nam (team leader), Mai Tuan Anh, Pham Gia Thuc, Pham Tung Lam, and Duong Hong
Quan.
2Hearings with Vietnamese firms and firms of other nationalities, including China, Taiwan, Korea
and EU, were conducted separately by MOI without our help.
3
These add up to 38 firms due to overlapping. Six firms supplied parts to both automobile assemblers and motorbike assemblers.
11Vietnam Development Forumthe week of March 13 in the South. Different hearing styles were used, fromformal meetings to factory visits, informal exchange and email correspondence,
to adapt to the preferences and time constraints of the companies. In semi-structured interviews, we generally inquired about the current situation of parts
localization and desired policy measures for supporting industry promotion. We
also received comments on the draft supporting industry master plan, if any. All
information was treated as confidential and no company name was to bereleased.
This report was compiled by VDF using the inputs from the interviewed firms. VDF takes full responsibility for its content. No statement or
analysis in this report should be construed as a consensus view among Japanese
FDI firms. In fact, opinions often differed among the three sectors, and evenamong firms belonging to the same sector. Arguments presented below aremajority views, or common denominators, among Japanese FDI firms operatingin Vietnam, as selected by VDF.

1. Current situation of local procurement
Vietnam’s supporting industries are relatively undeveloped. For
Japanese FDI firms in manufacturing, Vietnam’s local procurement ratio was
22.6% in 2003, while the ratios of Malaysia and Thailand were 45% or higher4.
However, the progress of local procurement differs significantly across thethree sectors studied.
The motorbike sector is most advanced in localization, with the average local procurement ratio of 75%5. This figure includes internal parts production by assemblers, sourcing from local suppliers, and sourcing from FDI suppliers in Vietnam. Although motorbike assemblers continue to stress the importance of developing supporting industries further, the degree of their localization is much higher than the other two sectors.
In the electrical and electronics sector, local procurement is rising at

According to JETRO, local procurement of the manufacturing sector in 2004 was 47.9% in Thailand, 45.0% in Malaysia, 38.3% in Indonesia, and 28.3% in the Philippines. See JETRO (2005).
5This figure was provided by a motorbike assembler during the intensive hearing week.
42

Supporting Industries in Vietnam from the Perspective of Japanese Manufacturing Firms

some FDI firms. In 2002, most consumer electronics assemblers were unable todomestically source even relatively simple plastic and metal parts. Now, however, one TV assembler reports that it is able to buy virtually all plastic parts
from (mainly FDI) suppliers in Vietnam. At present, local procurement for TVs
seems to range from 20% to 40%, depending on the producer (Mori, 2005: 28).
Similarly, a computer device producer said that it had increased its number ofdomestic suppliers from 7 in 2002 to 45 in 2006. As a result, local procurementof this firm rose from 5% in 2004 to 30–40% in 2006. However, there are otherproducers who continue to have low local procurement. One TV assembler still
maintains complete knock-down (CKD) production because imported parts arecheaper than domestic parts. Overall, the current localization level is still far
below what Japanese firms desire for attaining competitiveness. Even for manufacturers who have raised local procurement of plastic parts significantly inrecent years, finding electronics parts, molds, and metal processes such aspressing, forging, and plating, remains very difficult. An assembler of home
appliances said that it could not find any high-valued components in the domestic market. Although this firm has achieved a local procurement ratio of 70% in
terms of number of parts, its localization is only 30% in value. This implies that
localization has been concentrated in low-value parts.
As for the automobile sector, progress is slowest among the three sectors, with local procurement ratios of 5–10% (Japan Finance Corporation for
Small and Medium Enterprises [JASME], 2004). While some bulky or laborintensive parts, such as seats and wire harnesses, have been localized, mostother parts continue to be imported. Furthermore, automobile manufacturers in
Vietnam are currently beset with serious short-term problems such as secondhand car imports, a special consumption tax, and related uncertainty in thedomestic market6. These problems prevent auto-makers from making long-term
strategic plans. Compared with motorbikes, automobiles in Vietnam are at amuch lower level of demand size and development, which severely limits

6

The special consumption tax on passenger vehicles rose from 40% to 50% in January 2006, andthe import ban on second-hand passenger cars will be lifted on May 1, 2006. Domestic new car
sales in the first quarter of 2006 fell 32% compared with the same period last year due to the waitand-see attitude of consumers.

3

Vietnam Development Forumstrategic options to overcome these problems. Within the automobile sector,
trucks and buses have higher local procurement ratios than passenger cars
because the upper-structure of buses (passenger areas) and trucks (cargo storage) can be built locally by Vietnamese companies.

2. Key factors and relations for competitiveness
By the standards of Japanese manufacturing, competitiveness depends
on quality, cost and delivery (QCD). For Japanese parts producers in Vietnam,
the crucial aspects that need to be improved are cost and delivery, while quality
guarantee is taken for granted. To reduce cost and quicken delivery, a healthy
development of supporting industries is essential.
In mechanical assembly-type manufacturing, which is considered inthis report, parts cost looms large in the total production cost of final assemblers. For instance, one consumer electronics assembler said that parts accounted for 80% of the production cost while labor accounted for only 2%. Moregenerally, the parts cost usually occupies 70–90% compared with the labor costof less than 10%. Thus, cost competitiveness cannot be attained unless the cost
related to parts procurement is reduced. By importing Malaysian or Thai parts,
producers in Vietnam incur additional costs in transportation, storage and handling. Unless most parts are made in Vietnam, they cannot compete effectively
against Malaysian or Thai assemblers, who can use these parts without additional costs.
Furthermore, Japanese assemblers require high-frequency, on-time
delivery of parts in order to minimize inventory and production lead time. Normally, daily or even hourly deliveries are required. Unlike some Vietnamese
firms which hold large inventories as a safety buffer, Japanese firms always
consider inventory as a cost to be avoided as much as possible. To achieve zero
inventory, Toyota developed the Just-In-Time system (also known as the kanban system) in the 1950s, which has spread widely to other Japanese firms.
Quick and frequent delivery is impossible if parts are imported every few
months, or if it takes days to bring parts to the factory. For this reason, final
assemblers want suppliers to be located near them. One Japanese consumer
electronics company recently visited Vietnam to consider the possibility of4Supporting Industries in Vietnam from the Perspective of Japanese Manufacturing Firms

building a factory there, but gave up the idea after observing the weaknesses of
supporting industries in Vietnam.
For Vietnamese parts suppliers, on the other hand, the most crucial
aspects that must be improved are quality and delivery. Even if their parts arecheap, Japanese assemblers will never buy them unless these two factors areguaranteed. At present, there is a significant gap between Japanese assemblers
and Vietnamese suppliers regarding the acceptable standards in quality anddelivery, which will be discussed later.
Supporting industries consist of both FDI firms and Vietnamese
firms. Realistically, parts localization must begin with first attracting a large
number of FDI suppliers to Vietnam, followed by a gradual strengthening ofVietnamese suppliers. FDI firms must inevitably be a large part of supporting
industries in the early stage of Vietnam’s industrialization.
Demand size is the pre-condition for attracting FDI suppliers to Vietnam. Large demand is crucial for cost reduction and FDI attraction, which aremutually related. Without sufficient demand, parts makers cannot lower production cost (the reason will be explained below) and become competitive.
Therefore they will not invest in Vietnam. Overcoming the demand size problem must be the top priority in the development of supporting industries.
Once this problem is solved, our survey has shown that there are four
additional areas that must be enhanced in order to accelerate the growth of supporting industries: (i) high-quality industrial human resources, (ii) attractive tax
and tariff policies, (iii) stable policy environment, and (iv) overcoming theinformation and perception gaps between FDI assemblers and Vietnamese suppliers.
The basic relationship among demand size, the development of domestic suppliers (both FDI and Vietnamese), and the three elements of competitiveness is illustrated in Figure 1. Four areas that must be improved are also shown in
the figure. The remainder of this report will explain these components in detail.

3. Why demand size is important
Large demand size is crucial for supporting industries because theyrequire relatively large minimum orders to enter the market. This reflects the5Vietnam Development Forum

Figure 1. How to achieve agglomeration and competitiveness in parts industries
Stable policy
Tariff & tax
Industrial humanenvironment
policies
resources

FDI inflow,
cost reduction

Cost
FDI
Suppliers

Demandsize
Domestic demand(to assemblers)
Parts export

Three elements ofcompetitiveness

Delivery
Local
Suppliers
Quality
Overcoming
information &perception gaps

fact that, generally speaking, supporting industries are more capital-intensive
than final assembly, which tends to be highly labor-intensive. One auto parts
supplier stated that supporting industries would develop naturally even without
any promotion policy, if there was a sufficient demand.
Supporting industries such as molding, metal processing and plastic
injection require expensive machines and relatively few workers compared withassembly. Moreover, these machines are indivisible (one cannot purchase onetenth of a machine). Once machines are installed, the capital cost for the factoryis the same whether they are operated 24 hours a day and 365 days a year, or
only part of the time. Thus, the unit capital cost (total capital cost divided by the
number of products produced) declines inversely with the volume of production. For example, a factory making 600,000 plastic parts per year is likely to
enjoy efficiency while a factory producing only 2,000 parts per year can hardly
survive. That is why FDI parts makers need assurance that there is a large
demand (or there will be a large demand in the near future) before investing in
Vietnam.
This is in sharp contrast to final assembly, which relies on a large
amount of unskilled labor without any sophisticated machines. For such opera-

6Supporting Industries in Vietnam from the Perspective of Japanese Manufacturing Firms

Figure 2. Declining unit cost in supporting industries

Unit
cost

Capital-intensive

Labor-intensive

Production
volumetion, the unit cost is almost constant since there is no sunk capital cost. To double the production volume, all that is needed is to use twice as many workers,
tables, tools, and expand the factory space accordingly.
In the motorbike sector, domestic demand in Vietnam reached 2.02
million units in 2004, ranking third within Association of Southeast Asian
Nations (ASEAN) after Indonesia and Thailand7. It is normally said that many
motorbike parts suppliers begin to enter the market if the minimum orderexceeds 200,000 to 300,000 units (Mishima, 2005: 218). A domestic demand of
2 million units per year is sufficient to entice a number of FDI parts makers tocome to Vietnam and compete with each other. Indeed, motorbike assemblers
are now able to source many metal and plastic parts from both FDI and local
suppliers. However, they still import engine parts or produce them in-house.
The domestic market of consumer electrical and electronics is growing rapidly, but its absolute size remains small compared with those of other
ASEAN countries. For example, the annual sale of TVs is around 1.4 to 1.5
million sets in Vietnam, while Thai consumers buy 2.2 to 2.4 million sets per

7

The Vietnamese figure comes from the Ministry of Police and the Ministry of Industry (unpublished data). Within ASEAN, the largest motorbike market is Indonesia (3.08 million in 2003) followed by Thailand (2.11 million in 2005). See Mishima (2005), p. 215.

7

Vietnam Development Forumyear8. If exports are also included in calculating the market size, Vietnam looks
even smaller. Vietnam produced 2.2 million TV sets in 2003 (General Statistics
Office [GSO], 2005: 339)9, whereas Malaysia produced 9.9 million sets andThailand produced 6.5 million sets in 2004 (News Net Aisa [NNA], 2005: 79).
Because of the small market in Vietnam, Japanese parts makers prefer to export
parts from their existing factories in Malaysia or Thailand to Vietnam, rather
than taking the risk to invest in Vietnam. While some plastic suppliers havealready entered the Vietnamese market, there are few electronic parts suppliers
because the latter require larger minimum orders. One TV assembler said thatits sister factory in Malaysia could purchase almost 100% of the parts domestically, including electronic components, but that remained impossible in Vietnam.
Small demand size is far more serious an issue for the automobile
industry. In 2005, domestic demand for new passenger cars was about 35,000
units while Thailand produced over 1 million cars. According to one car manufacturer, a minimum order of 400,000 units is necessary to enjoy scale merit,which is roughly the market size of Indonesia or Malaysia. Despite the small
market, Japanese car makers have maintained their production facilities in Vietnam because they expected growing demand in the future in a country with apopulation of over 80 million. However, many Japanese car assemblers are disappointed that demand for new cars has been shrinking in recent years due topolicy reasons, such as the rising special consumption tax and the liberalizationof second-hand car imports. In addition, they are concerned that worsening traffic congestion and accidents may impede the healthy growth of the car market.
Moreover, without proper policy, increased traffic would cause environmental
damage, especially air pollution, as severe as in Bangkok or Jakarta.

Figures provided by a consumer electronics assembler during the intensive hearing weeks. Since
the number of TV manufacturers is almost the same in Vietnam (7 companies) and Thailand (6companies), the average market size for each assembler is smaller in Vietnam than in Thailand.
9
However, production of 2.2 million looks too large in comparison with the domestic market of
1.4–1.5 million sets (note that Vietnam exports very few TV sets).
88Supporting Industries in Vietnam from the Perspective of Japanese Manufacturing Firms

4. Possibility of export
One way to overcome the problem of small domestic demand is tofind export markets. For parts suppliers, this can be done indirectly by supplying to domestic assemblers who may export finished products in large quantity,
or directly through parts export.
In electrical and electronics, bulky finished products such as washingmachines and refrigerators may not be suitable for export, unless domestic
products are sufficiently low-cost to offset high logistics cost associated with
export. On the other hand, compact products such as computer peripherals andhi-fi stereos are normally produced in one location and distributed to the global
market. For instance, one computer device assembler in Vietnam exports 1.2
million printers per month under the privileges of being an export processing
enterprise (EPE). Another consumer electronics manufacturer, which currently
focuses on the domestic market, has a plan to convert its factory into an export
base, provided that the policy environment improves to make cost reduction
possible.
The most desired policy for cost competitiveness in electrical andelectronics is the reduction of parts tariffs to zero, or at least to a level lower
than the Common Effective Preferential Tariffs (CEPTs) on finished products(5% or less). Several consumer electronics manufacturers stated that further
tariff reduction on parts and materials was necessary for survival and preparing
brighter future plans. However, a number of the manufacturers added that, evenwith zero parts tariffs, domestically assembled finished products would still be
Figure 3. Possibility of export

9Vietnam Development Forumslightly more expensive than those produced in Malaysia or Thailand. This wasdue to the high logistics cost of having to import a large number of parts. One
consumer electronics assembler hoped to reduce such cost by rearranging theflow of imports for minimum inventory and quick delivery. This might beeffective in the short run, but increasing local procurement would be preferable
in the long run. If final assemblers expand production strongly, existing suppliers will receive larger orders, and it will be also easier to invite more FDI parts
makers to invest in Vietnam.
Another way to increase export is through direct parts export. For
this, again, it is essential that the parts in question be internationally competitive. Only those parts that satisfy the following conditions can be considered forexport. First, they must achieve cost competitiveness by using Vietnam’s comparative advantage—diligent and cheap labor—to a full extent. Second, partsand materials used in parts production must be low-cost, and their tariffs mustalso be zero or very low. Third, the product must be relatively compact andhigh-value. Fourth, there should be an efficient logistics system to minimize thefinancial and time cost of export. In sum, exportable parts must be labor-intensive, compact, and high-value. Moreover, they must be parts that do not require
strict Just-In-Time delivery. In Vietnam, wire harnesses for cars, which fit thisdescription, are now directly exported in large volume. But such parts are still
very few.
One important thing to remember is that the decision to export is notin the hands of the Japanese general director in Vietnam. The output, imports
and exports of each overseas subsidiary are part of the global strategy of Japanese multi-national companies (MNCs). They are decided by the headquarters ina way that contributes to the positioning of the entire business group in the
global value chain and production network. Cost competitiveness is absolutely
necessary to be selected by the headquarters to be an export base. Many Japanese firms in Vietnam, especially those without an EPE license, do not think thatthey currently have production cost low enough to be an export base. That is
why they urgently request a further reduction of import duties on parts andmaterials. While CEPTs on finished products became 5% or less in January
2006, many imported parts from non-ASEAN countries are still subject to Most
Favored Nation (MFN) tariffs higher than 5%. Recently, import tariffs on elec-

10Supporting Industries in Vietnam from the Perspective of Japanese Manufacturing Firms

tronic parts were lowered in response to the request of Japanese and Korean
assemblers in Vietnam, but the average parts tariff remains at 6.6%.
Similarly, when a Japanese subsidiary in Vietnam proposes to export
parts directly, such a plan must be consistent with the overall global strategy ofthe headquarters. Japanese wire harness companies initially came to Vietnam tosupply assemblers in Vietnam. They subsequently turned to export markets
because the domestic market was too small for profitability, and this re-orientation was approved by their headquarters.

5. High-quality industrial human resources
Once the demand size problem is overcome, the most crucial factor
for the long-term development of Vietnam’s manufacturing industries is thefostering of Meisters, a German term for highly skilled masters of manufacturing. In Vietnam, industrial weaknesses are often attributed to the lack of financial resources to buy modern equipment. However, the majority view among
Japanese firms is that high-quality industrial human resources are much more
important than high-tech machines. One Vietnamese firm supplying plastic
parts to Japanese and American firms remarked that highly skilled workers, not
new machines, were essential, and second-hand machines operated by goodworkers were superior to brand-new machines operated by poor workers. Similarly, a Japanese expert stated that simple assembly or routine machine operation could not generate international competitiveness, because anyone in any
country could do it. Another Japanese expert stressed the importance of professional spirit to pursue 100% product quality at all times, without stopping at
99%. According to him, this one-percent gap was the source of difference
between competitive FDI suppliers and uncompetitive local suppliers.
There are different types of Meisters contributing to various types ofmanufacturing processes. They include:• Line leaders who can manage and improve the entire production
process in a factory, rather than just one skill. In Japanese, such
workers are called tanoko (multiple-skilled workers).
• Very experienced molding engineers who can design, produce andadjust moldings for perfection, and who can feel even minute dif-11

Vietnam Development Forum

ferences of several microns with their hands.
• Super assemblers in cell production who can assemble a whole
product by themselves, and therefore can suggest the way to
improve the designs of individual parts for efficient assembly.
While the importance of human resource development is widely
talked about, the precise reason why this is so important is not well recognizedor shared. High-quality industrial human resources are essential in advancing
manufacturing beyond the levels reached by Thailand and Malaysia (“breaking
the glass ceiling”), as well as in coping effectively with the China challenge.
From the perspective of business architecture theory, Professor
Takahiro Fujimoto of Tokyo University argues that ASEAN countries, especially Thailand and Vietnam, should master integral manufacturing rather than imitating China’s modular manufacturing. Integral manufacturing requires parts to
be designed uniquely for each product, and to be mutually adjusted continuously for high performance. In contrast, modular manufacturing uses common parts
which are put together in flexible combinations to create new products quickly.
For developing countries, modular manufacturing is easer to implement but has
associated drawbacks such as oversupply, depressed prices, low profitability,
and the lack of incentive for technological improvement10.
Japan is a country of integral manufacturing, but it faces high wages
and an aging population. In 2007, many experienced workers will begin to
retire (the so-called “year 2007 problem”). Japan is desperately seeking ayoung, developing country partner in integral manufacturing but has foundnone so far. On the other hand, ASEAN countries need high skill building
beyond simple assembly in order to sustain growth and compete with China. If
Vietnam learns to become such a partner, with long-term vision and strong

10

Integral manufacturing in developing countries is an issue drawing much attention in Japanese
academic circles. It is also one of the hottest research topics at VDF in both Hanoi and Tokyo. See
Ohno, K. (2006). The Economic Development of Japan: The Path Traveled by Japan as a Developing Country. Tokyo: GRIPS (pp. 213–216), and Ohno, K. (2006). Integral Manufacturing: The
Way Forward for Vietnam, in Ohno, K. (Ed.), Industrial Policy Formulation in Thailand,
Malaysia and Japan: Lessons for Vietnamese Policy Makers. Hanoi: The Publishing House ofSocial Labour. In addition, VDF organized a symposium with Prof. Fujimoto’s research team on
July 13, 2006 in Tokyo.

12

Supporting Industries in Vietnam from the Perspective of Japanese Manufacturing Firms

Figure 4. Modular manufacturing vs. integral manufacturing
Modularmanufacturing

Integral
manufacturingPartsinterface

Parts are common and canbe used for any model

Each product has uniqueparts, specifically designed

MeritsQuick results and flexibility

Endless pursuit of quality

Demerits

No differentiation, excess
entry, low profit, lack of R&D
Institutional Openness, quick decision
requirements making, flexible outsourcing

Much energy and timeneeded to achieve results
Long-term relations, building
internal skills & knowledge

Performance

Time

Time

aspiration for high quality, Japan and Vietnam can form a strategic alliance in
integral manufacturing. In such a case, the Japanese government and business
community will surely assist Vietnam through ODA and technical assistance.
Other ASEAN countries are already asking for such help11.
To supply a large number of high-quality engineers, existing programs should be enhanced and new programs should be added through bothpublic and private efforts. The following measures were suggested by Japanesefirms and experts.
First, existing training programs should be fully utilized. For example, one molding supplier has sent five Vietnamese workers to Japan for training with the support of the Association for Overseas Technical Scholarship(AOTS), a Japanese official agency. One automobile parts supplier has sent
most of its middle-class engineers and managers to its group factories in
ASEAN under its own training program. In addition, many Japanese firms
organize internal competitions such as the QC Circle Olympics and the Skill
Olympics, in which workers belonging to the same business group in different

11

Thailand is linking up with Ota Ward of Tokyo, an area with many high-tech SMEs, to transfer
manufacturing skills. In Indonesia, Japanese FDI firms set up a new association in Jakarta tostrengthen the molding industry in February 2006.

13

Vietnam Development Forum

countries meet in one place to compete for high performance.
Second, the Vietnamese government should support training programs offered by firms. The draft of the Master Plan for the Development ofSupporting Industries in Vietnam in the Period of 2006-2015 with a Vision to2020 proposes to subsidize 50% of the cost incurred by the training activities ofindividual firms. Many Japanese firms welcomed this proposal. One company
asked for the precise definition of “training and education.” It wanted to knowwhether all types of training, both external and internal, would be supported.
Third, a system to promote and certify industrial Meisters should beestablished. Japan has Meister systems at national, prefectural (provincial), andfirm levels, which together encourage good engineers to do better and be socially recognized. For example, one of the top companies in Japan (an electronic
device manufacturer) has an internal Meister system for lens polishing, painting, and electrical wiring. Meister candidates are nominated by each department
and are classified into three ranks A, B, and C. The company then sends Aranked engineers to the Meister license offices of the central or local government. If they successfully receive Meister certificates from the government, thefirm will additionally award them with internal Meister titles and a bonus of
500,000 yen (about US$4,200). Meisters in this company are required to train
two successors for two years.
Fourth, collaborative training programs between FDI firms and local
suppliers should be encouraged. Such programs promote technical transfer tolocal firms, and provide opportunities for both sides to know each other andwork together. One of the most successful programs in collaborative training is
the Penang Skills Development Centre (PSDC) in Malaysia (Mori, 2005:
44–67). During our survey in Vietnam, many Japanese firms expressed interestin participating in such programs. They hoped that practical vocational training,
if properly conducted, would increase the supply of skilled workers and slow
down wage inflation. A number of Japanese firms said that they would send
their experienced engineers as instructors or make their equipment available forsuch training, if the government made a serious effort to initiate such programs.
Fifth, practical engineering education must be strengthened in highschools, industrial colleges, and universities. A motorbike parts supplier complained that the results of sending their workers to Japan for training were less14

Supporting Industries in Vietnam from the Perspective of Japanese Manufacturing Firms

than expected, because Vietnamese workers lacked basic skill and knowledge
for absorbing advanced technology. One computer device assembler proposedthat the government should pay more attention to basic but highly demanded
skills such as production engineering and efficient factory management, rather
than pursuing flashy words like IT, high-tech, and biotech. An electronics component producer also suggested bolstering practical skills and knowledge inmolding and pressing with precision.

6. Job hopping as an impediment to skill development
One important issue related to human resource development is job
hopping. For integral manufacturing, engineers with high skills and deep
knowledge of the production process must stay in one firm. However, Vietnamese workers who are trained by a company or have acquired some skills
often move to another company in search of higher salaries or better working
conditions. This prevents accumulation of highly specific skills and reduces
incentives for companies to train their workers. Even in labor-intensive garment
production and food processing, job hopping causes problems for personnel
management. But for supporting industries which rely on experienced engineersand expensive machines, job hopping is fatal. This phenomenon is not unique toVietnam; many developing countries report high job turnovers.
In Vietnam, several Japanese molding companies aim to establish an
integrated manufacturing system within a factory from design to marketing.
They train their workers to become full-fledged engineers who know how tomake molds from A to Z. However, their plans are often frustrated by middleclass engineers quitting without mastering high-level techniques. One Japaneseexpert criticized this trend because workers were losing the opportunity to
become excellent engineers in favor of short-term gains.
In Vietnam at present, there seem to be two macro reasons forincreased job hopping. First, an increased inflow of FDI is creating labor shortages, especially in localities where FDI is concentrated. An automobile parts
supplier in the North said that, as the industrial zone in which the company was
located was getting fully occupied, rising labor demand began to cause a highjob turnover and wage increase. The second reason is a shift in economic struc-15

Vietnam Development Forumture. In and around Ho Chi Minh City, service industries are expanding rapidly
and absorbing a large amount of the workforce. An electronic parts maker in Ho
Chi Minh City said that the average turnover of first-year employees had
increased dramatically in recent years, from less than 1% to 40–50 % at present.
However, not all firms report high job hopping. Among the firms wevisited, some said they had kept their workers successfully with very low
turnovers, even less than 1% per year. One reason seems to be location. An
automobile parts supplier in the suburbs of Hanoi explained that it was locatedin an area where labor demand had not risen very much and where most of theworkers were local, not migrant, with no intention of moving far. Another reason seems to be company policy toward employees. A plastic parts supplierdescribed its worker incentive programs, such as generous benefits, transportation allowance, and delicious lunches. Workers tend to be loyal to companies
which treat them well. The salary level is often not the decisive factor. It is necessary to study the conditions under which workers stay longer with one company, to minimize unnecessary job hopping.

7. Tariff reduction and tax incentives
The general director of a consumer electronics manufacturer statedthat tariff reduction and tax incentives were standard policy instruments for promoting supporting industries. Many firms we interviewed agreed. These measures are also widely practiced in other East Asian countries for encouraging
SMEs and supporting industries.
Many electrical and electronics firms requested that import duties onparts and components be quickly lowered preferably to zero, or at least to lessthan 5%, which was the CEPT rate for finished ASEAN products. This reduction was needed to avoid the situation of a reverse tariff structure in which tariffs on components were higher than tariffs on finished products. Otherwise,assemblers in Vietnam would lose cost competitiveness against ASEAN
imports. ASEAN imports that threaten production in Vietnam are often the
products of local subsidiaries belonging to the same Japanese business group.
From the viewpoint of the Tokyo headquarters, there is no reason to assemble
TVs and audio-visual equipment in Vietnam if such assembly incurs high parts

16

Supporting Industries in Vietnam from the Perspective of Japanese Manufacturing Firms

tariffs in addition to high logistics cost. It would be more efficient to export
them from the existing factories in Malaysia or Thailand, where local parts areavailable and production scale is large, to serve the Vietnamese market.
Tariff reduction would have two favorable effects. First, it would
enhance cost competitiveness of assemblers and could turn Vietnam into anexport base of certain finished products. Second, liberalization of parts importwould increase intra-industry parts trade and encourage Vietnam to specializein the production of certain parts to be exported globally. Advanced ASEAN
countries have already actively participated in East Asia’s production networkand found certain core components to specialize in. For example, Malaysia specializes in cathode-ray tubes (CRT) and Thailand specializes in compressors
used in air-conditioners and refrigerators.
In addition, a number of firms wanted import duties on raw materials
to be reduced. More than one parts supplier urged import tariff reduction on
high-quality industrial materials which were not produced in Vietnam. Several
metal parts suppliers complained about the recent tariff increase on cold rolled
steel from 0% to 7%, to protect the new Phu My cold rolling mill in the South.
This is forcing domestic metal users to raise their prices. The problem is thatthe quality of Phu My’s cold rolled steel is still below standard and Japanesefirms must continue to use imported cold rolled steel at a higher tariff. If the
Phu My mill improves quality and delivery speed to a level acceptable to Japanese firms, the problem may be ameliorated.
Capacity building of customs officers is also called for. Several firms
complained that common products available in Vietnam (steel pipe for construction, for example) and high-tech materials unavailable in Vietnam (raremetal precision tube for molding, for example) are charged at the same tariff
rate to protect the former. Japanese firms wanted popular products and highquality industrial materials be distinguished in the tariff schedule. In somecases, different tariffs were levied on the same product depending on the whimsof the customs official in charge. In general, customs officers do not have sufficient knowledge to distinguish and classify fundamentally different products.
Another important promotion measure is tax incentives. Preferential
tax treatment should be provided to encourage supporting industries. Thisshould be applied to both FDI and local suppliers without regard to17

Vietnam Development Forumnationality12. Corporate tax exemption and reduction, tax deduction for machinery purchases, subsidies for R&D, and the like, will accelerate investment insupporting industries. Neighboring ASEAN countries already provide such tax
incentives under well-focused national campaigns for promoting SMEs andsupporting industries.
For example, Thailand introduced preferential treatment for supporting industries in 1993–94. Targeted products and processes included molding,jigs, forging, casting, industrial tools, cutting, grinding, sintering, heat treatment, surface treatment, machining centers, electronic connectors, Ni-Cd andrechargeable batteries, and plastic engineering. Firms engaged in any of these14 activities were given the following privileges: (i) 8-year corporate tax
exemption regardless of location; (ii) 50% import tariff reduction for machinery
import for projects located in Zones 1 and 2 (inside and near Bangkok), (iii)
100% import tariff exemption for machinery import for projects located in Zone
3 (rural areas); and (iv) exclusion from foreign capital restriction by 1996
(JICA, 1995: 2-2-4).
Some Vietnamese policy makers are worried that further reduction ofparts tariffs and provision of tax incentives, proposed by FDI firms, may bringnegative results. Main concerns include: (i) a decrease in fiscal revenue; (ii)
how to promote domestic parts industries under zero tariffs; (iii) how to avoid
the situation where producers in other sectors demand similar special treatment;and (iv) the risk of Vietnamese producers being wiped out under the dominanceof FDI parts makers.
With regards to these issues, Japanese experts and firms replied asfollows. For the fiscal revenue effect, a detailed study on the long-term, indirect
impacts of tax and tariff reduction was needed. If such policies activate FDI andgrowth, the overall revenue effect might well be positive through increased
income, more traffic and port charges, income multiplier effects on other sectors, and so on. On the second issue, it was noted that financial incentives were
only one of the factors determining parts investment. As argued above, the12Equal treatment of domestic and foreign firms is one of the key requirements of the World Trade
Organization (WTO). More generally, none of the policy measures considered in this report violates WTO rules.

18

Supporting Industries in Vietnam from the Perspective of Japanese Manufacturing Firms

availability of large demand and highly skilled engineers is more important.
Supporting industries can grow strongly even without protective tariffs if theseother conditions are met. Because parts industries also use parts, high parts tariffs may not promote parts industries, depending on the precise structure ofsuch tariffs.
As to the third and fourth issues, the concerns were understandable
but prioritization and natural selection were inevitable. One consumer electronics assembler felt that mobilization of resources to targeted sectors was necessary and desirable, and supporting industries, which were the base for all
machinery industries, should be recognized as a key sector that warranted special support. In addition, elimination of a large number of Vietnamese firms,
hitherto weak and protected, is inevitable under globalization. It is part of thenatural selection process for Vietnam to become more competitive. Japanesefirms expect at least some local firms to survive and grow. Almost all Japaneseassemblers hope to increase transactions with local firms to reduce cost anddiversify suppliers. For instance, one Japanese molding firm expressed interest
in increasing subcontracts with Vietnamese suppliers. Japanese firms hope tobuild a new system of cooperation and division of labor with Vietnamese firms
under an increasingly open and competitive environment. The necessary condition for this is that Vietnamese firms make serious efforts in QCD.
At present, FDI firms often criticize policies, and the government inturn complains about the lack of promised performance by FDI firms. This acrimonious relationship is harmful to the healthy development of Vietnameseindustries. To improve the situation, one Japanese expert proposed a “give-andtake” deal between the government and Japanese FDI firms, in which the former seriously improves policies in accordance with business demands while thelatter set targets for production, export, cost reduction, localization, and so on,
conditional on the implementation of good policies. The government must
understand that business performance depends on not only enterprise effort but
also many external factors, including policies, and that business targets should
not be interpreted as commitments that can lead to penalties when they are notachieved. One Japanese firm did not like this idea since the proposal sounded
like “socialist planning,” and some were similarly concerned that numerical targets might bind their businesses. However, others were open to such an idea.

19Vietnam Development Forum

8. Unstable policy environment
Complaints about unpredictable policies are nothing new in Vietnam.
Everyone agrees that this is perhaps the most serious impediment to FDI in
Vietnam. We must emphasize this well-known weakness because it is also negatively affecting the growth of supporting industries. Policy instability has threemain features: (i) the lack of communication with businesses; (ii) ambiguity ofthe policy purpose; and (iii) sudden implementation. The Vietnamese government was sharply criticized when it suddenly enforced import quotas on motorbike parts in 2002, which caused serious damage to motorbike assemblers andsuppliers. The special consumption tax on automobiles also continues to causemuch confusion and chagrin. Japanese firms feel that the Vietnamese government has not learned much from these experiences. They are afraid that similar
problems will occur in the future.
Even when we were conducting the survey, some Japanese firms
were unable to meet us because they were engulfed in new policy-related problems which had the same features described above. Specifically, the increase inminimum wages in February 2006 caught most Japanese firms unpreparedbecause the government did not give them sufficient prior information13. Some
Japanese firms in the South suffered wildcat strikes in the wake of confusioncaused by the minimum wage hike. Some firms also criticized the requirementthat wages be raised 7% after initial training. For some workers, short-term
training is hardly enough. For example, at least a few years of training is needed
to produce good engineers. Uniform, compulsory requirement for wage
increase ignores differences among labor types.
Japanese automobile manufacturers and their suppliers were severely
hit by the announcement on the liberalization of second-hand car imports which
would start on May 1, 2006. The purpose of this policy was unclear. Some producers wondered if the government wanted them to leave Vietnam, or was justapplying pressure to reduce car prices. The explanation that used-car imports
were required for World Trade Organization (WTO) accession was not persua-

13

The minimum wages were raised from US$45 to US$55 in Hanoi and Ho Chi Minh City, fromabout US$35 to US$50 in smaller cities, and from US$31 to US$45 in the rest of the country.

20Supporting Industries in Vietnam from the Perspective of Japanese Manufacturing Firms

sive to some observers. Automobile assemblers tried to assess the long-term
impact of this policy but implementation details were not yet revealed. Meanwhile, new car sales dropped sharply in the first quarter of 2006 as consumers
waited for price decreases in May. Some production lines stopped.
There are two reasons why policy instability curbs the inflow of foreign parts producers. First, unlike big-name assemblers, most Japanese suppliers are SMEs with relatively small capital and little international experience.
They have little know-how in coping with policy uncertainty and working witha foreign government. They are extremely afraid of any failure in the factoryabroad, which may lead to the bankruptcy of the parent company. Observing
this situation, one Japanese material supplier advised the Vietnamese government to assure Japanese SMEs full support. Drafting a good supporting industry
master plan is the best way to do this.
Furthermore, unstable policy lowers the evaluation of Vietnam in theeyes of the MNC headquarters. In any Japanese corporation, the global strategy
is made at the headquarters, while a factory in Vietnam plays an assigned rolein it. Oftentimes, Japanese general directors stationed in Vietnam are very eager
to expand their factories and contribute to Vietnam’s industrialization. But theheadquarters usually does not care much about Vietnam, which is only a verysmall piece in the global business game. This gap in enthusiasm toward Vietnam is called ondosa (temperature gap), implying that the factory in Vietnam is
hot but the headquarters remains cool. General directors must get an approval
from the headquarters for expanding the factory, introducing new models,
exporting to the global market, and so on. But persuading Tokyo becomes very
difficult when the Japanese media are full of news about continuing policy
inconsistencies in Vietnam. The general director of an electrical and electronics
assembler said that he was doing everything to invite group companies to Vietnam, but he could not convince the headquarters under the present circumstances.

9. Information and perception gaps
For strengthening local capability, Vietnamese suppliers must work
together with FDI assemblers. However, two problems impede fruitful business

21

Vietnam Development Forum

cooperation between Vietnamese and FDI firms.
The first problem is the information gap. Although most FDI assemblers are desperately looking for local suppliers, they do not know where good
Vietnamese parts makers are located. Many Japanese firms use telephone directories and workers’ personal connections to look for potential suppliers. One
company said that it had to visit 100 firms to find one good supplier. All this is
too costly and time-consuming for private firms. A number of Japanese firms
noted that local suppliers did not actively approach them. Local suppliers generally do not seem to know how to build business relations with Japanese firms,
and lack the confidence to do business with them.
One way to bridge the information gap is to create a supporting industry database. Many Japanese firms said they would welcome such a database. In
fact, several organizations, including the Vietnam Chamber of Commerce andIndustry (VCCI) and Vietbig, have already produced yellow page-type databases, providing information on company names, contact addresses, and main
products14. However, a mechanical listing of hundreds and thousands of companies is not enough. FDI firms want to reduce time and cost in narrowing down
potential suppliers. This requires either explicit ranking or implicit recommendations by the database provider. Moreover, information must be accurate andupdated frequently. In most databases, listed firms are asked to update information by themselves, but it is doubtful if this can guarantee speed and objectivity.
A good database needs careful design and much commitment on the part of thedatabase provider.
The second problem is the perception gap. Even if the two sides findeach other, there is a wide gap between what Japanese firms require as minimum standards in quality, cost and delivery (QCD), and what local firms consider acceptable. The Vietnamese side complains that Japanese firms are too
fussy about little things while the Japanese side rejects local parts which they
say are below the required levels. One reason for this is that local firms have

14

VCCI’s Vietnam Business Directory is available in book form and on CD-ROM. Vietbig, a jointstock company, publishes its database in a book as well as on a website: www.yellowpages.com.
vn/index.asp. In Thailand, the Board of Investment’s Unit of Industrial Linkage Development(BUILD) is responsible for maintaining a supplier database.

22

Supporting Industries in Vietnam from the Perspective of Japanese Manufacturing Firms

had little exposure to global market competition while Japanese firms are
already fiercely competing with American, European, Korean and Chinese
firms. Another important reason is that the integral manufacturing of Japanesefirms, which requires long-term cooperation and endless pursuit of perfection,is at odds with the modular manufacturing of copied products practiced by mostVietnamese firms.
Vietnamese suppliers lack knowledge of the Japanese production system. For example, they send catalogs and product samples to JETRO or Japanese assemblers and expect to receive orders from this contact. But Japanesefirms never accept such casual contacts. In the case of automobiles, designingof a new model starts at the R&D center in Japan three years prior to mass production. Parts suppliers are required to participate continuously in this designin, working closely with assemblers and other parts makers. To join this system,
Vietnamese firms must send Japanese-speaking engineers to Japan for threeconsecutive years. In the case of electronics and motorbikes, the situation is not
as rigorous as that for automobiles, but assemblers still must perform quality
tests and get an approval from the headquarters before trying new part suppliers.
One Vietnamese firm supplying key metal parts to Japanese firms
said that it took three years to become a business partner of a Japanese motorbike assembler, a process that contained different interaction phases. Other
Vietnamese firms which supply to Japanese firms echoed that it took them
about two to three years before receiving the first order. Until then, they had tosend a large number of samples, which were rejected repeatedly, forcing themto improve quality step by step. This was a very costly and frustrating process.
But once trust is built, Japanese firms teach suppliers well and assure stablebusiness relations and large orders.
Two Vietnamese firms, which have successfully built business relations with Japanese assemblers, offered three lessons for newcomers. First, thetop priority is a sincere attitude toward business. Even if a firm’s initial ability
is low, Japanese firms will provide help as long as general directors make aserious effort to learn from the Japanese firm and meet high requirements (similarly, a large Japanese computer device assembler stated that it would first lookat the attitude of the general director when choosing local suppliers). Second,23

Vietnam Development Forumeach firm should accurately assess and honestly admit its weaknesses. If local
suppliers cheat or overstate production capacity or technology, the Japaneseside will immediately find out and will never trust them again. Finally, commitment to quality is crucial. The quality problem is what FDI firms are mostafraid of because problems with quality would destroy their reputation in the
global market.

10. Industrial and safety standards
Finally, we would like to touch upon two additional issues not introduced earlier: quality and industrial standards and unavailability of raw materials.
Vietnam needs to create safety and industrial standards at least to thelevels of neighboring ASEAN countries15. The current absence of industrial andsafety standards impedes the development of supporting industries in three
ways. First, import of low-quality finished products hinders the business expansion of domestic assemblers. A consumer electronics manufacturer stated that
low-quality imported products had eroded the market of high-quality productsthat it produced. Indirectly, this also reduces local parts procurement. Second,
import of low-quality parts and components may crowd out domestic suppliers.
A tire supplier said that low-quality tires had flooded the domestic market
because Vietnam did not have a consistent standard to grade the strength oftires. Third, domestic suppliers face difficulty in establishing their own quality
standards. A Japanese motorbike parts supplier said that they followed Japan
Industrial Standards (JIS), but Vietnamese suppliers would not adopt any quality control system because they were not familiar with any system either athome or abroad.
Furthermore, the government should provide timely information on
environmental laws in developed countries, to which Vietnamese products may
be exported. For instance, the EU introduced the law on the Restriction of Haz-

15

For example, Malaysia has Jabatan Bekalan Elektrik (JBE) and Standards Industrial ResearchInstitute Malaysia Bhd (SIRIM), and Thailand has Thai Industrial Standards Institute (TISI) as
national safety standards.

24

Supporting Industries in Vietnam from the Perspective of Japanese Manufacturing Firms

ardous Substances (RoHS) in January 2006, which prohibited import of products containing any of six specified substances16. Although Vietnam has not
adopted a similar environmental restriction, most FDI firms have chosen to
abide by ROHS for domestically sold products as well as exports. As a result,they now require Vietnamese parts and material producers to also follow
ROHS. However, the latter still lack the knowledge and technology to comply.
One Taiwanese motorbike parts supplier noted that it was unable to find any
local supplier of trivalent chrome, which was to replace the banned hexavalentchrome in metal plating, and therefore could not switch to the ROHS standard.

11. Unavailability of raw materials
Some assemblers and suppliers emphasized the importance of raw
material industries. As long as Vietnam relies on the imports of flat steel, plastic materials, industrial chemicals, paint, refined oil products, and so on, competitiveness in terms of cost and lead time cannot be realized against thosecountries that have these materials.
However, raw material industries are extremely capital-intensive, farmore so than the supporting industries which we have been considering. Before
investing in expensive equipment, there should be a sufficiently large industrial
demand to ensure efficient operation and low cost. According to one manufacturer of printed circuit boards (PCBs), China could invest a huge amount in thematerial industries of PCBs because it had hundreds of PCB assemblers thatused them. In Vietnam, there are only three PCB assemblers. Thus, it would
take a few decades before domestic demand for PCBs rose sufficiently to justify
producing the raw materials. Until then, tariff reduction, or even tariff exemption, on the raw materials of PCBs is the appropriate policy.

16

Cadmium, lead, hexavalent chrome, mercury, PBB, and PBDE.

25

Vietnam Development Forum

References

General Statistics Office (GSO). (2005). Statistical yearbook 2004. Hanoi: Statistical
Publishing House.
Japan External Trade Organization (JETRO). (2005). Japanese-affiliated manufacturers
in Asia (ASEAN and India): Survey 2004. Tokyo: JETRO.
Japan Finance Corporation for Small and Medium Enterprises (JASME). (2004, November). Kakkoku no jidoushagyoukai no doukou ni tsuite (The trends of automotive
industry in some countries). Keiei jouhou (Management Information), 323.
Retrieved February 22, 2006 from http://www.jasme.go.jp/jpn/publish/info/
no323.html#02
Japan International Cooperation Agency (JICA). (1995). Investigation report for industrial development: Supporting industry sector. Tokyo: JICA.
Mishima, K. (2005). The supplier system of motorcycle industry in Vietnam, Thailand,
and Indonesia: Localization, procurement and cost reduction processes. In K. Ohno
& V. T. Nguyen (Ed.), Improving industrial policy formulation, (pp. 211–234).
Hanoi: The Publishing House of Political Theory.
Mori, J. (2005). Development of supporting industries for Vietnam’s industrialization:
Increasing positive vertical externalities through collaborative training. (Master thesis, Fletcher School, Tufts University). Retrieved February 20, 2006 fromhttp://fletcher.tufts.edu/research/2006/Mori_MALD Thesis_010406.pdf
News Net Asia (NNA). (2005). Chuugoku ni katsu: Asean seizougyoukai (Beating
China: The manufacturing industry in ASEAN). Tokyo: NNA.

26

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

32

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.

35

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).

43

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.

44

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.

45

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.

References

Asian Productivity Organization (APO). (2002). Strengthening of supporting industries:
Asian experiences. Tokyo: APO.
Fuminori, I. (2004). Sapoutingu indasutori kenkyuu no tenkai: Kenkyuu shiteki shiten omotoni (The development of study on supporting industries: On the basis ofresearch historical point of view). (Essay, College of International Relation, Rit-

48

Supporting Industries: A Review of Concepts and Development

sumeikan University, 2003FY). Essay Collection, 4, 1.
Ichikawa, K. (2005). Building and strengthening supporting industries in Vietnam: A
survey report. Hanoi: JETRO.
Indian Parliament. (1951). Industries (development and regulation) act. Retrieved July
15, 2006 from http://www.vakilno1.com/bareacts/industriesdevact/industriesde
vact.htm.
Japan Overseas Enterprises Association (JOEA). (1994). Sapotingu indasutori no kenkyu(A study on supporting industries). Tokyo: JOEA.
Japanese Bank for International Cooperation (JBIC). (2005). Chiikikeizai apurouchi wo
fumaeta seisaku no ikkansei bunseki: Higashiajia no keiken to tadonaa no seisaku(Coherence analysis of policy based on regional economy approach: Experiencesfrom East Asian and policies of other donors). Tokyo: JBIC.
Karikomi, S. (1998). The development strategy for SMEs in Malaysia. IDE APEC Study
Center, Working Paper Series 97/98 – No.4. Tokyo: IDE APEC Study Center.
Kimura, F. (2001). Subcontracting and the performance of small and medium firms inJapan (1st ed.). Washington, D.C.: World Bank Institute.
Lauridsen, L.S. (2000). Policies and Institutions of Industrial Deepening and Upgradingin Thailand II – The Supporting Industry Policy with Particular Emphasis on the
Downstream Plastic Parts and Mould Industries. Working Paper No. 9, Departmentof Geography and International Development Studies, Roskilde University.
Retrieved June 30, 2006 from roskilde-university.com/inst3/IDS/Public/workpapers/no09.pdf/.
Ministry of Foreign Affairs (MOFA). (1998). Press briefing on summary of meetings
held by Prime Minister Keizo Obuchi at the ASEAN Summit. Tokyo: MOFA.
________. (September 29, 1999). Press release on ODA loan to Vietnam: To support
economic reform of Vietnam. Tokyo: MOFA.
________. (2003). Vietnam-Japan joint initiative to improve business environment witha view to strengthen the Vietnam’s competitiveness. Tokyo: MOFA.
Ministry of International Trade and Industry (MITI). (1985). Keizai kyouryoku hakusho(White Paper on Economic Cooperation). Tokyo: MITI.
________. (1987). Tsuushou hakusho (White paper on international economy and trade).
Tokyo: MITI.
Ohno, K. (Eds.). (2006a). Industrial policy formulation in Thailand, Malaysia andJapan: Lessons for Vietnamese policy makers. Hanoi: VDF.

49

Nguyen Thi Xuan Thuy_______ (2006b). FDI strategy under global and regional integration. In Lecture note ofInternational Economics. Retrieved August 1, 2006 from http://www.grips.ac.jp/
teacher/oono/hp/lecture_F/lec06.htm.
Porter, M.E. (1990). The competitive advantage of nations. New York: Free Press.
Ratana, E. (1999). The role of small and medium supporting industries in Japan and
Thailand. IDE APEC Study Center, Working Paper Series 98/99. Tokyo: IDE
APEC Study Center.
Rendon, R. (2000). A global review of the industrial subcontracting and partnershipexchanges (SPXs) established by UNIDO. Vienna: UNIDO.
Subrahmanya, M.H. Bala. (2006). Manufacturing SMEs in Japan: Subcontracting, structure and performance. Mimeo. Tokyo: National Graduate Institute for Policy Studies.
Suzuki, S. (2006, February 6). Kankoku, buhin-sozai sangyou o ikusei (Korea, promoting part and material industry). Nihon Keizai Shinbun, p. 6.
United Nation Conference on Trade and Development (UNCTAD). (2001). World
investment report 2001: Promoting linkages. New York and Geneva: UN.
US Department of Energy (DOE). (2005). Supporting industries: Industries of the
future, fiscal year 2004 annual report. Washington, D.C.: DOE.

50

Chapter 3
Quantitative Analysis of the Procurement
Structure of Supporting Industries
in ASEAN 4, Republic of Korea, and Japan
Toshiyuki Baba*

1. Introduction
The aim of this paper is to describe quantitatively the procurement
structure of supporting industries for key manufacturing categories in Asia. The
term “supporting industry” refers to a group of industries that supply the diverse
parts and materials used in the production of industrial products, such as automobiles and electronic and electrical products. In this paper, “supporting industries” is defined as a general term for all industries that supply parts and materials for the production of final products, such as automobiles and consumer electronics products. In the automotive industry, for example, a few ten thousandsof parts and materials that are ultimately assembled by car manufacturers are
manufactured by a variety of companies, including first-tier, second-tier, andthird-tier suppliers. Various materials (metals, plastics, rubber, glass, fibers,etc.) and processing technologies are therefore needed to produce a complete
automobile. Thus, to produce an automobile, it is necessary to have cooperation
not only within the automotive parts industry, but with a large number of otherindustries as well.
Regarding industrial development in Asia, there has been much discussion about the need to strengthen the supporting industries in order to boost
industrial competitiveness. Indeed, countries in Asia have already spent a few
decades developing their supporting industries, not only for automobiles but inother areas as well. To what extent have Asia’s supporting industries developed*

An associate professor of Hosei University, Japan.

51

Vietnam Development Forumas a result of these efforts? In this paper we conduct a quantitative analysis of
the procurement structures for the manufacturing industries for cars, trucks andmotorcycles (hereafter automotive/motorcycle industry in this paper) as well as
electrical and electronics products (ranging from air conditioners and washingmachines to televisions, CD and DVD players, and computers, etc.; hereafter
electrical/electronics industry in this paper) in the Association of Southeast
Asian Nations 4 (ASEAN 4: Thailand, Malaysia, Indonesia, and Philippines),
Republic of Korea (hereafter Korea in this paper), and Japan, and make inferences about the procurement structures from their supporting industries.
The procurement activities associated with supporting industries arecomplex and have certain special features. For example, (1) materials are procured from a large number of industries; (2) supplier relationships are intricate,with suppliers often supplying each other, and supplier-customer roles sometimes being reversed; and (3) in many cases, first- and second-tier suppliers andothers import from other countries the materials they need for their own production, even though these materials may be available within their own country.
Trade and industrial statistics alone are insufficient to analyze these complex
industrial linkages and trade structures; it is necessary to use industrial inputoutput tables. The Asian International Input-Output Tables used in this paper
reveal the industrial structures that are composed of the industries in each country (Figure 1). By using these tables, it is possible to accurately analyze theinputs from supporting industries into the industries targeted by our analysis. In
addition, by using back-linkage analysis, it is also possible to conduct analysis
converging on infinity of the linkages in each industry that provides inputs into
the industries targeted by this analysis. In this paper, by using the Asian International Input-Output Tables, we attempt a quantitative analysis of the structureof industries that support the automotive/motorcycle and electrical/electronics
industries, which Asian countries have selectively encouraged from among awide range of supporting industries. Many studies have already conducted
input-output analyses for Asia, but many of these have focused on the analysis
of industrial structures at the national level. Analysis that pays attention to theirsupporting industries is difficult to find.

52

Supporting Industries in Vietnam from the Perspective of Japanese Manufacturing Firms

Figure 1. Concept structure of Asian International Input-Output Table0 *

!"" 3  & 3  & .
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* %

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$  $

* *#*. %
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                         

2. Methodology
2.1. Industrial input-output tables and target of analysis
The input-output tables used in this paper include the tables for theyear 1975 (8 countries, 56 industrial sectors), 1990 (10 countries, 78 industrial
sectors), and 1995 (10 countries, 78 industrial sectors) of the Asian International Input-Output Tables from the Institute of Developing Economies (IDE, 1982,
1998 and 2001). The analysis in this paper compares ASEAN 4, Korea, andJapan. The selection of the industries for this analysis is based on the generalthinking model of Asian economic development that placed Japan as the leader;in this paper, under a similar development model, Japan and Korea are seen as
advanced countries compared to ASEAN 4 in terms of the automotive, electrical and electronic industries. The subjects of analysis in this paper are the automotive/motorcycle and electrical/electronics industries. The reasons for theirselection are that they are typical examples of industries that require extensive
supporting industries, and governments have strategically fostered both of themin ASEAN 4 and Korea.

53

Vietnam Development Forum

2.2. Terminology and Analytical Methodology
In this paper we conduct the analysis with an emphasis on input structures, paying attention to the procurement of materials required for production.
First, the domestic linkage effects in each country are measured for the automotive/motorcycle and electrical/electronics industries. In addition, to facilitate adetailed analysis, the terms “direct procurement” and “indirect procurement”
are introduced, as well as their related indicators.
“Direct procurement” is defined here as first procurement activities
from various industries by industry j when industry j carries out production.
Column j in the intermediate transaction segment of the international input-output tables shows the “amount procured” from which “country,” of the raw
materials needed for the production of a product in industry j. The raw materials
needed for that production are indicated under the “intermediate inputs” category. Using these features of the tables, it is possible to analyze to what extent
industry j is procuring materials from which industries in which country.
“Domestic direct procurement rate” (DDPR) is defined here as the proportionof direct procurement done domestically as a portion of all direct procurement,
as shown in Equation 1.

DDPR=

ma
ij
i =1
g m
a

·c
×100,
· · cij
a i

(1)

=1 =1

in which DDPR: Domestic direct procurement rate,cij: Intermediate input coefficient of industry j in country a,am: Total number of industries in each country, andg: Total number of countries.
Procurement activities in supporting industries cannot be expressed,
however, only in terms of direct procurement. The production linkage effectassociated with production in the supporting industries themselves brings avariety of indirect linkage effects both inside and outside the country, and generates new procurement activities. For example, let us consider the case ofindustry i, and industry j, which provides inputs to it. An expansion of production in industry i will naturally stimulate an expansion of production in industry

54Supporting Industries in Vietnam from the Perspective of Japanese Manufacturing Firms

j as well. At this point, if industry j is highly dependent on foreign sources, themore industry j expands production to meet demand in industry i, the more
imports from other countries will increase. In other words, newly-generated
procurement activity is dependent on other countries, but the concept of direct
procurement does not include the impacts of this indirect type of foreigndependency. In order to explain the production dependence structure caused bythis kind of indirect production linkage effects, it is necessary to introduce a
separate concept from direct procurement. We define “indirect procurement” as
the procurement conducted in the processes of continuous chain production
caused by indirect linkage effects. The “domestic indirect procurement rate”(DIPR) is defined as the proportion of indirect procurement done domestically,as shown in Equation 2.
m∑ abij−1

DIPR= i=1a
×100,
Bj−1

(2)

in which DIPR: Domestic indirect procurement rate,bij: Each elements of Leontief inverse matrix of industryaj in country a,
Bj: The sum of row elements of Leontief inverse matrix

aof industry j in country a, andm: Total number of industries in each country.
Direct procurement is based on roughly the same concept as thedomestic production ratio used in the automotive industry policies of ASEAN
and other countries. It must be noted that even if, at first glance, the domestic
production ratio seems high, in many cases in reality the supply of parts or subparts and materials may depend on imports from other countries. By examining
indirect procurement, we wish to quantify the structure of foreign dependency
for the materials needed to manufacture those parts.

55

Vietnam Development Forum

Figure 2. Linkage effect of automotive/motorcycle industry and electrical/electronics industry
Automotive/motorcycle industry(1995)

Electrical/electronics industry(1995)













































3. Results
3.1. Domestic production linkage effects
The automotive/motorcycle and electrical/electronics industries aresupported by an extensive range of other industries, so their linkage effects arelarge. This is one of the reasons that Asian countries have made it a priority tofoster these two industries. How large has their domestic linkage effect become
after many years of nurturing for these industries? Figure 2 shows the domestic
linkage effect of both industries in each country as of 1995. The value of thedomestic linkage effect shows the multiple of production generated in eachrelated industry for every unit of production in each of the core industries.
The figure shows that in Japan, this value is 2.7 for the automotive/
motorcycle industry and 2.2 for the electrical/electronics industry. Notably, thevalue is above 2 for both industries in Japan. This indicates that the indirect
linkage effects are greater than the direct effects, and that both industries exert alarge influence on the Japanese economy. In the case of Korea, the values are
2.2 and 1.7 for the automotive/motorcycle and electrical/electronics industries,
respectively. In ASEAN 4, they are 1.5 and 1.4, respectively. From the perspective of the linkage effect, Korea is at about 80% the level of Japan, and ASEAN

56

Supporting Industries in Vietnam from the Perspective of Japanese Manufacturing Firms

is only at about 60%. This result suggests that ASEAN 4 in particular has alower domestic linkage effect compared to Japan. This may suggest that thedomestic linkage effect is lower due to the low level of domestic procurement,
which may be due to inadequate development in their supporting industries.
3.2. Direct and indirect procurement in automotive/motorcycle industries
Figure 3 shows the trends for DDPR and DIPR for the automotive/
motorcycle industries in ASEAN 4 and Korea. Characteristics of each country
could be summarized as described below. In ASEAN 4, the direct and indirect
procurement rates from their own countries were stagnant in the 40% range
from 1975 until 1990. Overseas dependency on Japan was strong, but particularly for indirect procurement, the dependency on Japan was stronger than thaton domestic sources. Later, from 1990 until 1995, procurement from thedomestic supporting industries expanded. In ASEAN 4, it appears that supporting industries were stagnant from 1975 until 1990, but that they developed from1990 through 1995. This period of their expansion coincided with a period ofmajor economic expansion in ASEAN 4. Meanwhile, in Korea, domestic direct
and indirect procurement expanded from 1975 through 1990, to the point that
more than 80% of procurement was done domestically. From 1990 through1995 this composition continued at roughly the same level. During this twentyyear period, Korea’s dependency on its most important procurement source,
Japan, steadily declined. One could conclude that supporting industries in
Korea expanded from 1975 through 1990, and thereafter maintained the samestructure. There is a clear tendency in both ASEAN 4 and Korea for the proportion of domestic direct procurement to be lower than the proportion of indirect
procurement, and one could say that their supporting industries depend on procurement of materials from overseas, particularly from Japan. Even for indirect
procurement, however, by 1990 Korea shifted to a structure with about 80%
domestic procurement. As for Japan, over the twenty years from 1975 through1995, there was almost no change, with almost 100% domestic sources being
used for both direct and indirect procurement.
3.3. Direct and indirect procurement in electrical/electronics industries
Figure 4 shows the trends of DDPR and DIPR for the electrical/elec-

57Vietnam Development Forum

Figure 3. DDPR and DIPR of automotive/motorcycle industry
ASEAN 4: DDPR of automotive/motorcycle

ASEAN 4: DIPR of automotive/motorcycle

70

70

60

60

50

50

40

40

30

30

20

20

10

10
0

0
1975

1980

1985

From ASEAN 4
From Japan
From Singapore

1990

1995

1975

1985

From ASEAN 4
From Japan
From Singapore

From Korea
From USA

Korea: DDPR of automotive/motorcycle

1980

1990

1995

From Korea
From USA

Korea: DIPR of automotive/motorcycle

100

100

90

90

80

80

70

70

60

60

50

50

40

40

30

30

20

20

10

10
0

0
1975
1980
1985
1990
1995
From ASEAN 4
From Korea
From Japan
From USA
From Singapore

1975
1980
1985
1990
From ASEAN 4
From Korea
From Japan
From USA
From Singapore

1995

tronics industries in ASEAN 4 and Korea. The characteristics of these countries
could be summarized as described below. In ASEAN 4, the direct and indirect
procurement rates from their own countries declined significantly from 1975
through 1990, as dependency shifted from domestic to foreign sources. This
foreign dependence continued during the 1990s. Of the foreign sources,

58

Supporting Industries in Vietnam from the Perspective of Japanese Manufacturing Firms

Figure 4. DDPR and DIPR of electrical/electronics industry
ASEAN 4: DDPR of electrical/electronics

ASEAN 4: DIPR of electrical/electronics

70

70

60

60

50

50

40

40

30

30

20

20

10

10

0

0
1975

1980

1985

From ASEAN 4
From Japan
From Singapore

1990

1995

1975

From Korea
From USA

1980

1985

From ASEAN 4
From Japan
From Singapore

Korea: DDPR of electrical/electronics

1990

1995

From Korea
From USA

Korea: DIPR of electrical/electronics

100

100

90

90

80

80

70

70

60

60

50

50

40

40

30

30

20

20

10

10
0

0
1975

1980

From ASEAN 4
From Japan
From Singapore

1985

1990

From Korea
From USA

1995

1975

1980

From ASEAN 4
From Japan
From Singapore

1985

1990

1995

From Korea
From USA

dependence on Japan and the United States steadily increased over these twenty
years. In ASEAN 4, between 1975 and 1990, for both direct and indirect procurement there was a shift from domestic supporting industries towards choosing more foreign procurement. This structure has continued since then. Meanwhile, in Korea, domestic direct and indirect procurement expanded during the59Vietnam Development Forum

period from 1975 through 1990, to the point that about 60% of procurement
was sourced domestically. From 1990 until 1995, the foreign proportion of procurement increased. In Korea, direct and indirect procurement from domestic
supporting industries expanded from 1975 through 1990, but after 1990 thistrend was reversed, and it appears that in many cases procurement from overseas increased. In those cases, the main sources were Japan and the UnitedStates. As for Japan, over the period from 1975 through 1995, the compositionof domestic procurement stayed above 90%, for both direct and indirect procurement. During this twenty-year period, however, the procurement ratio fromforeign sources has steadily increased, with the largest foreign supplier being
the United States.

4. Review
The above discussion has been on a country basis, but because thisanalysis revealed that there were differences between the automotive/motorcycle and electrical/electronics industries with regard to changes in direct andindirect procurement, the author would like to proceed now by focusing theanalysis on industries. First the author summarizes the results of analysis to thispoint. For the automotive/motorcycle industry (with the exception of Japan,
which procured almost 100% domestically), between 1975 and 1995, Korea
shifted to an industrial structure with over 80% domestic procurement, followed
by ASEAN 4, which also increased its domestic procurement rate. The changes
in procurement for both ASEAN 4 and Korea were similar in that they generally experienced a steady expansion of domestic procurement. Meanwhile, in theelectrical/electronics industry, from 1975 through 1995, in Korea the domestic
procurement expanded temporarily, but then foreign procurement increased
again.
ASEAN 4 shifted towards an industrial structure with foreign dependence, with foreign exceeding domestic procurement, and this structure persisted. As shown above, the automotive/motorcycle industry emphasizes domestic
procurement, while the electrical/electronics industry is structurally foreigndependent.

60Supporting Industries in Vietnam from the Perspective of Japanese Manufacturing Firms

4.1. Differences in characteristics of parts
How did this difference arise between the automotive/motorcycle andelectrical/electronics industries? To begin with, one could consider the differences in characteristics of the parts being handled. The characteristics of automotive and electronic parts differ greatly. The first aspect is the nature of thoseparts. Many automotive parts are large and heavy, while many electronic parts
are small and light; thus, one could say that automotive parts are not as easilytransported as electronic parts. In interviews with car manufacturers, procurement managers state that one of the reasons they have encouraged local production and procurement is the nature of automotive parts, and their transport-related characteristics.
Conversely, electronic parts are light. Thanks to this, they are easy totransport by air. Interviews with Japanese electronic parts makers indicated thatmany of these exports are carried by air transport. In addition, due to their small
size and light weight, electronic parts are likely to be high in value per gram. In
studies on procurement of electronic parts in developing countries, Kodama andKiba (1994), Letchumanan and Kodama (2000) and others have shown quantitatively that the higher a part’s value per gram, the more likely is the dependency on foreign production. Based on such differences in the nature of parts, compared to automotive parts, electronic parts could be characterized as being easier to import.
The second aspect relates to design and standardization. It is common
for automotive parts to be custom-designed for each car model. Electronic parts
are more commonly composed of standardized components. Kokuryo (1999)
presented the concept of “open architecture.” Fujimoto (2001) and Shibata(2001) assert that automobiles are composed of non-standardized parts in aclosed architecture, while products such as consumer electronics products andpersonal computers are composed of standardized parts in an open architecture.
In addition, Shibata gave the label of “black box” parts to automotive parts
designed through cooperation between car makers and parts makers, and pointed out that many automotive parts consist of these parts. Substitution of suchspecialized “black box” parts is not easy, making it difficult to purchase themfrom just any source in the world. In contrast, electronic parts are standardized
and can be easily substituted thanks to their modular design, making it possible

61

Vietnam Development Forumto procure them from anywhere in the world, depending on cost and performance. These differences in the physical features and standardization of parts arethought to be among the factors affecting differences between the procurement
situations for automotive and electronic parts.
4.2. Differences in quality required by the market
Next, one could also consider differences in the quality required by
the market. If the we calculate each country’s domestic demand ratio in theautomotive/motorcycle and electrical/electronics industries from each year’s
figures from the Asian International Input-Output Tables, we see for 1975
through 1995 that in ASEAN 4, the automotive/motorcycle industry was almost
completely oriented toward satisfying domestic demand. The
automotive/motorcycle industry in Korea was also mainly focused on domestic
demand. Meanwhile, in the electrical/electronics industry, from 1975 through1990, in ASEAN 4 the industrial structure was focused on exports, and this tendency became stronger after 1990. In Korea as well, the export ratio of the electrical/electronics industry was high, compared to that of the automotive/motorcycle industry, and production for overseas exports rose steadily. Aoki (1993)
states that one issue regarding Malaysia’s electronics and electrical equipment
is that its industrial structure requires the import of more than 50% of the intermediate materials needed to produce manufactured goods for export. He indicates that the reason for this is that procurement cannot be done from thedomestic supporting industries, so the raw materials and parts must be imported. A number of inferences can be made from these points. Specifically, theautomotive/motorcycle industry was oriented toward satisfying domestic
demand, and products were acceptable at a level that was competitive domestically. For this purpose, it was not necessary for procured parts to be of highquality. In contrast, because the electrical/electronics industry was export-oriented, it was necessary to manufacture products that were internationally competitive. One could infer that in cases where domestically procured parts could
not achieve the required quality, it was necessary to procure high-quality parts
from overseas.

62

Supporting Industries in Vietnam from the Perspective of Japanese Manufacturing Firms

4.3. Differences in policies
One final aspect is differences in policies. ASEAN countries eitherbanned imports or placed high import duties on automotive parts in line with
policies to promote the domestic production of these parts. Meanwhile, ASEAN
countries poured their efforts into encouraging exports and gave preferential
treatment to exporting industries, using, for example, import duties and importsurcharges on the parts and raw materials necessary for production of export
products. Because the electrical/electronics industry was export-oriented, as
shown above, it was possible to import electronic parts duty-free or with very
favorable import duties. The differences between the automotive/motorcycle
industry compared to the electrical/electronics industry (in both direct and indirect procurement) are probably also due to such factors.

5. Conclusion
We have conducted an analysis of the procurement structure of theautomotive/motorcycle and electrical/electronics industries in the Associationof Southeast Asian Nations 4 (ASEAN 4), the Republic of Korea, and Japan,
and made some inferences about the state of development of their supporting
industries. It was not possible to draw conclusions on a country basis regarding
their supporting industries, so it was necessary to examine things by industry. In
the automotive/motorcycle industry, each country increased its domestic direct
and indirect procurement year by year, and supporting industries expanded. In
the electrical/electronics industry, however, the opposite results were found. We
could conclude that the automotive/motorcycle industry emphasizes domestic
procurement, while the electrical/electronics industry is structurally foreigndependent. Reasons for these differences include such factors as differences in
the nature of parts, differences in the quality required by the demand markets,and differences in government policies.

References

Aoki, K. (1993). The export-oriented strategy: The light and shadow seen in Malaysia.

63Vietnam Development Forum

Tokyo: Japan External Trade Organization (JETRO).
Fujimoto, T. (2001). Aakitekucha no sangyouron (Industrial theory of architecture). In
T. Fujimoto, A. Takeishi, & Y. Aoshima (Ed.), Bijinesu aakitekucha (Businessarchitecture) (pp. 3–26). Tokyo: Yuhikaku.
Institute of Developing Economies (IDE). (1982). International Input-Output Table for
ASEAN Countries 1975 (Statistical Data Series No.39). Tokyo: IDE-JETRO.
_______. (1998). International Input-Output Table for ASEAN Countries 1990 (Statistical Data Series No.81). Tokyo: IDE-JETRO.
_______. (2001). International Input-Output Table for ASEAN Countries 1995 (Statistical Data Series No.82). Tokyo: IDE-JETRO.
Kodama, F. & Kiba, T. (1994). Emerging Trajectory of International Technology Transfer. Occasional paper, Asia/Pacific Research Center, Stanford University.
Kokuryo, J. (1999). Open architecture strategy. Tokyo: Diamond Press.
Letchumanan, R. & Kodama, F. (2000). Reconciling the conflict between the “pollutionhaven” hypothesis and emerging trajectory of international technology transfer.
Research Policy, 29, 59–79.
Shibata, T. (2001). The research on learning process of R&D of product. Diss., University of Tokyo.

64Chapter 4
Designing and Managing
Supporting Industry Databases†
Junichi Mori*

1. Introduction
It is generally agreed that local procurement of parts and components
benefits both FDI assemblers and local parts suppliers. With more locallysourced parts, FDI assemblers are able to reduce transportation cost associatedwith imports, while local suppliers can increase business volume and absorb upto-date technology through business relations with FDI assemblers. Thus, promoting local procurement is a key to FDI-led industrial growth in developing
countries.
However, in Vietnam, most FDI assemblers do not have sufficient
information on where good Vietnamese parts suppliers are located, despite thefact that they desperately seek locally procured parts for cost competitiveness.
Many Japanese firms use very primitive methods such as telephone directories
and workers’ personal connections to look for potential suppliers. This information gap impedes fruitful business cooperation between Vietnamese suppliersand FDI assemblers. To bridge this gap, establishment of a supporting industry
database has long been requested by Japanese FDI assemblers. However, nosignificant progress has been made, in part because the Vietnamese side does
not know the precise requirements of an effective supporting industry database.
This paper explores the desirable features of the supporting industry
database and considers various issues in its operation. For this, existing databas-

Research and surveys for this paper were conducted from July to August 2006, when the author
was affiliated with the Vietnam Development Forum (VDF) and the National Graduate Institutefor Policy Studies (GRIPS). He would like to thank the officials, experts and enterprise managers
who provided valuable information.
∗
United Nations Industrial Development Organization (UNIDO), Vietnam.
†

65

Junichi Mori

es in Japan, Malaysia, Thailand, and Vietnam have been examined. In particular, local officials and chambers of commerce of six Japanese cities which havesuccessfully established supporting industry databases were visited and interviewed1. Their experiences offer important lessons for Vietnam, not only fordesigning databases but also for operating and maintaining them. With proper
design, operation, and maintenance, supporting industry databases can contribute to expanding business between FDI assemblers and local suppliers.

2. Why supporting industry databases are necessary
Rising demand for supporting industry databases is closely linked
with the development of supply chain management (SCM). The idea of SCM
has been practiced for a long time by advanced firms such as Toyota, but theconcept became particularly popular in the 1990s. From the viewpoint of building SCM, as more parts are locally sourced, greater reductions can be made inlogistics costs and production lead time. For this reason, FDI assemblers in East
Asia began to make great efforts in increasing locally sourced parts. The average local procurement ratio of Japanese manufacturers in ASEAN4 (Malaysia,
Thailand, Indonesia, Philippines) rose from 41.9% in 1998 to 51.8% in 2003.
The same ratio in China also rose from 46.8% in 1998 to 55.9% in 2003 (Minitry of Economy, Trade and Industry [METI], 2006).
This trend is also observable in Vietnam. Although most FDI assemblers initially came to Vietnam for the low-wage and high-quality labor force,
they are now trying to strengthen cost competitiveness by increasing local partsprocurement. According to a JETRO survey in 2004, 72.9% of Japanese manufacturers in Vietnam said that they planned to increase local procurement ofparts (Figure 1).
In Vietnam, however, FDI assemblers face serious difficulty in promoting parts localization. According to the same survey, the average ratio of
local parts procurement in all manufacturing sectors remained at 22.6% at the1

These six cities are Sumida-ku (Tokyo Metropolitan Area), Kawasaki City and Sagamihara City
(Kanagawa Prefecture), Hamamatsu City (Shizuoka Prefecture), and Okaya City and Chino City
(Nagano Prefecture). See Appendix A for the locations of these cities.

66

Designing and Managing Supporting Industry Databases

Figure 1. Procurement strategy of Japanese manufacturers in Vietnam

  

72.9




























Source: Japan External Trade Organization (2005).

value base, which was much lower than in other ASEAN countries2. The survey
also pointed out the problem of insufficient product quality of local suppliers.
However, a more fundamental problem in Vietnam seems to be the information
gap described above, which impedes business interaction between FDI assemblers and local suppliers in the first place. One Japanese firm noted that it had tovisit approximately 100 firms to find one good supplier (Vietnam Development
Forum [VDF], 2006). Because this is too costly and time-consuming for private
firms, FDI assemblers do not have sufficient incentives to replace parts importwith local procurement. Thus, it is essential to establish an effective supporting
industry database, which will reduce the cost of finding potential suppliers.
Development of the supporting industry database will shorten theprocess FDI assemblers must go through to select suppliers; the process consists of preliminary search, factory inspection, and sample evaluation. An effective supporting industry database can drastically reduce the time needed for preliminary search, in which company profiles, production facilities, quality level,and so forth, are reviewed. In addition, it can also reduce the time needed forfactory inspection and sample evaluation, by allowing FDI assemblers to screen
low potential suppliers and focus on only high potential suppliers.

2

Local procurement of all Japanese manufacturing sector in 2004 was 47.9% in Thailand, 45.0% in
Malaysia, 38.3% in Indonesia, and 28.3% in the Philippines.

67

Junichi Mori

3. Desirable characteristics of the database
The Vietnamese government and the Japanese government officiallyagreed on the importance of a supporting industry database in the VietnamJapan Joint Initiative Phase 1 (2003–2005), but such a database has not been
constructed3. It is likely that the Vietnamese side does not have sufficient information on the difference between supporting industry databases and businessdirectories.
In Vietnam, a number of yellow-page-type business directories
already exist, operated by joint-stock companies, public organizations, andbusiness associations. For example, Vietnam Yellow Pages4 is one of the mostpopular directories, which contains data of 60,000 companies. This directoryoffers free access through the Internet. Printed and CD-ROM versions are alsoavailable. The Vietnam Chamber of Commerce and Industry (VCCI) also manages the web-based Vietnam Business Directory 5, which includes data of
20,000 firms. This is also available in printed and CD-ROM versions. Moreover, several business associations such as the Vietnam Saigon Plastic Association publish sectoral business directories.
These business directories may help FDI assemblers to find contact
addresses of local suppliers by specific company names and main products.
However, that is not enough for FDI assemblers to shorten the preliminary
search period. For effective search, more details of local suppliers are needed.
The main difference between supporting industry databases and business directories is the depth of firm-level data. Business directories tend to cover a large
number of firms in many business sectors, but data of individual firms are basic
and limited. In contrast, supporting industry databases cover a relatively small
number of firms in a specified business sector, but they contain detailed data ofeach company. This will enable FDI assemblers to narrow down targeted suppliers based on suitable technology and production facility. In this way, FDI
assemblers will not waste time by avoiding suppliers with no potential, and can

See MOFA (2003, p. xii).
Vietnam Yellow Pages: http://www.yellowpages.com.vn/
5Vietnam Business Directory (VCCI): http://www.vidc.com.vn/Default1.htm
3
4

68

Designing and Managing Supporting Industry Databases

minimize the search cost of replacing imported parts by locally sourced parts,
especially in the preliminary search.
The content of the supporting industry database should closely matchthe supplier selection criteria of FDI assemblers. In addition to main products,
which are covered by most business directories, Japanese manufacturers usuallychoose suppliers by the following criteria: (i) general director’s attitude, (ii)quality, (iii) cost, (iv) capability of on-time delivery, and (v) production scale6.
As a prerequisite to starting a business partnership, FDI assemblers want to see
the seriousness of the general director in improving his or her business. Several
local suppliers that have successful relationship with Japanese firms say thatJapanese firms helped them even if their initial ability was low, as long as thegeneral director made a serious effort to meet the high requirements set by theJapanese side (VDF, 2006). After the seriousness of the general director is confirmed, the core criteria of supplier selection are quality, cost, and delivery(QCD). Furthermore, information on production scale is necessary to infer the
maximum production capacity of suppliers.
To satisfy these criteria, supporting industry databases should provide
information on the above five items, either explicitly or implicitly, in addition
to basic information such as company name, contact address and main products(Figure 2).
First, a well-written self-introduction can express the general director’s sincere attitude. This is not a perfect indicator, however, because how well
it is written depends on the drafter’s ability. Nevertheless, it can still be usefulin eliminating low potential suppliers who do not have ability to express theirstrength plainly. In addition, suppliers may indicate the experience of Just-InTime delivery in this column, because there is no other way to quantitatively
measure delivery accuracy.
Second, detailed information on production facilities (machine andequipment) will help FDI assemblers to infer the quality and scale of production. With a list of machines including manufacturers’ names, FDI assemblers
are able to guess the level of product quality. The number of machines can also

6

These criteria are identified through a large number of interviews the author conducted from 2004
to 2006. See VDF (2006).

69

Junichi Mori

Figure 2. Information required in supporting industry databases
Criteria of Supplier
Selection

Required Items in SI Databases--Company policy

Introduction

General
Director’sAttitude--JIT experience

Production Facility

List of machines,name of maker

Processing Accuracy

Processing range inmillimeter

Quality Certification

ISO 9000,
ISO 14000

Quality

Cost--Specialized skills

Main Customers
On-time Delivery
Annual Sales
Production Scale

Capital
Number of Employees

tell the maximum production capacity.
Third, processing accuracy expressed in millimeters can be an indicator of product quality, in particular when FDI assemblers need high-precision
products such as mold and die. Suppliers may also emphasize the high ability ofengineers and technicians in this column, even if the factory has only relatively
old machines.
Fourth, relevant quality certifications such as ISO 9000 and ISO
14000 are a good reference for general operation quality. They do not show
capability in any specific technology, but they are still useful to screen out low
potential suppliers.
Fifth, a list of main customers is an implicit indicator of QCD. If suppliers have consistent business relations with other FDI assemblers, there ishigh possibility that their QCD levels meet high requirements for competition.
In addition, with such a list, FDI assemblers can exchange information on certain suppliers with each other.
Finally, information about annual sales, capital, and labor force isuseful in measuring the production scale.

70

Designing and Managing Supporting Industry Databases

4. Supporting industry databases in Japan
Gathering detailed firm-level data is not easy. Even more advanced
ASEAN countries, such as Malaysia and Thailand, have not succeeded in establishing a good supporting industry database. However, some Japanese localities
operate high-quality supporting industry databases (see Appendix B for a list).
Japan has an agglomeration of highly competitive supporting industries, which consist mostly of small and medium enterprises (SMEs). Our
research has confirmed that some Japanese local governments and local chambers of commerce (henceforth “local public organizations”) have well-designed
supporting industry databases, which carry almost all of the information proposed in Section 2. These databases were established as a business matchingtool between assemblers and suppliers. Since SMEs with excellent manufacturing skills are not necessarily good at public relations and marketing, local public organizations need to help them link with potential buyers.
Furthermore, in the 1980s and 1990s, many large Japanese assemblers transferred their manufacturing bases overseas, under the pressure of the
sharp appreciation of Japanese yen after the Plaza Accord in 1985. Consequently, many SME suppliers which were located near large assemblers lost longstanding domestic customers. In order to revitalize these SMEs, local publicorganizations began to assist them to explore new business opportunities inother areas of Japan through supporting industry databases.
4.1. Okaya City database
For example, the municipal government of Okaya, which is a part of
the Suwa Lake Region in Nagano Prefecture, created a high-quality supporting
industry database7. Okaya has a concentration of various types of parts suppliers
which receive a large volume of orders from Seiko Epson, Olympus, andKyocera. There are approximately 700 to 800 SMEs in Okaya, of which 80%
are small enterprises with four or fewer employees. Most have produced metal
precision parts for cameras and watches, but some companies are gradually

7

Okaya City’s Enterprise Database: http://www.tech-okaya.jp/top.html

71

Junichi Mori

shifting to the production of automobile parts8.
Okaya City’s database contains very detailed information on eachregistered company (Appendix C). In the self-introduction column, firms can
showcase their company policy and specialized skills. Potential buyers canassess product quality and production scale of registered companies fromdetailed lists of machines with makers, model names, and stock. The section for
production processing technology states the range of processing accuracy in theunit of millimeters to show production quality. Another indicator of quality is
the acquirement of quality certifications such as ISO, which is found in the column of international standards. Furthermore, potential buyers can evaluate thelevel of QCD from the list of main customers. Finally, production capacity canbe inferred from capital and the number of employees.
Moreover, another feature of Okaya City’s database is ease of search.
Potential buyers can quickly narrow down the targeted group of suppliers bymultiple choices, which include business category, business sector, and specialized skills.
4.2. Monozukuri-net
Another good database is Monozukuri-net, an inter-city project byfour chambers of commerce in Hamamatsu City 9 in Shizuoka Prefecture,
Sagamihara City and Fujisawa City in Kanagawa Prefecture, and Ogaki City in
Gifu Prefecture. Monozukuri-net was initiated by the Chamber of Commerce ofHamamatsu City, where Yamaha Motor Co., Ltd. and Suzuki Motor Co., Ltd.
are located. In 2003, at the invitation of Hamamatsu, the Sagamihara Chamberof Commerce joined Momozukuri-net, and the Fujisawa Chamber of Commerce and the Ogaki Chamber of Commerce also joined in 2004. Member cities
are expected to increase further in the future.
In addition to its sophisticated database design, this inter-city project
has the mechanism of cost reduction and information sharing in managing the

One of the companies, Okaya Seiken Co., Ltd., which produces both automotive and electronics
parts, has established a subsidiary in Ho Chi Minh City, with the name Okaya Vietnam Co., Ltd.
See http://www.okaya-seiken.co.jp/
9Monozukuri-net of Hamamatsu: http://www.monodukuri.net/hamamatsu/
872Designing and Managing Supporting Industry Databases

databases. The Hamamatsu Chamber of Commerce is recovering initial investment cost by collecting monthly user fees from the other three cities. On theother hand, the other three chambers of commerce can save initial investment
cost by participating in the existing database and paying relatively small monthly user fees. Moreover, by sharing inter-regional information, it is expected thatinter-city business deals will increase, taking advantage of each city’s comparative advantage.

5. Motivating SMEs to participate in the database
Many Japanese local public organizations have established sophisticated supporting industry databases with considerable effort. However, effective operation of databases is often more difficult than designing them. Japanese
local public organizations have operated the databases by trial and error. The
major common problem is that SMEs do not participate actively in the databases. A supporting industry database will not function well without proper operation and regular maintenance, no matter how elaborately it is designed.
In Japan, data registration is normally conducted as follows. First, thelocal public organization distributes registration forms to local SMEs by post.
Local officials usually interact with SMEs through paper-based communication,
because most SMEs are unfamiliar with information technology (IT). Second,
SMEs fill in the form and send it back to the local public organization. Third,
the local public organization checks the information filled in by local SMEs andkey all the data into the database. Finally, for updating, some local publicorganizations issue passwords and ask registered firms to update the data bythemselves through the Internet. Others periodically send registration forms to
SMEs by post and ask them to report updated information.
In order to have an active database, it is essential to attract a sufficientnumber of registrants. However, not many SMEs send back registration forms,
despite earnest requests from local public organizations. For example, one public organization in Japan reported that they sent out registration forms to about
1,000 firms, but only eight responded. Small enterprises with ten employees orless often do not reply because they lack time and human resources to fill in theform. In addition, most SMEs are unfamiliar with IT and do not recognize the73Junichi Moribenefit of registering with a web-based database. Similar problems also occur inthe data updating process. SMEs often do not update information such as newinvestment in the production facility. Even though a password is issued for selfupdating through the Internet, few SMEs revise company data by themselves.
To resolve these problems, local public organizations with successful
databases have utilized three measures: (i) designing the database in public-private partnership, (ii) conducting intensive company visits, and (iii) providing
business matching services. Each is explained in detail below.
5.1. Designing the database in public-private partnership
Most local public organizations design supporting industry databasesin cooperation with local IT venture firms specializing in web services. However, if targeted SMEs are also involved in designing the database, they will be
more willing to participate in it. For example, Chino City in Nagano Prefecture
designed the database called Monozukuri-net Chino10 in public-private partnership. The municipal government of Chino organized a database committee,
which consisted of local government officials, representatives from the SME
business association, and a professor of Suwa Tokyo University of Science.
This partnership obliged SMEs to participate actively in the database. As aresult, about 80% of local manufacturing firms in Chino City have participatedin the database from the very beginning. This registration ratio is extremely
high in comparison to those of other cities. Another reason for the high registration ratio may be that SMEs in Chino City are medium-size firms with 100–200
employees rather than micro or small firms.
In addition, public-private partnership can make the database format
more user-friendly, which promotes participation of SMEs in the database. For
further development, it will be beneficial to involve targeted buyers in thedesigning process. In the case of Vietnam, such buyers are mainly FDI assemblers. Listening to their opinions will also improve the database design, which
will contribute to business expansion between FDI firms and local suppliers.

10

Monozukuri-net Chino: http://kougyou.chinoshi.jp/

74Designing and Managing Supporting Industry Databases

5.2. Intensive company visits
The supporting industry database is a sophisticated IT product, but its
operation requires labor-intensive, face-to-face service. Local public organizations which achieve high registration ratios of local SMEs often employ senior
experts with experiences working in manufacturing firms as managers or engineers. These senior experts visit SMEs one by one to help them fill in registration forms, and at the same time they provide technical or managerial advice forthese SMEs. Similarly, one local public organization combines database creation with IT training service. When IT instructors visit SMEs for employee
training, they also teach how to fill in the registration form and explain the benefits of participating in the database.
Intensive company visits may take several years before they succeed.
In the meantime, great patience is required from database builders. For example, the municipal government of Okaya started to gather detailed firm data in
2003. It mailed out registration forms to about 800 firms, but only 116 firms
replied. To increase registration, two senior experts were hired by the municipal
government to visit local firms one by one and gather the required data. After
three years of continued effort, they had collected data from 600 firms, or 75%
of all firms in Okaya City.
Intensive company visits also strengthen mutual trust between SMEs
and local public organizations through face-to-face interaction. Trust is an
important factor to increase SMEs’ participation in the database. One local public organization stated that SMEs often hesitated to disclose company data
because they did not know how local public organizations would use it. Another organization reported that some SMEs did not want to submit data to a private survey company which had a contract with the local authority. Therefore,
intensive company visits with face-to-face conversation can reduce SMEs’ psychological barriers to participate in the database. Another point is that local
public organizations can ensure the credibility of database information because
experts can check consistency between submitted data and actual conditions of
the factory and machines in company visits.
5.3. Providing business matching services
Business matching services, which provide more business activities

75

Junichi Mori

for SMEs, can attract more companies to participate in the supporting industry
database. In order to execute these services, it is necessary to establish a service
window at the local public organization, which receive inquires from buyers
and recommends suitable local suppliers.
Buyers may directly contact suppliers if they are large firms with acompetent procurement team or if they have already found very specific information in the database. On the other hand, if buyers are small and need more
information or recommendation from local public organizations, or if they cannot get sufficient information from the database, a service window will play animportant role in linking buyers with potential suppliers. For example, the Sumida SME Center in Tokyo has a supplier discovery service which is operated bysenior experts in management and engineering11. At buyers’ requests, they
search databases, select several suppliers as candidates, telephone them to see ifthey are interested in new business, and send the short list of potential firms tothe buyers. Other databases such as Okaya City’s database and Monozukuri-net
also have similar business matching services.

6. Issues surrounding performance indicators
The rest of this paper examines three issues related to the management of supporting industry databases: (i) performance indicators, (ii) choice
between national and local databases, and (iii) disclosure versus confidentialityof company data.
In addition to the three supplementary activities explained in the previous section, statistical evidence of expanded business opportunities provides
an important incentive for SMEs to participate in the databases. However, few
Japanese local public organizations accurately grasp the increase of businessvolume due to the existence of a database. For one thing, most of the databases
were established after 2000 and have not yet reached the evaluation stage. More
importantly, however, there is no established methodology to measure theimpact of databases. Local public organizations often count indirect inquires, in

11

Sumida Enterprise Guide: http://www.techno-city.sumida.tokyo.jp/sumida/index.htm

76Designing and Managing Supporting Industry Databases

which buyers ask for the recommendation of suitable suppliers through service
windows. However, they do not have information on the increase of direct
inquires, in which buyers contact local SMEs directly after looking at the database. For example, the Sumida SME Center received 130 indirect inquires in2006, of which 40 led to actual business, but they do not have a systematic way
to count the number and results of direct inquires. Ironically, direct inquires arelikely to increase as the database becomes more sophisticated and user-friendly.
If buyers can find sufficient information in the database, they do not need additional support from local public organizations.
Performance indicators are also necessary for local public organizations to prove the usefulness of the database and secure the budget for its operation. In fact, some local public organizations are facing difficulty in obtaining
additional budget to hire experts for intensive company visits because they cannot produce clear evidence of effectiveness. As a result, registration of targetedcompanies may remain low despite the fact that the database is constructed in a
sophisticated way.
Ideally, this problem will be solved if there is a mechanism in which
SMEs periodically report the number of all incoming business inquiries and theamount of actual business increase thanks to the database. Also, several local
public organizations plan to conduct surveys on the performance of the database. But gathering of precise data on a continuous basis may be costly andtime-consuming to both SMEs and local public organizations.

7. National versus local databases
Some argue that the national government should establish a nationwide supporting industry database because standardizing the format improves
operation efficiency. However, in general and in light of the Japanese experience, local public organizations are in a better position than the national government to operate databases efficiently.
First, it is unnecessary and even undesirable to completely standardize the database across all areas in the country. Instead, database format should
be customized to reflect regional features and priorities. In addition, interregional competition for providing good database service is healthy and can77Junichi Mori

improve the quality of databases.
Second, database size will become unmanageable at the national
level. A nationwide database would require operators to control an immense
volume of company data. Practically speaking, it is impossible to visit and gather detailed data from a very large number of firms. In Japan, where 489,115
SMEs exist in the manufacturing sector12, no successful supporting industry
database has been constructed at the national level. Although Vietnam has amuch smaller number of manufacturing firms, it would be equally difficult tocompile a nationwide database because of the undeveloped data collecting system13. In contrast, at the local level, registrants of a database are limited to thosein relatively small administrative areas. This is why successful databases inJapan are operated by city- or ward-level public organizations14.
The proper role of the national government is to indirectly facilitate
the development of local-level databases in each region. First, the national government can set the guidelines for minimum data requirements or provide subsidies and technical assistance to reduce entry or maintenance cost of databases.
Second, it would be beneficial if the national government initiated a pilot project to develop a model database, as local public organizations often lack sufficient administrative capacity. In such a database, the targeted sector should benarrow and the number of firms to be included should be kept small to matchthe operation capacity of most local public organizations. At the initial stage,
the database may contain very detailed data of a very small number of firms,
say 10 to 20. In this regard, one good example in Vietnam is the businessmatching program organized by the Technical Assistance Center (TAC), which
belongs to the Agency for SME Development (ASMED) under the Ministry ofData for 2004 as cited in Small and Medium Enterprise Agency (2006). In Japan, an SME is
defined as a company with a capital of less than JPY300 million (about US$2.6 million) or whose
employees are fewer than 300.
13
According to the General Statistics Office (GSO, 2006), 20,531 manufacturing firms operate
nationwide. Decree 90/2001/ND-CP defines that an SME is a company with a capital of less than
VND10 billion (about US$0.6 million) or whose employees are fewer than 300. With this definition, 76.1% of Vietnam’s manufacturing firms are SMEs. However, almost all firms in Vietnam
are considered as SMEs by the Japanese standard. For example, in 2003, about 90% of the firms
had capital of less than VND50 billion (about US$3 million) according to GSO (2005).
14
The ward (ku) is an administrative unit within a large city such as Tokyo, Yokohama, and Osaka,corresponding to quan in Vietnam.
1278

Designing and Managing Supporting Industry Databases

Figure 3. Information categories in Japanese databases
Group 1: To be Disclosed

Group 2: To be Confidential

Company Name

Main Products

Profit & Loss

Contact Address

Introduction

Age of General
Director

Availability of
Successor

Group 3: Up to Registrants

Annual Sales

Production Facility

Main Customers

CapitalProcessing Accuracy

Number of
Employees

Quality Certification

Planning and Investment (MPI). This program has collected relatively detailed
information on ten high-potential suppliers in selected sectors, and distributed
the list to Japanese assemblers through the Japan Business Association. Ideally,
interested provincial governments should learn database methodology from thispilot project and initiate their own databases, which also include unique regional features.

8. Disclosure versus confidentiality of company information
In principle, firms are not obliged to disclose all company information in the supporting industry database; participation in databases is voluntary.
Firms should have the right to selectively provide information that can be published. In Japan, registration forms usually consist of three groups of information: (i) information that must be disclosed for all firms, (ii) information thatmust remain confidential for all firms, and (iii) information whose status can bechosen by individual registrants (Figure 3).
The first category of information usually contains company name,contact address, main products, and self-introduction. The second category of
information includes profit and loss, age of general director, and availability ofsuccessor. It is not posted in the database but is used as confidential inputs forpolicy formulation.

79

Junichi Mori

The third category of information constitutes the core of the supporting industry database. It includes many items directly related to the supplierselection criteria explained above (Figure 2), such as annual sales, capital size,
production facility, processing accuracy, main customers, number of employees, and quality certifications. Although these data are less sensitive than thosein the second group, it is appropriate to allow registered companies to decide
which information is to be disclosed and which information is to be confidential. If database operators require firms to disclose all data in the third group,
some of them may opt out of the database altogether. For example, one Japanese local public organization asked firms to choose whether to disclose or hide
all data in this category without permitting them to select item-by-item. As aresult, more than half of the registered firms decided to keep all the data secret.
Although allowing companies choices about disclosure is important,the database will not function well if firms withhold too many items in the thirdgroup. Without disclosing them, a supporting industry database becomes a business directory. To avoid this situation, database operators should patiently persuade firms to disclose these data. In Okaya City, only 520 firms agreed to fully
disclose their data in the database among the 600 firms that submitted data. The
remaining 80 firms filled in all required information in the registration form,
but did not want to show it in the web. Some of them are afraid that the webbased database may allow anyone, even unwelcome people or companies, toaccess company information freely. For example, several firms in Okaya City
expressed their concern that releasing company information would increase
junk mail and random sales calls rather than serious business inquiries. The
municipal government of Okaya is now trying to convince them that the benefits of disclosing information should outweigh the demerits. Another solution
may be to limit database access to selected potential buyers screened in advanceby database operators, until the time when registered firms fully recognize thebenefits of data disclosure. In Vietnam, this may be an option in particular forpilot projects, but such screening will inevitably increase the administrative
load of database operators.

80

Designing and Managing Supporting Industry Databases

9. Concluding remarks
Several years ago, few FDI assemblers were interested in increasing
local procurement in Vietnam because most of them were busy stabilizing their
daily operations. In the initial stage of operation, FDI assemblers have todepend on imported parts. However, an increasing number of FDI assemblers
are now eager to move local procurement to the next stage, in which they must
improve cost competitiveness for survival. Vietnam’s integration into the global
and regional free-trade systems such as World Trade Organization (WTO) and
ASEAN Free Trade Area (AFTA) also accelerates this movement, because FDI
assemblers, even when they mainly target the domestic market, must competewith imports after tariff protection is removed.
In order to catch this wave of local procurement, effective supporting
industry databases are urgently required. Databases will assist FDI assemblers
to increase local procurement and allow local suppliers to establish business
relations with FDI assemblers. Some are concerned that, because FDI assemblers will trade only with FDI suppliers, local suppliers will not be able toexpand business even if supporting industry databases are constructed. However, this view is myopic and unwarranted. Although FDI assemblers buy parts
mainly from FDI suppliers at first, they will gradually be forced to seek local
suppliers if they hope to reduce procurement cost. Moreover, parts industries
are multi-layered, and FDI suppliers also need to buy parts from local suppliers.
Supporting industry databases can increase business not only between FDI
assemblers and local suppliers but also between FDI suppliers and local suppliers. For these reasons, supporting industry databases are a necessary lubricant
in promoting the strategy of FDI-led industrial development as well as providing benefits to local firms.

References

General Statistics Office (GSO). (2005). The real situation of enterprises: Through theresults of surveys conducted in 2002, 2003, 2004. Hanoi: Statistical Publishing
House.

81

Junichi Mori_________. (2006). Statistical yearbook of Vietnam. Hanoi: Statistical Publishing
House.
Japan External Trade Organization (JETRO). (2005). Japanese-affiliated manufacturers
in Asia (ASEAN and India): Survey 2004. Tokyo: JETRO.
Vietnam Development Forum (VDF). (June 2006). Supporting industries in Vietnam:
From the perspective of Japanese manufacturing firms, VDF Policy Note No. 2.
Tokyo: VDF.
Ministry of Foreign Affairs (MOFA). (2003). The report of Vietnam-Japan joint initiative to improve business environment with a view to strengthen Vietnam’s competitiveness. Tokyo: MOFA.
Ministry of Economy, Trade and Industry (METI). (2006). Dai 34 kai kaigai jigyou katsudou kihon chousa kekka gaiyou: 2003 nendo jisseki (The 34th survey on overseas
business activities: Actual results in 2003). Tokyo: METI.
Small and Medium Enterprise Agency. (2006). Chuushoukigyou hakusho 2006 nenban(White paper on small and medium enterprises in Japan). Tokyo: Gyosei.

82

Appendix A
Six Cities Visited by the Author, Map of Okaya City and Vicinity

Designing and Managing Supporting Industry Databases

83

31

Ogaki Chamber ofCommerce

Techno Plaza Okaya

Kawasaki-city Industrial
Kawasaki Database
Development Foundation

Sumida SME Center

Ota-ku Industrial
OTA-TECH.NET
Development Association

4

5

6

7

8

○
○

20,000?
?

ASEAN Supporting
Industry Database

VCCI

BOI, Thailand

SMIDEC, Malaysia

2

1

3

Enterprise 50○

60,000Vietnam Yellow Pages

Vietnam BusinessDirectory

Yellow Pages JSC

1
○

○

?

Chino-city

Suwa-city Industry
Guide

9

10 Suwa-city

○

○

○

?

2,500

○

○

○

○

○

○

Contact
Address

Monozukuri-net Chino about 400

Enterprise Database

1,300

600

194

Hamamatsu Chamber ofCommerce3

Okaya-city Enterprise
Database

54

Monozukuri-net

Fujisawa Chamber ofCommerce2

Registerd
Firm

98

Name

Sagamihara Chamber ofCommerce

Administrator

1

Cou
No.
ntry

Japan

Vietnam84

Others

○

−

−

−

○

○

−

○

○

○

○

○

○

○

Year ofFoundation

−

○

−

−

○

○

○

−

○

○

○

○

○

○

Capital

−

○

−

−

−

−

−

−

−

−

○

○

○

○

Annual
Sales

−

○

−

−

○

○

○

○

○

○

○

○

○

○

−

−

−

−

○

○

○

○

○

○

○

○

○

○

No. ofIntroduction
Employees

Registered Information

○

○

○

○

○

○

○

○

○

○

○

○

○

○

Main
Product

−

−

−

−

−

−

−

○

−

○

○

○

○

○

−

−

−

−

○

○

−

△

○

○

○

○

○

○

Main
Production
Customers
Facility

Appendix B
Comparison of Supporting Industry Databases in Japan, Malaysia, Thailand, and Vietnam

−

−

−

−

−

−

−

−

−

○

○

○

○

○

ISO

Junichi Mori

Designing and Managing Supporting Industry Databases

Appendix C
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Source: Okaya City’s Enterprise Database, available at http://www.tech-okaya.jp/top.html, as translated by the author.

86