<VDF Issue Paper>
Designing a Comprehensive and Realistic Industrial Strategy
February 3, 2004
Kenichi Ohno (VDF & GRIPS)
This paper raises a number of issues that should be considered in revising Vietnam’s
overall industrial strategy. Our purpose here is to offer some sharply formulated ideas toinitiate discussion for our future study. The proposals contained below partly reflect theconclusions of the previous NEU-JICA joint research (2000-03) but new arguments arealso added.
1. Weaknesses in industrial policy making
Vietnam’s industrial policy is often said to be inconsistent and unpredictable. There arethree different levels of the alleged problem.
First, the fundamental direction of overall industrialization strategy remains unclear. The
national goal is to become an industrial country by 2020. Some growth targets up to 2010
are given numerically in the official documents (the Five-Year Plan and the Ten-Year
Strategy). Beyond these, however, details are not spelled out. The missing “details”
include, for example:
 What does it mean, concretely, to be an industrial country by 2020?
 What is the roadmap (with interim targets) from now to 2020?
 Which industries will (or should) be the growth engine?
 What are the roles of SOEs, SMEs and FDI, respectively?
 What should be the strategy for coping with international integration?
 How should government and market be blended in Vietnam’s industrialization?
 How should supporting industries and upstream investment be promoted?
Second, the strategies for individual key industries are nonexistent or poorly formulated.
While MOI has produced a fairly large number of master plans for individual industries,
the quality of these master plans generally falls short of the required level in the age ofglobalization. In particular, industrial targets are defined in terms of physical quantities(production, exports, domestic supply ratio, investments, etc) rather than Vietnam’s
relative position in global competition (cost, quality, quick response, design, marketing,etc). Moreover, policy measures to improve competitiveness are not proposed concretelyor realistically. This largely comes from the absence of good analysis on the current
global competition.
Third, economic decision making is decentralized and industrial policy is not unified.
Different policy components which should be integrated actually conflict with each other,both horizontally and vertically. Different ministries formulate policies without muchcoordination. Conflicts between central and local authorities and implementing agencies

1are not resolved. Various policy components (industrial promotion, WTO negotiation,
FDI attraction, tariff and tax structure, public investment, etc) are not mutually enhancing.
This paper mainly concentrates on the first level, namely the questions related to overall
industrial strategy making. The other two levels are equally important but will not be ourmain focus below (for these, please see the NEU-JICA study1).
2. Defining an industrial country
What does it mean, concretely, to become an industrial country? This question should beanswered in a practical way which reduces uncertainty and encourages development,
rather than in a purely academic way. In fact, there is no easy way to theoretically define
an industrial country2. In this sense, the problem is a practical and strategic one regarding
how Vietnam should use its national goal to accelerate development.
The national goal should be ambitious but achievable under good effort. It should reflect
the reality of Vietnam as well as the global economy. If the goal seems clearly
unreachable, it loses meaning and credibility. Vietnam has already declared the goal of
joining the ranks of industrial countries by 2020 and cannot retract it politically, but its
precise definition has not been given. The ambiguity may be partly intentional, but webelieve it is time to specify its content more explicitly. This will improve the quality ofindustrial policy formulation and reduce the uncertainty that currently plagues businessenterprises.
We propose to think about industrialization in the following way.
First of all, the target for 2020 should not be too high. In sixteen more years, it is hardly
possible for Vietnam to become a full-fledged industrial economy on a par with the US,
EU or Japan. Within that time framework, it is also difficult to even reach the level of
Taiwan or Korea which possess capabilities to produce a broad range of products withlittle foreign assistance (Section 8). The goal for Vietnam in 2020 should be more modest.
It should be an industrialization based on skilled labor-intensive manufacturing, which isa part of the entire manufacturing activities. The goal for 2020 should be to become an
emerging industrial country with a leading position in a few selected manufacturing
processes in the global market, rather than a fully industrialized country.
Industrialization should not be measured by the absolute level of per capita income.
Surely, income growth is an important signal of successful development. But the absoluteincome level should be a suggestive indicator only and not an official target. There is no
theory to precisely tell us an income level that corresponds to an industrial country. The
1

JICA-NEU, Chinh sach cong nghiep va thuong mai cua Viet Nam trong boi canh hoi nhap, 2 tap, NXBThong ke, 2003; and GRIPS Mo dun thong tin, “Chien luoc cong nghiep hoa cua Viet Nam trong ky
nguyen toan cau hoa,” NEU-JICA, thang 8, 2003. Both documents are also available in English and partly
in Japanese.
2
Theoretically, industrialization can be defined to be a process of continuous expansion of manufacturingindustries as a growth engine (see below). However, there is no clear-cut definition of an industrial country
or the exact end-point of such a process. For more discussion, see Section 7 below.

2

important thing is that income continues to rise steadily and at a speed reflecting thenation’s growth potential.
Given the initial income level and a reasonable growth rate, the range of possible future
income is easily calculated. For Vietnam, per capita income targets of $730 in 2010 and$1,460 in 2020 are consistent with the official documents and should be achievable if
policy and economic environment are favorable. If the annual growth is 1.5% lower orhigher than this benchmark, income will be between $1,150 (bad case) and $1,850 (goodcase) by 2020. It is difficult to expect an outcome far outside this range. Setting theincome target much above this is not practical. Furthermore, these numbers are expressedin today’s dollar value and must be adjusted for price and exchange rate changes. This
makes the pursuit of absolute income targets even more ambiguous and complicated.

USD

Fo r re fe re n ce :Income in 2002
Malaysia ($3,880)
Thailand ($1,990)
Philippines ($970)
China ($960)
Indonesia ($820)
Laos ($330)
Cambodia ($300)

Plan
High
Low

2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020

2000
1800
1600
1400
1200
1000
800
600
400
200
0

Possible Paths of Per Capita GDP

Higher Income Group
Japan ($33,000)
Hong Kong ($24,000)
Singapore ($20,900)
Taiwan ($12,600)
Korea ($10,000)(ADB data)

In economic history, industrialization is normally defined to be a process satisfying thefollowing conditions: Durability—manufacturing industries3 grow continuously at a high speed (often
at double digits for a few decades or more) Contribution to overall growth—manufacturing industries are the largest
contributing factor to GDP growth (i.e., it is not just a small part of the national
economy).
 Structural change—the content of manufacturing industries shifts constantly from
simple processing to more complex production requiring high technology.
But this is a definition of an industrializing country (process), not an industrializedcountry (state). For the latter, we must improvise a new definition. We would like to3This is a narrow definition. The broader definition of industrialization additionally includes the growth ofmining, construction, transportation, telecommunication and public utilities which are closely related to thegrowth of manufacturing. In this paper, we prefer to use the narrow definition.

3

propose the following five criteria for Vietnam with special attention to its integration
into East Asian dynamism:
 Relative income—Vietnam joins the rank of successful East Asian countries withan income level comparable to its middle group (China and ASEAN4). This is arelative income target rather than an absolute one discussed above. At present,
Vietnam belongs to the lowest income group in East Asia rather than the middle
income group.
 Export structure—manufactured goods4 account for at least (75%)5 of exports.
This means that Vietnam no longer exports primary commodities mainly but its
export base has definitely shifted to manufacturing.
 Selected leading status in high-quality manufacturing—the country achieves aleading status in at least a few high-quality manufactured products or processes in
the global market. This requires an agglomeration of production which enables
Vietnam to become one of the largest exporters of that product in the world.
Moreover, this should be realized through good quality and reputation, notthrough large quantity driven by low price and low quality. For this, a full
mobilization of Vietnamese workers’ potentiality is the key (Section 5).
 Establishment of supporting industries—in the leading industries noted above,
there is a healthy growth of supporting industries (parts and materials) so that
localization ratios are high. For important industries such as garment, electronics,
motorbike, etc. medium-term targets for localization should be set in close
consultation with domestic and FDI producers and with periodic revisions asnecessary. However, 100% localization (full vertical integration under selfsufficiency) is not desirable in the age of globalization and international divisionof labor. Vietnam should establish a regional production network with Southern
China and the rest of ASEAN, exporting some parts to them and outsourcing
some inputs from them. What level of localization should be optimal should bedetermined from a strategic viewpoint.
 Internalization of supporting services—domestic skills that support high-quality
manufacturing are available so that it is no longer necessary to rely heavily on
foreigners. At least (70%) of skilled labor inputs should be domestically suppliedand only very specialized skills should be sourced externally. Needed skills
include policy design, production management, global marketing, “landmarketing” (advertisement for FDI and industrial parks), product design and so on.
To define the industrial targets for 2020, experiences of other East Asian countries arehighly suggestive. In particular, Thailand should be a good reference country for
Vietnam’s policy making. Today’s Thailand has an income level close to what Vietnam
can achieve in 2020. It belongs to a group of successful middle-income countries in East
Asia with manufactured products accounting for 75.6% of total exports. Thailand excels
in selected areas of high-quality manufacturing such as electronics and automobile. It
4

We define manufactured goods to be those belonging to SITC codes 5, 6, 7 and 8. Alternative definitions
are also possible.
5
The numbers in parentheses here and below are preliminary suggestions only, to be finalized with more
careful analysis.

4also has relatively well-developed supporting industries for these industries. However,there are also shortcomings. The long-term potential of Thai workers does not seem as
good as in Vietnam and the internalization of supporting skills (technical transfer) still
remains low. Thailand also did not succeed in reducing income gaps within the country
and slowing labor migration into Bangkok.
Thailand will probably continue to grow and be more developed by 2020. Our idea is notthat Vietnam should copy the development path of Thailand but use it only for a usefulreference point. Vietnam should aim at the industrial achievements of today’s Thailand at
the least, and try to do even better than Thailand in some aspects including internalizationof supporting activities, use of highly skilled labor force, income equity and controllingurban congestion, by 2020 (or even sooner). We believe this is a realistic goal. When thisis achieved, Vietnam can aim at even higher targets in the following decades (Section 8).

Manufactured Exports(% of total exports)
100%
Japan

Top Group

Taiwan80%

ThailandKorea

2nd Group
Singapore

60%

China
Malaysia

40%

Latecomers

ThailandPhilippines

20%

VietnamIndonesia
Vietnam

1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002

0%

Source: ADB, Key Indicators of Developing Asian and Pacific Countries , 2003/2001/1993; IMF, International Financial Statistics Yearbook 1990 .
For Japan, Japan Statistical Yearbook 2003/2002/1999 , Statistics Bureau/Statistical Research and Training Institute,
Ministry of Public Management, Home Affairs, Posts and Telecommunications, Japan.

3. Fundamental strategy
The fundamental orientation of industrial strategy is very important. But after ten years ofintensive global integration, Vietnam should not be debating it forever. The country
should decide what to do and implement necessary policies as soon as possible. In an
uncertain world, we cannot wait for perfect answers. Even if information is incomplete,
Vietnam must act now in order not to miss the dynamic opportunity. We believe it is hightime for Vietnam to clearly announce its desired development path.

5

Officially, Vietnam has adopted the multi-sector economic principle which accepts thecontribution of all sectors: farmers, family businesses, private enterprises, cooperatives,
SOEs and foreign-invested enterprises. But the role of each sector has not been clearlyspecified in the process of industrialization and modernization. In particular, the questionof which sector should lead the national economy has not been resolved despite theheated debate since the 1990s.
There are alternative views concerning this matter.
The state-led view argues that the state, not the market, should guide and direct
the development process. Otherwise, growth will be too slow or imbalanced. If
the private sector is unwilling to invest upstream or promote localization, the statemust invest or strongly guide the private sector to do so. SOEs should also play animportant role. This view contends that vertical (upstream) development of key
industries is essential for economic security and full-fledged industrialization.
The FDI-led view argues that policy should supplement the market rather thandictate it. Since Vietnam’s current industrial capability is too weak to cope withintense global competition, Vietnam should increase and fully utilize FDI for its
development. The government should also support local firms to link up with FDI
firms which have extensive global networks. This has been the successful strategy
in East Asia (including Thailand). As long as the policy is decided and owned by
Vietnam, FDI-led growth will not mean the loss of economic autonomy.
The SME-led view, by contrast, considers that the main source of growth mustcome from the domestic private sector, not SOEs or FDI firms. While Vietnam’s
private sector still remains weak and small, it has shown strong growth since thenew enterprise law of 2000. At present, SMEs continue to be suppressed due tounequal legal and policy frameworks. If such obstacles are removed and SMEs
are given the “level playing field,” they can become an endogenous growthengine.
The market-led view argues that the government should intervene as little aspossible in order to let the market determine winners and losers in global
competition. Policies implemented under political pressure and without sufficient
information make the situation worse. While market solutions are often harsh,
they are better than subsidies and protectionism. This view strongly supports
privatization, trade liberalization and the minimal role of the government.
While these views may partly overlap in some cases, we can say that they point tofundamentally different strategic directions and are, in that sense, mutually exclusive. In
the workshops and symposiums we have hosted, we have found that Vietnamese policy
makers are often divided between the state-led view and the FDI-led view. The Japanese
researchers and business community have strongly advocated the FDI-led view for
Vietnam (this paper is also based on this view). However, there are also some Japanese6experts who support the SME-led view. The market-led view is sometimes presented byforeign experts but not seriously considered by Vietnamese policy makers.
The fact that the Vietnamese government remains ambiguous in its fundamental position,
especially between the state-led view and the FDI-led view, creates a big problem fordomestic and foreign investors alike. They are worried and uncertain whether the market
principle will be strongly committed and promoted in the future or it may be modified orsuspended at will in the name of “national interest.” Foreign manufacturers considering a
relocation of their factories within East Asia are particularly sensitive to the reliability ofthe policy framework.
We urge the Vietnamese government to state its position on this matter unequivocally inthe overall industrial master plan (and even in the next Five-Year Plan). My advice is tomake an official statement including the following points:
 Vietnam is deeply and irreversibly committed to international integration and themarket-oriented economy. The goal of industrialization and modernization will beachieved through improved competitiveness under these commitments, notthrough protection or subsidies.
 The Vietnamese government will play a crucial role in promoting industries aswell as reducing various social costs associated with rapid industrialization andglobalization. Such policies are necessary since Vietnam’s market economy is in
the early stage of development. However, the ultimate fate of each industry shallbe determined by global competition and the effort of each producer, not by thegovernment.
 FDI will be strongly promoted as the main pillar of growth in the initial stage ofindustrialization (up to 2020). Creating a free and low-cost business climate for
FDI attraction is a top national priority. At the same time, policies to help local
firms link up with FDI firms and participate in the global market will also be
implemented.
 SMEs are important because (i) they are the source of domestic growth andemployment; (ii) they can become the basis of supporting industries; and (iii)some of them can even become globally competitive. Supporting measures
toward these goals will be provided.
 SOEs will be selectively reformed in proper steps. SOEs which can becomecompetitive through management reform and foreign linkage will be promoted.
Other SOEs will be downsized, merged or closed while paying due attention tosocial impact. The speed of downward adjustment will be tuned to the speed ofprivate and FDI sector development. The relative share of SOEs will be lowered
through private sector development rather than a forced absolute reduction of the
SOE sector (the two-track approach to SOE reform).
These are my suggestions only. The Vietnamese government should decide theappropriate contents of fundamental strategic direction by itself. Whatever the contents
may be, however, there should be no ambiguity about the role of each economic sector.

7

4. Innovation in industrial strategy making
We propose the following shifts in the methodology of formulating industrial masterplans, both for the overall economy and individual industries.
From quantity to quality (competitiveness)
Many of the existing master plans are expressed in desired quantities (output,
export growth, local supply ratios, investment projects, etc) which in turn reflect
certain policy goals of the top leaders. However, there is a significant gap
between Vietnam’s current capability and the severity of global competition. Anyplan which disregards this fact can hardly be successful. In the age ofglobalization, industrial strategy needs to be formulated to create international
competitiveness. This requires (i) thorough understanding of global and regional
trends; (ii) competitiveness analysis of rival countries (particularly China andThailand); and (iii) ascertaining Vietnam’s current position; and (iv) designing
realistic and concrete measures to raise Vietnam’s competitiveness to the level ofthe target rival country (and beyond).
International competitiveness results from various factors. The physical quality ofthe product is of course crucial, but that alone is not enough. Consider thefollowing aspects:
 Cost factor—for many producers, the largest cost component is parts andother intermediate inputs. Other important costs include electricity, land,
water, telecom, transportation, residence, etc. Coping with bureaucraticharassment can also be very costly. Surprisingly, the wage level is not very
important for many manufacturers. Its cost share is normally very small andits rise can be offset by productivity improvement.
 Time factor—quick response to market changes and customer requirement is
the key to success. This includes not only short production time but also thetime for design, transportation, customs clearance and final delivery tocustomers. Again, bureaucratic delays are highly detrimental to global
business strategy.
 Specialization and small lot production—mass production of low-to-medium
quality goods is easy, but it is invariably associated with excess supply andlow profitability. Vietnam should aim at high-quality specialized productswith small production lots which promise higher profit margin, rather thancompete directly with Chinese mass produced goods. This is true in almost all
products: electronics, garment, footwear, motorbike, seafood, furniture,
handicraft, etc.
 Choosing the right production model—there are different production models
in global competition: integrated vs. modular, vertical vs. horizontal, etc.
Vietnam should select the production models which are most suitable for its
dynamic comparative advantage (skilled labor-intensive manufacturing).

8 Marketing—firms that can reach out to consumers and users can get better

information and higher prices than those that don’t. Vietnam currently lacks
the ability to conduct effective international marketing.
 After-purchase support—for durable products, reliable after-purchase service
also contributes to building good reputation and customer loyalty.
From product orientation to process orientation
The Vietnamese government encourages high-tech industries. Under extensive
international division of labor, however, the concept of high-tech products ishighly ambiguous. The popular notion that computer, DVD, digital camera, etc.
are high-tech while garment, footwear, food, etc. are low-tech is misleading.
When upstream and downstream processes of one product take place in different
countries, some processes require high technology and creativity while otherprocesses can be done by any country. Naturally, value-added is more often
associated with high-tech processes, not with the entire product.
The diagram below shows where the value is typically created in computer
production. Value is high at the beginning (design and parts) and the end(marketing) while the middle process (assembly) is fairly low-tech. In this sense,
computer assembly is not much different from cutting and sewing garment. The
most “high-tech” process I have witnessed in Vietnam was a frozen shrimp
factory in Can Tho. To comply with hygienic standards for export, the factorymust use state-of-the-art production management and equipment. The idea thatcomputer is high-tech and shrimp is low-tech is seriously mistaken.

Value-Added in Computer P roduction
Value
Hightech

SoftwareProcessor
MemoryLCD

Brand nameSales channels
Sales management

Monitor
HDD
Motherboard

LowtechVietnam shoul dstart wi th assembly
but gradually
improve capability

Design& parts

Assembly

Upstream

MarketingDownstream

Source: Adopted from Yumiko Oka moto, “ Electronics and Electrical Industries,” in K. Ohno & N. Kawabata eds,
Industrial Strategy of Vietnam, Nihon Hyoronsha, 2003, p.101 (Vietnamese translation in 2003, p.116)

9

Moreover, even low-tech processes can generate much value-added and profit if
performed with skilled workers under excellent management. The difference
between cheap garment of ordinary quality (men’s white shirt) and expensive
garment of high quality (ladies’ fashion) is substantial. Vietnam should movefrom the former to the latter over time.
For these reasons, distinction between high-tech and low-tech products is not very
meaningful. We need to think in terms of processes, not products. The important
thing is to start with “easy” processes but gradually increase value by (i)performing the easy processes better than other developing countries (including
China); and (ii) gradually expand to adjacent, more high-tech upstream anddownstream processes of the same product. These correspond to vertical andhorizontal gray arrows in the diagram above.

From picking individual industries to setting a broad direction
Industrial promotion requires a delicate balance between government and market.
There is no doubt that the market should be the ultimate judge for the fate of any
firm or industry. However, this does not mean that everything should be left to themarket force. The government must support the burgeoning market while notobstructing its development. This is a very subtle task. The problem is particularly
acute for a country like Vietnam with underdeveloped markets and insufficient
policy capability.
There have been many studies on the competitiveness of Vietnamese industries.
One popular method is to classify individual industries into competitive,
somewhat competitive, and not competitive and so on, according to revealed
comparative advantage (RCA), effective protection, labor content, qualitative
judgment, etc. However, such categorization may not indicate true dynamic
comparative advantage of Vietnam. First, these studies rely on past and present
situations, not future possibility. Second, dynamic comparative advantage is notpredetermined but can be created in some cases by appropriate policies. Third,
industrial strategy should be formulated for processes, not for industries or
products as argued above6.
The government should generally support production processes which are suitablefor Vietnam without pre-judging specific industries. Which products andprocesses will emerge is up to market competition whose result is hard to predict
even for international producers. The government has much less information thansuch producers. Its proper role is to indicate the general direction clearly without
6

In some studies, for example, steel is classified as an “uncompetitive” industry. However, there are many
products and processes within the steel industry. To say unconditionally that the entire steel industry is
uncompetitive is, we think, a bit too crude. In long steel rolling (bars and wires) and galvanizing sheets,
where required capital is relatively low, there is already excess supply in Vietnam. As to flat steel rolling,
Vietnam is currently building its first cold rolling mill whose competitiveness will depend, among otherthings, on the production management capability and appropriateness of policies (including tariff rates).

10

micromanagement. Whenever individual industries are evaluated, the government
should listen and follow or predict the market trend rather than imposing its own
ideas on it.
5. Skilled labor-intensive manufacturing
Based on the arguments above, we believe the proper way to announce the direction ofindustrial promotion is something like this.
“Vietnam’s dynamic comparative advantage in the next few decades lies in skilledlabor-intensive manufacturing. Vietnam is endowed with high-quality labor force
whose potential is second to none in East Asia. This human resource however is
not yet fully utilized to meet the challenges of increased external competition. The
government will prioritize and strongly support any production processes whichtake advantage of Vietnam’s skilled labor.”

Industry A

Industry B

Industry C

text ileelectronics

motorbike

Upstream

Vietnam shoul dfirst concentrate
and i mprove on
skilled laborintensive processes.
From this base,vertical expansion
shoul d be achieved
gradually (notforced).

Next step
Current size
Downstream

Further step

“At present, Vietnam has already achieved some successes in the labor-intensive
processes of the following industries: garment, footwear, seafood, electronics,
furniture, and handicraft. The government will encourage expansion (horizontal)
and increased value-added (vertical) of these processes. It will also support skilledlabor-intensive processes in other industries (software, household tools, foodprocessing, etc). These are the leading industries for Vietnam. Vietnam aims to be
the top-class country in these areas by 2020.”“At the same time, these leading industries require parallel developments of otherindustries that support them. The following ‘supporting industries’ in a broad11

sense will also be promoted for the purpose of smooth and healthy
industrialization:--Hard supporting industries (parts and materials)--Soft supporting industries (product design, global marketing and procurement,
telecom, transportation, power, water supply, etc)--Industries to fulfill growing domestic demand (steel, chemicals, plastic, paper,
cement, etc. but with partial--not 100%--local supply and under careful
evaluation of cost and competitiveness)”
6. Attracting a critical mass of FDI
FDI attraction is the most important task under the industrial strategy proposed in thispaper. Vietnam’s FDI policy is improving but its speed is too slow to effectively respondto the rising global challenges including China, FTAs, WTO negotiation, etc. We urge a
drastic improvement of FDI climate in order to make Vietnam the best FDI destination in
East Asia (better than China and Thailand).
At present, there are mixed signals about FDI inflows into Vietnam. On the one hand,donors and business communities continue to complain bitterly about the inferiorbusiness climate. On the other hand, foreign firms (especially small ones) are beginningto show renewed interest in investing in Vietnam since 2003. The JETRO in HCMC
reports a sharp increase in the inquiries and visits by Japanese enterprises in recent
months. Should we be pessimistic or optimistic?
My view is that these periodic fluctuations should not worry the policy makers too much.
FDI inflows are sometimes high and sometimes low, but the fundamental problem ofVietnam is that the base is too low anyway. It has not yet received a critical mass of FDI
to ignite robust industrialization. Instead of worrying about small fluctuations, there
should be a dramatic policy shift to realize a much higher average level of FDI in themedium to long term, perhaps five to ten times more than the current level of $2-3 billion
per year.
Thailand and Malaysia transformed themselves from primary commodity producers (rice,rubber, tin, etc) to global electronics exporters during the late 1980s, when they received
strong inflows of electronics FDI on the order of 100 firms or more. As a consequence,
their manufactured export ratios rose from 30-40% to 70-80%. Vietnam has notexperienced such an event yet. If Vietnam wishes to become a world leader in any
production process, it also needs to receive torrential FDI inflows for several years. It
needs to attract not just small firms with isolated operation, but an entire group of large
firms and their numerous suppliers. In other words, the “Cannon effect” must be
multiplied by many times to realize this transformation.
FDI dynamics in East Asia is highly complex. The two forces of agglomeration(concentration of a certain process in one location) and fragmentation (international
division of labor among such concentrations) are at play. Furthermore, their interactive
patterns differ from one industry to another. In this dynamic process, it is never too late to12join the game and attract new FDI. This is particularly so in the electronics industry
where new products are created continuously. Vietnam’s goal should be to become an
important link in the agglomeration-fragmentation dynamics of East Asia.

Agglomeration
Initial concentration has anaccelerating effect
SiliconValleyFragmentation
PB: production block
SL: service link

International division of laborin parts production & assembly

SL

PB

SL

PB

SL
PB

PB
SL

PB

SL

Moreover, MNCs are constantly in search of new locations that offer the lowest cost of
doing business. They will happily shift their factories across countries in order to win
global competition. Among Japanese manufacturers, China is undoubtedly the mostfavored FDI destination, but putting all eggs in one basket is risky. Many large firms arealso considering new investments in ASEAN, and Thailand and Vietnam are currently
two top candidates. Thailand is reliable but less dynamic. Vietnam is exciting but its FDI
climate is inferior. By improving FDI climate, Vietnam can position itself above Thailand
as the No.1 FDI host country in ASEAN. This consideration should be included in FDI
policy formulation.

13

Japanese Firms: Choosing FDI Host Countries

China
Merits: Size, cheap & abundant labor,
engineering, material supply, etc
Demerits: policy & legal climate, lack of
IPR protection, energy shortage,risk of concentration

ASEAN
Too costly:
Singapore
Malaysia

Thailand?

Reliable but lessexciting

Too unstable:

Vietnam
Excit ing but risky

Philippines
Indonesia
Myan marNo one expects Vietnam to become an investors’ paradise overnight. However, investors
need an assurance that Vietnam is keenly aware of its inferior investment climate andtaking realistic steps to correct it as a top national priority. Therefore, the most important
thing in attracting FDI is to send the right signal. Changing the image of Vietnam is more
important than what Vietnam can actually do today. In this sense, it is a psychologicalgame. Market psychology can be changed quickly even though roads and ports cannot be
upgraded immediately.
My advice is to prioritize and sequence actions rather than trying to do everything at once.
Specifically, I propose that Vietnam start with the following “easy” actions which require
little capital investment but may have large announcement effects7:(1) Declare a national campaign to become No.1 FDI host country in ASEAN(2) Concentrate authority for economic policy formulation(3) Mobilize foreign expertise more strategically(4) Execute the Vietnam-Japan Joint Initiative well(5) Create the Vietnam Investment Promotion Agency (VNIPA)(6) Create a few bright spots and advertise effectively, for example--Reduce industrial electricity tariffs to lowest levels in East Asia--Reduce telephone charges to lowest levels in East Asia--Create the fastest and cheapest internet environment in ASEAN(7) Policy debate on public utility charges (incl. possibilities to lower them)7

For details, please see my Vietnam at the Crossroads, VDF Policy Note no.1, December 2003.

14

In conducting these policies, MOI needs to cooperate closely with other economic
ministries, especially MPI.
7. Building optimal regional linkage
On the one hand, there is an acute need to develop supporting industries so Vietnam does
not have to rely heavily on imported inputs. On the other hand, globalization requires thatcountries should trade industrial goods with each other instead of trying to produce
everything domestically. Do these statements conflict with each other?
The key to solve this “contradiction” is for Vietnam to become a crucial link in the East
Asian production network by specializing in certain processes while importing otherintermediate goods from neighboring countries. The goods Vietnam produces and exports
must be those that take full advantage of its dynamic comparative advantage (i.e., skilledlabor-intensive manufacturing) while the goods Vietnam imports must be those in which
other countries have dynamic comparative advantage. When these goods are combined
properly, the result will be the highest competitiveness in the global market. But if
combined wrongly, the outcome will be disastrous. To survive and win tough global
competition, it is essential to combine the best from each country.
For the goods in which Vietnam specializes, there should be sufficient agglomeration anda broad development of supporting industries. Supporting industries are needed in someindustries only to strengthen Vietnam’s dynamic comparative advantage. For the goods inwhich Vietnam does not excel, there should be no encouragement of upstream investment
since the money will be wasted. For example, Hong Kong offers a wide variety of textile
materials at low cost. Vietnam should outsource textile materials from such international
textile centers and add high value in the production of garment, rather than investing
public money to produce textiles. If private companies are investing in upstream
production, it is they who will take the risk. But the government should not pour a hugeamount of money for production the private sector considers inefficient.
China (especially Southern China) and the ASEAN neighbors are particularly important
potential partners for Vietnam8. Geographically, Vietnam is ideally located to serve as abridge between China and ASEAN. China is often regarded as a threat to Vietnam’s
industrialization. This is partly true, but China’s role as Vietnam’s partner in international
production should also be emphasized. China excels in producing industrial materials andinputs of low-to-medium quality at low cost. This advantage should be combined with
Vietnam’s skilled labor to produce internationally competitive products.
What should be combined from which country? Determination of concrete combinations
requires in-depth and up-to-date knowledge of each product. Moreover, the state ofglobal competition is changing constantly. In formulating such a strategy, the government
should listen carefully to the words of many international business people before deciding.
Bureaucrats and professors are not the right persons to judge. In Japan’s industrialization
8

This point is frequently emphasized by the Japanese business community in Vietnam, including JETRO,
the management of Thang Long Industrial Park, etc.

15

process, the Ministry of International Trade and Industry (MITI) had extensive channels
of information exchange with the business community during the 1960s.
8. Breaking the glass ceilingThis issue may be a bit too early to discuss in the context of Vietnam today, but I believe
it is useful to have a longer-term vision as the medium-term strategy is formulated.
Vietnam’s goal should not be just to catch up with Thailand but go beyond.
Depending on the achievement level in technical absorption, industrial countries can beclassified into different types as shown below.
Type<Stage 1>
Assembly
only<Stage 2>
Assemblyand parts<Stage 3>Highdomestic
capability<Stage 4>
Fullinnovative
capability

Description
Without supporting industries. Heavily
dependent on foreign technology andmanagement.
With substantial supporting industries.
Still heavily dependent on foreigntechnology and management.
Technology and management are mostlyinternalized. Can produce high quality
products but cannot lead innovation or
product design.

Countries

Thailand, Malaysia,(China)Equipped with all industrial capabilities,
including innovation and product designin the frontline of technology.

Japan, US, EU

Vietnam

Korea, Taiwan

The criteria for the classification are the existence of (i) supporting industries; (ii)capability in technology and management; and (iii) capability in frontline innovation, in
the ascending order of difficulty.
Industrialization of developing countries usually starts from Stage 1 where simple
processes are established under foreign dominance. At this stage, most inputs areimported from abroad. In Stage 2, as domestic assembly reaches a critical mass, domestic
supporting industries develop (by either local or foreign-invested suppliers). However,production is still highly dependent on foreign technology and management. In Stage 3,technology and management capability is internalized, and foreign dependency issignificantly reduced. Finally, in Stage 4, capability to create new products and leadindustrial development on a global scale is achieved.
Climbing up this ladder is extremely difficult for most developing countries. Even in East
Asia where industrialization is said to be quite successful, only Taiwan and Korea havereached Stage 3. Within ASEAN, there is no country that has broken the barrier between
Stage 2 and 3. It is as if there is an invisible glass ceiling preventing the ASEAN

16

countries to go above that level. China may have the capability to internalize technology
in the future, but its current exports are highly dependent on foreign technology and parts.
It is too early to tell whether Vietnam can overcome this glass ceiling. Vietnam is still inStage 1 and the next goal is to climb up to Stage 2. But Vietnam has a long-term
advantage which Thailand and other ASEAN countries lack, namely, highly skilled anddiligent labor. If this advantage is combined with greatly improved policies and excellent
management, Vietnam will be able to become the first country in ASEAN to reach Stage
3. While the goal now is to attract as much FDI as possible, Vietnam should also begin toaccelerate technical absorption to prepare for the further stages of development9.
Internalization of technology and management will require patience and strong resolve.
But Vietnam’s industrialization strategy should not only fulfill short-to-medium run
targets but also have high aspiration for the long run.
9. Suggested contents of the overall industrial visionThis paper presented a number of issues that should be considered in upgrading
Vietnam’s industrial strategy. At the end of discourse, let us present a possible table ofcontents for an overall industrial vision10.

Part One: Analysis of the Current Situation
1. Global review

2. Regional review

3. Vietnam’s current
position--Global development and competition trends--Global economic conditions (Japan, US, EU, etc)--Trends in international trade: WTO, FTAs, etc.
--Trends in FDI, ODA and other transfers and capital flows--Asian dynamism and regional production network at present--Assessment of Chinese industrialization--Assessment of ASEAN neighbors--Status of AFTA implementation (for all ASEAN countries)--FDI competition with China and other ASEAN countries--Regional FTA initiatives--Industrial achievements under Doi Moi and globalization(past review)--Sources of current growth and its problems--Vietnam’s current position in East Asia’s production networkand global competition (income, technology, industrial
agglomeration, input supply, depth of international linkage,
production cost comparison, engineers and managers, etc.)

9

In my article, “The Lucky Country,” Vietnam Economic Times, January 2004, pp.14-15, I argued that
Vietnam’s policy and business management must be improved dramatically to take advantage of its highquality labor. The article is also reprinted under a different title in VDF Policy Note no.1, December 2003.
10
VDF will review the industrial strategy documents of other countries such as Malaysia, Thailand, Korea,
Japan, etc. However, the reality of Vietnam today is different from the situation these countries faced in thepast, especially in the intensity of international integration. While the experiences of other countries areuseful, we need to add new policy elements to cope with the increased pressure of globalization.

17

--Vietnam as an FDI host: policy improvements, perception offoreign investors, remaining tasks--Assessment of trade commitments and their impact (AFTA,
USBTA, WTO negotiation, regional FTAs, etc)--Vietnam’s strengths and weaknesses compared with China or
ThailandPart Two: Industrial Strategy up to 2020
4. Fundamental
Strategy forindustrialization

5. Industrial goals for2020

6. Leading industries
and supporting
industries

7. Reform ofindustrial policy
formulation

8. Linking industrial
policy with trade
policy9. FDI attraction andpromoting parts
suppliers

10. Optimal regional
linkage(See Section 3 of this paper)--Irreversibly committed to integration and market economy--Government will play an important supporting role--FDI attraction and local firm link up to FDI is main pillar--SMEs are also important for job creation, supplier base, etc.
--SOE reform: two-track approach(See Section 2 of this paper)--Relative income (join the middle income group)--Export structure (manufactured products: 75% or more)--Boast a few leading export items with global competitiveness--Establish supporting industries (“hard” supporting industries)--Establish supporting services (“soft” supporting industries)(See Section 5 of this paper)--Skilled labor-intensive manufacturing is the leading sector
and maximization of its potentiality is highest national priority--Skilled labor intensive processes: garment, footwear,
electronics, furniture, handicraft, and others--Promotion of hard supporting industries--Promotion of soft supporting industries--Promotion of industries to fulfill growing domestic demand(See Section 4 of this paper)--From quantity to international competitiveness--From product orientation to process orientation--From picking individual industries to setting a broad direction--Administrative reform within government (better vertical andhorizontal coordination)--AFTA tariffs, non-AFTA tariffs and WTO tariff offers--Policy on non-tariff measures, market access and other areas--Linkage between above measures and MOI’s industrial masterplans(See Section 6 of this paper)--Proper FDI targets in light of East Asian FDI dynamics andVietnam’s dynamic comparative advantage--Critical mass of FDI to ignite autonomous industrialization
and build supporting industries--Immediate actions and long-term improvements needed(See Section 7 of this paper)--Creating agglomeration of skilled labor-intensive parts in
Vietnam for export (with its supporting industries)18

--Outsource other inputs from China and the rest of ASEAN(See Section 8 of this paper)
11. Technical transfer--Measures to supply managers, engineers and professionals
and improving--Reform of higher education and studying abroad
domestic capability--Use of ODA technical assistance and FDI linkage--Up to 2005 (income, export structure, FDI, localization, etc)
12. Interim roadmap--Up to 2010 (same)
Note: This is the proposed contents of an overall industrial master plan. Master plans forindividual key industries must also be drafted separately.
This table follows the standard format of industrial strategy papers by many Japanese
economists, except that greater attention is given to the aspects of globalization that
Vietnam faces.
[END]

19