VIETNAM AT THE CROSSROADS
Policy advice from the Japanese Perspective

Kenichi Ohno

Vietnam Development Forum

December 2003

Foreword
This booklet contains two of my recent essays targeted at
economic policy makers as well as the general public in
Vietnam. Since 1995, I have had the honor of joining and later
leading a series of joint research projects on Vietnam’s
economic development funded by the Japanese government.
More recently, I have worked closely with the Japan’s
Ministry of Foreign Affairs to revise its ODA strategy for
Vietnam. Through these years, I have thoroughly enjoyedworking with talented officials and researchers in Vietnam. At
the same time, I have come to a firm belief that Vietnam can—and should—do much better than today in industrialization andinternational integration.
The first essay, originally drafted for a newspaper, presents theessence of our policy advice in a simple and bold way.
Meanwhile, the second essay explains our policy proposals in
more detail with supporting information. We advocate FDI-led
industrialization which fully utilizes Vietnam’s superb labor
force. At the same time, the Vietnamese government should
strongly support domestic enterprises to establish linkage with
FDI firms and their global production networks. I hope thatthese messages come across more clearly in the free-style
writings contained here, supplementing the thicker books andreports that we have also produced.
December 2003
Kenichi Ohno
National Graduate Institute for Policy Studies (GRIPS)Tokyo

Sitting on Gold and Not Knowing It
Vietnam Should Become Number One in Skilled Manufacturing∗Among all developing countries of the world, Vietnam is a very
lucky one. You may not believe it, but this is the impression I got
from my eight years of studying the Vietnamese economy. When I
make research trips to other developing countries in East Asia,
Central Asia, Middle East, Africa and Latin America, my impression
is further strengthened. Many of them are afflicted with severe
political fights, ethnic rifts, terrorism, or bankrupt government. They
receive very little FDI in manufacturing. Some are ostracized byinternational organizations. With such troubles, no one can even talkabout development strategy. Compared with these “average” lowincome countries, Vietnam’s society is very stable. Today’s Vietnam
has all the conditions to undertake serious development tasks. It is
one of the rare countries whose governments can concentrate mainly
on economic policies. Besides, foreigners (including donors) love
Vietnam.
But that does not mean that development is easy. In fact, I feel thatthe great advantages Vietnam has over other countries are currently
being wasted instead of used to propel the country along the path toprosperity. Many business people perceive Vietnam’s growthpotential but it is not yet realized. Surely, the recent economic
growth of 7% plus is commendable, but this is supported by large
inflows of foreign money and a real estate bubble rather than
improved technology and competitiveness. It is not a homegrowndevelopment.
Social stability and a good location in East Asia are certainly strong
points. But the greatest asset of Vietnam is its people. What I mean is
not hospitality or kindness in general, but the quality of workers infactories and offices. Nowhere else in the world (this includes both∗

A free-style article based on the author’s essay written for the Vietnam Economic
Times.
1the developed and developing world) do workers perform as precise
and reliable duties as in Vietnam. All FDI factory managers I visitedin Vietnam attest to it without exception. They also complain about
the inferior quality of labor they experienced before in China,
Thailand, Malaysia, Indonesia, and so on. Some even say that
Vietnamese workers are better than Japanese workers.
In short, Vietnamese workers are number one in the world, and thisgreat asset must be fully mobilized to meet the challenges of China,
AFTA and WTO. But workers perform wonders only when guided
by good management and good policies. The big problem now is that
top-quality workers are combined with terrible management andinconsistent policies, so their potential is never realized. In thegarment industry, for example, the average productivity ofVietnamese workers is much lower than in China. This is not due toclumsy hands but because of poor production management. When astate-owned garment company rearranged sewing lines using
scientific analysis provided by a Japanese buyer, its productivity
increased dramatically from eight to fifteen shirts per worker per day.
Another interesting phenomenon is the sharp difference between
export-oriented FDI and domestic market-oriented FDI. Companies
like Fujitsu, Canon, and Mabuchi consider Vietnam as a platform tosupply high-tech products to the global market. They import almost
all inputs, process and assemble them, and export 100% of their
output. In this type of operation, official intervention is very limited
and exports and imports are virtually free. These companies are
greatly satisfied with their investments in Vietnam. By contrast,
companies like Toyota, Honda, and Toshiba mainly target thedomestic market. For this, they have to deal with a complex web ofregulations, unstable trade policy, and localization requirement(which would violate WTO). These companies are very angry andfrustrated. The lesson is that Vietnam is great when its bureaucracy is
bypassed. Vietnamese workers directly helped by foreign technology
and management are already globally competitive.
Vietnam is sitting on gold but not realizing it because of inferiorbusiness leadership. If Vietnam wishes to join the rank of2

industrializing countries in ASEAN and compete effectively with
China, there is no other way but to dramatically improve its
management and policy-making capability. And this is precisely thearea where progress is too slow.
Before 1995, Vietnam’s economic policy was summarized in fiveyear plans. Now, after ten years of global integration, policy
formulation is much more complex with external factors like China,
AFTA, WTO accession, FDI slowdown, bilateral trade disputes, aid
donors, currency crisis, and global price fluctuations. The world ischanging faster than the speed of Vietnamese policy response. As aresult, Vietnam always remains backward, relatively speaking.
When I visited Vietnam for the first time in 1995, we debatedalternative strategies. One group preferred to support state-owned
enterprises as the pillar of the national economy and self-sufficiency
of inputs. Another group considered the burgeoning domestic private
sector to be the growth engine. Meanwhile, the Japanese team argued
that FDI-driven international linkage was the key to industrializationand competitiveness. What surprises me is that government officials
are still debating this fundamental issue today. It is time for thegovernment to decide what to do, and implement necessary policies.
Unless the long-term vision indicating where the Vietnamese
economy is headed is set out more clearly, businesses cannot invest
with confidence. What is needed is not an endless debate on
economic systems but action on concrete policies.
So what should be done? Our advice is for Vietnam to (i) maximize
FDI inflows without selectivity by lowering the cost of doing
business (removing localization requirement is especially important);(ii) create a linkage of local firms to FDI firms; and (iii) absorb
technology, management skills, marketing, etc. from this linkage. At
each step, policy assistance is required since Vietnam’s market
economy is severely underdeveloped. The need to foster domestic“supporting industries” which supply parts to assemblers is widely
recognized, but Vietnam has not mastered the policy skill to actuallyaccomplish this feat. We cannot jump to the later steps unless thefirst step is achieved. Some policy makers want to establish
3

supporting industries even before there is a sufficient mass ofassemblers, but we think this is unrealistic.
There is a feeling among many Vietnamese that FDI-driven growth
is not an autonomous growth. They want Vietnamese companies tolead industrialization rather than foreign ones. This sentiment isunderstandable, but not practical. We must squarely face the realityof the global economic game instead of being confined to narrow
domestic knowledge. At present, Vietnam’s industrial capability
unassisted by foreign partners is very low and can hardly compete
globally. Vietnam’s industrialization must proceed by making a fulluse of foreign technology and networks, but the development
strategy itself must be owned by Vietnam. If the policy is yours,
using foreign help does not necessarily lead to the loss of economic
autonomy.
I am a little annoyed by the attitude of some Vietnamese officials
who say, “we understand your ideas, but we need more concrete
proposals.” But is it not the role of the Vietnamese government,
rather than foreign advisors, to design and implement concrete
policies? A country that only listens and does not act on its own isunlikely to industrialize. We are happy to discuss details and set an
example at first, but you must do most of the work the next time. The
ultimate purpose of learning from foreigners is to graduate from it. If
you can do it the sooner the better.

4

Vietnam at the Crossroads
The Need for Dramatic Improvement in Investment Climate∗This paper presents the ideas frequently discussed among Japanese
officials, scholars and business people interested in Vietnam. While
the author alone is responsible for the contents below, it is hoped thatthe paper will provide a useful background for understanding why
Japan recommends certain actions by Vietnam.

I. Where Vietnam Stands
Prosperity without competitiveness
While Vietnam’s per capita income is only about $400, its streets arefull of fashionable motorbikes and new shops are coming up
everywhere. This is a scene rarely seen in other similarly poor
countries. One big puzzle of the Vietnamese economy is: where does
the money come from? How can a poor country like Vietnam sustain
strong consumption and construction booms, and grow above 7% per
year?
It is not because Vietnam is already competitive in the global
economy. The main reason for strong domestic demand is the large
inflow of foreign money relative to economic size. Apart from export
earnings, Vietnam receives over $10 billion (about 1/3 of GDP) of
foreign exchange every year. A country receiving so much foreign
money can certainly build new houses and buy expensive motorbikes.
Once injected, these funds start to circulate in the national economy
through activation of local businesses and real estate bubbles.
Through this process, many people get rich.

∗

Based on an unpublished letter to Vietnam’s policy makers written in September
2003.
5Vietnam Receives Foreign Exchange (2001)
Viet Kieu remittances1$ 4.0 billion

FDI implementation$ 2.3 billion

ODA disbursement$ 1.5 billion

Tourism receipt$ 1.5 billion

Workers’ remittances$ 1.5 billion

TOTAL$ 10.8 billion

Can Vietnam sustain this situation? Surely not, if Vietnam fails toimprove competitiveness quickly as trade liberalization proceeds.
Most of these funds come to Vietnam expecting a bright future of theVietnamese economy. If their hopes are dashed, capital inflow willslow down. Prosperity without competitiveness is fragile.
From 1996 (when AFTA started) until now, Vietnam has not
succeeded in creating new industries with international
competitiveness. The majority of exports are either primarycommodity based or manufactured under the supervision of foreign
firms. Vietnam is making many efforts but still remains relatively
behind because China is rising faster and the global market ismoving far ahead.
Another worry is low efficiency of investment. Compared with thepast, Vietnam’s investment-to-GDP ratio has now greatly increased
to 34.3 ％ (GSO data for 2002). However, with this level ofinvestment, the country should be growing nearly 10% per year. The
1

Viet Kieu money data is imprecise due to the existence of the informal channel(brought-in cash) in addition to the formal channel (bank transfers). Receipt ofViet Kieu money is concentrated in the south of the country.
6

fact that Vietnam only grows just above 7% signals low capitalefficiency. 2 Vietnam’s current growth is characterized byquantitative expansion rather than quality improvement.
Will Vietnam fly high or slow down?
Since late 2002, in Tokyo, the Japanese government had many
internal discussions on Vietnam. The three key ministries in charge
of ODA, namely the Ministry of Foreign Affairs (MOFA), Ministryof Finance (MOF), and Ministry of Economy, Trade and Industry(METI) and the ODA executing agencies, namely the Japan Bank forInternational Cooperation (JBIC) and Japan International
Cooperation Agency (JICA) have been deeply involved. The
Japanese Embassy, JICA, JBIC, Japan External Trade Organization(JETRO), and Japanese Business Associations in Hanoi and HCMC
also participate in these discussions. This move reflects the neworientation of Japan’s ODA policy in general, as well as the recent
events in Vietnam that worry Japan, including the motorbike
problem in 2002-2003. The majority view which has emerged among
the Japanese concerned, as the author sees it, can be summarized asfollows:“Vietnam has a good potential to grow fast and catch up withother East Asian countries, and we want to support this process.
But Vietnam’s potential is not yet realized due to inferior policy
environment. FDI is the key to industrialization and Vietnam
should improve FDI climate quickly and dramatically.”
This view was also clearly stated by Japanese Ambassador Norio
Hattori at the CG meetings in Hanoi, December 2002.

2

The ratio of the investment/GDP ratio to the growth rate is called the incremental
capital-output ratio (ICOR) and measures the macroeconomic efficiency ofinvestment. In Vietnam’s case, ICOR is 4.9 (=34.3% / 7.0%) in 2002, which is a
bit too high (i.e., inefficient).
7

Manufactured Exports(% of total exports)
100%
Japan
TaiwanLeading Group
80%

Korea
Singapore

Second Group
60%

Malaysia

Lagging Group

ThailandPhilippines

40%
Indonesia
China

20%

VietnamVietnam
2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

1989

1988

1987

1986

1985

1984

1983

1982

1981

1980

1979

1978

1977

1976

1975

0%

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

Even among East Asian countries, economic success is not uniform.
Taiwan and Korea have already reached a point where R&D,
production and marketing can be conducted by themselves with little
foreign assistance. Malaysia and Thailand have also raised income
and industrialized greatly, but they still rely heavily on foreigntechnology and management. On the other hand, the Philippines and(to some extent) Indonesia seem to be unable to soar beyond acertain level of industrialization. The main reasons for this arepolitical instability and hostile investment climate.
Compared with other East Asian countries, Vietnam has theadvantages of (i) great human resources; (ii) ideal location between
China and the rest of ASEAN; and (iii) political and social stability.
But these advantages are not yet fully utilized because of the twowell-known problems associated with Vietnam’s investment climate,namely, poor infrastructure and policy inconsistency.
Of these two weaknesses, improvements in infrastructure are being
made steadily. Japanese ODA also contributes greatly to building
Vietnam’s transport and power sectors. Even so, infrastructure
8

service still remains inadequate, and it is clear that patience isrequired before the quality reaches a satisfactory level. But we areconfident that it will be done; it is only a matter of time.
But we are not so confident about policy inconsistency. There is no
guarantee that policy will greatly improve, unless the government
has the strong resolve to do so. Moreover, if the government has thewill, very rapid improvements are surely possible. Japan now
wonders if ODA is really effective in a developing country where
policy quality remains deficient. For this reason, Japan wants todiscuss growth strategy and its linkage with ODA through deepened
policy dialogue with the Vietnamese government.
Needless to say, Vietnam faces a large number of development
problems. Why focus on investment climate alone, and not on otherproblems? The reason is as follows. First, Vietnam should
concentrate on a small number of issues instead of trying to solve all
problems at once, which is impractical. Second, we believe
investment climate is the best policy entry point for accelerating
growth, since the issue attracts much attention of the Vietnamese
government, domestic and foreign businesses, and donors including
Japan. Third, investment-led growth, if realized, will facilitate thesolution of other socio-economic problems including poverty,
unemployment, technology, SOE reform, SME promotion, ruraldevelopment, and so on. For these reasons, we believe that dramatic
improvement of investment climate is the most suitable policy goalfor Vietnam at this moment. We also believe it is certainly
achievable.
Japan’s desire to see a greatly improved investment climate in
Vietnam is manifested in a number of programs that Japan ispursuing, including:

New country assistance program for Vietnam (to be approved inlate 2003)
Vietnam-Japan Joint Initiative to Improve Business Environment
with a View to Strengthen Vietnam’s Competitiveness (agreed

9




between two Prime Ministers and scheduled to be completed by
December 2003; see below)
NEU-JICA Joint Research Project on Vietnam’s Industrialization
under Integration (2000-2003)
Vietnam-Japan Investment and Trade Working Group meetings(annual and monthly)

FDI dynamics and the importance of policy
The most urgent task for Vietnam’s industrialization is the attractionof a critical mass of FDI. To attract FDI when China and other
ASEAN countries are also vying for it, simple opening of theeconomy is not enough. To overcome the negative image of Vietnam
as an FDI destination requires a bold move and a clear signal, backed
by a thorough understanding of global market trends and the needs offoreign investors. For this purpose, gradual improvements are notsufficient. Vietnam should surprise the world by offering the best
investment climate in East Asia.
FDI flows have become extremely dynamic in recent years. One
tendency observed today is agglomeration, namely, concentration of
producers in a place where such concentration initially starts. The
other tendency is fragmentation, namely, international division oflabor of different production processes to manufacture one product.
These two tendencies interact in complicated ways to create winners
and losers in FDI absorption.
At present, Vietnam’s absorption of FDI is far below a critical massrequired to accelerate industrialization. In the second half of the
1980s, Thailand and Malaysia received hundreds of FDI projects
from Japan and became major exporters of electronics. China
received over $400 billion of FDI during the last decade. By contrast,
Vietnam has so far received only $15.7 billion of manufacturing FDI(by end 2002), and Japanese electronics FDI into Vietnam counted
only 13 by the year 2000. To become an industrialized economy,
Vietnam must attract FDI which is one order of magnitude greaterthan this.

10J a p a n e s e E le c tro n ic s F D I in A S E A N
Cu m u lative n u m be r o f man u fac tu rin g e stablish me n ts

180
160

Parts & devices

140

Telecom & com puters

120

Audio & visual

100
80
60
40
20
0
M alaysia

ThailandIndonesia S ingapore Philippines Vietnam

Source: Electronic Indus tries A s s ociation of J apan (2000), quoted by Yum ik o Ok am oto, "Electronics
and Electrical Indus tries ,"in K. Ohno & N . Kaw abata, eds , Industrialization Strategy of V ietnam ,N ihon H yorons ha (2003).

The traditional factors to attract FDI include low wage, large
domestic demand, and availability of natural resources. These factors
are still relevant, but in the context of East Asian dynamism, there
are other factors that are even more crucial for attracting FDI: (i)open and stable policy environment; and (ii) overall reduction of thecost of doing business. The important point is that, unlike thetraditional factors, these are not given by initial conditions but can becreated by policy. To achieve global competitiveness, multinational
corporations constantly seek a location which offers high flexibility
and low cost. For them, policy environment is far more important
than the availability of local demand or natural resources.
Some argue that Vietnam should maximize the use of domestic
resources instead of relying heavily on FDI. The fear of foreign
economic dominance is understandable, but such a strategy isimpractical. The technology gap between Vietnam and abroad is toolarge and Vietnam has little chance of winning global competition by
itself. No ASEAN country has succeeded in industrialization throughself-sufficiency. In East Asia, inward orientation and economic
stagnation are strongly correlated. We believe that Vietnam’s policy

11autonomy can be maintained even if its industrialization is FDIdriven. That depends critically on how well Vietnam uses FDI to its
advantage. The option of not absorbing FDI in large quantity is notavailable, especially in the early stage of industrialization.
Foreign investors’ perception
Vietnam is a very popular destination among Japanese tourists. Afterthe initial visit, there are many repeaters. But Japanese businessmen
are more cautious. They also love Vietnam, but they complain
bitterly about its policy. Many Japanese firms consider investing in
Vietnam, but few actually come.
To be more precise, there are two groups of FDI. Export oriented
FDI firms such as Fujitsu, Canon, and Sumitomo Bakelite are
generally satisfied with Vietnam’s investment conditions. They
operate in virtually free trade and use Vietnam as a base forexporting high-tech products to the global market. By contrast,
domestically oriented FDI firms such as Honda, Toyota, and Toshiba
are often extremely frustrated with Vietnam’s policy (although they
still love Vietnam as a nation). I have visited hundreds of firms
operating in Vietnam since 1995, and this divided perception is veryclear and persistent.
The Nikkei Shimbun is a newspaper every Japanese business person
reads, and it is also the most important source of information about
the Vietnamese economy in Japan. In 2002, the Nikkei carried many
articles about the motorbike problem, which seriously hurt ourperception of Vietnam as an FDI host country. The Japanese
government and business community were alarmed at the“worsening” of Vietnam’s investment climate. Good news is easily
forgotten, but bad reputation will stay forever. The satisfaction ofexport-oriented firms is ignored because of this unfortunate incident.
Although the Nikkei now publishes brighter news about Vietnam, it
will take a huge effort to reverse the negative image created inprevious years.

12For Japanese manufacturers considering FDI in East Asia, thequestion is roughly as follows. The fundamental choice is between
China and ASEAN. On the one hand, China is huge, dynamic andvery attractive, and it is in fact the most preferred destination foralmost all investors. But putting all eggs in one basket is risky.
Japanese firms which already operate in China want to diversify its
production base. On the other hand, ASEAN is the traditional
destination of FDI for Japan with extensive Japanese production
networks already in place. While ASEAN looks weaker than China
at present, Japanese manufacturers will not abandon it; instead, theywant to strengthen their ASEAN production base and invest in China
simultaneously. Operating from two locations allows more flexibility
in business strategy.
If ASEAN is chosen as an investment site, the next question is whichcountry in ASEAN? At present, Indonesia and the Philippines are too
unstable politically. Malaysia’s wages are too high. For these reasons,most Japanese investors are interested in the choice between
Thailand and Vietnam. Thailand has long received Japanese FDI andboasts a reasonably good investment climate. Vietnam’s policy andinfrastructure are far inferior, but its economy is younger and more
dynamic. Therefore, safety-oriented investors go to Thailand while
seekers of excitement and risk come to Vietnam. This means that
Vietnam can surpass Thailand and become the best FDI destinationin ASEAN if policy environment improves significantly.
The most recent survey conducted by the Nikkei Shimbun and theJapan Center for Economic Research confirms this. The survey
covers 606 Japanese firms operating in East Asia. In evaluatingproduction bases on a scale from 0 to 10, the top five locations were
three coastal regions of China, plus Thailand and Vietnam. When
asked how they plan to shift production bases, the most popularanswer was moving from one place to another within China.
However, there were also many Japanese firms considering a movefrom China or ASEAN5 to “Other Asia” (including Vietnam).

13

Which location do you think is the most attractive
Pointsproduction base?
(1) China (Central Coast)

7.2(2) China (Southern Coast)

6.9(3) Thailand

6.3(4) China (Northern Coast)

5.9(5) Vietnam

5.8

From which location to which location do you plan toPercent
move production base?
(1) From China to China

23.3%(2) From ASEAN5 to China

17.9%(3) From Taiwan to China

11.8%(4) From ASEAN5 to Other Asia

8.4%(5) From China to Other Asia

7.4%

Source: Survey on China and Asia After Five-to-Ten Years, Nikkei Shimbun
and Japan Center for Economic Research. Reported in Nikkei Shimbun,
September 15, 2003.

The survey also notes that Japanese large firms already have asufficient number of production bases in East Asia. Any further
reorganization will be relocation of existing ones rather than new
additions, and that will be driven by careful comparison of locational
advantages across different countries.

14II. Critical Issues
Vertical versus horizontal orientation
In the course of joint research between Japan and Vietnam since
1995, we have hosted many workshops, symposiums and policy
dialogues. On these occasions, the same policy question comes up
again and again regardless of which industry is being discussed,
whether electronics, motorbike, textile and garment, or steel.
At present, Vietnam’s modern industries are small and concentrated
in labor-intensive assembly-type processing (gray ovals below). This
sector, which lies relatively downstream in the production process, iscurrently dominated by FDI firms and SOEs with foreign connection.
Industrial agglomeration is still small even in this sector. Beyond this
sector, Vietnam’s ability to design, produce parts and materials, andmarket internationally is severely limited. Given this primitive
industrial structure, two alternative strategies are debated.

Industry A

Industry B

Industry C

text ileelectronics

motorbike

Upstream
VERTICALORIENTATION(parts &materials)

HORIZONTALORIENTATION(assembly)

Current size
Downstream

15

(i) Vertical orientation. The first strategy is to accelerate the growthof domestic upstream industries (vertical arrows). The use ofdomestic inputs is strongly promoted by various policy measures.
Local contents requirement which penalizes non-compliance is atypical example. If private investment is not forthcoming, the state is
urged to invest in desired upstream industries. According to thisstrategy, the market mechanism should be modified actively toachieve the national goals, which typically include "balanced"
industrial structure, alleviation of balance-of-payments pressurearising from importation of inputs, and national self-sufficiency. It isargued that growth which depends heavily on FDI and market forces
will be too slow and biased toward simple manufacturing with low
value-added.
(ii) Horizontal orientation. The second strategy contends that
Vietnam should refrain from aiming at vertical industrialization in
the age of globalization. Instead, this view recommends full
utilization of its abundant and highly skilled labor and doing what it
already does even better (horizontal arrow). More specifically,
garment, footwear, electronics assembly, food processing, furniture,
handmade goods, and other light industries should be the driving
force of Vietnam's industrialization. Even though exports of theseproducts are rising, they still suffer from low efficiency and lack ofmarketing. If great skills of Vietnamese workers are combined withprofessional management and marketing, Vietnam can become theglobal champion of light industries. The country can grow much
faster and create much more jobs by specializing in downstream
processing where it excels, instead of investing a huge sum incapital-intensive industries. Vietnam's dynamic comparativeadvantage lies in labor- and skill-intensive industries, and not in
capital-intensive upstream industries.
These are two diametrically opposed views on how Vietnam shouldcope with the forces of international integration. In the many
meetings we have hosted, Vietnamese participants were often split
between the two views while the Japanese team invariably upheld thesecond view.

16

Localization
There is a constant call for creating “supporting industries” that
supply parts and intermediate materials to final assemblers. At
present, Vietnam has very little capability of producing such inputs.
While the goal is easy to endorse, experts disagree as to how thatshould be achieved. One view advocates a relatively strong state
leadership in enforcing local contents requirement, while the otherview wants to rely mainly on dynamism of the private sector(especially FDI). Clearly, state and market must be combined wisely
in the development process. But more concretely, what is the rightmix in the Vietnamese context?
In our workshops, Vietnamese parts producers frequently criticize
FDI firms for buying imported parts and being unwilling to use
domestic parts. FDI firms reply that they are trying very hard to
procure domestically but cannot find local producers with sufficientquality. While some local firms claim that their products are alreadyinternationally competitive, they are hardly so in the eyes ofJapanese producers.
Another debate often heard goes as follows: Japan requests theabolition of local contents requirement and the reduction of parts
tariffs to zero. This is needed to create a favorable business condition
to compete in the global market. Meanwhile, the Vietnamese side
asks, “How can we create supporting industries if we don’t use parts
tariffs and local contents requirement?”
It should be emphasized that all foreign assemblers of the importsubstitution type 3 (consumer electronics, motorbike, automobile,etc.) desperately want to procure domestically for their survival. Thisis because parts occupy the largest share (normally 70-80%) of theirproduction cost, and international competitiveness is never achieved
unless parts cost is reduced. This requires a shift from imported parts
which are expensive and slow to arrive to using domestic parts which3

By contrast, export-oriented FDI firms which import and export 100% are notconstrained by a complicated web of localization policy.
17

are cheaper and quick to arrive. For them, reduction of labor cost is
not very crucial since it only accounts for 5-10% of total cost.
The Vietnamese side and the Japanese side share the common goalof higher localization, but they continue to disagree because theirperceptions and business models are different. There is a serious
communication failure between them. They should be provided with
opportunities for mutual talk and understanding. More importantly,
we strongly recommend constructive engagement between the twoparties. This means that FDI firms should offer business targets interms of cost reduction and localization which are ambitious but
achievable. In return, the government should support them withconsistent tariff design and promotion measures. When these actions
mesh nicely, industrialization is accelerated. Such constructive
engagement should be based on the in-depth analysis of global
markets and consistent with Vietnam’s external commitments
including AFTA, USBTA, WTO, and East Asian FTAs (in the
future). The following diagrams visualize such constructive
engagement for a hypothetical industry.

Conditional business targets that might beindicated by F DI firms (example)
Target 1 : reduction o f prod uctio n cost

International price

100%

2003

2004

Target 2 : localizatio n ratio

2005

2006

2007 2008

18

2009 2010 ・・・

Conditional policy actions that might beoffered by Vietnamese government (example)
Policy 1: tariff reduction schedule
Non-AFTA
AFTA

5%Policy 2: promotion measures
Loans, financial incentives
Technical assistance using ODA
Legal & policy reform, management & marketing support

2003 2004 2005 2006 2007 2008 2009 2010 ・・・

Localization policy can be good or bad, and the difference between
them is very subtle. Good localization must be:Demand-led and natural (not forced or against market)
Predictable with long-term schedule (not ad hoc revisions)
Based on constructive engagement between producers andgovernment as stated above (not mutual distrust)If localization is forced and unnatural, such policy will have theunintended effect of driving both assemblers and parts producers outof Vietnam. If that happens, Vietnam’s industrialization will stall.
Tariff design
There are only a few years left before the AFTA completion date ofJanuary 2006. Up to now, AFTA was easy since it had little impact
on domestic prices or producers. But in the last stretch of AFTA
implementation, Vietnam faces a real challenge. The remaining
process will hurt.
19

In July 2003, the Vietnamese government announced a revised CEPT
schedule with expanded tariff lines. But even now, the AFTA impact
is relatively small and Vietnam seems to be playing delay tactics.
CEPT tariffs on many sensitive items are now set to 20% until theend of 2005 (will they be lowered to 0-5% at the last moment?).
There is no clear policy regarding parts tariffs or non-AFTA tariffs.
Prospects for removing localization requirement and otherregulations are uncertain. There is a rumor that some products(motorbike?) will be placed in the General Exception List. Thus,
fundamental uncertainty surrounding Vietnam’s tariff structure
remains unchanged. Under such circumstances, no business caninvest confidently.
In the last several years when AFTA was progressing, Vietnam
should have acted vigorously to restructure existing industries andcreate new ones with international competitiveness. But policy wasineffective and very little has been achieved toward this goal. Even
today, Vietnam desperately lacks preparation for AFTA. We areworried that the day of reckoning will come in January 2006. If
AFTA is fully implemented under weak competitiveness, there will
be bankruptcies and unemployment which leads to social instability.
If this is to be avoided, Vietnam will be forced to retract AFTA
commitments and regress to ad hoc protection. Neither prospect is
attractive. This is a dilemma generated by the absence of long-term
integration strategy.
It is very late and little time is left to improve competitivenessagainst the AFTA challenge. Nevertheless, late action is better thanno action at all. We recommend the following rules to improve
Vietnam’s tariff design.4 They should be useful even after 2006.
i.

4

Comprehensiveness: the whole tariff structure should be apart of overall industrial strategy and consistent with otherpolicy components (master plans, promotion measures,

For numerical examples of alternative tariff reduction proposals for individual
industries, see our website listed at the end.
20

budget, infrastructure, SOE reform, education and training,
etc.)
ii.

Stability: Once announced, a tariff reduction schedule should
be carried out without change (unless external emergency
occurs; see (vii) below).

iii.

Vertical consistency: parts tariffs should be lower than tariffs
on finished products (this rule is sometimes violated in
Vietnam).

iv.

Evaluation of cost impact: the fact that tariff protection will
hurt downstream users and consumers should be taken into
account.

v.

Free trade in inputs: there should be no tariffs on inputs ofexport-oriented firms (even better: no tariffs on all industrial
inputs).

vi.

Start-up protection: when an industry is newly established, amodest and temporary tariff to cover initially low operationand interest payments is acceptable for a few years.

vii.

Emergency protection: a developing country should beallowed to protect itself against global market instability or
unfair trade practices of other countries (though suchprotection must be implemented carefully lest it should
become excessive or permanent).

In addition to these general rules, there is a tough policy question of
how to design tariffs for uncompetitive industries. There should be a
special strategy for import substitution industries which are weak andhave been protected behind the wall of trade barriers. The AFTA
impact will fall mainly on them. They include materials industries
such as steel, paper and chemicals, as well as domestic marketoriented FDI projects such as consumer electronics, motorbike andautomobile. The policy toward uncompetitive industries should be
conditional, dynamic, and backed by up-to-date information on theseindustries and global markets. Removal of protection should be at theright speed to bestow incentives to restructure while avoiding social
confusion. It should be neither too fast to cause massive
21

unemployment nor too slow to protect them forever. This is indeed avery delicate task.
Tariff reduction for weak industries must be pre-announced andimplemented without revisions (whether or not the industry succeeds
in improving efficiency). The ultimate fate of the industry should bedetermined by market competition and the effort of each firm.
However, the government should assist firms with realistic
restructuring plans in the transition period. How such support should
be designed differs from one industry to another. For this purpose,
we have studied the steel industry in detail in our joint research.
Land marketing
One of the things that Vietnam lacks almost completely is thecapability in international marketing. Many people still think thatphysical production is the main activity of manufacturing industries,
and well-executed production should lead to large profits. But thefact is production itself does not create much value in theinternational value chain. Most value is created in the designing(upstream) and marketing (downstream) processes. To increase value,
Vietnam should look at these aspects rather than simply increasing
the number of domestically produced products.
Moreover, marketing is not just for physical products. To attract FDI,
land marketing is equally essential but very few Vietnameseorganizations practice it. In the south of the country, there are manyindustrial parks managed by Vietnamese with relatively goodresults. 5 However, without overseas marketing, their names aretotally unknown to potential Japanese investors. These industrial
parks hope to attract big-name FDI firms and some have distributed
English pamphlets to JETRO (Japanese business organization). But
5For example, Tan Tao, Vinh Loc and Cat Lai II are very popular industrial parks
among local firms but virtually unknown in Japan. At Tan Tao, a large number of
Taiwanese firms came by word of mouth. Vinh Loc also attracts foreign firms
including Chinese, but only one small Japanese firm invested in it. With an ideal
industrial location in the future, Cat Lai II is already full but has attracted very few
FDI firms.
22others have not yet produced any pamphlets. They seem to have little
practical knowledge of how land marketing should be done.
Professional assistance is required to perform effective marketing.
The existence of a wonderful industrial park means nothing unless it
is effectively advertised to potential customers.
The same problem is also observed at the national level. The
government hopes to receive as much FDI as possible but there isvery little professional marketing of Vietnam as an FDI host country.
General formulation and supervision of policy by MPI is important,
but that alone is insufficient. There should be another organization, atthe operational level, to assist individual foreign investors before andafter they come to Vietnam. Before they come, there should be welltargeted marketing to provide all information that investors require.
After they come, there should be regular dialogue and assistance sothat their factories run smoothly. If there is any problem, it should be
fixed promptly. Such customer-oriented marketing and after-service
are currently missing in Vietnam’s FDI policy.
An industrial park specialist who created Thang Long Industrial Park
states that the following three factors are essential for a successful
industrial park:

Location: this is the most important factor in any real estatedevelopment. Good location must offer proximity to port (andairport), availability of engineers and workers at reasonable
cost, and urban amenities. Suburbs of Hanoi and HCMC offer
the best conditions. Most industrial parks planned in remoteareas may have to be closed.
Infrastructure service: manufacturing firms require various
inputs including electricity, telephone, internet, water, sewage
treatment, transportation, customs clearance, residence, etc. A
good industrial park must offer all of them in stable supply,high quality and low cost.
Management capability: An industrial park must be efficientand responsive. Pre-investment marketing and post-investment
services as mentioned above must be offered in a professionalway.
23

Many Vietnamese industrial park managers agree with this view.
This lesson should also be helpful in marketing Vietnam as a FDI
host country.
One must be assertive in advertising. Vietnam should reach out
abroad and drag foreign investors into Vietnam, rather than waiting
at home for customers’ arrival. Spreading information is the task ofhost countries, not FDI firms. In China, local industrial park officials
overwhelm you with smiles, well-arranged tours, and food anddrinks, making you feel like an emperor. In Vietnam, we do not feelsuch a strong pull. Investors are not sure if Vietnam really wants
them to come.
For attracting Japanese firms, we suggest hiring people who speak
Japanese fluently and know Japanese business practice. In addition,
hire a professional to design a marketing strategy targeted especiallyat Japan. But these are just the beginning. There are many otherthings to be done in order to attract a critical mass of FDI (see below).

III. Suggestions for Immediate Action
No one expects Vietnam to become an investors’ paradise overnight.
Japanese manufacturing firms understand that Vietnam is a
latecomer country and needs a substantial amount of time to solve its
development problems. However, investors need an assurance that
Vietnam is keenly aware of its inferior investment climate and taking
realistic steps to correct it as a top national priority. If, on thecontrary, Vietnam lacks awareness or determination, investors are
not willing to wait. 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 thissense, it is a psychological game. Market psychology can be changed
quickly even though roads and ports cannot be upgraded
immediately. Many Japanese firms are interested in Vietnam, but
few actually come to invest. The main reason is not the poor
infrastructure, but because they cannot detect a strong will of theVietnamese government to make things better.
24

On the one hand, the current effort by the Vietnamese government,
while commendable, is not enough. On the other hand, with limited
human and financial resources, Vietnam cannot solve all problems at
once. Efforts must be sharply focused and strategically sequenced.
We propose the following seven actions for immediate consideration.
If there is a will, each can be executed quickly without incurring ahuge financial cost. These actions are mutually related, and will
together help to create an effective mechanism to solve policy issues
inside the Vietnamese government. When they are initiated (evenbefore they are completed), investors will see that the Vietnamese
government has become very serious.
(1) Declare a national campaign to become No.1 FDI host country in
ASEAN
The Prime Minister should declare this goal as a top national
priority in the next five years. By setting this official goal,
Vietnam commits itself in a position where no easy way out ispossible, domestically and internationally. This enhances policy
credibility and investor confidence. The success of this goal
should be measured by the amount of FDI inflows.
(2) Concentrate authority for economic policy formulation
Currently, economic policy making is too diffused and no one
takes responsibility. Policies lack consistency, and response isslow when speed is needed. Vietnam has many bright people but
they are scattered and without decision-making authority. We
propose a small group of young and highly talented professionals
under the Prime Minister who design economic policies andsupervise relevant ministries. Such top-down decision-making
was adopted for a few decades by virtually all East Asian
countries which succeeded in industrialization.
(3) Mobilize foreign expertise
There are many things that Vietnam alone cannot achieve andtherefore require foreign help. Overseas marketing of products
25and land is the area which is very important but often ignored.
Design of realistic industrial strategies also requires inputs fromforeign experts. Such inputs should be integrated into an overall
development strategy. At present, there is too much waste in using
foreign expertise. Foreign opinion and pressure can also activate
domestic policy debate, so use them wisely and strategically.
(4) Execute the Vietnam-Japan Joint Initiative wellThis initiative, agreed by the two Prime Ministers and conductedby MPI Minister Vo Hong Phuc and Japanese Ambassador Norio
Hattori, is an important channel for bilateral policy dialogue. The
action plans are to be finalized by December 2003, followed by
implementation and monitoring. This initiative provides a good
opportunity to improve Japan’s perception of Vietnam, especiallyin matters related to FDI.
(5) Create VNIPA
The recent JICA report urges creation of the Vietnam Investment
Promotion Agency (VNIPA) which specializes in land marketingand post-investment service for FDI firms. 6 These are thefunctions completely lacking in Vietnam today (the MPI reorganization in July 2003 was good but not enough). Foreign
expertise is indispensable in VNIPA’s initial operation. Whether
VNIPA reports directly to the Prime Minister or operates under
MPI is up to the Vietnamese government to decide.
(6) Create a few bright spots and advertise effectively
There are many demands from foreign investors, but they cannot
be implemented at once. Instead of trying to solve everythingslowly, concentrate effort on a few small areas which are easy to
improve, and publicize the results loudly. For example,

6

JICA, “The Study on FDI Promotion Strategy in the Social Republic of Vietnam,”March 2003.
26





Reduce industrial electricity tariffs to lowest levels in East
Asia (immediately)
Reduce telephone charges to lowest levels in East Asia
(immediately)
Create the fastest and cheapest internet environment in
ASEAN (Hanoi and HCMC should become as good as
Singapore within a few years)

These are my suggestions. Instead of these, other improvements
are also possible. But they must be dramatic.
(7) Policy debate on public utility charges
A related issue is the pricing of public utilities such as electricity,
telephone, water, port service, roads, and bridges. Someinternational organizations demand price increase to cover cost.
Each supervising ministry will surely resist any price reduction.
But these services are inputs to all industries and greatly affectVietnam’s overall competitiveness. At present, these costs are toohigh to attract FDI. Whether each public utility corporation
should have a sound budget, or certain subsidies are warranted tostimulate private investment, is a fundamental policy question in adeveloping country like Vietnam. I do not have the right answer
yet. But there should be a serious debate on this matter.
There are many other development problems that Vietnam must copewith. But the actions above should provide a good starting point.
Once the government has clearly signaled its resolve to improve
investment climate, national budget, bank loans, technical assistance,and donor support required to execute these actions—and otherdevelopment policies—should be more easily forthcoming.
(For more, please see http://www.grips.ac.jp/module/vietnam)27