VIET NAM PRODUCTIVITY REPORTIDENTIFYING GROWTH CHALLENGES AND EXPLORING A WAY FORWARD

VIET NAM PRODUCTIVITY REPORT Identifying Growth Challenges andExploring a Way Forward
Copyright © 2021 by the authors: Ohno Kenichi, Nguyen Duc Thanh, PhamThi Huong
All rights reserved. No part of this book may be reprinted or reproduced in any
form without permission by the authors.
Cover image: “Mystic Dance 07” by Nguyen Chi Long (2021, acrylic on canvas,
100x100 cm). Collection of NĐTOHNO KENICHI, NGUYEN DUC THANH, PHAM THI HUONG

VIET NAM PRODUCTIVITY REPORTIDENTIFYING GROWTH CHALLENGES AND EXPLORING A WAY FORWARD

VIET NAM NATIONAL UNIVERSITY PRESS, HANOISupported by

Ministry of Economy,
Trade and Industry

Japan Society the Promotionof Science FoundedJapan International
Cooperation Agency

ACKNOWLEDGEMENTS
This Report was prepared by researchers of the Viet Nam Institutefor Economic and Policy Research (VEPR), at the Viet Nam National
University in Ha Noi, in cooperation with the GRIPS Development Forum(GDF) of the National Graduate Institute for Policy Studies (GRIPS) in
Tokyo. The drafting team consisted of Associate Professor Nguyen Duc
Thanh (VEPR/VESS), Ms. Pham Thi Huong (VEPR), and Professor
Ohno Kenichi (GRIPS). The authors would like to express gratitude
to Professor Tran Van Tho (Waseda University, Tokyo), Associate
Professor Vu Minh Khuong (National University of Singapore), Ms.
Pham Thi Tuyet Trinh (Cornell University, USA), Associate Professor
Pham The Anh and Ms. Hoang Thi Chinh Thon (National Economics
University, Ha Noi), Ms. Duong Cam (Viet Nam’s General Statistics
Office) for their valuable comments in the process of completing thisstudy. We are indebted Ms. Bui Thi Thuy Linh (VEPR) who has madea significant contribution in Chapter 5 and provided effective research
assistance during the project. The authors benefited greatly from thefeedback from the participants of the consultation workshop organizedin March 2019, as well as from the opportunities to discuss our findings
at the national conferences on sustainable growth and labor productivity
convened by Prime Minister Nguyen Xuan Phuc in December 2017
and January 2018, respectively. We are also grateful to the Office ofGovernment and the Communist Party Central Economic Commission
for discussing various issues related to productivity. We remain
especially thankful to Dr. Vu Tien Loc, Chairman of the Viet Nam
Chamber of Commerce and Industry (VCCI) and his research team forcooperating with us in organizing workshops and key events related to
productivity. We would like to acknowledge the continuous support andv

substantive discussion by Ambassador Umeda Kunio, Mr. Watanabe
Go, Mr. Yamamoto Kohei, and other members of the economic team of
the Japanese Embassy in Ha Noi. Ms. Shimamura Masumi at Mitsubishi
UFJ Research Consultant provided information on Singapore’s
productivity movement in Chapter 6. Ms. Vu Thi Thu Hang and Ms.
Le Thi Minh Hien (VEPR) and Ms. Iizuka Mieko (GDF) provided
valuable and efficient administrative, logistic, and editing support inproducing this Report. Finally, the authors thankfully acknowledge thefinancial support of the JSPS KAKENHI Grant Number JP17K02006,
the Ministry of Economy, Trade and Industry (METI) of Japan, and theJapan International Cooperation Agency (JICA).
Ha Noi – Tokyo, March 2021

vi

ABOUT THE AUTHORS
Ohno Kenichi is a professor at the National Graduate Institute for
Policy Studies. He was at the International Monetary Fund, Tsukuba
University, and Saitama University before taking up his current position.
He specializes in comparative research on industrial strategies in Asia
and Africa. He conducts policy dialogue with Viet Nam and Ethiopia.
He received a PhD in Economics from Stanford University, USA, in
1987. His recent books include Learning to Industrialize (2013), The
History of Japanese Economic Development (2018), and How Nations
Learn (2019, co-edited with Arkebe Oqubay).
Nguyen Duc Thanh is the founder and CEO of the Viet Nam Center
for Economic and Strategic Studies (VESS), Ha Noi. He was founding
president of the Viet Nam Institute for Economic and Policy Research(VEPR), VNU University of Economics and Business (2008-2020), andmember of the Economic Advisory Group for the Vietnamese Prime
Minister (2011-2016). He received a PhD in Development Economics
from the National Graduate Institute for Policy Studies (GRIPS),
Japan in 2008. His recent books include the series of Viet Nam Annual
Economic Reports published during 2009-2020.
Pham Thi Huong is a senior researcher at VEPR. She received an MSc
in International Cooperation Policy from the Graduate School of Asia
Pacific Studies at Ritsumeikan Asia Pacific University in 2016.

vii

viii

CONTENTS
Acknowledgementsv
About the authorsvii
List of tables 								 xiiList of figures 							xiii
List of boxes								 xvIntroduction and key findings
xviiPart I
CHARACTERISTICS OF
LABOR PRODUCTIVITY PROGRESS IN VIET NAM
Chapter 1
DEFINITION AND MEASUREMENTOF LABOR PRODUCTIVITY
1.1. Measurements of labor productivity
1.2. Decomposition of labor productivity growth

45

Chapter 2
CURRENT SITUATION OF LABOR PRODUCTIVITY
IN VIET NAM
2.1. Labor productivity over time
2.2. Labor productivity by economic activity
2.3. Labor productivity by type of ownership2.4. The labor market and Lewis’ turning point
2.5. Manufacturing and the FDI sector: why labor productivity isstagnant

11
14
25
27
33
ix

2.6. Persistence of unskilled labor
2.7. Limited participation in the global value chain
2.8. Summary

38
39
40

Chapter 3
SOURCES OF LABOR PRODUCTIVITY GROWTH
3.1. Growth accounting

45

3.2. Growth accounting: subsectors

50

3.3. Shift-share analysis

52

3.4. Shift-share analysis: subsectors

56

3.5. Additional analysis on manufacturing63

3.6. Concluding remarks

67

Chapter 4
VIET NAM’S LABOR PRODUCTIVITY
IN THE INTERNATIONAL CONTEXT
4.1. Data

69

4.2. The level and growth of economy-wide labor productivity

704.3. Labor productivity by sector in Viet Nam and selected countries 72
4.4. Decomposition of labor productivity by shift-share analysis

78

4.5. Sectoral contribution to labor productivity growth83

4.6. Conclusion

89

Chapter 5
PRODUCTIVITY ENHANCEMENT POLICYIN THE DOI MOI PERIOD
5.1. The evolution of productivity policy

91

5.2. Key policy components

94

5.3. Methods to improve enterprise productivity

104

5.4. Summary: achievements and limitations

106x

PART II
JAPANESE PRODUCTIVITY ENHANCING MEASURESAND THE POSSIBILITY OF THEIR ADOPTION IN VIET NAM
Chapter 6
SELECTIVELY ADOPTING JAPANESE PRODUCTIVITY TOOLS
6.1. Why Japanese experience may be useful for Viet Nam
114
6.2. Three issues in learning productivity policy
119
6.3. Singapore’s productivity movement with Japanese cooperation 128
Chapter 7
JAPANESE PRODUCTIVITY METHODSIN THE VIETNAMESE CONTEXT
7.1. Mindset change
7.2. Five S and kaizen
7.3. Handholding
7.4. Shindan (SME consultancy)
7.5. TVET-industry linkage
7.6. Kosen (technical and vocational schools)
7.7. Mobilization of technical interns dispatched to Japan(gino jisshusei)
7.8. Kosetsushi (technical support centers)
7.9. FDI-domestic firm linkage
7.10. Supporting industry promotion policy

135
140
146
151
157
163

REFERENCES
APPENDICES

189
201

167
172
176
182

xi

		

LIST OF TABLES
Table 2.1. Decomposition of GDP growth into labor productivity
and employment growth

13

Table 2.2. Viet Nam Standard Industrial Classification System

15

Table 2.3. Labor share by sector (%)

28

Table 2.4. Economic activities of household (%)
Table 2.5. Urban-rural income gap (VND thousand)32
32

Table 2.6. Viet Nam’s participation in global value chains

40

Table 3.1. Decomposition of labor productivity growth (%)

47

Table 3.2. Subsector contribution to economy-wide laborproductivity growth (period average, %)58

Table 3.3.

61

Subsector shift-share decomposition for selected years (%)

Table 3.4. Contribution of selected activities to manufacturinglabor productivity growth (Unit: percent)

64

Table 4.1. Labor productivity growth in Viet Nam and selected
countries (Percent per annum)

71

Table 4.2.

Sectoral contribution to overall labor productivity growth:
selected Asian countries (%)

86

Table 5.1. Evolution of Viet Nam’s productivity movement

98

Table 5.2. VNPI’s functions and activities

101

Table 6.1. Japanese productivity tools for domestic adoption
and dissemination abroad

117

Table 7.1. JICA’s productivity cooperation (Relatively large
projects with institution-building content)

142

Table 7.2. Curriculum for shindanshi training at Tokyo SME
University

153

xii

LIST OF FIGURES
Figure 2.1. The level and growth rate of Viet Nam’s laborproductivity (Constant 2010 price)

13

Figure 2.2. Labor productivity of broad economic sectors(In VND million per worker, at constant 2010 price)

16

Figure 2.3. Contribution to GDP by economic sectors

17

Figure 2.4. Labor productivity: agriculture, forestry, and fisheries

18

Figure 2.5. Composition of value-added: agriculture, forestry
and fisheries

18

Figure 2.6. Subsectoral labor productivity: agriculture, forestry, andfisheries
19
Figure 2.7. Labor productivity: industry and construction(Constant 2010 price)

21

Figure 2.8. Composition of value-added: industry and construction(Constant 2010 price)
21
Figure 2.9. Subsectoral labor productivity: industry and construction(Constant 2010 price)

21

Figure 2.10. Labor productivity: services (Constant 2010 price)

23

Figure 2.11. Composition of value-added: services(Constant 2010 price)

23

Figure 2.12. Subsectoral labor productivity: services(Constant 2010 price)

24

Figure 2.13. Labor productivity by ownership(VND million per worker, at constant 2010 price)

26

Figure 2.14. Labor productivity by ownership (level and growth)

27
xiii

Figure 2.15. Distribution of labor between rural and urban areas (%) 30
Figure 2.16. GDP share by ownership (Constant 2010 price)

35

Figure 3.1. Growth accounting: decomposition of labor productivity
growth (%)
45
Figure 3.2. Growth rates of labor productivity, capital intensity,
and TFP

46

Figure 3.3. ICOR and TFP growth47

Figure 3.4. Decomposition of labor productivity growth: selected
subsectors (%)

51

Figure 3.5. Decomposition of labor productivity growthby ownership type (%)

52

Figure 3.6. Shift-share analysis: decomposition of labor productivity
growth (%)
54
Figure 3.7. Annual subsector contribution to economy-widelabor productivity growth (%)

57

Figure 4.1. Labor productivity of Viet Nam and selected countries 71
Figure 4.2. Labor productivity by sector

75

Figure 4.3. Shift-share decomposition: Northeast Asia and Viet Nam 81
Figure 4.4. Shift-share decomposition: selected ASEAN countries 82
Figure 4.5. Sectoral contribution to overall labor productivity
growth in Viet Nam

84

Figure 5.1. The structure of National Program 712

103

Figure 6.1. Singapore: evolution of productivity supportingorganizations

129

Figure 6.2. Singapore: evolution of Productivity Movement

131

Figure 7.1. Shindanshi exam and registration scheme

153

Figure 7.2. Training process management

159

Figure 7.3. Employment support system

160

Figure 7.4. Gino Jisshusei (technical interns) in Japan

169

Figure 7.5. Thailand: network for linking Thai and Japanese firms 179
Figure 7.6. Integrated SME support under Kishin-ho and Denshin-ho 183
xivLIST OF BOXES
Box 1.1.
Box 1.2.

Decomposition of labor productivity
by growth accounting method8

Decomposition of labor productivity growthby shift-share analysis method9xv

INTRODUCTION AND KEY FINDINGS
Productivity is a key concept in economic growth and welfare. It
measures how much is expended in terms of effort and materials andhow much is produced in terms of goods and services as a result. If
large output is obtained with small input, productivity is high and thenation can enjoy a high living standard. If only little value is produced
despite large effort and material input, productivity is low and thenation is likely to be trapped in either low or middle income. There aresome nations richly endowed with natural resources such as oil, gas,diamond, copper, and the like relative to population size, which permits
high income without making much human effort. But most other nations
devoid of such given advantage, including Viet Nam, must accumulateknowledge, skills, and technology to climb the industrial ladder, stepby step, to high income. For such nations, attaining high income andimproving productivity are essentially the same thing. That is why
productivity enhancement is critical for Viet Nam’s socio-economic
development. Viet Nam can attain high income only if it improves
productivity significantly from the current level.
The Vietnamese economy is under constant pressure fromdeepening global and regional integration and the future risk of a middle
income trap. Despite the reasonably high growth attained in the last
two-and-half decades, Viet Nam’s productivity and innovation remain
low, and Vietnamese enterprises generally have not secured sufficientcompetitive advantage to cope with the global market. This Reportstudies Viet Nam’s productivity focusing on labor productivity andtotal factor productivity (TFP). It analyzes the process of productivity
growth of the entire economy, across sectors and over time, as well as
by making comparisons with neighboring countries.
xvi

Two remarks are in order. First, we need to differentiate the level
and the growth rate of productivity. Both are important but point todifferent aspects of economic performance, and we will study both.
Viet Nam is a country that has an average growth rate of productivity
within ASEAN, but the absolute level of productivity is still low. If thissituation continues, it may take a very long time for Viet Nam to rise
to high income. Growth must be accelerated from the current low base.
Second, productivity is a quantity-based measure which asks how
many goods and services are produced per unit of input. In addition toquantity, nations must also pursue quality and innovation. Productivity,
quality, and innovation are different concepts even though there are
overlaps. Original and high-quality products are the hallmark of anadvanced economy, and professionally trained and innovative humanresources are required to generate them. Productivity, quality, andinnovation are all important, but their relative importance should shift
as the economy moves from an early to late stages of industrialization. A
nation in an early industrialization stage producing garment, shoes, andelectronic devices for export under foreign instruction and management,such as Viet Nam, must attain high efficiency to be integrated into theglobal value chain. Then, gradually, the nation’s product mix must be
upgraded from “cheap, common, and standard” to “upmarket, original,and high quality.” Finally, the nation should aim to become a creator of
new goods and services keenly demanded globally, which bring highincome and profit to those who invent and commercialize them.
This Report will concentrate on productivity. This does not meanquality and innovation are unimportant for Viet Nam, but the current
status of Viet Nam as a lower-middle income country with mostly
borrowed technology calls for deep analyses and effective policies
focusing on productivity instead of a broader and more ambitious
research. When most workers remain unskilled and factories are operating
inefficiently, it is difficult for Viet Nam to conquer the global market
with high quality and innovation. Industrial challenges must be taken up
in proper sequence without jumping necessary steps. We will focus onxvii

the basics of productivity improvement such as business management,
factory efficiency, workers’ skill and attitude, administrative and logistic
efficiency and the like, which directly impact productivity but are notyet effectively and widely practiced in Viet Nam, rather than frontline
technologies such as bio-tech, AI, IoT and Industry 4.0. These things
will become critical when Vietnamese factories operate at world-classefficiency and Vietnamese workers are well-trained and disciplined, andwhen Viet Nam is ready to move up from upper-middle income to highincome.
Part I of the Report defines productivity and discusses issues
related to the measurement of productivity (Chapter 1), then examines
the past and current state of labor productivity in Viet Nam fromvarious angles at both the economy level and sector level (Chapter 2).
Growth accounting and shift-share analysis methods are used on thedata from the General Statistics Office (GSO), the Asian Productivity
Organization (APO), and others to estimate the factors contributing toViet Nam’s labor productivity growth (Chapter 3). We also compare thestatus of Viet Nam’s productivity with those of selected economies inNortheast Asia and ASEAN (Chapter 4). Viet Nam’s past and current
policy efforts in improving labor productivity and TFP are reviewed(Chapter 5). Assessment of the current state of productivity in Viet Nam
and the results of policy efforts in the post-Doi Moi period are valuable
inputs to reform productivity policy in the future.
Part II explores the possibility of availing of additional Japanesecooperation to introduce globally acknowledged Japanese productivity
methods to Viet Nam, with proper selectivity and adjustment. We believe
this will become an important pillar of productivity enhancement in Viet
Nam if implemented effectively and sustainably. We examine generalprinciples that need to be followed in adopting any foreign productivity
models, and study the case of how Singapore learned from Japan in the
1980s (Chapter 6). We then explain ten concrete productivity tools andmethods originating in Japan and introduced to many other countries for
initiating productivity movements with the help of the Japan International
xviii

Cooperation Agency (JICA), the Japan Productivity Center (JPC), andother Japanese public and private organizations (Chapter 7).
******************************************
Our key findings are summarized in the following eight points.
First, Viet Nam’s economy-wide labor productivity has increased
over time but its speed was moderate and unstable. Unlike countries
that have achieved high economic development in the rest of Asia, Viet
Nam has not experienced a period of very rapid productivity increasethat allows an economic take-off to high income. In absolute value(constant 2010 price), labor productivity of the whole economy grewfrom VND 18.29 million per worker in 1990 to VND 68.40 million
per worker in 2019, or by 3.74 times. On annual average, the growth
was 4.65% from 1991 to 2019. Any rapidly industrializing economy
is expected to attain higher labor productivity growth than this withina quarter century. China, which had labor productivity similar to Viet
Nam in 1990, raised it by 8.98% annually or 9.4 times by 2017. Thus,
Vietnam’s past productivity performance was good but not spectacular.
Because of this, Vietnam’s speed of catching up with high-income
economies has been slow (Chapter 2).
Second, Vietnam’s labor productivity evolved in three distinct
stages: high growth (1991-95), stagnation (1996-2012) and recovery(2013-). In the first stage, Viet Nam steadily eliminated barriers tomarket and decisively integrated into the international community. These
efforts were behind the initially remarkable growth in Vietnam’s laborproductivity, which peaked at 7.13% in 1995. This was a reviving of
economic growth from past suppression and returning to the path which
the nation was supposed to tread. There was efficiency catchup withineach industry (“within effect”) and rising capital intensity as constraints
on private business activities were removed. Meanwhile, labor force
remained relatively stable in both quality and quantity. In the second
stage starting from the mid-1990s, labor productivity growth slowed
down. The Asian financial crisis in 1997-98 and the global financial
xix

crisis in 2008-09 disturbed the Vietnamese economy. More importantly,
growth increasingly relied on heavy capital investment with declining
capital efficiency. Lackluster productivity performance continued into
the new millennium. From 2000 to 2012, labor productivity growth was
only 3-4% per year. In the third stage, the situation began to improve andlabor productivity growth approached the speed in the first stage (until
the COVID-19 pandemic hit the national as well as global economy
in 2020). TFP’s contribution to labor productivity rose to as high as
73% in the period 2011-19, while the contribution of capital intensity
declined. The main engine of growth shifted from heavy investment
to true efficiency improvement. However, the reason for this desirable
change remains largely unknown (Chapter 2).
Third, looking at the broad three-way sectoral classification,
labor productivity growth was highest in the industry and construction
sector (secondary industry), followed by the service sector (tertiaryindustry). Meanwhile, the agriculture, forestry and fishery sector(primary industry) had the lowest labor productivity growth as well as
level. Even so, labor productivity growth of industry and construction,
which together accounted for nearly 42% of GDP, was not spectacularby global standards, and it even began to decelerate around 2001 when
Viet Nam was still a low income country. After growing rapidly inthe 1990s, manufacturing labor productivity remained stagnant in the
2000s and 2010s. This slowdown was premature because dynamismof the manufacturing sector should continue for at least a few more
decades to take the country to high income (Chapter 2).
Fourth, by ownership type, labor productivity of the FDI sector
declined significantly beginning in the early 2000s while those of
the state and non-state sectors increased steadily. The low and evendeclining labor productivity of the FDI sector is surprising because FDI
was supposed to bring high technology and global competitiveness toViet Nam and especially to Vietnamese enterprises, which is clearly nothappening. A large part of FDI inflow has been into the manufacturingsector. In the early 2000s, the composition of FDI manufacturingxxprojects shifted dramatically from capital-intensive to labor-intensive
ones having relatively low productivity per worker. The disappointing
performance of labor productivity of the FDI sector may largely explain
why labor productivity of Viet Nam’s manufacturing has hardly risen
since 2001, and why Vietnamese enterprises are still unable to participate
meaningfully in global value chains. Suspicion is that the majorityof foreign manufacturers regard Viet Nam as a location to engage inunskilled labor-intensive production—sewing, food processing, parts
assembly and other simple processes—and the Vietnamese government
has not introduced policies to counter this notion by greatly advancing
domestic value. The situation of low manufacturing productivity
perpetuates even after a quarter century of global integration. Viet Nam
seems stuck at the bottom of the Smiling Curve, which illustrates highvalue creation in upstream (R&D) and downstream (global marketing)and low value creation in midstream (processing and assembly).
Meanwhile, the increase in labor productivity of the state sector partly
came from a series of reforms such as the streamlining and equitization ofstate-owned enterprises. This process eliminated low-productivity state
activities and left highly capital-intensive industries in the public sector,
thus pushing up the average labor productivity. Labor productivity of
the non-state sector remains very low despite improvements over theyears (Chapter 2).
Fifth, the shift-share analysis shows that the driving force of laborproductivity in the period 1991-2015 was the within effect (improvementin each sector) though there was also a subperiod, from 2001 to 2010,
when the shift effect (labor movement across sectors) was the dominant
contributor. However, the shift effect recently subsided even though alarge proportion of Vietnamese labor still remains in rural areas andengaged in low productivity agriculture, and industrialization is far fromcomplete. This premature slowdown of inter-sectoral labor movement
may point to the existence of barriers to labor mobility such as the small
size of production and market of sectors with high labor productivity,or the lack of skills in Vietnamese workers who cannot meet the laborxxirequirement of globally competitive industries. Put more positively,
there is much room for Viet Nam to improve overall productivity byremoving such barriers and stimulating labor mobility across sectors.
Experiences of early industrializing economies such as Northeast Asian
economies and Singapore show that the within effect, which is primary,and the shift effect should both be dynamic and interactive to sustainhigh productivity growth. In Viet Nam’s development stage, which
is lower middle income, both effects need to be greatly re-activated(Chapter 3).
Sixth, when compared with selected Northeast Asian and ASEAN
countries, Viet Nam’s labor productivity is still very low despite
reasonably high economic growth in the past two-and-half decades.
In 2017, labor productivity of Viet Nam’s nine sectors (following
the APO’s industrial classification) was at or just above the lowest
level in the region. Viet Nam’s labor productivity was the lowest in
construction; and transportation, storage, and communications. It was
the second lowest, only above Cambodia, in agriculture, forestry andfishery; manufacturing; electricity, gas and water supply; wholesale
and retail trade, repair of vehicles and household goods, hotels andrestaurants; and community, social and personal services. Meanwhile,
Viet Nam’s performance was closer to average in mining and quarrying;and financial intermediation, real estate, renting and business activities(Chapter 4).
Seventh, Viet Nam has made policy effort to improve laborproductivity by establishing the Viet Nam Productivity Institute (VNPI)
in 1997 and preparing conditions for national productivity enhancement,
which was also called “quality growth”. In the First Decade of Quality(1996-2005), a number of foreign productivity methods were introduced
to Vietnamese enterprises to raise productivity while ensuring quality. The
Second Quality Decade (2006-15) expanded and prototyped additionalmodels. In 2010, National Program 712 targeted TFP’s contribution to
GDP of at least 35% by 2020, and this target was achieved already in2018. After two decades of effort, a policy framework has been laid andxxii

agencies and experts accumulated experience. Nevertheless, productivity
movement in Viet Nam is still partial and fragmented, focusing only on
the business sector and covering only some aspects of productivity. As
explained above, Viet Nam’s productivity remains near the bottom of
the region and the productivity movement is top-down rather than being
driven by the initiatives of individuals, firms and community groups.
Productivity agencies and their mandates are scattered in different
ministries which makes policy coordination difficult. Productivity policy
needs to be integrated at the national level, by establishing the National
Productivity Council or a similar high-level mechanism, with strong
authority to direct and monitor implementation (Chapter 5).
Eighth, support for productivity enhancement has been offeredthrough international cooperation, especially from Japan and the Asian
Productivity Organization (APO). This has contributed greatly to Viet
Nam’s productivity movement, but more is needed because current
productivity performance is far from the desired level. This Reportlists ten Japanese productivity methods which produced good resultsin Japan and many Asian countries and the rest of the world, but not
yet introduced to Viet Nam in earnest. Viet Nam should study themcarefully and choose some of them for execution in proper sequence,with selectivity and adjustment to Viet Nam’s reality. Viet Nam may
also learn productivity from other countries, but it is advisable to startwith Japan because the Japanese government is ready to cooperate
further, and the Japanese business community is also willing. At thesame time, the learning must not be passive but effectively owned andpromoted by the Vietnamese side. Viet Nam can learn technical aspects
of productivity from foreigners, but administrative and institutional
mechanisms that spread good practices must be homemade because
political, economic and social circumstances differ from country tocountry. Copying foreign tools works only to a certain point, beyond
which a truly domestic system is needed to design and implement
policies in a way most suitable for Viet Nam. Viet Nam’s Productivity
movement must be “Made in Vietnam” (Chapters 6 and 7).
xxiii

Part I
CHARACTERISTICS
OF LABOR PRODUCTIVITY PROGRESS
IN VIET NAM

Chapter 1
DEFINITION AND MEASUREMENTOF LABOR PRODUCTIVITY
Productivity is a key indicator of economic effectiveness, revealing how
well the resources are combined and utilized to achieve the desired andexpected results (Bain, 1982). Productivity can be examined at different
levels: economy-wide, industry, or organization. It can even be applied
to factories, departments, and individuals (Prokopenko, 1987).
One of the most common measurements of productivity is laborproductivity. It is the ratio of output of goods and services to labor input
to produce such output. Another way to measure it is by way of capital
productivity, which is the ratio between output of goods and services tophysical capital input. It is usually measured by the incremental capitaloutput ratio (ICOR), i.e., an increase of GDP which a unit of capital
investment supports. The third measurement is total factor productivity(TFP). This is the amount of output that is not explained by the quantity ofvarious inputs used in production, showing effectiveness in the utilizationof inputs. Compared with the first two productivity measures, which arepartial, TFP is a comprehensive proxy since it reflects the amount of
output that is not yet accounted for by all factor inputs in the production
function. Estimating TFP, however, is a complex statistical exercise
which is sensitive to models and different parameter assumptions, often
producing widely different results across researchers.
Which measurement of productivity should be used depends on the
purpose of research and the availability of data. If there is doubt about
3

VIET NAM PRODUCTIVITY REPORT
the underlying growth process or if the data of capital stock is unreliable,
labor productivity is the most suitable measure to examine the tendency
in short and medium-term (about ten years or less). If these problems
are minor, TFP is more credible in studying long-term trends (Sargent &Rodriguez, 2001). The two indicators should be considered concurrently
to assess the short-term and long-term trends of economic growth.

1.1. MEASUREMENTS OF LABOR PRODUCTIVITY

Our research focuses mainly on labor productivity, the most common
measurement used globally in general and in Viet Nam in particular. TFP
will also be examined, especially in connection with the decompositionof labor productivity growth.
According to the International Labor Organization (ILO), economywide labor productivity is the total amount of output (measured by GDP)
produced by total labor input (measured by total number of employedpersons) in a specific reference period. The Organization of Economic
Cooperation and Development (OECD) defines labor productivity as
the ratio of the output measured by GDP or total value added to totallabor input measured in total hours worked or total number of employedpersons (OECD, 2001). Thus, labor productivity can be calculated easily
with available estimates of output and labor input. In practice, laborproductivity is often measured by real GDP (a value added concept)
either per hour worked or per employee, depending on the purpose ofinternational comparison and data availability.
Nonetheless, calculated labor productivity indicators may be
influenced by the accuracy of data as well as the method of defining
input and output. The first limitation relates to the definition of output,that is, whether it is a gross or net concept. Gross output measures all
economic activities in the production of new products and services
without deducting intermediate costs, while value added is net output
4Chapter 1. Definition and measurement of labor productivity
obtained by subtracting intermediate costs from gross output. While
it is relatively easy to measure value added in current price, it is moredifficult to measure it in constant price, because separate price indexes
are needed to deflate sales and inputs. The problem of deflating inputs
may be more severe due to various service inputs used by an economic
unit, whose price indexes are hard to get. Measuring gross output, on
the other hand, is fairly straightforward as it just requires price indexes
for observable sales (Steindel & Stiroh, 2001). Another problem occurs
in the measurement of labor input. Different concepts and statisticalsources are used to measure it in different countries, which can impedeinternational comparability. In principle, the measurement of labor input
should take into account differences in workers’ education, qualification,
skill, and experience. But in practice, only data for number of hours
worked or number of workers is available in many countries.
In this Report, labor productivity is calculated with a simple
formula as follows.
Labor productivity =OutputTotal number of employed persons

The output is measured by GDP at the economy level and by value
added at the industry level. The next section discusses two theories
often applied in decomposing labor productivity, including the growthaccounting method and the shift-share analysis method.

1.2. DECOMPOSITION OF LABOR PRODUCTIVITY GROWTH
1.2.1. Growth accounting method

The neoclassical growth accounting framework was pioneered by
Solow (1957) and has been used extensively. In this framework, laborproductivity growth is decomposed into two main components: capital
deepening (increase in capital per unit of labor) and the growth of totalfactor productivity (effective improvement, sometimes also regarded as
5

VIET NAM PRODUCTIVITY REPORT
innovation). The Asian Productivity Organization (APO) in its annual
report also adopts this two-way decomposition. In addition, APO
classifies capital input into two sub-categories, namely, information
technology capital (IT capital) and non-information technology capital(non-IT capital).
Using the production function framework, Jorgenson and Stiroh(2000) decomposes labor productivity growth into three components:
capital deepening, labor quality, and TFP growth. They consider
labor quality as the change in the ratio of number of hours worked byworkers who have higher marginal products. As a result, labor quality
enhances labor productivity which is accompanied by increased labor
compensation. Vu Minh Khuong (2014) likewise applies the three-way
decomposition, in which labor productivity reflects improvement inlabor skills and proper matching between skills and jobs.
This research, however, uses the more common two-way
decomposition of labor productivity growth into capital deepening and
TFP growth (Box 1.1) due to the limitation of data availability. Viet
Nam lacks information on total hours worked or classification of laborby education level and skills.
1.2.2. Shift-share analysis method

In this decomposition, productivity for the entire economy is thesum of the productivity of each sector weighted by sectoral employment
share. However, labor productivity in each industry changes over time
and workers also continuously move across sectors. In order to reflect
these two processes, the shift-share analysis method decomposes laborproductivity growth into three elements, namely (i) the within effect,(ii) the shift effect, and (iii) the interaction effect (Box 1.2).
The within effect reflects the impact of labor productivity growthwithin individual sectors on the economy-wide labor productivity. The
6

Chapter 1. Definition and measurement of labor productivity
shift effect measures the impact of reallocation of labor to more (orless) productive sectors; productivity changes due to labor mobility
across sectors. The interaction effect captures the impact of labor
reallocation on sectors with growing productivity (not necessarily highproductivity), that is to say, productivity growth due to the combined
effects of within-sector productivity growth and reallocation of labor(Timmer & Szirmai, 2000; Alam et al., 2008).
Several studies find that the shift effect is the key driver of laborproductivity in developing economies. It is the movement of laborfrom less productive sectors, typically traditional agriculture, to moreproductive ones, such as modern manufacturing and service sectors,
which should enhance economy-wide labor productivity. However,such “horizontal” economic expansion will become no longer possible
once unproductive sectors become small or totally eliminated. Anotherproblem is that, even if workers move from agriculture to manufacturing
or service sectors, they may continue to work with low laborproductivity due to the lack of basic knowledge and skills. This trend
is further enhanced if manufacturing in developing countries is trappedin simple processing or assembly works which require unskilled labor
only. In such circumstances, contribution of internal labor migration
to economy-wide labor productivity remains insignificant. Therefore,
to accelerate labor productivity growth, developing countries need to
improve productivity within each growing sector toward the level ofadvanced economies, rather than just relying on internal labor migration(Timmer & Szirmai, 2000; Alam et al., 2008).
The within effect depends on the improvement of technical knowledge
and innovation in the production process. This must be facilitated byworker training in knowledge and skills as well as by technology transfer
or purchase from foreign countries (Molnar & Chalaux, 2015).

7

VIET NAM PRODUCTIVITY REPORTBox 1.1. Decomposition of labor productivity
by growth accounting method
Let the production function n be:(1.1)

Y = A.Kα.Lβ

where Y, K, L, A are output, capital, number of employed persons, andTFP, respectively.
Assuming constant return to scale, we have α + β = 1.
Dividing both side by L, we get
α(1.2)
Y A.K α .LβK
A.  
= =
α +β
L
L
L
K
Y
Defining y = and k =, then y and k are labor productivity
LL
per worker and the capital-labor ratio (average capital per worker).
Equation (1.2) becomes:
y = A.kα(1.3)

Taking log and differentiating both side, we have
lny = αlnk + lnA(1.4)∆lny = α∆lnk + ∆lnA
Equation (1.4) says that labor productivity growth can be
decomposed into capital intensity growth (α∆lnk) and TFP growth(∆lnA). Capital intensity makes labor more productive by providing agreater amount of capital for each worker, which improves economywide labor productivity in proportion to the contribution share ofcapital (coefficient α) in the production function. TFP growth enhances
labor productivity growth by the ratio of one-to-one.

8

Chapter 1. Definition and measurement of labor productivity
Box 1.2. Decomposition of labor productivity growthby shift-share analysis method
Productivity for the entire economy is expressed as the sum of
the productivity level of each sector weighted by sectoral employment
share, as follows.
 Yj L j 
Ym
n
n
(2.1)
P
=
= ∑ j 1=
 * =
 ∑ j 1 ( Pj *S j )m=Lm L j Lm 
where Y, L, and P (=Y/L) are output, number of employed persons, andlabor productivity of sector j (j = 1, …, n) and of the entire economy(m). Sj is the labor share of sector j in the total economy.
Labor productivity in year t isn
Pmt = ∑ j =1 ( Pjt * S tj )(2.2)

The increase in economy-wide labor productivity for year t
relative to base year 0 is=
Pmt − Pm0 ∑ j 1 =( Pjt * S tj ) − ∑ j 1 ( Pj0 * S 0j )
=
n

n

(2.3)

0
0
0
t
n
Add and subtract ∑ j =1 ( Pj * S j ) , ∑ j =1 ( Pj0 * S tj ) and ∑ j =1 ( Pj * S j )on both sides and rearranging, and dividing through by Sj , we haveequation (2.4) that decomposes economy-wide labor productivity
growth in year t relative to base year 0, as follows.
n

∑
P −P
=
0
Pm

( P − P ) * S  ∑

+
Pm0

n

 P * ( S − S ) ∑

+
Pm0

n
n
n
0
0
0
0
t
t
0
t
j
j
j
j
j
j
=
j 1=
j 1=
j 1
m
m

( Pjt − Pj0 ) * ( S tj − S 0j )  (2.4)Pm0

On the right side of equation (2.4), the first component is thewithin effect, reflecting the contribution of sectoral labor productivity
growth to economy-wide labor productivity, assuming that labor
shares remain unchanged. An increase in sectoral labor productivity
leads to an increase in economy-wide labor productivity. The within
effect has a positive impact on labor productivity when there is
improvement in knowledge or technology in the industry, which may
be called vertical economic development.
9

VIET NAM PRODUCTIVITY REPORTThe second component is the shift effect, which measuresthe effect of labor reallocation across sectors, assuming that laborproductivity in each sector remains unchanged. Aggregate laborproductivity increases thanks to the shifting of labor from low laborproductivity sectors to higher labor productivity sectors, reflecting
horizontal economic development.
The third component is the interaction effect, which captures
the relationship between changing labor shares and the changes in
sectoral labor productivity. The positive sign of the interaction effectmeans the within effect and the shift effect are complementary, that is,
sectors with an increase in labor productivity expand, and vice versa.
If the interaction effect is negative, the within effect and the shifteffect are substitutes, that is, labor productivity growth is positive inshrinking sectors and negative in expanding sectors. The interaction
effect shows labor movement to productivity-growing sectors, but notnecessarily to high-productivity sectors (Maddison, 1952; Timmer &Szirmai, 2000; Alam et al., 2008).

10

Chapter 2
CURRENT SITUATIONOF LABOR PRODUCTIVITY IN VIET NAM
In this chapter, we calculate and evaluate Viet Nam’s labor productivity
using secondary data from the General Statistics Office (GSO) (see also
Appendix 1). Main trends in the level and growth of labor productivity
are identified for the period 1991-2019. We examine the entire economy,
three broad economic sectors (agriculture, industry, and services), andtheir subsectors as well as by ownership type. We will also discuss four
notable and mutually related facts about Viet Nam’s labor productivity
concerning (i) rural-urban labor migration and Lewis’ turning point,(ii) stagnation of labor productivity of manufacturing and the FDI
sector, (iii) persistence of unskilled labor, and (iv) inability to participate
meaningfully in global value chains.

2.1. LABOR PRODUCTIVITY OVER TIME

Since the time of Doi Moi and global economic integration, Viet
Nam’s labor productivity has increased although the pace wasunstable and without making a breakthrough into a very high level. In
absolute value (constant 2010 price), labor productivity of the whole
economy rose from VND 18.29 million per worker in 1990 to VND
68.40 million per worker in 2019, or only by 3.74 times. In East andSoutheast Asia, any rapidly industrializing economy is expected toattain much higher labor productivity growth within three decades.
11

VIET NAM PRODUCTIVITY REPORT
Viet Nam’s past productivity performance was therefore good but not
spectacular. Because of this, Viet Nam’s speed of catching up withhigh-income economies has been slow.
Viet Nam’s labor productivity evolved in three distinct stages: highgrowth (1991-95), stagnation (1996-2012), and recovery (2013- ) as
illustrated in Figure 2.1 and Table 2.1.
During the first half of the 1990s, Viet Nam vigorously eliminatedbarriers to market and decisively integrated into the international
trading community. These efforts were behind the remarkable initial
upsurge in Viet Nam’s labor productivity, which peaked at 7.13% in
1995. This mostly reflected efficiency improvement in virtually all
sectors thanks to the reduction of apparent inefficiencies and rising
capital intensity as economic constraints and controls were significantly
removed, encouraging output and investment across all sectors
including manufacturing. This should be regarded as a one-time jumpfrom economic suppression to liberalization. Many policy measuresfor establishing a multi-sectoral market economy, stimulating theparticipation of enterprises and attracting foreign direct investment were
key factors in these early years1. Meanwhile, in the 1990s, Vietnameselabor force remained basically unchanged in terms of both quality andquantity.

1

The 1990s was marked by the issuance of crucial documents that formed a solid legal
framework for the market economy in Viet Nam. They included the Private Enterprise Law
and Enterprise Law (1990); recognition of private ownership in the 1992 Constitution;legal clarification over private ownership in the 1995 Civil Law; the Law on Promotionof Domestic Investment (1994); the State-owned Enterprise Law (1995); the Amendmentof the Foreign Investment Law (1996); the Commercial Law (1997); and the Land Law(1987) and its Amendment (1993). Simultaneously, international trade and investment were
promoted with the signing of the trade agreement with EU (1992); normalizing diplomatic
relation with the USA (1995); and joining ASEAN (1995) and APEC (1998).

12

Chapter 2. Current situation of labor productivity in Viet Nam
Figure 2.1. The level and growth rate of Viet Nam’s labor productivity(Constant 2010 price)

Source: authors’ calculation based on GSO data.

Table 2.1. Decomposition of GDP growth into labor productivity and employment
growthAll period
Period of high productivity
growth1991-2019

Growth rate (%/year)
Labor
productivity Employment
4.65
2.26

GDP
6.91

1991-1995

5.70

2.48

8.18

1996-1999
2000-2007
2008-2012

4.73
4.18
3.10

2.26
3.02
2.69

6.99
7.19
5.79

Period of productivity recovery 2013-2019

5.53

0.92

6.46

Period of productivity
stagnation

Source: authors’ calculation based on GSO data.

However, the growth of labor productivity slowed down in thelate 1990s. The external shock from the Asian financial crisis in 1997-98
disturbed the Vietnamese economy. More importantly, growth thenrelied heavily on capital investment with declining capital efficiency.
Lackluster productivity performance continued into the new millennium.
From 2000 to 2012, labor productivity growth was in the range of 3-4%
per year. Meanwhile, China, which started from income and economic
situation similar to Viet Nam, quickly rose and surpassed Viet Nam
13

VIET NAM PRODUCTIVITY REPORTin labor productivity during this period. In 2008-09, another global
financial crisis lowered Viet Nam’s labor productivity growth to 2.6%.
However, the external shock was not the sole or even primary reason
for the low performance. More fundamentally, a series of economic
reforms introduced in the new millennium had positive quantitative
effects on employment and enterprise registration but did not generate
visible results in quality, productivity, or competitiveness2.
More recently, labor productivity growth started to recover fromaround 2013 approaching the figures recorded in the mid-1990s. In termsof its decomposition, too, previous lackluster trends began to reverse withrising contribution of labor productivity growth and falling contributionof employment growth to overall growth. From 2015 to 2019, laborproductivity growth maintained around 6% per year. The cause(s) andsustainability of recent productivity spurt are still uncertain. Further work
is needed to determine the relative contributions of private dynamism,
policy improvement, and external factors. If recent good performanceis thanks to either of the first two factors, economic structure may haveshifted for better and high growth may continue into the future. But if it isdue to sheer luck or a favorable external shock, it may be just temporary.
We may point to an increasing number of FTAs with other nations andregions, and China-US trade confrontation with positive fallouts for Viet
Nam, as additional external effects but their numerical impacts must be
ascertained. Program 712, the first national productivity program, waslaunched in 2010 with the aim of increasing the contribution of TFP tooverall growth (Chapter 5). How much influence it had on the long-term
productivity trend requires investigation.
2.2. LABOR PRODUCTIVITY BY ECONOMIC ACTIVITY

Labor productivity of individual sectors contributes to labor productivity
2 The Enterprise Law (2000) removed barriers to business registration, simplified procedures
and reduced market entry costs, generating a more favorable business environment.
Equitization of SOEs was also accelerated. Signing a bilateral trade agreement with theUnited States (2001), establishment of stock exchanges (2000) and joining WTO (2007)
further expanded new business opportunities.

14

Chapter 2. Current situation of labor productivity in Viet Namof the entire economy in proportion to the amount of labor employedin each sector. Analysis at the sector level is of great importance inunderstanding the dynamics of a nation’s labor productivity. We may
ask such questions as: what are highly productive industries that sustain
productivity growth and that should be maintained and strengthened, andwhat are low-productivity industries that pull down overall productivity
growth? We will do this by using the GSO’s Viet Nam Standard Industrial
Classification System, shown in Table 2.2, on which our data is based.
Table 2.2. Viet Nam Standard Industrial Classification System

Large sectors Agriculture,
Industry andforestry,(group of
construction
and fisheryindustries)
Subsectors 1. Agriculture 1. Manufacturing(industries)
2. Forestry
2. Mining
3. Fisheries
3. Construction
4. Electricity, gas,steam, and air
conditioning
supply5. Water supply,
sewerage, waste
management

Services
1. Wholesale and retail trade;
repair of motor vehicles andmotorcycles
2. Transportation and storage
3. Accommodation and foodservice activities
4. Information andcommunication
5. Financial, banking andinsurance activities
6. Real estate business activities
7. Professional, scientific andtechnical activities
8. Administrative activities andsupport services
9. Activities of sociopolitical organizations;compulsory security; public
administration
10. Education and training
11. Health, social assistanceactivities
12. Arts and entertainment
13. Activities of households
producing undifferentiatedgoods and services ofhouseholds for own use
14. Other service activities

Source: General Statistics Office15

VIET NAM PRODUCTIVITY REPORT
2.2.1. Labor productivity of three broad sectors

In general, labor productivity of three main economic sectors—(i) agriculture, forestry, and fisheries; (ii) industry and construction; and(iii) services—has each improved significantly over the years (Figure2.2). Among them, agriculture, forestry, and fisheries had the lowest
labor productivity in absolute level while industry and construction had
the highest labor productivity. The latter sector includes activities withhigh labor productivity such as mining and certain manufacturing. In
2019, the average labor productivity of industry and construction was
1.1 times higher than that of services and 3.49 times higher than that ofagriculture, forestry, and fisheries. This structure of labor productivity
across broad sectors is consistent with the expected dynamism in adeveloping country such as Viet Nam in which industry is the main
driver of structural transformation.
Yet, the development of labor productivity was not smooth overtime. From 2000 onwards, labor productivity growth slowed down inboth the industry and construction sector and the services sector, the two
sectors that contribute most, about 86%, to GDP (Figure 2.3). Below wewill look at the movements of labor productivity at subsector level to gain
further insight.
Figure 2.2. Labor productivity of broad economic sectors(In VND million per worker, at constant 2010 price)

Note: before 2010, GSO reported sectoral outputs at market prices that included indirect
taxes less subsidies. From 2010, GSO separated indirect taxes less subsidies as a new category and16Chapter 2. Current situation of labor productivity in Viet Nam
sectoral outputs were reported net of such taxes and subsidies. This created discontinuity in data
series. We tried to eliminate this artificial gap by reallocating indirect taxes less subsidies to sectorsthat contained such taxes and subsidies for 2010-19. Please refer to Appendix 1 for this adjustment.
Source: authors’ calculation based on GSO data, with adjustment for the 2010 data gap.

Figure 2.3. Contribution to GDP by economic sectors

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

2.2.2. Agriculture, forestry, and fisheries

The agriculture, forestry, and fisheries sector has the lowest laborproductivity but the highest growth rate, with a steadily upward trend
over the years (Figure 2.4). The spike in 2005 might be due to a data
problem rather than any real productivity shock. If this temporary
abnormality is ignored, labor productivity growth of agriculture,
forestry and fisheries seems to have been influenced by international
shocks, market movements, and other external conditions suchas favorable weather, high GDP growth, and good conditions forexport. In particular, Viet Nam’s accession to the World Trade
Organization (WTO) in 2007 and a series of free trade agreements
17

VIET NAM PRODUCTIVITY REPORT(FTAs) in recent years have facilitated the export of agricultural andaquatic products3.
Figure 2.4. Labor productivity:
agriculture, forestry, and fisheries

Figure 2.5. Composition of value-added:
agriculture, forestry and fisheries(Constant 2010 price)(Constant 2010 price)

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

Source: same as Figure 2.4.

Agriculture is the largest creator of value-added in this broad sector(76% in 2019), followed by fisheries (20%) and forestry (4%) as seenin Figure 2.5. Despite an improving trend over the years, agriculturallabor productivity remains low in absolute terms, at only 38% of thatof the whole economy in 2019. The fisheries industry has relatively
high labor productivity, 2.19 times higher than forestry and 1.46 times
higher than agriculture in 2019, thanks to rapid improvement from1991 to 2019 (Figure 2.6). Labor productivity of fisheries is sensitive
to the world situation because fishing and aquaculture in Viet Nam aremostly export-oriented, to the tune of over 80% of total sales (Vietfirst
securities, 2018), major markets being the United States and Europe.
3

After joining WTO, Viet Nam concluded a number of free trade agreements suchas the Vietnam-Japan Economic Partnership Agreement (VJEPA) in 2009, theVietnam-Chile Free Trade Agreement (VCFTA) in 2014, the Vietnam-Korea Free
Trade Agreement (VKFTA) in 2015, and the Vietnam-EU Free Trade Agreement(EVFTA) in 2019. These FTAs aim to expand commodity markets and reduce
tariffs, benefiting Viet Nam’s agricultural and aquatic products which generally
have comparative advantage compared to foreign products.

18

Chapter 2. Current situation of labor productivity in Viet Nam
Figure 2.6. Subsectoral labor productivity: agriculture, forestry, and fisheries(a) Agriculture(b) Forestry(c) Fisheries

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

2.2.3. Industry and construction

The industry and construction sector has the highest laborproductivity in the economy. It registered a relatively robust productivity
growth in the 1990s but faced a decline and stagnation in the first two
decades of the twenty-first century (Figure 2.7).
Within this broad sector, manufacturing is a critical subsector
occupying 53% of sectoral value-added in 2019 (Figure 2.8) and
expected to play a vital role in job creation and economic growth andtransformation. However, its labor productivity has shown erratic
movement and hardly increased since 2001, a phenomenon which isshocking and deeply disappointing in an industrializing economy such
19

VIET NAM PRODUCTIVITY REPORTas Viet Nam (Figure 2.9(a)). More precisely, labor productivity of
manufacturing rose steadily until 2001 but fell suddenly and greatly
in the first decade of this century. It then resumed its ascent but withoccasional setbacks, only to return recently to the level observed two
decades ago. In the long-term average from 1990 to 2019, manufacturinglabor productivity rose only 2.01% per year in comparison with 4.65%
per year for the whole economy. The reason(s) for this unusual stagnation
will be explored more fully in a separate section below.
Mining, having the highest labor productivity level within thisbroad sector, at VND 1.22 billion per worker in 2019, experienced low
productivity growth and even a decline around the mid-2000s but recovered
significantly from 2009 onwards (Figure 2.9(b)). To interpret this trend, it isnecessary to understand the special characteristics of this natural resourcebased and domestic market-oriented subsector in Viet Nam, in addition to
the general fact that mining is an industry with a high capital-labor ratio(VNPI, 2016). In Viet Nam, minerals are export-restricted products (Item7, Article 3, Law on Minerals, 2010), the annual output of mining products
is prescribed in the Development Plan (Article 10, Law on Minerals 2010),
and the prices of some minerals such as coal, iron ore, limestone, and basalt
are state-controlled because they are key inputs to price-stabilized goods
and services such as electricity, cement, and steel. With output and prices
decided by the government, the labor productivity of mining hinges on thenumber of workers mobilized each year, which fluctuates greatly.
Construction has the lowest labor productivity among this group(Figure 2.9(c)). Recent negative growth in its labor productivity canbe explained by the faster growth of employment compared with thegrowth of its value-added. Besides that, performance of the construction
subsector is highly correlated with the cycles of investment andcredit in the national economy, and its declining labor productivity
is attributable to slow investment in buildings and infrastructure. The
government’s credit tightening policy, such as raising interest rates andcommercial banks’ reserve ratios, causes a sharp fall in both output andprices in the property market, with a serious reverberating effect on
the construction industry. From 2009 to 2015, the prevalence of nonperforming loans in the banking system hindered smooth capital flows
20

Chapter 2. Current situation of labor productivity in Viet Nam
into construction, which reduced value creation in this subsector. Thismay be the main reason for the significant decline in labor productivityof the construction industry in recent years.
Labor productivity of electricity, gas, steam, and air conditioning
supply, and that of water supply, sewerage, waste management are also
shown in Figure 2.9. As they are mostly managed by the government,
their labor productivity is outside market influence.
Figure 2.7. Labor productivity:
industry and construction(Constant 2010 price)

Figure 2.8. Composition of value-added:
industry and construction(Constant 2010 price)
100%
80%
60%
40%
20%

2019

2017

2015

2013

2011

2009

2007

2005

2003

2001

1999

1995

1997

1993

1991

0%
Construction
Water supply, sewerage, waste management
Electricity, gas, steam and air conditioning supply
Manufacturing
MiningSource: authors’ calculation basedon GSO data, with adjustment for the 2010
data gap.

Source: same as Figure 2.7.

Figure 2.9. Subsectoral labor productivity: industry and construction(Constant 2010 price)(a) Manufacturing

21

VIET NAM PRODUCTIVITY REPORT(b) Mining(c) Construction(d) Electricity, gas, steam, airconditioning supply(e) Water supply, sewerage, waste management

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

2.2.4. Services

In the services sector, labor productivity hovered around
VND 60 million per worker in the period 1991-2015 and then rose to
VND 86.30 million per worker in 2019 (Figure 2.10) without any strong
upward trend. Wholesale, retail, and repair accounts for about 25% ofvalue-added of this sector, while other subsectors carry the weight ofabout 5-10% each (Figure 2.11). The value-added structure of services hasremained relatively stable over the years. The apparent jump in 2010 may
result from our less-than-perfect adjustment for the change in the GSO’s
treatment of “products taxes less subsidies on production” in that year andis therefore mostly artificial (see the footnote of Figure 2.2 and Appendix 1).
22

Chapter 2. Current situation of labor productivity in Viet Nam
Figure 2.10. Labor productivity:
services(Constant 2010 price)

Figure 2.11. Compositionof value-added: services(Constant 2010 price)
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019

0%

Wholesale, retail trade and repair
Accommodation and food service activities
Education and training

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

Transportation and storage
Real estate activities
Other service activities

Source: same as Figure 2.10.

Labor productivity of wholesale, retail trade, and repair exhibited nolong-term trend either upward or downward, with medium-term cycles,
during the entire period except the statistical gap in 2010 mentioned
above (Figure 2.12(a)). This can be explained by the particularnature of Vietnamese consumers and those who cater to their needs.
According to the 2017 Economic Census, this subsector was dominatedby unincorporated individual traders who outnumbered commercial
enterprises by 11 times. The value-added of each individual trader isinsignificant and tends to decrease over time. Their operation is verysmall, with an average capital size of VND 136.5 million and labor sizeof 1.5 employees, and this situation remained basically the same acrossdifferent census years. Their business is spontaneous, fragmentary,
and without modern business methodology. Yet this segment attracts alarge number of sellers of about 3.3 million, providing convenience toconsumers with a variety of goods with reasonable prices supplied near
their residences.
Real estate business and financial, banking, and insurance
activities are two subsectors that have recorded high labor productivity,
not just among services but even in the entire economy (Figure 2.12(e)(f)). Yet, both showed significant volatility. Real estate business hadvery high labor productivity from 2003 to 2009 when the Vietnamese
23VIET NAM PRODUCTIVITY REPORT
economy boomed under a property bubble and high inflation. Similar
to the construction subsector, performance of the real estate subsector
is highly correlated with macroeconomic booms and busts, investment
strength, and credit growth. Medium-term volatility with little longterm improvement was also observed in other subsectors. Other
than transportation and storage (Figure 2.12(b)), which had a mild
upward trend, it is difficult to detect any steady improvement in laborproductivity of the services sector as well as its subsectors.
Figure 2.12. Subsectoral labor productivity: services(Constant 2010 price)

24(a) Wholesale, retail trade, and repair(b) Transportation and storage(c) Information and communications(d) Accommodation and food service(e) Financial, banking, and insurance(f) Real estateChapter 2. Current situation of labor productivity in Viet Nam(g) Professional, scientific and technical activities

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

2.3. LABOR PRODUCTIVITY BY TYPE OF OWNERSHIP

This section examines labor productivity by type of ownership, namely,
the state sector, the non-state sector, and the FDI sector.
During more than a quarter century from 1991 to 2019, labor productivityof the FDI sector increased 1.19 times, that of the non-state sector 3.34 times,
and that of the state sector 4.24 times (Figure 2.13). However, this end-toend comparison conceals unusual in-between developments, especially in
the FDI sector.
From 1991 to 2001, labor productivity of all ownership types
increased gradually, though from different initial levels. In these years,
labor productivity of the FDI sector was far higher than those of the twodomestic ownership types. However, the situation changed suddenly anddramatically in 2003 when the labor productivity of the FDI sector began
to decline significantly for several years. By 2016, it was overtaken andsurpassed by that of the state sector. This unexpected result will be further
analyzed in a separate section below.
Meanwhile, the steady growth of labor productivity in the state sector
can be attributed to two reasons. First, a series of state-owned enterprise(SOE) reforms implemented by the government had succeeded in reducing
25

VIET NAM PRODUCTIVITY REPORT
the number of SOEs and retaining only the most efficient ones in thestate hand. This selection with “winners” bias naturally raised the average
productivity of the SOE sector over time. Second, remaining SOEs tended
to be large and highly capital-intensive, and enjoyed government supportand monopolistic price-setting powers, which allowed them to generateapparently high labor productivity unlike most private firms which were
smaller, less capital-intensive, and under strong market competition. To
the extent that remaining privileges were more critical than the successof SOE reform, the steady improvement of labor productivity in thestate sector does not really reflect efficiency achievement but an artificial
advantage derived from high capital intensity and state protection.
Despite steady growth, labor productivity of the non-state sector
remained far below those of the other two sectors without any sign ofovertaking either of them. This sector is a mixture of traditional and modern
firms, and the former dominate in terms of number. There are innovativeand dynamic private firms in Viet Nam, but their good performance cannot
compensate for the majority of firms with small-size, low-capital, andpre-modern operations. The non-state sector is the largest sector in termsof employment, and should take the driver’s seat in producing value andcompetitiveness in a multi-sectoral market economy. Persistently low
productivity of this sector should be a serious concern for policymakers.
Figure 2.13. Labor productivity by ownership(VND million per worker, at constant 2010 price)

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

26

Chapter 2. Current situation of labor productivity in Viet Nam
Figure 2.14. Labor productivity by ownership (level and growth)(a) State sector(b) Non-state sector(c) FDI sector

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

2.4. THE LABOR MARKET AND LEWIS’ TURNING POINT

The dual economy model of Arthur Lewis postulates that industrializationof a labor-abundant traditional society is accomplished by expansionof modern industry which absorbs rural surplus labor through ruralurban migration (Lewis, 1954). If this process proceeds smoothly, idle
or underemployed workers will eventually be eliminated. This is Lewis’“turning point” at which labor surplus turns to labor shortage in thenational economy. Beyond this point, wages start to rise and the total
wage bill expands, which shifts income distribution in favor of labor.
27

VIET NAM PRODUCTIVITY REPORT
However, the process may stall if agriculture cannot supply sufficient
food for urban workers, if industrial growth is too weak or narrow toabsorb rural labor, or for any other reasons. For a developing economy
like Viet Nam, it is crucial to know where the country stands in the
Lewis’ growth trajectory, and whether and when the labor market
tightens and workers’ wages and welfare begin to rise.
The labor structure of Viet Nam has changed greatly from 1991 to2019 (Table 2.3). Labor moved from agriculture, forestry, and fisheries toindustry and construction as well as to services. The manufacturing andconstruction subsectors, which accounted for the bulk of industrial activity,
saw their combined labor share increase from 11.2% to 30.1% between
1991 and 2019. If manufacturing alone, it went up from 7.7% to 20.7%.
By type of ownership, employees working in the state sector decreased
from 12.9% to 9.8% while that of the FDI sector increased from 0.8%
to 8.2% in the same period. The proportion of workers in the non-state
sector was more stable, staying around 84-87% during the entire period.
Thus, in Viet Nam, reallocation of labor across different industrial andownership sectors seems to have played a major role in promoting laborproductivity in the national economy. Shift-share analysis in Chapter 3
will provide more concrete evidence for this conclusion.
Table 2.3. Labor share by sector (%)

By economic activity
Agriculture, forestry, and fisheries
Industry and construction
MiningManufacturing
Construction
Services
Wholesale, retail, repair
Transport and storage
28

1991

2000

2010

2019

72.35
11.20
0.86
7.68
2.32
16.45
4.87
2.16

67.77
12.03
0.59
8.55
2.54
20.20
7.34
2.51

49.50
20.95
0.56
13.55
6.34
29.55
11.31
2.89

34.45
30.11
0.36
20.65
8.44
35.44
13.32
3.61

Chapter 2. Current situation of labor productivity in Viet Nam
Accommodation and food service activities
Information and communications
Financial, banking and insurance activities
Real estate activities
Professional, scientific and technical activities
By type of ownershipState sector
Non-state sector
FDI sector

1.40
0.27
0.23
0.13
0.13

1.84
0.25
0.18
0.23
0.16

3.49
0.52
0.52
0.21
0.44

5.01
0.63
0.88
0.56
0.57

12.90
86.34
0.76

11.70 10.40
87.30 86.10
1.00 3.50

7.73
83.54
8.72

Source: authors’ calculation based on GSO data.

One principal cause of accelerated internal labor movement was
the liberalization of foreign trade and investment. Just within one
year, from 2001 to 2002, the number of newly approved FDI projects
increased by 46%, from 555 to 808, as a result of the signing of thebilateral trade agreement with the United States in December 2001. FDI
further increased by Viet Nam’s WTO accession in 2007, after which
the number of FDI projects never fell below 1,000 per year. In 2008,
the value of registered FDI projects was USD 71.8 billion which was 24
times higher than that in 2002. Most of these FDI projects were in theindustry and construction sectors, which occupied 70.6% of cumulative
registered FDI capital as of December 2019 (GSO data). Due to thishuge FDI inflow, a large amount of agricultural land had to be converted
to industrial land. In this urbanization process, rural workers migrated
to cities and their surrounding areas in search of cash income, many ofwhom ended up in industrial zones.
Figure 2.15 shows the trend of urban workers gradually increasing
in number relative to rural workers (data is available only from 2005).
However, industrial and construction value-added grew more slowly
than the speed of this labor movement, which put a downward
pressure on labor productivity. Apparently, it takes a certain amountof time and effort for rural workers and previous farmers to adjust
their working style, adapt to new job requirements, and improve
productivity, a process which is captured by the within effect in the29VIET NAM PRODUCTIVITY REPORT
decomposition analysis of Chapter 3. However, it is worrisome thatthe ratio of unskilled workers relative to skilled ones is on the rise
instead of falling. According to Nguyen Ba Ngoc and Pham Minh Thu(2014), between 2007 and 2013, labor who lacked skill, as definedby job duty and required certification, rose from 7.1% to 11.1% in
agriculture, from 55.5% to 65.5% in industry and construction, andfrom 30.5% to 56.4% in services. Skill training lags behind the rapidly
rising demand for skilled workers. Although Vietnamese population islarge and still relatively young, labor force remains mostly unskilled
and its conversion to skilled workers has been slow.
Figure 2.15. Distribution of labor between rural and urban areas (%)

Source: General Statistics Office.

Is Viet Nam approaching the Lewis’ turning point, or at least
progressing toward it? Labor has migrated from agriculture to industry,
construction, and services as shown above, but the pace of this movement
is neither very fast nor accelerating to satisfy the growing demand forindustrial labor. Wages are rising and acute labor shortage has emergedin large cities, while workers still appear plentiful and superfluous inrural villages and remote areas. Ha Noi and Ho Chi Minh City may
have already crossed the turning point but the rest of Viet Nam seems
to be still in a labor surplus economy. Possible causes of this dual
labor market structure may include (i) rural surplus labor becoming
30

Chapter 2. Current situation of labor productivity in Viet Nam
increasingly scarce due to past industrialization, despite the appearanceof continuing labor surplus, (ii) insufficient incentive or mechanism
for rural workers to acquire skills needed by modern industry,(iii) insufficient income gap between rural agriculture and urban industry
to trigger labor migration, or (iv) the existence of some cost, friction, or
policy impediments preventing smooth labor migration across sectors
and geographic locations.
However, the statistics may overestimate the share of labor in rural
areas due to the household registration (hộ-khẩu) system. Many people
migrate from rural to urban areas to work but they may still be officiallycounted as living in their home villages according to their de jurehousehold registration. Moreover, the fact that large population remains
in rural areas does not mean that all are working as farmers. Viet Nam’svillages are turning to non-farm activities faster than population datasuggests, as revealed by income structure of rural households. Basedon the Viet Nam Household Living Standards Surveys, Newman andKinghan (2015) found that, on national average, income derived fromagriculture, forestry, and fisheries steadily declined from 28.6% in 2002
to 19.9% ​​in 2014, and the trend was reconfirmed by our calculation for
2016, when the share was down to 17.7%. For rural households only,
the share of income from agriculture went down from 43.4% in 2002 to
31.8% in 2012, and had since 2010 been surpassed by income derived
from the industrial sector as salaries and wages. Table 2.4 shows that,between 2008 and 2016, the decrease of households specializing in
agriculture was 7.4 percentage points while the increase of households
engaged in both agriculture and wage labor was 4.3 percentage points.
Meanwhile, households combining farm income and enterprise activity
fell significantly during 2008-12, and slightly recovered in 2016—
though it is not clear if this recovery is a new trend. Other income
categories remained relatively stable. This data suggests that the main
source of rural income is shifting from agriculture to industry andservices, mostly in the form of hired labor, without necessarily leaving
the village or abandoning agriculture.
31

VIET NAM PRODUCTIVITY REPORT
Table 2.4. Economic activities of household (%)

2008 2010 2012 2014 2016
Single source
Agriculture
Labor
Enterprise
Double source
Agriculture & labor
Agriculture & enterprise
Labor & enterprise
Triple source
Agriculture, labor & enterprise
No activity

25.16
4.09
2.39

22.38
4.45
3.03

20.59
5.73
3.58

19.53
5.64
3.76

17.74
6.01
3.24

40.62
11.41
2.44

41.91
12.10
2.93

43.15
9.35
2.43

45.62
6.79
3.39

44.96
8.68
2.91

11.50
3.39

10.04
3.16

10.45
4.72

10.36
4.91

11.17
5.30

Source: adapted from Newman and Kinghan (2015). Results for 2016 were added by the authors.

Disparity in earning opportunity between big cities and ruralvillages is the main motivation for labor migration. However, in Viet
Nam, the income gap between the two areas has gradually narrowed
and become stable in the second half of 2020s, which is good for
attaining shared growth (Table 2.5). This may partially explain whyrural-urban labor migration is not as vigorous as can be expected fromthe quantitative expansion of modern industry.
Table 2.5. Urban-rural income gap (VND thousand)2002 2004 2006 2008 2010 2012 2014 2016 2018
Whole country

356

484

636

995

1,387 1,999 2,497 2,949 3,536

Urban

622

815

1,058 1,605 2,129 2,989 3,536 4,151 4,883

Rural

275

378

506

762

1,070 1,579 2,061 2,431 2,959

Urban/rural ratio 2.3

2.2

2.1

2.1

2.0

1.9

1.7

1.7

1.7

Source: World Bank Group (2016). Results for 2014, 2016 and 2018 are added by the authors.

From the above data, it can be concluded that labor migration fromagriculture to industry and services is currently in progress in Viet Nam
32

Chapter 2. Current situation of labor productivity in Viet Nam
driven by ongoing industrialization, with or without physical migration
into cities. Some actually move to cities permanently, temporarily,
seasonally, or irregularly while others take up non-farm jobs withoutleaving the village. This was a phenomenon commonly observed in
Northeast and Southeast Asian economies during their rapid growth.
The process is not yet complete in Viet Nam as surplus labor still seems
to exist nationally, especially in rural areas. This leads us to conclude
that Viet Nam as a nation has not reached Lewis’ turning point. However,Ha Noi, Ho Chi Minh City, and their surrounding areas have long faced
labor shortage since the 2000s under strong wage pressure and frequent
job hopping. The question is why labor migration does not occur ina more massive way to fill this regional labor gap, to the extent thatrural villages are almost emptied of young workers, as we historicallyobserved in Japan in the 1960s and China in the 1990s and 2000s.
Rural-urban labor migration does occur in Viet Nam but the pace seems
to be stable or at least not accelerating. We already mentioned possible
reasons for this, such as emerging labor shortage even in rural areas,
workers ill-equipped with industrial skills, the narrowing income gap
between cities and villages, and the existence of some mobility barriers
preventing smooth labor migration.

2.5. MANUFACTURING AND THE FDI SECTOR: WHY LABOR PRODUCTIVITY IS STAGNANT

Manufacturing plays a key role in the catch-up process of anindustrializing economy, and its labor productivity growth is expected
to lead the overall performance of the national economy. In fact, this isprecisely what happened in many high-performing Asian economies. In
Viet Nam, the labor productivity of manufacturing in 2019 was VND
72.59 million per worker, which was 6% higher than the average of
the whole economy. However, a shocking fact is that manufacturinglabor productivity has hardly increased over the last two decades as
illustrated in Figure 2.9(a) in Section 2.2.3 above. It fell greatly andreturned to the former level only recently.
33

VIET NAM PRODUCTIVITY REPORT
Another striking discovery is that labor productivity of the FDI sector
fell significantly and stagnated over the years, as shown in Figure 2.14(c)in Section 2.3 above. In the 1990s and up until 2001, labor productivity of
the FDI sector was far higher than that of the state or non-state sector, andrising strongly. However, it suddenly began a steep fall in 2002, whichlasted for several years followed by a weak recovery. Then, around 2015,
labor productivity of the FDI sector fell again and was overtaken by thatof the state sector. Other studies also corroborate our finding. Nguyen
Tien Dung et al. (2017), using micro data from the Viet Nam Enterprise
Census, report that value-added per worker in the FDI sector increased
only 0.7% per year between 2004 and 2015 while that of the privateand state sector rose 8.5% and 9.7% per year, respectively, during thesame period. This dramatic and unexpected development in the laborproductivity of the FDI sector needs explanation.
These two phenomena, in the manufacturing sector and the FDI
sector, are inter-related because many FDI firms engage in manufacturing.
According to the GSO data, 59.1% of cumulative FDI inflow at the endof 2019 was in the manufacturing sector. Disappointing productivity
performance of the FDI sector can be attributed partly to the contractionof mining, especially oil. Viet Nam’s crude oil output declined sharply
from its peak in 2004. This decrease, combined with weak global
oil prices, severely hit the oil-producing sector which included FDI
enterprises. However, the crisis in energy and mining cannot explain the
lackluster performance of manufacturing FDI. Foreign manufacturers
are supposed to bring advanced management, technology, and marketing
to developing countries, with strong spillover effects, and contribute to
the latter’s economic development. This is not happening in Viet Nam,and we need to ask why this is so. Put another way, we may also ask
why so many foreign manufacturers have been attracted to Viet Nam
when manufacturing productivity was hardly rising.
One important cause of declining labor productivity of the FDI
sector was a dramatic sectoral shift which occurred in the early 2000s.
Truong Quang Hung (2012) notes that, previously in the 1990s, FDI
inflows mainly targeted mining and import substitution sectors such as
34

Chapter 2. Current situation of labor productivity in Viet Nam
automobiles, motorcycles and consumer durables. Since 2000, however,
FDI in export-oriented, labor-intensive, large-scale manufacturing
suddenly and greatly increased. Many of such firms were engaged ingarment, footwear, electronics, and food processing which hired a large
number of unskilled workers in production lines. Within two years, thenumber of employees at FDI firms more than doubled, from 339,100
in 2001 to 770,900 in 2003, which started to cause labor shortage inand around Ho Chi Minh City and also in and around Ha Noi several
years later. Meanwhile, value-added of this sector increased only 1.18
times from VND 129.33 billion in 2001 to VND 153.18 billion in 2003.
This explains a sharp decline in labor productivity of the FDI sector
observed between 2001 and 2003 (Figure 2.14(c)).
Subsequently, from around 2006, foreign investors began to focus
more on services, some of which achieved high growth, and laborproductivity of the FDI sector began to pick up. Looking at the composition
of GDP, contribution of the FDI sector continued to grow steadily, thoughslightly, even in recent years despite the weak performance of laborproductivity (Figure 2.16). In 2019, the FDI sector accounted for 23.1%
of GDP while corresponding figures for the non-state and the state sector
were 51.6% and 25.3%, respectively. Quantitative expansion of output
and employment more than offset the stagnant labor productivity of the
FDI sector, resulting in an increasing share of GDP.
Figure 2.16. GDP share by ownership(Constant 2010 price)

1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%

State sector

Non-state sector

FDI sector

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

35

VIET NAM PRODUCTIVITY REPORT
We now turn to the crucial question of why the labor productivityof manufacturing FDI, especially of labor-intensive export-oriented
type, remains persistently low. A study by Nguyen Viet Khoi & Shashi
Chaudhary (2019) suggests that this may be because foreign investors
choose Viet Nam as a place to engage in lowest productivity activities
such as sewing and cutting, manual assembly, and other simple processes
in the global value chain, which is at the bottom of the famous Smiling
Curve4. Many foreign investors view Viet Nam as a middle-stream
workshop, not as an executor of upstream or downstream processes
whose value creation is greater, and therefore do not expect experienced
engineers or skilled workers from Viet Nam, and do not even feel theneed to train them as such. For this reason, the labor productivity of
manufacturing FDI declined significantly as labor-intensive exportoriented FDI began to arrive in large number around 2003, and remained
low in recent decades. This interpretation, if correct, explains why Viet
Nam did not achieve any big spurt in manufacturing productivity as
massive FDI flowed in, and why many FDI firms remain happy andsatisfied with the current situation without any motivation to improve itthemselves or asking the Vietnamese government to remedy it.
Low domestic value creation is a common feature of any latecomer
economy in the early stage of FDI-led industrialization, but most
governments introduce policies to entice FDI firms to produce moredomestic value. Malaysia and Thailand have turned to such a strategy
long ago. By contrast, Viet Nam, which has received manufacturing FDI
for more than a quarter century, has neither launched such a national
strategy nor introduced necessary policy measures in an integrated way.
Supporting industry promotion is one of the necessary policy measures,
4

Plotting supply chain processes from upstream to downstream on the horizontal
axis, and the amount of value creation on the vertical axis, the Smiling Curve is a
U-shaped curve showing that high value is generated in upstream (R&D, design,
high-tech materials and components, etc.) and downstream (marketing, branding,retail, etc.) while value creation is low in middle stream (simple assembly andprocessing). This is generally true in many manufacturing sectors in which Viet
Nam excels such as apparel, footwear, and electronic device assembly.

36

Chapter 2. Current situation of labor productivity in Viet Nam
but Viet Nam has not yet produced visible results in this area (Section
7.10). Moreover, there are other measures that need to be adopted,
including the general leveling-up of domestic workers and enterprises
as proposed in detail in Chapter 7, selective attraction of value-creating
foreign investors, incentivizing FDI firms to transfer knowledge andtechnology, promotion of applied science and pragmatic engineering atuniversities and research centers, importing skilled foreign labor, andsupport of technical learning, patent use, and R&D.
It should be added that nationalities and subsectors of FDI also
matter. It was mainly Taiwanese and Korean firms that began fromaround 2003 to aggressively invest in labor-intensive export-oriented
processes — especially in garment, footwear, smart phones, and otherelectronic products — in Viet Nam which generated a downward trend
in the labor productivity of the FDI sector. Meanwhile, Japanese FDI,
which started to arrive earlier in the mid-1990s, was more concentrated
in import-substituting engineering-type processes such as motorbikes,
automobiles, consumer electronics, as well as production of dieand-mold and other metal and plastic components required by theseprocesses. Japanese firms also engage in the production of garment,
printers, small motors, and the like, but their weight is relatively small.
Finally, there is the problem of transfer pricing. This is an illegal
accounting practice in which multinational corporations do not declare
the true costs of imported materials and intermediate inputs or the true
revenues from exported products in order to minimize or avoid tax
payments globally. By over-reporting import costs or under-reporting
export sales vis-à-vis parent or group companies abroad, foreignsubsidiaries can artificially suppress their revenues and profits which
are subject to taxation in the host country. Vietnamese authorities havediscovered many such cases. FDI enterprises in garment, leather, andtea production and trading often report business losses. In Ho Chi Minh
City, up to 90% of foreign garment producers were “unprofitable,”while most domestic producers in the same subsector were profitable.
In 2012, the Tax Department of Ho Chi Minh City inspected and found37

VIET NAM PRODUCTIVITY REPORTVND 2,688.5 billion of false declaration and VND 86.8 billion of
unwarranted reduction and deduction, resulting in VND 2,611 billionof fine and retrospective tax collection. In one incident, by inspecting
16 garment enterprises alone suspected of transfer pricing, the CityTax Department annulled the reported loss of VND 367.8 billion andcollected VND 11.3 billion in additional taxes (Nguyen Thi Thu Hoai
and Duong Van An, 2015). It is likely that transfer pricing is spread
not only in garment but also in many other sectors. To the extent thattransfer pricing is pervasive among FDI firms in Viet Nam, domestic
value creation is under-reported and so is their labor productivity.

2.6. PERSISTENCE OF UNSKILLED LABOR

Two problems that contribute to the weak productivity performance of
manufacturing as well as the FDI sector are examined below. The first is
the problem of unskilled labor, discussed in this section, and the second
is the lack of productive and meaningful participation in global value
chains, explained in the next section.
Viet Nam used to have a good reputation of having a large numberof young, dexterous, and diligent workers. This statement is, to a large
extent, still true even today. However, after three-and-half decades of
Doi Moi and a quarter century of global integration, Viet Nam can nolonger expect to compete effectively in the global market and progress
toward high income by relying only on this labor feature. One reason
for this is that Viet Nam’s population is sure to age and the ratio ofworking population will shrink in the future. But the more serious
reason is that, after so many years of rapid industrialization, thequality of Vietnamese labor force has not improved very much beyond
being young, dexterous, and diligent. Viet Nam has not fostered, nor
did its government help to produce, a sufficient number of scientists,managers, engineers, and technicians with professional knowledge andexperience who can compete effectively with the world. There is little
38

Chapter 2. Current situation of labor productivity in Viet Nam
evidence that Vietnamese labor is improving fast enough to fill the needof emerging industries. On the contrary, there are even signs that the
opposite is happening.
As noted above, Nguyen Ba Ngoc and Pham Minh Thu (2014)
report that the ratio of workers who never received vocational training
increased, rather than decreased, from 2007 to 2013. This ratio went
up from 55.5% to 65.5% in manufacturing and construction, and from
30.5% to 56.4% in services. Viet Nam experienced large bubbles inthe stock and urban property markets around 2007, which drove many
people to speculation in pursuit of short-term capital gain. This incident
may have turned the Vietnamese people, who used to be patient andhardworking, to shortsighted materialism instead of technology
learning for long-term goals. Around 2015, the number of applicants
to technical and vocational colleges in Northern Viet Nam suddenly
and significantly declined, threatening such colleges with operationaldifficulty and the risk of bankruptcy. In a tightening urban labor market,
high school graduates rushed to find easy jobs to earn quick cash rather
than go to school for additional years to acquire technical skills. This
mindset of the Vietnamese youth is worrisome, as it is not conducive tothe building of an industrial nation with global competitiveness.

2.7. LIMITED PARTICIPATION IN THE GLOBAL VALUE CHAIN

Participation in global value chains should provide Viet Nam withincreased value creation, more and better jobs, proper specializationand positioning in the global economy, and the spillover effect oftechnology and management that raises domestic capacity (Taglioni &Winkler, 2016). However, these benefits are not automatic or naturally
arising. They must be pursued and earned by domestic businesses
and policymakers with good planning and serious effort. The amountof these benefits accruing to the home country varies considerably
depending on where and how the country participates in global value
39

VIET NAM PRODUCTIVITY REPORT
chains, whether and how fast the country moves from low-value to highvalue processes, and the existence or absence of strategy to participate
more deeply and effectively in the global production system on the partof domestic businesses and government.
Nguyen Viet Khoi and Shashi Chaudhary (2019) define the“backward participation” as the amount of domestically produced
intermediate products and services contained in a nation’s totalexport, and “forward participation” as the amount of value-added
earned abroad in a nation’s total export. “Participation in global value
chains” is the sum of these two ratios. According to their definitions
and calculation, Viet Nam’s participation in global value chains greatly
increased from 34.2% in 1995 to 55.6% in 2015 (Table 2.6). However,
the increment came only from the rising backward participation, andnot from forward participation which remained low at around 11-14%
throughout the two decades (except a temporary increase in 2000). This
fact is very interesting and also consistent with stagnant manufacturinglabor productivity discussed above.
Table 2.6. Viet Nam’s participation in global value chains
Year

Forward participation(%)

Backward
participation (%)

Participation in global
value chains (%)

1995

12.6

21.6

34.2

2000

19.5

27.2

46.7

2005

14.5

36.1

50.6

2010

12.5

40.5

53.0

2015

11.1

44.5

55.6

Source: Nguyen Viet Khoi and Shashi Chaudhary (2019).

The rise in Viet Nam’s backward linkage, which may be regarded
as the development of supporting industries, occurred in computerand electronic devices, garment and footwear, food and beverages,
and electrical machinery. We may judge that the policy of supporting
industry promotion thus generated good results at least in these products.
40

Chapter 2. Current situation of labor productivity in Viet Nam
However, these industries are mainly engaged in labor-intensive middlestream activities such as sewing, cutting, and manual assembly which
are the lowest segment in the Smiling Curve. Moreover, what little
supporting industry base Viet Nam has constructed mainly consists offoreign component suppliers rather than Vietnamese ones. As a result,these export-oriented subsectors contribute greatly to Viet Nam’s grossexport value, but much less to domestic value-added.
Why does this situation persist for so long? One explanation isthat Viet Nam has been largely unable (or did not make enough effort)
to upgrade itself and graduate from the status of a simple assembly
factory of the world after it gained such a status in the 1990s. The
other explanation is that foreign investors and buyers jealously guard
high value processes in producing Made-in-Viet Nam exports, suchas product development and design, input procurement, logistics anddistribution, and branding and marketing. They have neither desire
nor pressure to give these processes to the Vietnamese side unless
Vietnamese managers and engineers greatly improve their skills tobe able to replace foreigners by offering high quality with lower cost.
These two explanations are complementary and mutually reinforcing.
Unless this vicious circle is broken, Viet Nam is forever stuck as an
assembly platform. Impetus for ending this disadvantage must comefrom the Vietnamese side because most foreign firms do not see any
clear incentive to change and upgrade Viet Nam; they have otherinvestment destinations to migrate to.
2.8. SUMMARY

The economy-wide labor productivity of Viet Nam has risen over time but
its absolute level remains low in comparison with economies that haveattained high income and technology in East and Southeast Asia. Viet
Nam’s productivity performance is not poor but about average among
regional economies. The nation has not experienced a spell of very rapid
increase in productivity to overcome a middle income trap and move up
41

VIET NAM PRODUCTIVITY REPORT
quickly to high income. As a result, Viet Nam’s speed of catching up withand overtaking other regional economies has been slow.
In terms of sectors, the labor productivity of industry and construction
has been the highest, followed by services, while that of agriculture, forestry
and fisheries has been the lowest. Within industry and construction, whichconstitute 42% of GDP, performance of labor productivity was generally
weak. Manufacturing labor productivity stagnated after the early 2000s
instead of rising robustly to lead the nation’s industrialization. Meanwhile,
sectors that account for smaller shares of GDP such as mining and financial,banking, and insurance activities had higher productivity in both leveland growth rate though they were very sensitive to business cycles, pricefluctuation, and other sector-specific shocks.
Regarding the type of ownership, labor productivity of the FDI
sector rose strongly at first but then declined sharply. By contrast, laborproductivity of the state and non-state sectors increased more steadily.
Even so, labor productivity of the non-state sector remains low inabsolute terms despite improvements over the years. Meanwhile, theincrease in labor productivity of the state sector partly came from a seriesof state enterprise reform which streamlined and equitized many of suchenterprises, retaining only good performers in the state hand and thus
pushing up their average productivity. Other reasons for a relatively good
progress of state-sector labor productivity include a high capital-laborratio and various privileges and protection offered by the government.
This chapter additionally featured four remarkable facts surrounding
Viet Nam’s labor productivity, labor market, and participation in global
value chains.
First, Viet Nam’s labor market has not reached Lewis’ turning
point where vigorous demand for industrial workers eliminates labor
surplus nationwide, and causes wages to rise. There is still surplus laborin rural areas which however migrates only moderately to urban areas
or to industrial and services sectors, despite acute labor shortage inthese areas and sectors.
42

Chapter 2. Current situation of labor productivity in Viet Nam
Second, in the early 2000s, labor productivity of manufacturing
stopped rising and that of the FDI sector sharply declined, which were
surprising and discouraging phenomena in a rapidly industrializing
economy such as Viet Nam. We suspect that this was caused mainly
because many—if not all—foreign investors and buyers regard Viet Nam
as a platform for simple processing and assembly, without expecting
high competence and professionalism from Vietnamese engineers andworkers. The government has not introduced policies to rectify thisundesirable situation. Great national effort is required for Viet Nam to
get out of this trap and move forward.
Third, the quality of Vietnamese workers is not improving rapidly,
and some data suggest that it is even deteriorating, in recent years. Thisis shown by the lack of technical training among workers, the national
mindset toward short-term speculation and away from long-term learning,
and unpopularity of technical and vocational colleges among the youth.
Fourth, even with active foreign trade and FDI, Viet Nam’s
participation in global value chains is limited and does not augment
domestic value very much. The degree of participation has risen over
the years, but due only to rising backward participation (supporting
industry development, the bulk of which was driven by FDI component
suppliers) while forward participation (overseas logistics and marketing)remains weak. This result is consistent with the above-mentioned factthat Viet Nam is stuck with low-value activities on the Smiling Curve,
and most foreign investors have little motivation to change this situation.

43

Chapter 3
SOURCES OF LABOR PRODUCTIVITY GROWTH
This chapter provides two types of labor productivity decomposition
based on growth accounting and shift-share analysis, using data mostly
from the General Statistics Office (GSO), to investigate the factors
behind Viet Nam’s labor productivity dynamics. Subsector data is also
employed to look into the structure within the manufacturing sector.
3.1. GROWTH ACCOUNTING

According to the growth accounting method explained in Chapter 1,
labor productivity growth can be decomposed into the change in capitalintensity and TFP growth. As narrated in Section 2.1, Viet Nam’s laborproductivity went through three distinct stages: high growth (1991-95),
stagnation (1996-2012), and recovery (2013- ). The features of each stage
can be re-confirmed, and additionally analyzed, by decomposition of laborproductivity growth as shown in Figure 3.1, Figure 3.2, and Table 3.1.
Figure 3.1. Growth accounting: decomposition of labor productivity growth (%)

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

45

VIET NAM PRODUCTIVITY REPORT
Figure 3.2. Growth rates of labor productivity, capital intensity, and TFP

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

During the first half of the 1990s, labor productivity grew rapidly
with the primary impetus coming from rising capital intensity. This
was the period when Viet Nam actively eliminated barriers to market
and decisively integrated into the international trading community withthe signing of a trade agreement with the EU (1992), normalization of
diplomatic relations with the US (1995), and joining ASEAN (1995).
This period also saw introduction of many policy measures for creating
a multi-sectoral market economy, stimulating the participation of private
enterprises, and inviting FDI. As previous constraints were removed,
the number and volume of investment projects increased rapidly, while
Vietnamese labor force remained relatively stable in both quantity andquality. This led to a strong rise in capital intensity (i.e., the ratio of
capital to labor). As each worker was equipped with a greater amount of
capital, labor productivity naturally rose. TFP growth in this period was
generally negative, meaning that efficiency improvement in the true
sense of technology, knowledge, and innovation had not yet started.
In the late 1990s, labor productivity growth slowed down. Viet
Nam’s growth continued to rely heavily on capital investment, eventhough the initial temporary effect of re-introducing the market economy
and re-opening to the world had mostly been exhausted. Aggressive
investment, though less spectacular than the previous period, sustained46

Chapter 3. Sources of labor productivity growth
growth quantitatively without corresponding improvement in laborskill or institutional quality. Low efficiency of capital was indicatedby a high incremental capital-output ratio (ICOR), which implies thatlarge investment was needed to support an additional growth of 1% (seebelow for more discussion). Meanwhile, TFP growth continued to stayin the negative range (Table 3.1 and Figure 3.3). The Asian financial
crisis in 1997-98 additionally disturbed the Vietnamese economy.
Table 3.1. Decomposition of labor productivity growth (%)

All period
Period of highproductivity
growthPeriod ofproductivity
stagnation
Period ofproductivity
recoveryLabor
productivity
growthContribution ofContribution share

Capitalintensity

TFP

Capitalintensity

TFP

1991-2019

4.65

4.44

0.22

95.37

4.63

1991-1995

5.70

10.39

-4.69

182.16-82.16

1996-1999
2000-2007
2008-2012

4.73
4.18
3.10

8.05
3.77
0.58

-3.32
0.40
2.52

170.2490.31
18.79-70.24
9.69
81.21

2013-2019

5.53

2.28

3.25

41.20

58.80

Source: authors’ calculation based on GSO data.

Figure 3.3. ICOR and TFP growth(a) Incremental Capital-output Ratio (ICOR)(b) TFP growth (%)

Source: authors’ calculation based on data from IMF and GSO.

47

VIET NAM PRODUCTIVITY REPORT
Lackluster productivity performance continued into the newmillennium. From 2000 to 2012, labor productivity growth was in
the range of 3-4% per year. In 2008-09, another global financial
crisis lowered Viet Nam’s labor productivity growth to 2.57%. The
contribution of capital investment to labor productivity growth became
steadily smaller, with capital intensity actually falling in 2008 (-1.2%)
and in 2011 (-6.1%). The first incident in 2008 reflected the negative
impact of the global financial crisis on capital investment, while
the second decline in 2011 may be due to a data treatment problem(Appendix 1). To cope with the global financial crisis, the Vietnamese
government launched a stimulus package in 2008 which included active
public investment (Thanh Hoan, 2009). For some unknown reason,
this public expenditure flow was statistically counted as an increasein capital stock in 2009 and 2010, which generated a sharp decline in“capital stock” when the stimulus package ended in 2011. As for TFP
growth, it turned from negative to positive in the early 2000s but its
growth rate was still low.
More recently, from around 2013, labor productivity growth
accelerated from the previous 3-4% range to 5-6% range. The
discouraging trends in earlier years also began to reverse with a rising
contribution of TFP growth to labor productivity, while the contributionof capital intensity, which was overwhelming in 1991-95, declined.
After 2007, TFP growth replaced heavy capital investment as theleading contributor to labor productivity growth.
It must be noted that TFP calculation is subject to error andvariation. Our calculation, using the official data of GSO, reveals that
TFP growth had contributed significantly to labor productivity growthin the period 2000-12, or 32.5% on annual average. Meanwhile,according to Jorgenson and Vu (2013), TFP contributed 50.8% to laborproductivity growth in the period of 1990-2000 but this proportion
dropped to a mere 3.6% in the period 2000-12 due to the government’s
aforementioned public investment drive which dominated growth48

Chapter 3. Sources of labor productivity growthduring this period. APO (2015) estimates that TFP contributed about
26% to Viet Nam’s annual labor productivity growth at that time. Bothstudies show much lower contribution of TFP growth than the present
report. This difference may be due to the use of different assumptions ordatasets in estimation (Appendix 1).
Be that as it may, the decomposition exercise of labor productivity
growth clearly indicates that advancement of labor productivity is notalways a sign of efficiency improvement in the true sense but may also
be generated by excessive capital investment without any efficiency
improvement on the part of labor (Ohno, 2016). To properly assesslabor productivity growth, additional information must be consulted,
among which the incremental capital-output ratio (ICOR) is mosthandy and useful. It is the ratio of the investment rate (investment/GDP) divided by the growth rate of GDP, showing how muchadditional capital is needed to produce an additional GDP growth of
1%. A high ICOR implies low efficiency in using capital, and viceversa. Viet Nam’s ICOR rose significantly in the 1990s and 2000s,
then fell somewhat in recent years, as illustrated in Figure 3.3, withthe following average: 2.37 during 1991-95, 4.90 during 1996-2012,
and 4.01 during 2013-19.
The high ICOR in the past may be explained partly by high demandfor infrastructure construction. Infrastructure development is an essential
requirement for socio-economic development in countries starting from
low income and little capital stock, such as Viet Nam in the early years
of Doi Moi and global integration. In such circumstances, aggressive
public investment may well be justified. However, according to Le Xuan
Ba and Nguyen Thi Tue Anh (2010), Viet Nam’s ICOR, reaching 6 to 7
at its peak, was far higher than those of newly industrializing countries
in Northeast Asia in their take-off periods, such as Taiwan (2.7) andSouth Korea (3.0) during 1961-80. It was also considerably higher thanChina’s (4.0) in its high growth era of 2001-06 and Thailand’s (4.1)
during 1981-95. Evidence is strong that Viet Nam’s investment was49

VIET NAM PRODUCTIVITY REPORT
not used effectively after the economy was liberalized and opened up
in the early 1990s, even if we take the need to build infrastructure into
consideration.

3.2 GROWTH ACCOUNTING: SUBSECTORS

Turning to disaggregated data, the fact that capital intensity drove
labor productivity in the period 1991-2000 was also clearly visible inagriculture, forestry, and fisheries as well as industry and construction(Figure 3.4). By contrast, labor productivity growth of services
depended mostly on TFP growth rather than capital investment, notjust in the early period but the whole period, given the nature of this
sector that physical equipment is less essential especially at smaller
commercial establishments. After 2000, as a general tendency and in
most subsectors, contribution of capital intensity fell and that of TFP
growth rose, although some subsectors experienced negative TFP
growth. Consistent with our discussion in Chapter 2, manufacturinglabor productivity was not strongly driven by TFP growth even in the
new millennium, which resulted in weak performance.
In terms of type of enterprise ownership, capital intensity had alarge influence on labor productivity growth in all sectors in the 1990s,
though this effect was slightly less prominent and more volatile in the FDI
sector (Figure 3.5). After 2000, the impact of capital intensity generally
became small and the role of TFP growth more prominent, especiallyin the non-state sector. However, TFP contribution was unstable andweak in the FDI sector, as its labor productivity fell greatly in theearly 2000s—especially in 2003—and then stagnated subsequently, aphenomenon we analyzed in detail in the previous chapter.

50

(f) Mining(j) Accommodation and food service(e) Construction(i) Real estate business activities(c) Fisheries(k) Financial, banking and insurance activitie(g) Wholesale, retail and repair

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

(b) Forestry(a) Agriculture(d) Manufacturing(h) Transportation and storage

Figure 3.4. Decomposition of labor productivity growth: selected subsectors (%)

Chapter 3. Sources of labor productivity growth51

VIET NAM PRODUCTIVITY REPORT
Figure 3.5. Decomposition of labor productivity growth by ownership type (%)(a) State sector(b) Non-state sector(c) FDI sector

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

In sum, it may be concluded that Viet Nam’s labor productivity
was initially driven by heavy investment, which included infrastructuredevelopment, but the contribution of capital intensity gradually fell
and was overtaken by TFP growth around the turn of the century.
This transition of contributing factors was expectable and welcome.
However, the manufacturing sector and the FDI sector, the twooverlapping sectors in which we detected serious weaknesses in Chapter
2, did not enjoy a strong upsurge of TFP growth in the last two decades.

3.3. SHIFT-SHARE ANALYSIS

As explained in Chapter 1, there is another way to decompose laborproductivity growth. Labor productivity for the entire economy is thesum of productivity of each sector weighted by sectoral employment
share. However, labor productivity in each industry changes over time
and workers may also move across sectors. In order to reflect these twoprocesses, shift-share analysis decomposes labor productivity growth
into three elements, namely, (i) the within effect, (ii) the shift effect, and(iii) the interaction effect.
52

Chapter 3. Sources of labor productivity growth
The within effect reflects the impact of labor productivity growthin each sector on the labor productivity of the national economy
assuming that sectoral labor allocation remains constant. If there isan advancement in technology, management, or production method
in individual sectors, the within effect will carry a positive sign. The
shift effect captures the impact of labor reallocation across sectors
assuming that sectoral labor productivities remain the same. Overalllabor productivity rises and falls as labor moves from low-productivity
to high-productivity sectors, and vice versa. A vibrant shift effect meansa fast structural transformation of the national economy is underway.
Meanwhile, the interaction effect shows the secondary impact of labor
movement across sectors with different speeds of labor productivity
growth. This effect will be positive if labor migrates from sectors withlow labor productivity growth to those with high labor productivity
growth (regardless of their initial levels), and vice versa.
In economies in the process of industrialization and global
integration, such as Viet Nam since the 1990s, liberalization policies are
expected to immediately raise output and productivity in almost all sectors
by removing previous suppression and control, and restoring incentives toinvest and produce. Because of this, the within effect is likely to dominate
in the initial stage. Subsequently, as labor begins to migrate in large number
from traditional agriculture and services to modern and more dynamic
sectors, the shift effect will become relatively more prominent. However,both effects must interact and remain active for the industrialization process
to proceed strongly until high income is achieved. We will examine whether
this presumed pattern is observed in Viet Nam.
Deploying GSO data, aggregate labor productivity is calculated
from economic sectors that have sufficient information. There are some
sectors with limited output and labor indicators, especially those where
household labor, self-production, and self-service are dominant, forwhich industrial labor data is unavailable. We will use the remaining 21
sectors that have sufficient data on value-added and number of employedworkers. Although aggregate labor productivity thus calculated is lower
53

VIET NAM PRODUCTIVITY REPORT
than that based on GDP per worker, the difference is small enough foranalytical purposes; both share similar trends and patterns.
In Viet Nam, labor productivity for the entire economy grew
4.65% per year in the period of 1991-2019. During most of this period,
the within effect played a key role in promoting nation-wide laborproductivity (Figure 3.6).
Figure 3.6. Shift-share analysis: decomposition of labor productivity growth (%)

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

From 1991 to 2000, the within effect contributed between 1.68 and5.75 percentage points, or 64-104% of total, to overall labor productivity
growth. The shift effect was between 0.73 and 1.44 percentage points,
or 16-45% of total, in its contribution. The interaction effect carried
negative signs, which means that labor tended to move from industries
with increasing labor productivity to those with declining laborproductivity, but in insignificant magnitude. A series of Doi Moi policies
based on the “supply-side” theory contributed to the activation of thewithin effect, which led to strong productivity performance in this earlystage. They included removal of internal trade barriers, approval ofprivate commercial establishments, dissolution and/or merger of weakstate enterprises, external opening, and attraction of foreign investment(Pham The Anh and Dinh Tuan Minh, 2013).
In the following decade, from 2001 to 2010, the shift effect became
more important and overtook the within effect as the main driving force
54Chapter 3. Sources of labor productivity growthof labor productivity, contributing 90.41% to overall labor productivity
growth. This is because a large number of workers migrated fromsectors with low labor productivity, especially traditional farmingwith surplus labor, to sectors with higher labor productivity such asindustry, construction, and certain services. Between 2000 and 2010,
the proportion of labor engaged in agriculture, forestry, and fisheries
fell from 67.8% to 49.5%, while that of the industry and construction
sector nearly doubled, from 12.0% to 21.0%, and that of the services
sector also expanded from 20.2% to 29.6%. Contribution of the within
effect decreased and became more volatile, and even recorded a negative
figure in 2002. The interaction effect was negative and sometimes quite
large, implying that labor tended to migrate from high-growth to lowgrowth labor productivity sectors, which partly offset labor productivity
growth driven by the shift effect. The policy initiatives introduced in thisperiod, such as the Enterprise Law, the bilateral trade agreement with theUnited States, joining the World Trade Organization, and the accelerated
equitization of state-owned enterprises created an enabling environmentfor quantitative business expansion. They stimulated domestic investment
and FDI inflow, which drew labor from less productive sectors, without
necessarily strengthening labor productivity within individual sectors.
From 2011 to 2019, contribution of the shift effect became lessclear than in the previous decade, dropping to 41.8% in 2018 but thenincreased to 79.5% in 2019. The within effect regained its leading
position in driving labor productivity growth, explaining almost alllabor productivity growth in 2013-18. Thus, productivity improvement
within individual sectors, which had been more subdued during 2001-10,
was re-ignited. The interaction effect was still negative but small.
These results, featuring the declining shift effect and the revivalof the within effect in recent years, are also confirmed by the Viet Nam
Productivity Institute in its annual Viet Nam Productivity Report. In
there, the contributions of labor mobility and within-sector productivity
growth were 55.9% and 44.1%, respectively, during 2005-10. In thefollowing period of 2010-17, labor mobility slowed down, contributing
55

VIET NAM PRODUCTIVITY REPORT
only 32.6% while intra-industry productivity improvement contributed
67.4%. The interaction effect was reported to be positive in these
periods, as opposed to negative values found in our calculation, albeit
small or near zero except in 2002 and 2003. In a similar exercise, Dinh
Van An and Nguyen Thi Tue Anh (2008) also give a negative interaction
effect for the period of 2001-05.
We conclude that, overall and as a rough approximation, Viet Nam’slabor productivity was driven mostly by productivity gain in individual
sectors, supplemented by labor movement from industries with low
labor productivity to those with high labor productivity. As noted
earlier, these two forces are those naturally arising in any latecomer
developing economies. We normally anticipate that the within effectfirst dominates, then the shift-share effect catches up as labor starts tomigrate in large number with a lag, and both should play strong andinteractive influences throughout the industrialization process.
However, in Viet Nam, the impact of labor mobility seems to have
weakened in recent years, and labor productivity was again driven
mostly by the within effect alone from around 2013. Dynamic interaction
between the two effects, which was historically very visible in Japan,
South Korea, China, and so on, seems to have waned in Viet Nam when
it was still at lower middle income and there remained a long way ahead
to high income. We do not possess sufficient information to identify
the cause(s) of this peculiar and worrisome phenomenon. We can only
suggest, as we did in Section 2.4 above, some possible candidates suchas disguised labor shortage in rural villages, insufficient incentive forworkers to migrate to cities or to learn required skills, or the existenceof some hidden barriers to labor migration.

3.4. SHIFT-SHARE ANALYSIS: SUBSECTORS

During the period of soaring labor productivity, which subsectors werethe major drivers of nationwide productivity in terms of the strength of56

Chapter 3. Sources of labor productivity growth
sectoral productivity performance as well as the destination of surplus
labor migration? This section examines subsectoral data to try to answer
this question. Figure 3.7 graphically illustrates annual contributions of
key subsectors to labor productivity growth while Table 3.2 presents
the same information numerically for 21 subsectors in period average.
Shift-share analysis decomposition by subsectors is given in Table 3.3
for selected years of 2000, 2010, and 2019. Although decomposition
results of individual years are unstable and not to be interpreted as
long-term trends, this information, together with Figure 3.7 and Table
3.2, can provide us with some hints on what have been happening at
subsector levels.
Figure 3.7. Annual subsector contribution to economy-wide labor productivity
growth (%)

Note: the apparent jump in 2010 may reflect our less-than-perfect adjustment for the change
in the GSO’s treatment of “products taxes less subsidies on production” (see the footnote of Figure 2.2
and Appendix 1).
Source: authors’ calculation based on GSO data, with adjustment for the 2010 data gap.

57

VIET NAM PRODUCTIVITY REPORT
Table 3.2. Subsector contribution to economy-wide labor productivity growth(period average, %)19912000

20012010

20112019

19912019

Whole economy

100.00100.00100.00100.00Agriculture

8.05

6.34

3.07

5.91

Forestry

0.53

-1.10

0.22

-0.13

Fisheries

1.99

0.72

2.12

1.59

Mining

17.53

18.83

-1.39

12.11

Manufacturing

20.15

8.16

33.30

20.10

Electricity, gas, steam, and air conditioning
supply

4.17

5.96

7.86

5.93

Water supply, sewerage, waste management

0.75

0.97

0.87

0.86

Construction

8.62

11.55

6.60

9.00

Wholesale and retail trade, repair

7.00

2.81

15.51

8.19

Transportation and storage

2.55

5.03

3.45

3.69

Accommodation and food service activities

3.18

5.75

4.72

4.55

Information and communications

0.86

1.44

1.67

1.31

Financial, banking and insurance activities

7.92

10.91

7.28

8.75

Real estate business activities

7.92

6.56

1.65

5.51

Professional, scientific and technical activities

0.61

3.15

1.71

1.83

Administrative activities and support services

0.30

0.62

0.51

0.47

Activities of Communist Party, socio-politicalorganizations, etc.

2.82

3.08

3.25

3.04

Education and training

2.09

3.75

3.33

3.05

Health and social assistance activities

0.98

1.72

1.55

1.41

Arts, entertainment, and recreation

0.52

1.26

0.96

0.91

Other service activities

1.47

2.47

1.77

1.91

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

58

Chapter 3. Sources of labor productivity growth
Five subsectors that had, generally and throughout the entire period,
largest impact on overall labor productivity are (i) manufacturing;(ii) mining; (iii) construction; (iv) financial, banking, and insurance
activities; and (v) wholesale, retail, and repair. They collectively accounted
for roughly 61% of overall labor productivity growth in the 1990s and2010s though their impact was reduced to about 52% in the 2000s.
Manufacturing was the largest contributor to overall laborproductivity growth in the entire period of 1991-2019 as well as intwo subperiods of 1991-2000 and 2011-19, accounting for more than
20% of total labor productivity gain. However, in the subperiod of
2001-10, its contribution fell to 8.16% and was surpassed by those ofmining, construction, and financial, banking and insurance activities.
This finding probably reflects the stagnation of manufacturing laborproductivity which started in the early 2000s, discussed in Chapter
2, as well as the data volatility mentioned above. The within effect ofmanufacturing was 10.8% in 2000, -51.1% in 2010, and -5.4% in 2019,
which is too bumpy for drawing any definite conclusion, but negative
figures in later years are at least consistent with the weakening trend in
manufacturing productivity performance.
The mining sector’s contribution to overall labor productivity growth
was 12.1% in the entire period, but from around 2006, it became very
volatile year to year. Its subperiod contribution was 17.5% in 1991-2000
and 18.8% in 2001-10, but sank to -1.4% in 2011-19. Decomposition for2000 shows a large within effect of 32.7% which was partly offset bya negative shift effect. But decomposition of 2019 reports a very small
within effect, at only 1.6%. As discussed earlier, the mining subsector is
dictated by government plans and global price gyration.
Construction contributed 9.0% to overall labor productivity growthin the entire period, its contribution varied from 6.6% to 11.6% on
average across the subperiods. Shift-share decomposition is alsodifficult to interpret.
Finance, banking, and insurance activities was the fourth largest
contributor to overall labor productivity growth in the entire period at
59

VIET NAM PRODUCTIVITY REPORT
8.8%. Its contribution in the most recent subperiod was down to 7.3%.
The within effect rose from 9.6% in 2000 to 20.7% in 2010, and thenfell to -8.8% in 2019. The shift effect was negative in 2000, at -1.1%,
but was positive in 2010 (11.4%) and 2019 (18.4%). The quantitative
expansion of this sector may be the main cause of its contribution tolabor productivity growth.
Wholesale, retail, and repair’s contribution was 8.2% to theoverall labor productivity growth in the entire period, but it too had
an inexplicable decline to 2.8% in the second subperiod, with a huge
negative contribution in 2010 alone. The within effect was also volatile,
declining from -7.9% to -101.1% and then rising to 15.5% across thesubperiods. The shift effect was positive in 2000 and 2010, at 15.4%
and 17.7%, respectively, which may reflect the fact that this subsector
has been an important absorber of surplus or discharged labor fromtraditional agriculture as well as modern industry and services.

60

Whole economy
Agriculture
Forestry
Fisheries
MiningManufacturing
Electricity, gas, steam, and air
conditioning supply
Water supply, sewerage, waste
management
Construction
Wholesale and retail trade, repair
Transportation and storage
Accommodation and food service
activities
Information and communications
5.7
0.8
8.3
-7.9
0.8
-0.1
-0.5

4.7

0.9

9.8
5.9
1.8

2.4

0.7

100.0
10.3
0.6
2.1
24.7
18.1

Total

1.1

2.5

1.4
15.4
1.5

0.0

-1.0

0.0

0.0

0.1
-0.2
0.0

0.0

-0.1

2000
Within Shift Intereffect effect action
effect104.2 15.6 -19.8-11.7 22.9 -0.7
-0.4
1.0
0.0
50.8 -30.2 -16.5
32.7 -7.5
-0.9
10.8
6.7
0.4

2.6

20.9

35.9
-88.3
15.6

2.8

15.4

100.0
-8.4
-1.4
-2.1
33.9
-49.7

Total

-0.3

14.1

6.0
-101.1
19.0

-0.1

19.3

2.9

6.0

28.9
17.7
-2.7

2.9

-3.3

0.0

0.8

1.0
-4.9
-0.6

0.0

-0.7

2 010
Within Shift Intereffect effect action
effect7.2
123.5 -30.7
18.2-25.5 -1.1
-0.1
-1.3
0.0
-6.9
5.2
-0.4
61.9
-23.1 -4.9
-51.1
1.5
-0.2

Table 3.3. Subsector shift-share decomposition for selected years (%)

1.3

4.0

9.6
14.0
4.4

0.7

6.4

100.0
2.4
0.2
0.5
0.4
34.7

Total

-0.9

3.6

1.0
15.5
-1.4

-0.4

-4.4

28.6
18.7
1.1
4.3
1.6
-5.4

2.4

0.4

8.6
-1.4
5.9

1.1

11.5

79.7
-14.8
-0.8
-3.5
-1.2
40.7

2019
Within Shifteffect effect

-0.1

0.0

0.1
-0.1
-0.1

0.0

-0.6

Interaction
effect
-8.3
-1.6
-0.1
-0.3
0.0
-0.7

Chapter 3. Sources of labor productivity growth

61

62
9.6
2.2
-1.3
0.0
1.9
1.5
0.9
0.3
-0.2

6.7

4.8

0.5

0.2

2.1

1.6

0.7

0.4

1.1

1.8

0.1

-0.3

0.1

0.2

0.2

-0.6

9.6

-1.1

0.0

0.0

0.0

0.0

0.0

0.0

0.0

-0.6

-0.1

10.0

3.9

6.7

14.6

16.7

1.4

6.9

29.1

33.7

3.2

2.4

1.4

12.4

20.6

0.8

8.3

-41.6

20.7

6.3

1.4

5.0

1.8

-3.1

0.6

-1.2

92.0

11.4

0.5

0.2

0.2

0.4

-0.9

0.0

-0.3

-21.3

1.6

1.4

0.9

1.3

2.8

1.6

0.5

1.5

3.3

8.2

-1.5

1.0

0.5

6.0

8.5

0.1

-1.4

-9.2

-8.8

3.0

-0.1

0.8

-2.8

-5.9

0.4

3.0

13.9

18.4

-0.2

0.0

0.0

-0.4

-1.0

0.0

-0.2

-1.4

-1.5

Note: the total column shows the subsector’s contribution share to economy-wide labor productivity growth. The other three columns decompose the subsector’s contribution into each effect.
Source: authors’ calculation based on GSO data, with adjustment for the 2010 data gap.

Financial, banking and insurance
activities
Real estate business activities
Professional, scientific andtechnical activities
Administrative activities andsupport services
Activities of Communist Party,socio-political organizations, etc.
Education and training
Health and social assistanceactivities
Arts, entertainment andrecreation
Other service activities

VIET NAM PRODUCTIVITY REPORT

Chapter 3. Sources of labor productivity growth
3.5. ADDITIONAL ANALYSIS ON MANUFACTURING

Nguyen Thi Tue Anh et al. (2016) analyzed the contribution of“structural change” to the labor productivity growth of manufacturingfrom 2008 to 2013. We will selectively quote from their research tosupplement our results. They defined the sum of the shift effect andthe interaction effect as the impact of structural change on laborproductivity of the whole economy or any particular sector, whichever
the case may be. The research used data from the Statistical Yearbook
and the Viet Nam Enterprise Census of GSO, and examined 35
activities within manufacturing, placing emphasis on six activities
with the largest contribution to labor productivity growth as well as
employment. They are (i) food processing, (ii) apparel, (iii) shoes andleather, (iv) manufacture of products from other non-metallic minerals,(v) manufacture of products from precast metals except machinery andequipment, and (vi) manufacture of electronic products, computers,
optical products5. Decomposition results are presented in a re-formatted
form in Table 3.4. Since annual decomposition fluctuates greatly, thefollowing discussion focuses on five-year averages.

5 OECD classifies food processing, apparel, and footwear as low-tech sectors,
non-metallic mineral products and prefabricated metal as mid-tech sectors, andelectronic products, computers and optical products as a high-tech sector. However,such classification by product name is often misleading. Even within the same
industry, required skill, technology, and knowledge are very different depending on
which part of the global value chain (or the Smiling Curve) a nation specializes in.
Viet Nam’s assembly of smart phones and electronic components is hardly “hightech” even though R&D and product design embody frontline technology.

63

VIET NAM PRODUCTIVITY REPORT
Table 3.4. Contribution of selected activities to manufacturing labor productivity growth(Unit: percent)

Subsector(classification code)
Food processing (10)Total
Within effect
Shift effectInteraction effectApparel (14)Total
Within effect
Shift effectInteraction effect
Shoes and leather (15)
Total
Within effect
Shift effectInteraction effectProducts from othernon-metallic minerals (23)
Total
Within effect
Shift effectInteraction effectProducts from precast metals excl.
machinery and equipment (25)
Total
Within effect
Shift effectInteraction effectElectronic products, computers,
optical products (26)
Total
Within effect
Shift effectInteraction effect2008 2009

2010

2011

2012

Five-year
average

10.6 -27.7-2.6 -23.7
13.3 -3.7-0.1 -0.3

-72.2
-57.2
-18.3
3.4

54.0
63.9
-7.5
-2.4

18.1
31.6
-12.4
-1.1

-3.4
2.4
-5.7
-0.1

-0.9
-3.9
3.0
0.0

39.7
37.2
3.1
-0.5

135.2 -68.4
138.2 -70.4-1.6
2.9-1.4 -0.8

-52.6
-62.9
13.5
-3.2

10.6
7.6
4.2
-1.2

-28.7
-18.0
-11.5
0.9

28.1
20.3
8.8
-1.0

96.7 -51.4
88.0 -56.4
5.2
7.1
3.5 -2.1

-25.9
-24.5
-1.6
0.2

3.8
1.9
1.6
0.3

86.7 32.5
75.3 54.2
8.5 -27.6
2.8 5.9

-45.5
-20.8
-27.6
2.9

29.4
30.7
-1.1
-0.3

-53.5
9.9
-39.0 20.1
-17.7 -13.1
3.1
2.9

16.4
7.7
8.3
0.5

6.9
2.2
4.9
-0.1

23.1
9.0
12.9
1.2

-0.7
-3.2
2.6
-0.1

42.9
30.0
10.6
2.2

17.7
9.1
7.9
0.8

42.4 26.5
27.9 44.3
11.0 -31.0
3.6 13.3

15.6
1.4
13.9
0.3

63.2
42.0
13.4
7.9

136.8
87.6
33.7
15.5

56.9
40.6
8.2
8.1

Source: adapted from Nguyen Thi Tue Anh et al. (2016) with re-formatting.

64

Chapter 3. Sources of labor productivity growth
Contributions of three labor-intensive light manufacturing
activities – food processing, apparel, and shoes and leather – to overall
manufacturing labor productivity during the sample period of 2009-12
were generally weak or even negative. Among the three, apparel had
the largest contribution of 10.6% per year. The within effect of these
activities was positive but relatively small, which was insufficient toimprove national productivity performance substantially. The “structuralchange,” or the sum of the shift effect and the interaction effect, wasnegative for food processing and small positive for apparel and shoes andleather. This indicates that these low-tech light manufacturing activities
were not a large contributor to overall labor productivity through labor
migration. Labor may have moved from agriculture to these activities,
but if their labor productivity was stagnant or not so different fromtraditional farming, the shift effect would not be very large. Low value
creation and resulting insufficient participation in global value chainsare suspected as the principal cause of these weaknesses.
Products from other non-metallic minerals had a robust within
effect of 20.1% which however was offset by the negative combined
impact of the shift and interaction effects. Total contribution to overall
manufacturing labor productivity was just half of the within effect, at
9.9% per year. Meanwhile, products from fabricated metal contributed
more, at 17.7% per year, and this subsector’s within, shift, and interactive
effects were all positive. As demand for metal and non-metal materials
and intermediate components rose with ongoing industrialization, theseindustries played an important role in the development of supporting
industries in Viet Nam.
Manufacturing of electronic products, computers and opticalproducts had the highest contribution among the six activities examined
here, at 56.9% per year, driven by the strong within effect of 40.6%. The
other two effects of “structural change” were also positive, at a combined
impact of not-so-insignificant 16.3%. This was the leading subsector
that accelerated Vietnamese industrialization during this period, by
raising within-sector productivity as well as absorbing a large amount65

VIET NAM PRODUCTIVITY REPORTof surplus labor for productive works. The most prominent entry in thissubsector was Samsung that invested in Viet Nam in 2009 to establish
new global production sites for smart phones, coupled with many otherelectronic and computer-related projects before and during this period,
most of which were from Japan and South Korea. Thus, it may besaid that this subsector successfully avoided the pitfall that other lightmanufacturing activities, such as apparel and footwear, had fallen. Evenin this subsector, however, the initiators and managers of value creation
remain mostly foreigners, and large value-added mainly belong to themrather than Vietnamese managers, engineers, or workers.
Two other subsectors, not listed in Table 3.4, are worthy ofadditional mention. Chemicals and chemical products, a capitalintensive subsector which constitutes a part of materials and supporting
industries, contributed significantly to the growth of manufacturinglabor productivity, especially after 2011, though its share of employment
generation was only 2% of total manufacturing employment. In
contrast, manufacturing of furniture, a traditional and more low-tech
activity, tended to contribute more to job creation rather than to thegrowth of manufacturing labor productivity. The difference between thetwo may stem from the degree of integration into globally competitiveand dynamic modern industries. The chemicals industry, as an essential
upstream process, supplies many crucial inputs to downstream
manufacturers and assemblers while furniture is consumer-oriented andhas no deep industrial linkage.
The study by Nguyen Thi Tue Anh et al. (2016), though the periodof 2008-12 was neither long nor up-to-date, revealed an important
diversity among manufacturing subsectors in their contributions
to overall productivity either through their own productivity gainor through labor mobility. Some traditional light manufacturing
subsectors such as food processing, apparel, footwear, and furniture
do not show remarkable contribution even when they are operatedby FDI. Meanwhile, electronic assembly, an activity equally or evenmore labor-intensive under strong foreign control, contributes greatly
66

Chapter 3. Sources of labor productivity growth
to overall productivity and has become the central pillar of Viet Nam’s
industrialization. As for upstream processes (i.e., supporting industries)
such as metal, non-metal, and chemical subsectors, their contributions tooverall manufacturing productivity are quite large, though not as striking
as that of electronic assembly. Degrees of global competitiveness andintegration into global value chains seem to matter in producing thesedifferences.

3.6. CONCLUDING REMARKS

Findings in this chapter, based on two types of decomposition oflabor productivity, were generally consistent with the facts and trends
obtained in Chapter 2 for the whole economy as well as for key sectors
and subsectors. The chapter provided additional insights and subsectoral
details and variations.
The main driver of Viet Nam’s labor productivity growth shifted,
overall and gradually, from capital intensity to TFP (growth accounting
decomposition). Capital efficiency, measured by ICOR, deteriorated
significantly when heavy investment was driving growth in the late
1990s to 2000s, but it improved somewhat in recent years. It was also
found that, from another angle, the driving force of labor productivity
mainly came from the within effect, or productivity gain in individual
subsectors, although the shift effect, or impact of labor migration, wasdominant in the intervening period of 2001-10 (shift-share analysis
decomposition). More recently, the shift effect has declined eventhough surplus labor with low productivity seems to remain in rural
areas. The weakening of inter-sectoral labor migration is puzzling
because Viet Nam is still at lower middle income with a long way to fullindustrialization with advanced technology. Some barriers to further
labor mobility are suspected. Strong and dynamic interaction between
the within effect and the shift effect must continue to take the economy
to upper middle income and eventually to high income.
67

VIET NAM PRODUCTIVITY REPORT
Manufacturing was the greatest contributor to economy-widelabor productivity while finance, banking, and insurance activities andwholesale, retail, and repair also made considerable contributions. The
contribution of construction was quite stable, and that of mining wasvolatile, especially in recent periods, which is difficult to interpret.
Even with quantitative contribution, productivity performance of
manufacturing was not strong enough to catapult Viet Nam onto ahigh productivity path and global competitiveness. The unwelcome
stagnation of manufacturing labor productivity and weak performanceof the FDI sector, fully discussed in Chapter 2, were also visible insubsector data.
Within manufacturing, some labor-intensive subsectors such as
electronic assembly has become a strong driver of overall productivity
while contribution of labor-intensive traditional manufacturing,such as food processing, apparel, footwear, and furniture, to national
productivity was small. Upstream subsectors that supply inputs tomechanical and electronic assemblers (known as supporting industries),
such as metal, non-metal, and chemical products, also had significant
contributions. This diversity among manufacturing subsectors should be
duly noted when policies to promote productivity and labor migration
are formulated.

68Chapter 4
VIET NAM’S LABOR PRODUCTIVITY
IN THE INTERNATIONAL CONTEXTIn this chapter, using the Asian Productivity Organization (APO) dataand industry classification, Viet Nam’s labor productivity is comparedwith those of selected countries in Northeast and Southeast Asia—
Japan, South Korea, China, Singapore, Thailand, Philippines, Malaysia,
Indonesia, and Cambodia—at both overall economy level and sector
level, to identify Viet Nam’s position in the region. Using the shift-shareanalysis method, we also examine the relative importance of the within
effect and the shift effect in Viet Nam and selected regional countries
over time. Contribution of manufacturing to overall labor productivity
growth is additionally studied for each country.

4.1. DATA

For international comparison, we use the APO Dataset 2019 whichcontains data up to 2017. GDP and sectoral value added are measured
in constant 2011 price at purchasing power parity exchange rates.
The advantage of using the APO Dataset is that both GDP and total
employment of listed countries are divided into nine identical categories:(i) agriculture, hunting, forestry, and fishing; (ii) mining and quarrying;(iii) manufacturing; (iv) electricity, gas, and water supply; (v) construction;(vi) wholesale and retail trade, repair of vehicles and household goods,
hotels and restaurants; (vii) transport, storage and communications; (viii)
financial intermediation, real estate, renting, and business activities; and69

VIET NAM PRODUCTIVITY REPORT(ix) community, social and personal services. Since GDP and labor input
are categorized into these groups, economy-wide labor productivity canbe calculated as a sum of per-worker GDP (labor productivity) of eachindustry weighted by the employment share of each industry.
However, as APO’s statistics are collected from national accountsof reporting countries, national differences may arise in the precise
definition and classification of the sectors or the way in which value
added and employment are calculated. For this reason, labor productivity
may not be exactly comparable across countries. This is a problem that
researchers encounter in any attempt in international comparison. With
this said, the APO Dataset should still be a useful data source for crosscountry comparisons.
In the following part, labor productivity levels and growth rates ofViet Nam and other selected countries are shown at both economy andindustry level. Furthermore, labor productivity growth is decomposed
into different factors related to labor movement to determine the sourceof growth in these countries.

4.2. THE LEVEL AND GROWTH OF ECONOMY-WIDE LABOR PRODUCTIVITY

In comparison with selected Northeast and Southeast Asian countries,
the absolute level of Viet Nam’s labor productivity is low even though
its growth has been relatively high since 1991. Despite its upward
trend, Viet Nam’s labor productivity did not experience any significant
spurt that could significantly raise its international standing amongneighboring countries (Figure 4.1 and Table 4.1).
In 1991, measured in constant 2011 USD at purchasing power
parity exchange rates, the labor productivity of Viet Nam was USD
2,958, higher than China’s USD 2,772. In the same year, the laborproductivity levels of Japan and South Korea were respectively 22.1
times and 9.5 times higher than that of Viet Nam. ASEAN5 countries
also had higher labor productivity than Viet Nam. Specifically, the labor
70

Chapter 4. Viet Nam’s labor productivity in the international context
productivity of Singapore and Malaysia was 23.8 times and 9.8 times
higher, and Thailand, Philippines, and Indonesia were 4.4 times, 3.6
times and 4.2 times higher than that of Viet Nam, respectively.

Figure 4.1. Labor productivity of Viet Nam and selected countries(a) High income economies(b) Middle income economies

Note: expressed in USD thousand per worker in constant 2011 PPP dollars.
Source: authors’ calculation based on the statistics from APO.

71

VIET NAM PRODUCTIVITY REPORT
Table 4.1. Labor productivity growth in Viet Nam and selected countries(Percent per annum)CountryJapan
South Korea
China
Singapore
ThailandPhilippines
Malaysia
Indonesia
Cambodia
Viet Nam

1991-2000
0.99
5.30
9.25
3.95
3.46
1.26
3.92
2.47
3.72
5.74

2001-2010
0.79
3.29
9.94
1.91
3.19
1.95
2.61
3.29
4.06
4.79

2011-2017
0.51
1.43
7.26
1.91
3.72
4.47
2.28
3.51
4.93
4.83

1991-2017
0.79
3.54
8.98
2.66
3.42
2.34
3.01
3.04
4.16
5.15

Source: authors’ calculation based on statistics from APO.

Furthermore, over time, Viet Nam’s labor productivity growth
remained low in comparison with high-performing economies in the region.
As noted above, in 1991, the labor productivity of Viet Nam was similar tothat of China. Thereafter, China attained a high average labor productivity
growth of 8.98% during 1991-2017, and especially in the first decade of thiscentury when its labor productivity growth nearly reached 10% per annum.
As a result, China increased labor productivity by 9.4 times from 1991 to2017 while Viet Nam’s rose only 3.7 times. Viet Nam needs to acceleratelabor productivity growth significantly, not just maintain its current pace, if
it does not want to further lag behind other countries in the region.
4.3. LABOR PRODUCTIVITY BY SECTOR IN VIET NAM AND SELECTED COUNTRIESIn this section, Viet Nam’s labor productivity is compared withother selected countries for nine sectors based on the APO industrial
classification. Labor productivity in each sector is calculated as theratio of value added to the number of employed persons in that sector.
The results show that, in 2017, the labor productivity of Viet Nam inalmost all sectors was at the lowest range in comparison with the selected
Northeast and Southeast Asian countries (Figure 4.2). Viet Nam’s laborproductivity was the lowest, even below Cambodia, in two sectors,
72

Chapter 4. Viet Nam’s labor productivity in the international context
namely construction; and transport, storage and communications. It was
the second lowest, only above Cambodia, in agriculture, forestry, andfishery; manufacturing; electricity, gas, and water supply; wholesale
and retail trade, repair of vehicles and household goods, hotels andrestaurants; and community, social and personal services. In contrast,
Viet Nam had relatively high labor productivity in two sectors, including
mining and quarrying; and financial intermediation, real estate, renting
and business activities. The following subsections will examine more
fully Viet Nam’s standing in individual sectors.
4.3.1. Agriculture, forestry and fishery

In 2017, Viet Nam’s labor productivity in agriculture wasapproximately USD 4,784 per worker, only higher than that of Cambodia(USD 4,261) and 51.7% of that of China (USD 9,256). Malaysia’s laborproductivity in this industry was nearly 11.2 times higher than that of Viet
Nam. Despite the relatively high average growth rate in the period from1991 to 2017, Viet Nam’s agricultural productivity continued to remainin the second lowest rank compared with other countries in the region.
4.3.2. Mining and quarrying

Labor productivity of mining and quarrying depends greatly on
the technology and features adopted in each mining country. In 2017,
Viet Nam’s labor productivity in this sector was higher than that ofCambodia (nearly 11 times), Philippines (4 times), Japan (3.5 times),South Korea (1.7 times), and China (1.7 times).
4.3.3. Manufacturing

From 1991 to 2017, Viet Nam’s labor productivity in manufacturing
increased from USD 3,212 to USD 11,515 per worker with an average
growth rate of 5.0% per year. China had manufacturing labor productivity
growing at 9.7% per year in the same period to achieve the level 4.7 times
higher than that of Viet Nam in 2017. Other countries that were far moreproductive than Viet Nam in 2017 include Singapore (17.3 times), South
Korea (10.8 times), Japan (9.9 times), and Malaysia (7.4 times).
7374(f) Wholesale, retail, repair, etc.

(c) Manufacturing

Note: measured in USD thousand per worker in constant 2011 PPP dollars.
Source: authors’ calculation based on the statistics from APO.

(h) Financial intermediation, real estate, renting, (i) Community, social and personal services
and business activities(e) Construction(d) Electricity, gas and water supply(g) Transport, storage, and communications(b) Mining and quarrying(a) Agriculture, forestry, and fishery

Figure 4.2. Labor productivity by sector

VIET NAM PRODUCTIVITY REPORT

Chapter 4. Viet Nam’s labor productivity in the international context
4.3.4. Electricity, gas and water supply

In 2017, Viet Nam’s labor productivity in this sector reached
USD 83,426 per worker with an average growth rate of 5.95% per year
in the period 1991-2017 and 8.12% per year in the period 2011-17.
Labor productivity in this sector of Japan, South Korea, and China
was 1.2 times, 5.9 times, and 1.7 times higher than that of Viet Nam,
respectively. China experienced the most impressive growth among thecompared countries, at 11.5% per year in the period 1991-17, but grewat a slower pace at 7.73% per year in the period 2011-17. China’s laborproductivity was USD 143,343 per worker in 2017.
4.3.5. Construction

In 2017, Viet Nam’s labor productivity in construction was
USD 9,791 per worker which was lower than that of Cambodia, at USD
10,479 per worker. However, it should be noted that Cambodia had far
higher labor productivity in the past which gradually declined to near
Viet Nam’s level. The average growth rate of labor productivity in Viet
Nam was 2.70% per year in the period 1991-17 and 2.60% per year
in the period 2011-17. In this industry, China had the highest growthrate among the countries, at 6.78% per year in the period 1991-17 and7.73% per year in the period 2011-17.
4.3.6. Wholesale and retail trade, repair of vehicles and household goods, hotels andrestaurants

Labor productivity of this industry in Viet Nam reached
USD 9,237 per worker in 2017, growing at an average rate of 2.37% peryear in the period 1991-17 and 4.32% per year in the period 2011-17.
Singapore’s labor productivity was 17.7 times higher than that of Viet
Nam. The ratio relative to Viet Nam was 7.3 times for Japan, about fourtimes for Malaysia and Korea, and nearly three times for China in 2017.
Viet Nam recorded a moderate growth rate of labor productivity in this75

VIET NAM PRODUCTIVITY REPORT
industry. China had the highest growth rate at 5.61% per year in the
period 1991-17 and 4.52% per year in the period 2011-17.
4.3.7. Transport, storage, and communications

Labor productivity of Viet Nam’s transport, storage, andcommunications was the lowest among the selected countries. In 2017,
Singapore’s labor productivity was 14.6 times higher, and Malaysia wereabout 11 times more productive than Viet Nam. In the period 1991-2017,
Viet Nam had the sixth highest growth rate in this sector at 2.63% per
year, behind China (7.4% per year), Indonesia (5.1% per year), South
Korea (4.5% per year), Thailand (3.9%), and Malaysia (3.7%).
4.3.8. Financial intermediation, real estate, renting, and business activities

In 2017, for this sector, Viet Nam had labor productivity 1.24
times higher than South Korea, 1.8 times higher than Malaysia andPhilippines, and 2.3 times higher than Cambodia. This is somewhat
surprising, but there are also countries that show far higher laborproductivity than Viet Nam in this sector such as Singapore, Japan, andChina. The reasons for this great variation and why Viet Nam is moreproductive than South Korea, for example, need investigation. They
may reflect true differences or may arise due to differences in industry
classification, data collection, or measurement of value added and labor
input among these countries. More accurate evaluation will become
possible when more disaggregated data becomes available. This warning
is equally applicable to other sectors we examine in this section.
4.3.9. Community, social and personal services

In 2017, labor productivity in community, social and personal
services of Viet Nam, at USD 9,957 per worker, was superior only76

Chapter 4. Viet Nam’s labor productivity in the international context
to that of Cambodia. Labor productivity of Japan, South Korea, andSingapore in this industry was respectively 6.5 times, five times, and
4.1 times higher than Viet Nam’s. The average growth rate of laborproductivity in Viet Nam was 2.63% per year in the period 1991-17
and 3.87% per year in the period 2011-17, ranking third after China andMalaysia during these periods.
In conclusion, the labor productivity of Viet Nam in almost allindustries is at the lowest level in comparison with those of selected
countries in the region. In agriculture, forestry and fishery, despite
relatively high growth, Viet Nam’s labor productivity was only higher
than Cambodia’s. In manufacturing labor productivity, there is a huge
gap between Viet Nam’s level and those of not only Northeast Asian
countries but also other ASEAN members. In the service sector, Viet
Nam has higher labor productivity than that of Cambodia but generally
falls behind the rest.

4.4. DECOMPOSITION OF LABOR PRODUCTIVITY BY SHIFT-SHARE ANALYSIS

As explained in Section 1.2, labor productivity growth can be
decomposed into the within effect, which reflects labor productivity
improvement within individual sectors, the shift effect, which captureslabor movement across sectors with different labor productivity
performance, and the interaction effect, which is the secondary impact
generated by these two effects. This section compares the results of theshift-share analysis for selected Asian countries including Viet Nam.
4.4.1. Japan, South Korea, China, and Viet Nam

Labor productivity of Japan, South Korea, and China in their yearsof high growth was largely driven by the within effect (Figure 4.3).
In Japan, from 1971 to 1991, the within effect was mainly positiveand contributed greatly to the growth of labor productivity with an
77VIET NAM PRODUCTIVITY REPORT
average annual contribution share of 73.5%. The shift effect and theinteraction effect contributed 26.4% and 0.1% each year, respectively,
to labor productivity growth during this period. After 1991, the within
effect remained mostly positive and contributed to the growth of laborproductivity. Meanwhile, the shift effect had a negative impact in someyears.
In South Korea, the within effect gradually dominated laborproductivity growth. Since 1981, the labor productivity of individual
sectors had improved and contributed 80.5% to the country’s laborproductivity growth. The shift effect continued to contribute positively
at the rate of 24% while the interaction effect was mostly negative withannual contribution of -4.4%.
In China, the contribution of the shift effect was generally smaller
than that of the within effect. Furthermore, China sustained a positive
interaction effect in the 1980s (except 1982 and 1984), the 1990s (except
1990, 1994, 1998, and 1999), and the period of 2003-12, suggestingthat Chinese labor generally migrated from sectors with stagnant laborproductivity growth to those with rising labor productivity growth in
the periods of high labor productivity growth.
Thus, for Northeast Asian countries, the within effect has been themain driver of labor productivity growth with its contribution to overalllabor productivity growth about 80% in each country. Observations inSouth Korea and China show that the contribution of the shift effect was
relatively low compared to the within effect.
In Viet Nam, significant economic changes were generated in the
post-Doi Moi period. The growth of labor productivity in the period
1991-2000 came mainly from the within effect with the contribution
share of 89.9% while the shift effect and the interaction effectcontributed 12% and -1.9%, respectively. In the next period from 2001
to 2010, considerable labor movement due to economic restructuring
as well as the arrival of FDI enterprises in the manufacturing andprocessing sector led to the dominance of the shift effect contributing78

Chapter 4. Viet Nam’s labor productivity in the international context
93.3% to labor productivity growth. During this period, the within
effect contributed only 14.3%. After 2010, the within effect graduallyrose and surpassed the shift effect, accounting for 109.1% and 8.9%of labor productivity growth, respectively. These results are consistent
with the results obtained from the national data (Chapter 3). The shifteffect had a decreasing trend in recent years. Meanwhile, the interaction
effect was mostly small and negative throughout the examined period.
4.4.2. Selected ASEAN countries

In general, Southeast Asian countries relied on the shift effect inthe early stage of development, then moved gradually to depend on
the within effect. The within effect was positive in most economies
in the period 1991-17 (Figure 4.4). The shift effect supported laborproductivity growth of both developing countries such as Thailand,
Cambodia, and Philippines, and a developed country such as Singapore
in its early development stage. Meanwhile, the interaction effect was
mostly negative for ASEAN countries.
The general pattern of contribution shares of different growthcomponents is clearly seen among the selected countries. In the
ASEAN, Singapore is the country that has a very high contribution of
the within effect, reaching over 80% after 1998. The contribution of thewithin effect was also quite high in Thailand, Indonesia, and Malaysia,
and relatively stable in the case of the Philippines. Meanwhile, the shifteffect still plays a significant role in Thailand, Philippines, and Malaysia.
In the period 1991-17, Cambodia had a pattern of contribution of theseeffects to labor productivity growth somewhat similar to Viet Nam.

79

1973

1973

1971

1971

(c) China(a) Japan

1989
1991
1993
1995

2015

2015

2013

2013

2011

2011

2009

2009

2007

2007

2005

2005

2003

2003

2001

2001

1999

1999

1997

1997

-10%

-5%

0%

5%

10%

15%

-10%

-5%

0%

5%

10%

15%

1983

1983

1981

1981

1979

1979

1977

1977

1975

1975

1973

1973

(d) Viet Nam(b) South Korea

1987
1989
1991
1993
1995

2009

2009

2007

2007

2005

2005

2003

2003

2001

2001

1999

1999

1997

1997

Figure 4.3. Shift-share decomposition: Northeast Asia and Viet Nam

Source: authors’ calculation based on the statistics of APO.

-10%

-5%

0%

5%

10%

15%
1975

1975

-10%
1977

1977

-5%

1979

1979

0%

1981

1981

5%

1983

1983

10%

1985

1985

15%

1987

1987
1989
1991
1993
1995

2017

2017

1971

1971

1985

1985
1987
1989
1991
1993
1995

2011

2011
2013

80
2013

2015

2015

2017

2017

VIET NAM PRODUCTIVITY REPORT

81
-15%

-10%

0%

-5%

5%

10%

15%

20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

-15%

-10%

1991

1991

-5%

1992

1992

0%

1993

1993

5%

1994

1994

10%

1995

1995

15%

1996

1996

20%

Source: authors’ calculation based on the statistics from APO.

(d) Philippines(a) Singapore

1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017

1997

1997

(e) Indonesia(b) Malaysia

1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017

-15%

-10%

0%

-5%

5%

10%

15%

20%

-15%

-10%

0%

-5%

5%

10%

15%

20%

(f) Cambodia(c) Thailand

1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017

Figure 4.4. Shift-share decomposition: selected ASEAN countries

1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017

1998

1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017

1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017

Chapter 4. Viet Nam’s labor productivity in the international context

VIET NAM PRODUCTIVITY REPORT
4.5. SECTORAL CONTRIBUTION TO LABOR PRODUCTIVITY GROWTH

In this section, we deploy the APO dataset to calculate the contributionof economic sectors to labor productivity growth in Viet Nam from1991 to 2017 (Figure 4.5). For comparison, sectoral contributions arealso examined for selected Asian countries (Table 4.2).
In Viet Nam during the 1970s and 1980s, labor productivity growth
was mainly driven by agriculture, forestry, and fishery; and financial
intermediation, real estate, renting and business activities (not shown in
Figure 4.5). After that, mining and quarrying was the leading contributor
to labor productivity growth in the 1990s when economy-wide laborproductivity grew around 6%. Back then, labor productivity growth was
also supported by such sectors as financial intermediation, real estate,renting and business activities; manufacturing; wholesale and retailtrade, repair of vehicles and household goods, hotels and restaurants;
agriculture, forestry, and fishing; and construction. However, in 1998
and 1999, the labor productivity growth of the whole economy slightly
declined due to the adverse impact of the Asian financial crisis which
sharply reduced the contribution of a few service-related sectors.
In the period 2001-10, labor productivity of the whole economy
grew more slowly than the previous period. The contribution of the
manufacturing sector gradually rose to replace the mining sector as
the leading contributor to labor productivity growth in Viet Nam. The
contribution of mining was even negative in certain years. Wholesale
and retail trade, repair of vehicles and household goods, hotels andrestaurants had a fairly stable contribution over the years while thecontributions of agriculture; construction; and finance, real estate andbusiness activities went down. In this period, no economic sector made aproductivity breakthrough large enough to stir up the labor productivityof the whole economy to a higher trajectory, and the Vietnamese
economy continued to grow but not at a spectacular rate.
82

Chapter 4. Viet Nam’s labor productivity in the international context
Since 2011, the contributions of economic sectors gradually
recovered and had a positive impact on labor productivity growth,
although a remarkable leveling up of the growth process was again
not observed. It is noteworthy that the manufacturing sector was thedominant driver of labor productivity growth in Japan, South Korea,
and China during their high growth periods (Appendix 4). So far, such a
manufacturing-based shift to high growth and high income has not been
observed in Viet Nam.
Figure 4.5. Sectoral contribution to overall labor productivity growth in Viet Nam

Source: authors’ calculations based on data from APO.

Labor productivity growth in Japan, South Korea, and China
was generated mainly by the manufacturing sector and certain service
sectors such as financial intermediation, real estate, renting andbusiness activities; and wholesale and retail trade, repair of vehicles
and household goods, hotels and restaurants (Table 4.2). Thailand also
had a pattern similar to these countries.
83VIET NAM PRODUCTIVITY REPORTIn Japan, the labor productivity growth of the whole economy in the
period 1971-80 came mostly from manufacturing as well as community,social and personal services. Manufacturing continued to expand in thenext two periods before it turned to a downward trend in the period
2001-10. The same tendency was observed for the community, socialand personal services. Meanwhile, wholesale and retail trade, repairof vehicles and household goods, hotels and restaurants continued toincrease contribution to labor productivity growth.
In South Korea, sectors that contributed most to the growth oflabor productivity in 1971-80, 1981-90, and 1991-2000 were financial
intermediation, real estate, renting and business activities; community,social and personal services; and manufacturing. However, the relative
contribution of manufacturing increased while those of the other two
sectors decreased over time. Agriculture accounted for a very small
proportion with diminishing contribution to labor productivity growth.
Regarding China, the contribution of manufacturing tended to
decline but it was still the most important sector buttressing laborproductivity growth of the whole economy, accounting for 32.6%
in the period 2001-10 and 37.3% in the period 2011-17. Over time,
contributions of construction; agriculture; and financial intermediation,
real estate, renting and business activities fell sharply while the share ofcommunity, social and personal services increased significantly.
In Thailand, in 1971-80, 1981-90, and 1991-2000, the manufacturingsector led the growth of economy-wide labor productivity despite its
volatility in the rate of contribution in the following stage. Agriculture
registered a large decline in the contribution to labor productivity
growth. Wholesale and retail trade, repair of vehicles and household
goods, hotels and restaurants and construction had a sharp increase in
the proportion in 2001-10 with the corresponding contribution of 41.3%
and 29.8%. The construction sector’s contribution grew particularly
sharply in the period 2001-10 but subsequently declined to 5.9% in the
period of 2011-17.
84Chapter 4. Viet Nam’s labor productivity in the international context
In Viet Nam, the manufacturing sector steadily rose to produce thelargest contribution to labor productivity growth of about 31% in the period
2011-17. The contribution of agriculture to the growth of economy-widelabor productivity decreased to 6.63% in the period of 2011-17, equivalent
to the contribution of agriculture to the labor productivity growth of China in
the period 1991-2000. Mining and quarrying made dominant contribution
to the labor productivity growth of Viet Nam in 1991-2000, but there
was a sharp decline in the following periods. This result is different fromthe analysis obtained from the GSO data, which shows that mining andquarrying is still an important sector for labor productivity growth in Viet
Nam. Financial intermediation, real estate, renting and business activities
had a declining contribution unlike wholesale and retail trade, repair ofvehicles and household goods, hotels and restaurants; and community,social and personal services whose contributions rapidly increased. These
three service sectors still explain much of Viet Nam’s labor productivity
growth, with a total contribution of 45.2% to economy-wide laborproductivity growth in the period 2011-17.
Table 4.2. Sectoral contribution to overall labor productivity growth:
selected Asian countries (%)

Japan

1971-80 1981-90 1991-00 2001-10 2011-17
Agriculture, hunting, forestry
and fishing
Mining and quarrying
Manufacturing
Electricity, gas and watersupplyConstruction
Wholesale and retail trade,
repair of vehicles andhousehold goods, hotels andrestaurants
Transport, storage andcommunications
Financial intermediation,
real estate, renting andbusiness activities

-1.63

0.49

60.57

-6.77

-2.27

1.36
21.29

-1.00
20.33

8.30
312.24

0.59
14.40

0.38
77.87

1.58

1.30

9.65

6.83

11.53

11.52

-3.65

-10.18

11.89

27.93

18.92

16.06

-31.0326.07-41.64

-1.63

7.14

-15.06

12.22

14.31

18.67

23.37

-109.03

15.90

16.56
85

VIET NAM PRODUCTIVITY REPORT
Community, social andpersonal services
Whole economy
Korea

29.92

35.96

-125.45

18.88

-4.67

100.00 100.00
100.00100.00 100.00
1971-80 1981-90 1991-00 2001-10 2011-17

Agriculture, hunting, forestry-19.81
3.42
0.08
1.09
-2.64
and fishing
Mining and quarrying
-0.66
-0.81
-0.77
-0.22
-0.17
Manufacturing
24.87
23.45
27.07
39.86
43.43
Electricity, gas and water
1.67
2.27
3.54
2.89
1.67
supplyConstruction
4.81
8.73
-5.69
2.08
0.20
Wholesale and retail trade,
repair of vehicles and
13.07
15.11
6.78
3.64
11.79
household goods, hotels andrestaurants
Transport, storage and
7.74
4.38
11.52
8.91
9.34
communications
Financial intermediation,
real estate, renting and
35.57
22.64
34.33
22.84
21.59
business activities
Community, social and
32.75
20.80
23.15
18.90
14.80
personal services
Whole economy
100.00 100.00
100.00100.00 100.00
China
1971-80 1981-90 1991-00 2001-10 2011-17
Agriculture, hunting, forestry-361.32
29.66
7.55
5.19
4.79
and fishing
Mining and quarrying
38.29
2.23
4.99
6.06
-0.70
Manufacturing315.00
18.33
36.00
32.63
37.32
Electricity, gas and water
18.11
1.05
3.90
2.82
1.96
supplyConstruction-20.46
1.33
5.77
7.00
7.38
Wholesale and retail trade,
repair of vehicles and
95.19
7.77
8.32
10.99
12.30
household goods, hotels andrestaurants
86

Chapter 4. Viet Nam’s labor productivity in the international context
Transport, storage and159.86
5.41
8.00
6.85
8.05
communications
Financial intermediation,
real estate, renting and-112.98
23.89
9.80
12.25
11.83
business activities
Community, social and
11.09
10.33
15.66
16.22
17.08
personal services
Whole economy
100.00 100.00
100.00100.00 100.00
Thailand
1971-80 1981-90 1991-00 2001-10 2011-17
Agriculture, hunting, forestry
19.54
-2.67
8.11
-14.61-8.08
and fishing
Mining and quarrying
5.99
7.77
3.08
-18.75
3.35
Manufacturing
35.35
35.15
28.85
15.17
54.90
Electricity, gas and water
0.14
2.63
3.31
-8.82
2.80
supplyConstruction
2.78
9.15
9.36
29.84
5.85
Wholesale and retail trade,
repair of vehicles and
12.69
16.51
13.95
41.26
19.24
household goods, hotels andrestaurants
Transport, storage and
8.62
6.08
6.84
12.16
8.32
communications
Financial intermediation,
real estate, renting and
13.27
6.88
22.16
31.07
10.71
business activities
Community, social and
1.61
18.48
4.33
12.67
2.91
personal services
Whole economy
100.00 100.00
100.00100.00 100.00
Viet Nam
1971-80 1981-90 1991-00 2001-10 2011-17
Agriculture, hunting, forestry
45.47
-7.26
11.98
7.47
6.63
and fishing
Mining and quarrying
2.49
15.55
31.88
-1.95
-1.02
Manufacturing
9.45
24.88
12.98
25.56
31.24

87

VIET NAM PRODUCTIVITY REPORTElectricity, gas and watersupplyConstruction
Wholesale and retail trade,
repair of vehicles andhousehold goods, hotels andrestaurants
Transport, storage andcommunications
Financial intermediation,
real estate, renting andbusiness activities
Community, social andpersonal services
Whole economy

1.45

3.48

2.92

6.13

7.03

4.78

0.36

4.92

11.45

6.06

12.37

14.94

8.84

18.39

21.20

3.67

7.34

2.73

6.36

4.85

12.28

26.72

16.00

14.17

10.99

8.05

14.00

7.75

12.42

13.01

100.00100.00100.00100.00100.00Source: authors’ calculation from the APO dataset.

4.6. CONCLUSION

In comparison with some Northeast Asian countries and ASEAN member
countries, Viet Nam has low labor productivity even though its growth
was relatively high since the 1990s. Without a breakthrough into a highgrowth path, increase in Viet Nam’s labor productivity was unable togreatly improve the nation’s standing among neighboring countries.
In 2017, labor productivity of most of the nine industrial sectors ofViet Nam was at or just above the lowest level in regional comparison.
Viet Nam’s labor productivity was lowest among the compared
countries, including Cambodia, in two sectors. It ranked the second
from the bottom, just above Cambodia, in other five sectors including
agriculture and manufacturing. Meanwhile, Viet Nam had better
labor productivity than two or more comparator countries in the tworemaining sectors only.
88Chapter 4. Viet Nam’s labor productivity in the international context
When decomposing labor productivity growth using the shiftshare method, a clear pattern emerges. In Northeast Asian countries andSingapore, the within effect has been the main driving force of laborproductivity with the contribution share of about 80% in each country.
In South Korea and China, contribution of the shift effect was relatively
small compared to the within effect. Viet Nam and other selected
ASEAN countries relied on the shift effect in the early stage of theirdevelopment, then moved gradually to depend on the within effect.
It should be recognized that the countries we compare are at different
development stages. For global income convergence, latecomers needto exhibit negative correlation between productivity level and growth—
you need to grow faster at low income to catch up with high income
achievers. China is still a middle income country, but it has grown very
fast. South Korea already attained high income but it also grew fast until
recently. But Viet Nam is only at lower-middle income and growing at
an average pace. If this situation continues, Viet Nam will surely face a
middle income trap in the future as warned by some researchers.

89Chapter 5
PRODUCTIVITY ENHANCEMENT POLICYIN THE DOI MOI PERIODThis chapter has three purposes. First, the Vietnamese authority’s
perspective on the role of productivity is provided. Second, we will
describe Viet Nam’s efforts to improve productivity at the nationaland enterprise level. Lastly, the achievements and limitations of thegovernment’s efforts will be discussed6.

5.1. THE EVOLUTION OF PRODUCTIVITY POLICY
5.1.1. The early years

The awareness of importance of productivity in Viet Nam generally
lagged behind those of other countries globally and even regionally.
It was not until 1986 that Viet Nam officially decided to abandon
inefficient central planning and adopted market mechanisms. After that,the vital role of productivity was increasingly recognized.
In the early years of Doi Moi, the term “productivity” was
not mentioned very much. Nevertheless, agricultural liberalization
spearheaded production enhancement. In 1988, the agricultural reformknown as Resolution 10 (Resolution 10-NQ/TW 1988) was introduced,
transferring production materials to farmers. Prior to that, agricultural
6 The authors would like to express gratitude to Msc. Nguyen Thi Le Hoa (VNPI),
Dr. Nguyen Dang Minh (VNU-UEB), and Dr. Nguyen Thi Tue Anh (CIEM) for
valuable comments in the process of completing this chapter.

91

VIET NAM PRODUCTIVITY REPORT
production was stagnant, food production declined, hunger wasprevalent, and Viet Nam had to import millions of tons of foodstuff
every year. Resolution 10 immediately incentivized farmers, and within
only two years of implementation, Viet Nam stopped importing food andstarted to become the world’s leading rice exporter. In addition, changes
in economic management mechanisms also raised Viet Nam’s overall
productivity and production capacity. During the 1990s, productivity
improvement from the previous economic suppression was the main
driver of economic growth. Roughly 40-60% of growth in this period
can be explained by productivity catch-up and the rest can be attributed
to revamped capital accumulation (World Bank, 2012).
5.1.2. The First Quality Decade 1996-2005

Viet Nam began to organize many productivity-related eventsand receive related cooperation projects. In 1995, the first Viet Nam
Quality Conference was organized by the Directorate for Standards
and Quality. In 1996, the Round-table Meeting on Productivity withthe participation of the Asian Productivity Organization (APO), andthe ISO 9000 Forum were held in Ha Noi. When Viet Nam joined the
APO in 1996, Viet Nam’s productivity movement can be said to havebegun. The First Quality Decade 1996-2005 was launched by former
Vice President Nguyen Thi Binh, which set the goal of encouraging
organizations and enterprises to apply appropriate systems and tools
to enhance productivity, quality, and competitiveness. The agenda of
the First Quality Decade was influenced by the APO’s philosophy that
productivity and quality always went together. This orientation aimed
to end the traditional notion of the central planning period that “quality
must be sacrificed to improve productivity, and vice versa.” As it turned
out, Viet Nam then chose quality as the top priority.
The mid-1990s witnessed Viet Nam’s great effort to reintegrate into
the world. Viet Nam joined not only the APO but other internationalorganizations such as the World Bank, the International Monetary92

Chapter 5. Productivity enhancement policy in the Doi Moi period
Fund (IMF), and the Asian Development Bank (ADB). Diplomatic
relation with the United States was also normalized. This wave ofglobal reintegration led to the formation of Viet Nam’s first specializedorganization for productivity, the Viet Nam Productivity Center(VPC), in September 1997, which was later renamed to the Viet Nam
Productivity Institute (VNPI). It became the center of the National
Quality and Productivity Movement.
After joining the APO, in 1996, Minister of Science and Technology
Mr. Nguyen Quan attended the APO summit for the first time. He realizedthat productivity improvement tools presented at the conference were
urgently needed in Viet Nam, and a special agency to introduce thesetools was also essential. The VPC (later VNPI) was thus created under
the Directorate for Standards, Metrology, and Quality (STAMEQ) of the
Ministry of Science and Technology (MOST). This structure imposed
multiple layers of management over the VNPI, which was cumbersomeand different from much simpler structure in other countries. The Japan
Productivity Center (JPC) was directly under the Government of Japan, andthe Malaysia Productivity Corporation (MPC) was under the management
and financial support of the Ministry of International Trade and Industry.
Placing a national productivity agency under multiple layers of management
may impede its functions and effectiveness, as we see below.
One important activity in the First Quality Decade was theestablishment of the Viet Nam Quality Award by the STAMEQ,
which annually selected and rewarded enterprises exceling in quality
and operational performance. The Award encouraged Vietnamese
enterprises of all genres and sectors to improve operation and develop
products with high quality and strong competitiveness.
Implementation of the First Quality Decade encouraged enterprises
to adopt quality management systems such as ISO 9000 and ISO
14000 and introduce productivity tools such as kaizen and 5S. These
international standards in quality management, environment, safety,
and social responsibility were applicable to all types of business.
However, Vietnamese enterprises often did not produce or keep dataon productivity and efficiency, making it difficult for managers to93

VIET NAM PRODUCTIVITY REPORT
understand the current situation or take corrective measures. Due toslow application of new systems and tools, Vietnamese enterprises
were slower to improve competitiveness than rival companies in theregion and the world. This partially explains why Viet Nam’s growthof 7-8% at that time was not accompanied by remarkable productivity
improvement. In the second half of the First Quality Decade, thecontribution of productivity to economic growth was only 15% while
capital deepening was the main engine of growth.
5.1.3. The Second Quality Decade 2006-2015

Acknowledging this problem, in 2006, the issue of productivity
improvement was formally and clearly stated for the first time in the
Resolution of the Tenth Party Congress, which became one of the
key pillars of the Socio-Economic Development Plan 2006-2010.
Productivity targets were integrated into industrial and sectoralorientation, with almost every sector aiming at quality and productivity
growth with great speed.
The Second Quality Decade was launched with the slogan “Quality
and Productivity: Key and Integration” at the Sixth Viet Nam Quality
Conference in 2005 (Ngu Hiep & Van Nguyen, 2015). The goal of theSecond Quality Decade was less about the introduction of productivity
enhancing systems and tools and more about their application to
improve the competitiveness of domestically manufactured products
against overseas products. Another important difference was that theprevious emphasis on quality was replaced by the idea that quality andproductivity should go together.
In May 2010, the Prime Minister officially approved the National
Program on Improving Productivity and Quality of Products andGoods of Vietnamese Companies to 2020 (Program 712 for short). To
administer this, the Program Executive Board was established under
MOST which was tasked to organize and implement assigned projects.
This was the first time that productivity became the key mission undera national action program.
94

Chapter 5. Productivity enhancement policy in the Doi Moi period
At the Eleventh Party Congress in 2011, the central issue shiftedto total factor productivity (TFP). The general goal of improving
productivity and quality was now translated into a specific target variable.
The Socio-economic Development Strategy 2011-2020 required “totalfactor productivity contributing to the growth of about 35%.” The
Second Quality Decade carried out a series of activities including(i) raising awareness of society about productivity; (ii) completing thelegal framework on the Quality Measurement Standards; (iii) guiding
and supporting enterprises to improve productivity and quality; and(iv) strengthening technical infrastructure for productivity and quality
improvement activities. However, many planned activities remained
unimplemented. The movement’s summary report acknowledged that theawareness raising campaign was random and not nationwide, there waslittle coordination among different policy measures, the legal documents insome sectors remained ambiguous, and only a small number of enterprises
participated in the programs. Therefore, the movement did not generate asignificant change in productivity and quality on the national scale.
In the final year of the Second Quality Decade, the International
Labor Organization (ILO) published the report “ASEAN Community
2015: Managing Integration for Better Jobs and Shared Prosperity,” inwhich Viet Nam’s labor productivity was ranked lowest in the AsiaPacific region. This shocking report produced many commentaries in
the media, most of which expressing disappointment. Clearly, Viet Nam
needed a strategic shift and more drastic action. Instead of launching
the Third Quality Decade, Viet Nam began to look for its own model ofproductivity improvement.
5.1.4. A search for a national model

Productivity continued to be top priority in the Twelfth National
Congress of the Communist Party in January 2016. One of the key
missions in the new five-year plan was “focusing on implementing
solutions to improve the quality of growth, labor productivity, andcompetitiveness of the economy.” Concern shifted decisively from95

VIET NAM PRODUCTIVITY REPORT“productivity and quality” to “productivity.” In the era of Industry 4.0,
innovation was also added to the goal of improving productivity.
In November 2016, Resolution 05-NQ/TW of the Central Executive
Committee publicized general guidelines and policies to renovate thegrowth model to improve the quality of growth, labor productivity, andcompetitiveness of the economy. It also set productivity targets for the
2016-20 period, including (i) annual average productivity growth should
be higher than 5.5%; (ii) The growth of within-industry productivity should
contribute more than 60% to the increase in overall labor productivity
by 2020; (iii) TFP should contribute 30-35% to the average growth in
the period 2016-20; and (iv) narrowing the competitiveness gap with theASEAN4 countries (Malaysia, Thailand, Indonesia, and Philippines).
To concretize this policy, in February 2017, Resolution No. 27/NQCP of the Government issued the Action Program of the Government
for policy innovation, growth model, improving labor quality andcompetitiveness for the economy. It assigned 16 major tasks and 120
specific tasks to ministries, sectors, and localities. The Ministry ofPlanning and Investment (MPI) was designated as the lead agency tofacilitate the Action Program and report progress to the Government
and Party organizations. MPI was also made responsible for monitoring
relevant indicators including labor productivity, TFP, and contributionof within-industry productivity, which previously was carried out by
the VNPI under MOST. In turn, MOST was given the task of building
and operating a database to benchmark best productivity practices forenterprises.
However, progress so far has been limited. MPI was slow toissue implementation details. Designated ministries were also slow toelaborate annual working plans or report the results to MPI. By October
2018, after nearly two years of the Resolution, only 25.8% of the tasks
had been implemented with clear results, 57.5% of the tasks had been
implemented with only initial results, and 16.7% of the tasks were
implemented “with delay.”
Collaboration among implementing ministries was difficult. For any
agency under a ministry to work with another agency under a different
96Chapter 5. Productivity enhancement policy in the Doi Moi period
ministry, procedure must go through many management layers. For
instance, when the General Statistics Office under MPI wants to consult
the Viet Nam Productivity Institute under MOST, it must send an official
letter to MPI, which is transferred to MOST, then STAMEQ, then VNPI.
The rule that state agencies must act with the approval of higher authorities
virtually frustrated any inter-ministerial cooperation. Meanwhile, the
VNPI continues to provide support to local statistical offices in computing
labor productivity. This may be understandable because MPI is not an
organization to provide technical assistance on productivity.
In 2017 and 2018, the Government re-instructed related agencies
to find a new direction for productivity, especially labor productivity.
Many studies and workshops were organized and the Central Institutefor Economic Management (CIEM) under MPI was now designated as
the hub institute to preside over the state-level projects on productivity,
which included the project on “Evaluating the contribution of industries
and structural shift to labor productivity growth in Viet Nam” and the
project on “Viet Nam’s agricultural labor productivity growth: current
situation and solutions.”
In 2018, productivity was a burning topic in the National
Assembly sessions (Bao Yen, 2018), asking why Viet Nam had been
unable to define a suitable national model for productivity movement.
Meanwhile, the Advisory Group of former Prime Minister Nguyen
Xuan Phuc recommended that the Government should establish the
National Productivity Council to lead a productivity movement (LeNguyen, 2018). The council was officially formed but it has not started
its assigned activities as of the end of 2020.
In February 2020, the Prime Minister’s Instruction for Solving
National Labor Productivity Enhancement (No.7 CT-TTg) was issued
to accelerate productivity actions. It consists of 46 orders addressed to
15 categories of official bodies such as ministries, agencies, businessand labor organizations, and local government units. These orders
call for proposing, establishing, promoting, and coordinating various
things, which are however broad, general, and without implementation
or monitoring details. As such, the Instruction shares the same problem
as past policy actions which lacked enthusiasm, incentives, and clear
97

VIET NAM PRODUCTIVITY REPORT
structure with concreteness and feasibility (see below), and thus may
not generate visible results with wide impact.
Table 5.1 Evolution of Viet Nam’s productivity movement
First Quality Decade

Second Quality Decade(1996-2005)(2006-2015)

Asian
financialcrisisContext

Deep
integration
into world
economyTheeconomycontinues
to achieve
highgrowthJoining
WTO

GlobalfinancialcrisisEuropeanpublicdebt crisis;
domestic
economyrecovers
slowlySixth Viet Nam Quality Conference

Resolution No.
05-NQ /TW,
Resolution No.27 /NQ-CP, Instruction
No.7/CT-TTg

Ministry of Science and Technology(leading)

Ministry of Science and Technology(leading)

Ministry ofPlanning andInvestment(leading)

events

Goal

Ministry of Scienceand Technology
To promote and motivate organizations To create quality reputation, improveand enterprises to apply management the competitiveness of “Made-insystems and productivity improvement Vietnam” goods
tools

To innovate growthmodel, improvelabor productivity
and the economy’scompetitiveness- Establishment of VNPI under Ministryof Science and Technology- VNPI: continuingtasks as in theprevious period- VNPI: continuing to guide
productivity improvement tools forenterprises and starting conducting- VNPI plays role in supporting andguiding productivity improvement tools research on productivity
Main activities

for enterprises- Establishment of Viet Nam Quality
Award

Source: illustration by the authors.

98

Industry 4.0

First Viet Nam Quality Conference
Major documents/

Leading andimplementing
agencies

From 2016- MPI is responsible- Continuing to maintain the Viet Nam for calculating and
Quality Award
researching laborproductivity
Launching Program 712 (Phase 1)
Program 712(Phase 2)

Chapter 5. Productivity enhancement policy in the Doi Moi period
Viet Nam’s past policy efforts are summarized in Table 5.1. It canbe admitted that, despite two-and-half decades of the government’s
effort after joining the APO, Viet Nam has not yet been able to initiate
a genuine productivity movement which is intensive, effective, andnationwide.

5.2. KEY POLICY COMPONENTS

Below we will examine in detail the VNPI and Program 712, the twocore institutional components of the current productivity policy ofViet Nam, with their strengths and weaknesses.
5.2.1. The Viet Nam Productivity Institute (VNPI)VNPI was established in 1997 with the support of the APO.
For this purpose, Japanese experts were dispatched from the Japan
Productivity Center (JPC) and JICA. Since 2000, through JICA senior
volunteer programs, about ten Japanese experts continued to assist
the VNPI sequentially with various programs. Japanese cooperation
took the form of joint projects such as Internship Program for
Young Managers from Japanese Enterprises (2012-13), Productivity
Consultancy Trainers Training in the Mekong Region with Socioeconomic Focus (2015-16), and Workplace Improvement andSatisfaction of Employees (2016-18). At the end of 2018, VNPI had
a total of 25 Vietnamese experts, of whom 15 had attended the twoyear training program hosted by JPC in Viet Nam. In addition, mostexperts participated in short-term training courses in Japan throughthe annual APO program.
The VNPI has a president, a vice president, and sevendepartments. Besides that, two divisions are located in Ho Chi Minhand Da Nang. The VNPI’s missions are (i) conducting research to99

VIET NAM PRODUCTIVITY REPORT
propose national productivity policies and solutions; (ii) providing
consulting services and organizing workshops on managerial skills
and business development; and (iii) providing information on latest
methods and international experiences (Table 5.2). Note that the
research component (the first item) was added in 2010, which later
included annual publication of the Viet Nam Productivity Report,
from 2014. The methodology and framework of the VNPI’s annual
Viet Nam Productivity Report were adopted from the APO. It provides
data on labor productivity, TFP, and the current state of productivityof the entire economy, economic sectors, and individual industries. It
also analyzes factors affecting productivity, and compares Viet Nam’s
performance with those of selected Asian countries.
The VNPI implemented such projects as the creation of
productivity indicators, provincial productivity studies, proposals
for manufacturing and service sectors, measurement of TFP of theindustrial sector, policy proposals, and development of the “OneVillage, One Product” and other models. By the end of 2018, the VNPI
had also provided consultation to more than 5,000 organizations,trained over 100,000 participants in domestic and international
workshops, conferences, and field trips, and produced over 200,000
copies of newsletters, 90,000 copies of books, and hundreds of posters,
videos, and CDs for productivity awareness.

100Chapter 5. Productivity enhancement policy in the Doi Moi period
Table 5.2. VNPI’s functions and activities
Conducting research to propose policies and solution to bolster national productivity
 Researching and proposing strategies, policies, mechanisms.
 Researching, calculating and publishing periodic report.
 Researching and building model for systematic methods and solution to promote
productivity and quality.
 Developing human resource and constructing scholar network.
 Disseminating information and knowledge related to productivity.
Providing consulting services and organizing workshops on managerial skills and businessdevelopment
 Training courses: applying solutions to improve productivity; developing the quality ofexperts and productivity enhancing personnel; improving managerial skills for senior
managers.
 Consulting services: building a management system following international standards;
applying models and solutions to improve productivity; providing a management system
integrated with indicators and solutions; calculating, evaluating productivity; providing
excellent operating models.
 Assessment and issuing certificates: assessing firms and issuing certificate for Good
Executive Plan of 5S, Lean, TPM in order to encourage companies to sustain and regularly
innovate these methods.
Engaging in international cooperation to research and apply solutions to improve productivity
for sustainable development
 Cooperation with APO and other national productivity organizations to perform research,develop experts in productivity improvement and build models to promote productivity.
 Participating in research, calculation, and making comparison on national productivity
indicators.
 Organizing international conferences, conducting field trips, publishing productivity
enhancement materials, to facilitate knowledge transfer and accumulation of experience.
Source: VNPI.

The VNPI was expected to become a competent and effective
national productivity agency. However, with its current position in the101

VIET NAM PRODUCTIVITY REPORT
system of many agencies related to productivity under MOST, the VNPI
has not fully fulfilled its expected role. The VNPI’s problems include(i) weak support and commitment from top national leaders, (ii) the
absence of strong national productivity movement which it is supposed
to manage, and (iii) limited visibility, budget, and staffing.
5.2.2. National Program 712

The Government introduced Program 712, whose full namewas “Improving Productivity and Quality of Products and Goods ofVietnamese Companies to 2020,” as the first national program forproductivity and as part of the Second Decade of Quality, approved underDecision No. 712/Qd-TTg of May 2010. It is a collection of missions
and solutions to reform the legal framework, policy mechanisms,
organizations, and human resource. To coordinate activities under
Program 712, MOST formed the Program Executive Board chairedby its Minister, with Vice Minister and the Director of the Directorate
for Standards, Metrology, and Quality serving as vice chairpersons.
Other members were representatives from various ministries and theViet Nam Chamber of Commerce and Industry (VCCI). Program 712
carried out nine projects, of which eight were managed by MOST andother ministries, and one was directed by the People’s Committee of
each province and first-tier cities (Figure 5.1).
In the first phase 2010-15, Program 712 met general objectives but thequality of results was problematic. The Program’s summary report statedthat the number of national standards established exceeded the target andother general goals were also met. But the report also admitted several
drawbacks. First, there was delay in procedure and approval of certain
projects. Second, authorities and provinces adopted different methods
which made cooperation among them difficult. Third, many companies
and individuals participating in the Program were without enthusiasm.
Fourth, the network of consultants and managers who supported theProgram was insufficient. Fifth, there was a shortage of budget resources.
Sixth, instructions and the regulatory framework issued by the Program
Executive Board were neither consistent nor effective.
102

Chapter 5. Productivity enhancement policy in the Doi Moi period
Figure 5.1. The structure of National Program 712
General objectives
 Building and applying technical standards, managerial systems and tools to improve
productivity
 Creating a significant change in productivity and quality of core products

Specific objectives
Newly introducing 6,000 national standards Forming teams of experts and consultants
60,000 companies will be guided to apply
Applying national standards with 100%
technological advancement, managing
coverage of products which may violate code
system, tools to enhance productivity andof sanitization and adulterate the habitat
quality
Establishing network of organizations to test 40% of enterprises that produce core
the compliance of core products with national products will have and execute a plan tostandards
boost productivity
Creating productivity and quality movement Increasing the contribution of TFP to GDP toat all cities and provinces
35% by 2020
Working framework
Directorate for Standards, Metrology and Quality(support Program Executive Board)

Program Executive Board

Ministry of Science and Technology and six otherministries (supervise 8 projects)

People’s Committees(supervise 1 project)

1. Setting and applying standards

9. Promoting
productivity and quality
3. Increasing the productivity and quality of products and goods in industry
of products and goods
4. Increasing the productivity and quality of products and goods in agriculture
produced by SMEs in
5. Increasing the productivity and quality of products and goods in information local regions
2. Promoting productivity and quality activities

and communications
6. Increasing the productivity and quality of products and goods in construction
7. Increasing the productivity and quality of products and goods in health care
8. Increasing the productivity and quality of products and goods intransportation

Source: collected by authors from Decision No.712/QĐ-TTg in May 21, 2010.

103

VIET NAM PRODUCTIVITY REPORT
5.3. METHODS TO IMPROVE ENTERPRISE PRODUCTIVITY

To improve national productivity, enterprise productivity is first priority.
Many measures and actions have been adopted for this purpose. Thissection describes institutes, centers, and consultative businesses thattrain enterprises as well as the models and tools they utilize.
5.3.1. Supporting organizations

As mentioned above, Program 712 aims at supporting Vietnamese
enterprises to improve productivity and quality. To attain the goalof guiding 60,000 enterprises, relevant ministries and the People’s
Committees of provinces and major cities were to create action programs
for agencies under their authorities.
For example, under the project of “Improving the productivity
and quality of industrial products,” the Ministry of Industry andTrade (MOIT) developed the “Business Support Program” for theperiod 2017-18, which contained seven tasks and seven targets. For
the task of “Support training and transforming the environmental
management system to the new version of ISO14001:2015 for industrial
enterprises” under this program, MOIT conducted three activities:(i) five training courses on the new environmental management system(ISO14001:2015); (ii) consultation and guidance on the conversion of
ISO14001:2004 to ISO14001:2015 for 22 enterprises; and (iii) issuingcertificates for enterprises applying ISO14001:2015.
Training courses on productivity improvement tools wereannounced to the business community. Lecturers were invited toteach according to the requirements set by each ministry and local
government. These lecturers came from agencies under the Directorate
for Standards, Metrology, and Quality (most frequently from the
VNPI), private consultant firms, or foreign organizations7. Enterprises
7

Public sector supporting organizations include the VNPI, the Quality Assurance
and Testing Center (QUATEST), the SME Development Support Center(SMEDEC), the Quality Training Center (QTC), the Viet Nam Certification Center

104

Chapter 5. Productivity enhancement policy in the Doi Moi period
participating in training courses received financial support up to 70% of
the course fee in the case of MOIT.
5.3.2. Tools and methods

Enterprise productivity is influenced by many factors. Amongthem, three factors are considered to be the most fundamental, namely,(i) workers as the source of improvement, (ii) leaders eager to engage
in and support improvement activities, and (iii) technology and process
management (Nguyen Anh Tuan & Le Hoa, 2013). Productivity
improvement methods and models are introduced to solve one or twoof these three factors, or even all three. As a latecomer nation, Viet Nam
must learn models and tools for enterprise productivity improvementfrom foreign sources, especially from those that are famous for theirproductivity movements such as Japan, Singapore, Western countries,
and international organizations.
Basic productivity tools for productivity improvement of businesses
include (i) the standard management system of the International
Organization for Standardization (ISO), (ii) the recommendation
system and the standard benchmark and learning from the best methodfrom the West, and (iii) a variety of tools such as 5S, kaizen, QCC,
TQM, JIT, lean production system, seven tools of quality control, TPM,
etc. from Japan. Among these, the ISO management system, 5S andTPM are the most popular tools in Viet Nam. The ISO management
system is the first tool that most enterprises apply (at different levels). If
enterprises additionally meet the requirements of 5S, lean production,
or TPM, they will be rewarded a prize or a certificate of good practice.

(QUACERT), and the Vietnam-Germany Technology Training and Transfer
Centre (HwC). Private sector supporting organizations include GKM Viet Nam
Company, Masypic Productivity & Quality Consulting JSC, P&Q Solutions, Qpc
Productivity & Quality Consulting Company Limited, M-Talent Human Resources
Management JSC, EPRO Consulting JSC, Nawasa Academy, and others.

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VIET NAM PRODUCTIVITY REPORT
5.4. SUMMARY: ACHIEVEMENTS AND LIMITATIONS

Based on the discussion in this section, let us summarize Viet Nam’s
productivity efforts up to now, with its achievements and limitations.
5.4.1. Achievements

Even though the awareness raising process of productivity has
been slow in Viet Nam in comparison with other countries in Southeast
Asia, Viet Nam has prepared basic conditions to initiate a future national
productivity movement, with the support of Japanese experts and the
APO from the mid-1990s to the present.
The trade-off between productivity and quality, which was theconcern of policymakers in the days of central economic planning, hasbeen dissolved. The First Decade of Quality 1996-2005 introduced anumber of new methods to Vietnamese enterprises, with the aim of
improving productivity while ensuring quality. The Second Decadeof Quality 2006-15 expanded various prototyped models to improve
productivity for businesses. Program 712 was implemented with thegoal of raising TFP’s contribution to GDP growth to 35% by 2020.
This particular goal has already been achieved with better productivity
performance in recent years; according to the GSO data, the contribution
of TFP to GDP growth was 43.5% in 2018.
After two decades of productivity enhancing efforts, policy planningand enforcement mechanisms are now in place. Relevant agencies
have accumulated experience in productivity improvement, and many
workers are well trained to promote technology transfer. These are asolid foundation for Viet Nam to implement new productivity policies
in the future.
5.4.2. Limitations

Our review of past and present productivity policies shows that Viet
Nam’s productivity movement lacks breadth and depth. Policies so far
106Chapter 5. Productivity enhancement policy in the Doi Moi period
focused only on the business sector, while the problem of productivity
is pervasive in the government, businesses, educational institutions, andhouseholds. Moreover, as the initial productivity policies were concernedwith the quality aspect, other aspects of productivity such as laborproductivity were largely neglected. As a result, the 2015 ILO Reportranked Viet Nam at the lowest in the Asia-Pacific region, far below the peer
countries in Southeast Asia. Besides that, the Vietnamese mindset regarding
productivity is still marred by traditional top-down plan thinking rather
than the bottom-up approach driven by individual firms and organizations.
In designing and implementing policies, communication andcoordination among support organizations are hampered or delayed
due to scattered authority and multiple management layers of many
ministries. To overcome this perennial problem, a proposal was madeto establish an independent agency, such as the National Productivity
Council, directly under the Government to preside over various programs
and support organizations. This proposal has been formally adopted,
but an active use of this mechanism requires continued commitmentof the top leaders as well as sufficient mandate, staffing, and budget
allocated to this Council and its secretariat.
Regarding methodology and models to improve productivity forenterprises, Viet Nam has received technical and financial support
from many countries, especially Japan, and a number of internationalorganizations. International cooperation has produced reasonable
results so far, but foreign models must in the long run be converted
to a genuine homemade model. Productivity enhancement requires
both technical and administrative support. Application of successfulforeign models usually solves the technical problem, but administrative
procedure and institution must be re-invented to suit the reality of Viet
Nam. Otherwise, most tools will work only to a certain level without
taking deep root in the Vietnamese society. Vietnamese businesses needa model of productivity improvement that is truly “Made in Viet Nam.”
Viet Nam has worked on productivity for many decades, and there
have been a series of high-level resolutions. The Party Congress and the107VIET NAM PRODUCTIVITY REPORT
Government are seriously concerned about productivity. Even so, theresults of many policies remain ineffective due to serious weaknesses
in Viet Nam’s policy making process. They include (i) the lack ofcontinued commitment and support by national leadership, (ii) the lackof incentives for firms, workers, and individuals to participate, (iii) in
implementing concrete projects, the lack of detail design—only broad
directions are given—and proper mechanisms, staffing, and budgets,(iv) government and ministerial bureaucracy which causes deadlocks
and delays, and (v) insufficient international support. The productivity
movement of Viet Nam has so far been small, scattered, and only
partially implemented. It neither transformed national mindset nor
produced visible results.
This concludes Part I which analyzed the past productivity
performance and policies of Viet Nam. Despite relatively high GDP
growth in the last three decades, it is evident that Viet Nam faces many
problems which prevent further acceleration of national productivity.
They include the long-term productivity growth trend which has beenreasonable but less-than-spectacular, the status near bottom of theregion, the disappointing productivity performance of the manufacturingsector and the FDI sector, the lack of meaningful participation in global
value chains, weaknesses in workers’ mindset and skill formation, andpolicies which have failed to visibly boost productivity. Removal ofthese shortcomings must be the first task of tasks for Viet Nam as it
strives for upper middle income and beyond.
Part II of the Report offers a set of concrete ideas and suggestions
that may help to upgrade the productivity policy of Viet Nam. At its
core, renewed policy learning from Japan with proper selectivity andamendment is proposed. In addition, how any foreign model should belearned is discussed generally, and how Singapore successfully learned
productivity movement from Japan in the 1980s is explained specifically.
The remainder of Part II is dedicated to the presentation of ten Japanese
productivity tools which have been introduced to many developing
countries in Asia and elsewhere. Particular attention is placed on how
108they were initially developed in Japan, how other nations learned andadjusted them to local needs, and Viet Nam’s experience in introducing
them (if the tool has ever been tried in the past). These are not meant tobe a comprehensive solution to the problem of productivity, but should
be considered a starting point of an invigorated national productivity
movement in Viet Nam. Ten Japanese tools are not to be adopted
hastily and simultaneously, but to be chosen carefully and implemented
effectively, one by one, with sufficient policy attention and resource
mobilization. The Japanese government and businesses highly evaluate
industrial partnership with Viet Nam in the last three decades, and are
generally very willing to continue collaboration.

109

Part II
JAPANESE PRODUCTIVITY ENHANCING MEASURESAND THE POSSIBILITY OF THEIR ADOPTION
IN VIET NAM

Chapter 6
SELECTIVELY ADOPTING JAPANESEPRODUCTIVITY TOOLSThe productivity movement in Viet Nam has been small andfragmented, and it has not reached the threshold where national mindset
is dramatically transformed and visible results are produced. Viet Nam
needs a policy reform which contains clear policy targets and design,
institution building, incentives and resource mobilization, productivitypromoting projects and events, bottom-up initiative, smooth labormobility, strong support organizations, better business environment—
and a sustained national productivity movement that executes these
activities and lasts at least for several years.
In revitalizing the national productivity movement, international
cooperation is of great help provided that Viet Nam retains policy
ownership and knows how to use such cooperation effectively foreconomic development. In Part II of this Report, ten productivity
methods originating in Japan and introduced to many countries aredescribed in concrete detail. In so doing, the context and experience ofViet Nam and other Asian nations in adopting these Japanese models
are carefully and extensively explained. This will assist Viet Nam
to learn and modify foreign productivity methods with appropriate
selectivity and adjustment to fit Viet Nam’s reality, and also to avoid
obvious pitfalls.
Japan is not the only country from which Viet Nam can learn
productivity. Nevertheless, Japan is a great source of productivity
improvement, especially in manufacturing, and has a long and rich
113

VIET NAM PRODUCTIVITY REPORT
experience in systematically transferring its methods to other nations
through METI, JICA, JETRO, JPC, AOTS, etc. Moreover, the Japanese
government and Japanese FDI firms in Viet Nam have expressed their
willingness to continue to cooperate with Viet Nam for industrial
purposes. The detailed accounts of Japanese productivity methods
given below should serve as basic information to facilitate mutual
understanding and industrial cooperation between Viet Nam and Japan.
This chapter discusses general principles in learning foreign models
while the next chapter will present ten Japanese methods in full detail.

6.1. WHY JAPANESE EXPERIENCE MAY BE USEFUL FOR VIET NAM

Japan’s catchup process began in the late nineteenth century when the
Tokugawa samurai government opened up the nation to the powerful
and advanced West. Since then, Japan has developed many productivity
tools for industrial catchup which are unique to Japan. Some of them goback more than a century, many were created in the post-World War II
high growth era of the 1950s and 60s, and others were introduced more
recently. By now, many of these productivity tools have been taught andemulated in the rest of the world, especially in Asia where Japanese FDI
has large presence, but also in Europe, North America, Latin America,and Africa with the assistance of Japanese firms, government, NPOs as
well as private consultants. Basic tools such as 5S and quality control
circles (QCCs) have become a standard learning package around theworld. Some countries have graduated from Japanese assistance andcarry out productivity actions by themselves. There are even countries,
such as Singapore and India, that have mastered Japanese productivity
tools in their own ways and started to teach other countries (the case of
Singapore will be examined in detail in Section 6.3).
In the process of global dissemination, Japanese productivity tools
have proved effective in all societies and cultures, not just in countries
which share the same national features as Japanese such as teamwork,
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Chapter 6. Selectively adopting Japanese productivity tools
long-term orientation, and manufacturing dexterity. In fact, there arevery few nations in the world who resemble Japanese in their life andwork style. Even so, kaizen works effectively in India, Argentina, andEthiopia where popular cultures are very different from Japanese. Basicwork disciplines such as keeping the factory neat and clean, being
punctual, reducing muda (waste), and reporting problems immediately
are culture-free advice which can improve productivity in any country.
Another important point is that, in importing Japanese productivity
tools, each country must select and modify the original model to suitdomestic society. Mindless copying-and-pasting is unadvisable.
Because each society is different, foreign ideas and systems must
be adjusted to fit the reality of the home country without losing theintended core function. When Maruti Suzuki taught efficiency to Indian
automotive engineers, the latter spontaneously created an inter-firm
network of kaizen experts to exchange information and teach and help
new recruits, a phenomenon unseen in Japan. When Thailand introduced
shindan, training curriculum was simplified, and official certification
was not issued unlike the Japanese original model. Ethiopia learned 5Sfrom the Japan International Cooperation Agency (JICA), but it createda standard dissemination procedure unique to Ethiopia for speed andvolume, and began to coach entire cities consisting of many public andprivate entities and schools, which is very different from the Japanese
way of customizing guidance to each individual firm.
Viet Nam opened up to the Western world more than a quarter
century ago, and since then has received many Japanese business
investment and cooperation projects. Bilateral human exchange has
greatly increased. But Viet Nam has not embraced any of the Japanese
productivity tools in a deep way. Individual Japanese firms, JICA
experts and senior volunteers, the Japan Productivity Center (JPC),
and other institutions have implemented many productivity programsin Viet Nam, but these were random and mutually unrelated, and thescale was usually small (Chapter 5). These have not been integrated
into Viet Nam’s national productivity movement for internalization,
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VIET NAM PRODUCTIVITY REPORT
scale-up, and sustainability. Productivity programs conducted by theJapanese side alone are insufficient, and impact often evaporates when
the program ends8. In order to promote productivity in greater scale
for visible results, Viet Nam should launch a national productivity
movement under close cooperation among the Party, the Government,
and the business community.
This Report proposes that Viet Nam should adopt Japanese
productivity tools intensely and consistently, with appropriate selectivity
and adjustments, to overcome a future middle income trap and continue
to climb to high-income status. In so doing, Viet Nam should exercise
strong ownership and commitment instead of being a passive receiverof international support. In Chapter 7, standard Japanese productivity
programs which are practiced in Japan and taught in many countries are
explained. They can also be introduced to Viet Nam if both countries havestrong commitments. The actual speed and depth of learning depends on
the will and capacity on the Vietnamese side as well as the amount of
resources Japan can mobilize in both financial and human terms.
Needless to say, foreign models do not have to be confined to Japanese.
Viet Nam is free to choose any foreign models for productivity enhancement.
But Japan is the leading source of concrete productivity measures in theworld and there are already thousands of Japanese firms operating in Viet
Nam. Moreover, Japanese firms and government are generally willingto cooperate with Viet Nam. For these reasons, we recommend that Viet
Nam start with Japanese productivity tools. Table 6.1 is the preview of ten
Japanese productivity tools discussed in Chapter 7.
8 In principle, any industrial project in any country should proceed in the following
sequence to maximize impact (certain overlapping of different stages is admissible):(i) a small-scale pilot project (often with international support), (ii) establishmentof a national model with proper local adjustments, (iii) training of domestic
experts and consultants, (iv) creation of a national institutional mechanism with
sufficient mandate, staffing, and budget, (v) full nationwide implementation, and(vi) privatization, where government recedes and the private sector takes over the
movement. Foreign-supported industrial projects in Viet Nam often end at stage (i)without proceeding to other steps.

116Chapter 6. Selectively adopting Japanese productivity tools
Table 6.1. Japanese productivity tools for domestic adoption and dissemination abroadTool

Key feature

Existing or related programs

1

Mindset change Proper mindset must be inculcated Some nations adopted national
before productivity enhancement productivity movements withis attempted. Some countries have varying degrees of success.
transformed national mindset Singapore and Ethiopia launchedfully or partially. A national such national campaign withproductivity movement requires Japanese help. In Viet Nam, nomobilization of multiple tools and systematic national effort has
actions for at least several years been introduced.
under the top leader’s strong
commitment.

2

5S and kaizen

Kaizen is a philosophy with a set Japanese FDI, JICA, Japanof concrete tools for eliminating Productivity Center, and privatemuda (any wasteful action consultants have taught 5S andor thing) from the workplace. kaizen in many countries with
5S is the most basic practice visible improvements. In Vietfor implementing kaizen. The Nam, efforts exist but they areteaching method is standardized not yet widespread or integrated.
but variation exists acrossdifferent firms and experts.

3

Handholding

A customized and comprehensive In Japan, JETRO and local
support for selected SMEs governments routinely provide
for 2-3 years with a clear handholding support to SMEs.
target, covering management, Similar support is also available
marketing, technology, product in Taiwan, Korea, Malaysia, etc.
development, finance, etc. as Not yet practiced in Viet Nam.
needed (not just kaizen).

4

Shindan

A state-certified SME consultant Japan has 27,000 shindanshi
system with standardized who work at home and abroad.
training, tests, and renewal. JICA has introduced shindan in
Shindan experts (shindanshi) can many Southeast Asian nations
be officials or private citizens. including Thailand, Indonesia,
They actively assist SMEs often at and Malaysia, with somerelatively low fees.
difficulties.

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VIET NAM PRODUCTIVITY REPORT
5

TVET-linkage

TVET institutions in Japan not This linkage formation is aonly teach skills to students but standard content in Japanesework closely and constantly with cooperation for TVET institutions.
hiring firms to improve programs JICA assisted Ha Noi University ofand facilitate internship and job Industry, Industrial University
placement of students. Graduating of HCM, and other schools forstudents are highly demanded by linkage formation (Kosen below
industry.
also contains linkage elements).

6

Kosen

Kosen is a Japanese education JICA Kosen Project (2013-18)
system for producing engineers created pilot kosen schools atwith practical skills and proper Industrial University of HCM,
attitude. The Vietnamese Cao Thang Technical College
kosen model is defined as TVET (HCMC), Hue Industrial College
institutions teaching technical and Phuc Yen College of Industry
knowledge and skills, proper (Vinh Phuc, now renamed tomindset and creativity as well College of Industry and Trade).
as supporting students for Kosen Kiko is continuinginternship and employment.
support.

7

Mobilization of Gino jisshusei are foreign workers Viet Nam is the country sending
gino jisshusei learning technical skills at specific the largest number of gino(technicalfirms in Japan for three years. jisshusei to Japan. Japanese SMEs
interns in Japan) Japan is revising this system to are generally impressed withreceive more workers in broader their attitude and skill learning.
sectors and for longer periods. Japan and Viet Nam are working
Returning workers should be to strengthen monitoring andactively mobilized for fatherland’s eliminate improper receiving
industrialization, but this is often firms and labor brokers.
not happening.

8

Kosetsushi(technicalsupport centers
for SMEs)

118

Kosetsushi are local technical Japan has a long history ofcenters with official technical kosetsushi with at least one inexperts and analytical equipment. every prefecture. Some nations
They provide various technical have similar technical centers,
service such as testing, but often only at central level.
analysis, certification, product Vietnamese MOIT is studying thedevelopment,
processing, possibility of setting up kosetsushi
problem finding, etc. to SMEs at with Korean help, visits to Japan,
subsidized cost.
etc.

Chapter 6. Selectively adopting Japanese productivity tools
9

FDI-domestic
firm linkage

Support for FDI to find local Thai BUILD/BOI conducts
firms for part procurement or matching services. Malaysia tried
long-term partnership. Direct VDP and ILP in the past. Viet Nam
official support such as trade has trade fairs, databases, andfairs, matching events, database, matching events but produced
and individual firm assistance, as little result due to the scattered
well as subsidizing private effort, nature of these activities and theare commonly used. Meanwhile, lack of local firm capacity.
forced linkage against firms’ willusually does not work.

10 Revitalizing
supporting
industry
programs

Integrated
supportfor Japan, Thailand, and Malaysia
management,
technology, promoted supporting industries
and finance should be given to each in its own way. Viet Nam’s
candidate firms. In latecomer current system is primitive,
nations, policy should start cumbersome, and highlywith direct technical support limited in scope. For broader
and move to indirect private impact, it should be significantly
guidance as domestic capacity reformed by selective adoption
rises. Transparent and easy-to-use of international best practices.
incentives and linkage formation
support should also be offered.

6.2. THREE ISSUES IN LEARNING PRODUCTIVITY POLICY

In this section, three issues that must be considered in introducing
productivity methods from Japan and elsewhere are presented: (i) policy
organization, (ii) features and instruments of a national productivity
movement, and (iii) distinction between direct policy support andindirect guidance and incentives.
6.2.1. Policy organization

If productivity is to become the top national priority, a proper
policy mechanism must be established to conduct a comprehensive
national productivity movement. How this mechanism should be best119VIET NAM PRODUCTIVITY REPORT
arranged depends on the nature of politics, administrative capacity,
private dynamism, social structure, popular mindset, and other uniquefeatures of each nation.
In some countries, national productivity movements are driven by
the private sector. In other countries, they are launched and carried out
by the government. Japan’s productivity movement which started in thelate 1950s was driven by the business community although public policy
also played a supportive role. Three NPOs—the Japan Productivity
Center (JPC), the Union of Japanese Scientists and Engineers (JUSE),
and the Japan Management Association (JMA)—facilitated learningfrom the United States and Europe, adjusting foreign models to
Japanese reality, and disseminating the modified model to all firms(Kikuchi, 2014). In India, the kaizen movement is carried out mostly
by private organizations such as Maruti Suzuki (car assembler) andthe Confederation of Indian Industry and the Automotive Component
Manufacturers Association (business associations). In contrast, national
productivity movements in Singapore in the 1980s and Ethiopia in the2010s were executed as top-down policy with the Prime Minister as
principal promoter. Initial results were rolled out to a wide range of
workplaces through official agencies in each country. Given the present
circumstances of Viet Nam, where the private sector as a whole is notstrongly pursuing or requesting productivity actions, the Vietnamese
government must be the initiator of a national productivity movement.
During the long process of industrialization, Japan has developed athick layer of enterprise supporting organizations. The current situation
can be described as follows. At the policy level, the Ministry of Economy,
Trade and Industry (METI) is the responsible ministry and the SME
Agency under METI is in charge of national SME policy formulation.
For implementation, the Organization for SME and Regional Innovation,
Japan (SMRJ) under METI is the key executing agency at the national
level. There are also many local support mechanisms at prefectures(provinces) and municipalities which coordinate with national agencies.
Moreover, there are numerous non-government players that help SMEs
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and supporting industries such as local banks, credit unions, industrial
associations, business NPOs, universities, and research institutions.
Japan also has many experienced (but aging) industrial experts willingto work for public purpose at low fees.
It is difficult for Viet Nam to build a full policy mechanism like
Japan’s in the short run. It should create a simpler mechanism at firstand gradually introduce additional functions as experience is gained
and budget becomes available. At the very minimum, a high-level
policy organization that directs and monitors productivity enhancing
policies must be created. The National Productivity Council was
officially established in 2019 and Deputy Prime Minister Vu Duc Dam
was appointed as chairperson. This mechanism should be strengthened
under the new government through political leadership, sufficientmandate, and active use for policy making purposes.
On the implementation side, Viet Nam needs a competentand dynamic agency to implement and monitor the policies
decided by the National Productivity Council. There are different
options for this. The first is to strengthen and upgrade the existing
Viet Nam Productivity Institute (VNPI), currently under the
Ministry of Science and Technology (MOST), to be the executing
agency of the national productivity movement (Chapter 5).
This requires significant strengthening of the VNPI’s capacity andelevating the official status of the VNPI to the level above ministries.
The second is to create a new agency directly under the Prime Ministerto replace (and absorb the current functions of) the VNPI. The third isto create a new agency under a ministry (the choice of ministry needs
to be carefully examined) but having sufficient authority to execute anationwide movement and coordinate relevant ministries and agencies,
with a strong backing of the top leaders of the Party and the Government.
Another important task is to train and produce competent
Vietnamese industrial experts who have deep knowledge of international
best practices as well as Viet Nam’s reality, and who can effectively teachVietnamese firms, workers, and new experts on the ground. Trained
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experts must be properly incentivized to engage in tasks contributing toViet Nam’s industrialization for a long time.
For creating these necessary institutions and human resources,
cooperation of Japanese organizations such as JICA, JPC, and theJapan SME Management Consultant Association (J-SMECA), as well
as a study of existing productivity models in Singapore, Taiwan, Korea,
Malaysia, Thailand, and other Asian economies will be highly useful.
6.2.2. Features and instruments of a national productivity movement

The GRIPS Development Forum has studied the past experiencesof national productivity movements in various countries. Singapore,
Ethiopia, Botswana, India, and Mauritius were actually visitedfor meetings with core organizations and experts. Japan, Korea,
Tunisia, Argentina, and other countries were studied through records,
documents, and interviews with responsible experts. Some countries
brilliantly succeeded in achieving national productivity goals whileothers produced less remarkable results or could not sustain the
movement for long. Some movements were driven by private initiative
while others were carried out by government order or demand from FDI
firms. Some countries selected focus areas such as manufacturing or the
automotive sector while others targeted more broadly to cover factories,
services, offices, agriculture, schools, and government offices. Despite
these differences, there are certain general lessons to be gained as wellas common methods and instruments for success (JICA & GRIPS
Development Forum, 2011). General lessons include the following.
First, a national productivity movement is not just one or two
projects that last for a few years. It must be a comprehensive program
package with many components that require continued effort forseveral years or more. The movement must start with awareness raisingand mindset change, which is the first and usually the most difficult
stage. This elevates popular mindset toward efficiency, discipline, and122

Chapter 6. Selectively adopting Japanese productivity tools
good planning, and convince all citizens of the crucial importanceof productivity for themselves as well as for the nation. This stage isfollowed by on-site productivity improvement guidance at factories
and other workplaces by international experts and the learning of thispractical skill by domestic experts. When the number of domestic
practitioners of productivity improvement increases greatly to cover all
sectors and regions, when the nation can sustain the movement without
foreign help, and when it even starts to teach other nations, the national
productivity movement can come to a successful completion.
Second, the top national leader’s strong commitment andinvolvement, usually at the level of the president or the prime minister,is essential. Singapore’s movement was driven by Prime Minister Lee
Kuan Yew. Ethiopia’s movement was personally commanded andsupervised by Prime Minister Meles Zenawi, and subsequently andequally enthusiastically by Prime Minister Hailemariam Desalegn. A
national productivity movement is a complex policy mix which inevitably
encounters political, administrative, financial, and technical problems
along the way. These cannot be solved unless the top leader personallyoversees the progress. Leaders at the ministerial or lower level are unable
to overcome difficulties that require inter-ministry cooperation.
Third, in addition to the top leader’s commitment, national passion
for excellence which engulfs government officials, entrepreneurs,
engineers, workers, students, and ordinary citizens is critical for propelling
productivity widely and ceaselessly to achieve a national goal, as well as
for forging a social compact in which everyone actively participates inand benefits from the productivity movement with no one left behind.
Spirit and emotion, not just technical methods, must be the driving force.
Fourth, sufficient economic incentives are needed to broaden thebase of the productivity movement. Some people work very hard fornational development and/or psychological satisfaction but most others
need higher salaries, bonuses, promise of promotion, and other material
paybacks to sustain the movement for a long time. This applies to all
stakeholders including public servants, experts, teachers, managers,
123VIET NAM PRODUCTIVITY REPORT
engineers, and workers. Without such incentives, the national movement
will be reduced to a small-scale affair driven by a few passionate patriots.
Fifth, several support functions for policy design and implementationmust be created and granted with sufficient mandate, staff, and budget
to guide and execute the national movement in all stages and functions.
These functions can be performed by the productivity implementing
agency discussed above, or they can be outsourced to separate
institutes and centers. Support functions should include providing
useful information and analysis for the creation of a national model andstandards; producing standard textbooks, programs, and other materials(see below); organizing a massive mindset campaign, worker and teacher
training programs, productivity awards and outreach to all sectors andregions; productivity certification; inter-agency coordination; receiving
international cooperation; and developing the capacity of the private
sector.
Sixth, a large number of practical instruments and materials must
be created. This is to be done by learning various international bestpractices, then producing a new model most suitable for domestic reality
by selecting, adjusting, and combining foreign components. Commonlyused instruments and materials for a national productivity movement
include the following.
(i) Slogans, symbols, mascots, posters, etc. for popular awarenessraising. Singapore adopted a bee as a visual symbol ofproductivity and teamwork, and “Together We Work Better” asa national slogan. The idea that productivity benefits everyone—firms, workers, and government—was repeatedly broadcast. In
Mauritius, “Make Mauritius Work Together” was propagated. In
Ethiopia, kaizen songs and dances were created.
(ii) Creation of standardized teaching materials which include
curriculum, courses, textbooks, manuals, visual aids, e-contents,
video programs, movies, and stories describing successful
nations, firms, and individuals. These can be translated from124

Chapter 6. Selectively adopting Japanese productivity tools
foreign sources or newly created by national experts, and madeavailable to public through various media, publications, and a
web portal site.
(iii) An education and training system at central and local levels
which teach both theory and practice to managers, workers,
students, etc. and a higher training system for their trainers.
(iv) Seminars, lectures, symposiums, ceremonies, and otherpublicity events conducted by national and regional leaders aswell as productivity experts.
(v) Competition for productivity awards at the national, regional, sectoral,
and even firm level to recognize and promote excellent people andactions. How to organize such competition can be learned from Japanand other nations which regularly hold such events.
(iv) Creation of Productivity Month in which productivity-related
events such as the prime minister’s address to the nation, kaizen
rallies, award-giving ceremonies, seminar series, TV and radio
programs, etc. are organized. November was the Productivity
Month in Japan and Singapore, and September is the Kaizen
Month in Ethiopia.
(vii) Mobilization of experienced foreign advisers through international
cooperation or national budget. They can assist with the detailed
design of a national productivity movement as well as its execution.
6.2.3. Direct policy involvement versus indirect guidance and incentives

For any industrial policy, government can support the private
sector either directly, by providing various services by government
officials and facilities, or indirectly, by setting goals, directions, rules,
etc. and guiding firms through incentives and subsidies. A country
with limited private capacity and dynamism normally starts with direct
support measures, and gradually shifts to indirect ones as the private
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sector expands and becomes more competitive. However, it is common
that government itself often lacks capacity, and therefore must seriously
learn policy methods before it can assist the private sector. This is a
two-step strengthening of domestic capacity, and the speed and depthof government learning determines how fast and far the nation rises inindustrialization (Oqubay and Ohno, 2019).
Meiji Japan began industrialization by importing and installingthe exact replicas of Western machines and factories through official
turnkey projects commissioned to British, French, and other foreign
teams. Japan’s first railroad, national mint, steel mills, shipyards,
lighthouses, modern mines, technology university, etc. were built thisway mostly in the 1870s. But in 1880, government decided to privatize
most of these projects (except military and public utility facilities) toemerging zaibatsu such as Mitsui, Sumitomo, and Mitsubishi throughcompetitive bidding. These zaibatsu quickly transformed former
loss-making government projects into profitable businesses. Japan’stransition from official involvement to private action was very quick,and the Japanese government has ever since supported the private sector
mainly through indirect means.
Since the late 1980s, supporting industry promotion in Thailand
also moved from direct support to indirect support (item 10 of Chapter
7). At first, the Thai government created the Machinery Industries
Development Institute (MIDI) with JICA technical cooperation, and
MIDI officials visited firms for managerial and technical guidance.
Then the Bureau of Supporting Industries Development (BSID),
upgraded from MIDI, coached firms to form industrial associations formutual help and receiving policy support. Now industrial policy andcooperation are implemented through these private associations andtheir summit organization. Similarly, a shindan system introduced fromJapan to Thailand was gradually privatized so Thai shindan support isnow conducted mostly by private shindanshi (experts and consultants).
Even at a high income level, government should play an importantrole in encouraging, assisting, and coordinating private activities. This
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Chapter 6. Selectively adopting Japanese productivity tools
is done indirectly by policy guidance (direction setting) as well as
incentives and subsidies (financial privileges). It should be pointed out
that, in most countries, providing these privileges generates an internalfight between the Ministry of Industry, which wants to promote domestic
industry, and the Ministry of Finance, which opposes generosity forbudgetary reasons. Clear leadership, a sense of proper balance, andprioritization are needed to solve this perpetual conundrum. A strong
national leader who can rule over different ministerial interests canoffer a solution. Otherwise, an inter-ministerial mechanism mustbe established to decide on the exact position a country should takebetween industrial promotion and fiscal soundness. In some countries,
the parliament is the place where such policy debate takes place.
The art of offering incentives and subsidies must be learned bycomparing international best practices. The standard methods include
time-bound reduction and/or exemption of corporate income tax, importduties, (special) sales tax, and other tax obligations as well as provisionof soft loans and direct subsidies, provided that firms satisfy certain
conditions such as investment, training, technology, export, or ICT. In
some countries, privileges are administered professionally and carefully
to produce great outcomes. In others, they are given incompetently withno results. Policy details must be learned well to avoid the latter situation.
In Malaysia, the Small and Medium Industry Development
Corporation (SMIDEC) during its operating years of 1995-2007
offered various grants, soft loans, and incentives to manufacturing
SMEs which fulfilled preset conditions concerning ownership, size,value added, or rural contribution. “Concept Papers” clearly specified
eligible actions for support such as strengthening industrial linkage,logistic services, overseas marketing, business planning, product andprocess improvement, obtaining quality certification, etc. The list ofeligible actions was very long. Company actions were monitored after
three, six, and twelve months and benefits were withdrawn if nonimplementation was detected. This was an example of well-designed
SME support incentive policy with transparent and concrete conditions.
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VIET NAM PRODUCTIVITY REPORT
In some cases, financial privileges can be offered without any
loss of fiscal revenue. In Singapore, the Skills Development Fundwas founded in 1978 as an employer-based mechanism to provide
incentives for staff training. Under this system, all employers must
pay a Skills Development Levy for each worker they employ for up to
the first USD 4,500 of gross monthly remuneration at the levy rate of
0.25%, or USD 2 per worker, whichever is higher. The government thenprovides subsidies to employers who invest in upgrading the skills of
their employees. Employers can receive course fee subsidies of up to
90% with the amount of subsidies varying with course type and content.
Other possible external funds are international cooperation and private
donations, but this requires the existence of convincing policy visions
and proposals.

6.3. SINGAPORE’S PRODUCTIVITY MOVEMENT WITH JAPANESE COOPERATIONAs a prime example of how Japanese productivity methods are taught
and learned, let us examine more closely the case of Singapore.
Productivity movement in Singapore was a government-led initiative
under the strong guidance of Prime Minister Lee Kuan Yew, in which
Japanese support was effectively used, especially in the 1980s.
6.3.1. Historical backgroundThe need to enhance productivity was already keenly felt even
before Singapore’s independence in 1965. In the 1960s, Singapore
promoted export-oriented labor-intensive industries through FDI
attraction. To execute this strategy, the Productivity Unit was created in1964 under the Economic Development Board (EDB), an organization
established in 1961 to support the manufacturing sector. In 1967, theNational Productivity Center was created under EDB, which was later
upgraded to a more autonomous agency, the National Productivity Board(NPB), in 1972 (Figure 6.1). In early days, the Singaporean concept of128

Chapter 6. Selectively adopting Japanese productivity tools
productivity was strongly influenced by Western—especially British—
thinking, which placed emphasis on logic, rationality, and results rather
than practice and process.
By the second half of the 1970s, as neighboring countries also started
to adopt labor-intensive industries, Singapore had to graduate from laborintensive production to the use of higher skills, which further increased
the importance of developing industrial human resource. Prime Minister
Lee Kuan Yew frequently visited Tokyo to learn the secret of Japan’s
success in advancing productivity as well as met Japanese managers in
Singapore to discuss Japanese-style work attitude and labor-management
relations. The Japanese model was more practical and very different fromthe Western model. In 1981, Prime Minister Lee Kuan Yew met Kohei
Goshi, the founder of the Japan Productivity Center (JPC), who stressed
three principles that must be observed in improving productivity. They
were (i) maintenance or even expansion of employment, (ii) harmonious
relation between labor and management through consultation, and (iii)
fair distribution of outcomes. These principles were in turn derived fromthe fundamental idea that “humans are the basis of productivity” (JICA,
2016). These principles were copied as the guiding principles of the
Productivity Movement in Singapore.
Figure 6.1. Singapore: evolution of productivity supporting organizations

Source: compiled by Mitsubishi UFJ Research and Consulting (MURC) from various materials.

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6.3.2. Japanese cooperation in the 1980s

In the 1980s, Singapore began full-fledged productivity promotion
with Japanese cooperation. At the same time, its industrial goals were
upgraded to achieve global competitiveness; becoming a regional
business hub; and promotion of advanced technology, high value
added, R&D, and professional services. In 1981, the Singaporean
government launched the new Productivity Movement, and the National
Productivity Council (NPC) was established as its policy formulationand monitoring organization whose members came from government,
businesses, labor, and academia.
JICA’s technical cooperation termed the Productivity Development
Project (PDP), lasting seven years from 1983 to 1990, provided a
crucial pillar of Singapore’s Productivity Movement. Singapore was thefirst country to receive comprehensive productivity support from JICA.
The PDP’s achievements included the following: (i) approximately
200 Singaporeans were trained in Japan, (ii) about 4,000 Singaporeans
received domestic training using materials developed in Singapore,(iii) a total of 200 Japanese experts served as lecturers, (iv) Japaneseexperts and consultants guided more than 200 companies in Singapore
for productivity improvement, and (v) some 100 companies adopted 5S
with guidance from NPB (JICA, 2016).
With the support from JPC, the guiding idea of the Productivity
Movement was given in three principles, namely, (i) productivity
improvement should increase employment in the long run,(ii) government, employers, and workers must work together toimplement productivity measures, and (iii) fruits of improved
productivity must be distributed fairly among management, labor, andconsumers (JICA and GRIPS Development Forum, 2011).
Singapore’s Productivity Movement evolved in three phases:
Phase I (awareness, 1981-85), Phase II (action, 1986-88), and Phase
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Chapter 6. Selectively adopting Japanese productivity tools
III (ownership, 1989-90s). Phase I spread the awareness of importanceof productivity among firms and workers featuring flexible thinking,positive attitude, and teamwork. Phase II performed concrete
productivity improving guidance to selected firms targeting bothmanagers and workers. Phase III shifted the main role of sustaining andexpanding the productivity movement to private hands (Figure 6.2).
Initially, there was difficulty for Singaporean officials andmanagers, who were comfortable with Western management style, tolearn and adopt the Japanese productivity model.
Figure 6.2. Singapore: evolution of Productivity Movement

Source: JICA and GRIPS Development Forum (2011).

Overcoming this took nearly entire Phase I. In time, however, theJapanese way gradually penetrated the Singaporean mind. The
Productivity Movement supported by Japan and deeply committed byPrime Minister Lee Kuan Yew became very active, and the domestic
system to sustain productivity improvement was installed. In the 1990s,
with Japanese support and introduction, Singapore even began to offer
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VIET NAM PRODUCTIVITY REPORTinternational cooperation to developing countries in Asia and Africa toshare its experience in productivity development.
The factors contributing to the success of Singapore’s productivity
advancement included (i) strong commitment and effective oversightby the highest national leader, (ii) a comprehensive and integrated
strategy with many internal linkages, (iii) strong collaboration among
government, private firms, labor unions, industrial associations, andeducational and professional institutions, (iv) vigorous learning frombest practices, especially from Japan, through international cooperation,(v) the support of workers who understood the need to change andembrace a productivity culture, and (vi) the idea that an ambitious
goal could only be achieved through an effective combination of soundpolicies and strategic institutional design, emphasizing cross-sectoralcollaboration and sustained efforts (Vu Minh Khuong, 2014).
6.3.3. Continued effort

Singapore continues to improve productivity even beyond theJapan-assisted Productivity Movement in the 1980s. The Singaporean
policy formulation generally and always starts with establishmentof a time-bound and issue-specific ad hoc committee consisting ofgovernment, labor, business, and academic representatives, to develop
strategies from broad direction to concrete implementation details inproper steps. A vision, quantitative targets, and concrete strategies are
specified with effective mutual linkage.
In 2010, the Economic Strategies Committee (ESC) launched thevision of “high skilled people, innovative economy, distinctive global
city,” set quantitative targets of attaining productivity growth of 2-3%
and GDP growth of 3-5% per year, and defined seven key strategies
for achieving these targets covering (i) skills and innovation, (ii) a
global-Asia hub, (iii) a vibrant and diverse corporate ecosystem, (iv)
innovation and commercialization of R&D, (v) a smart energy economy,132

Chapter 6. Selectively adopting Japanese productivity tools(vi) enhanced land productivity, and (vii) building a distinctive global
city and an endearing home.
Subsequently, the Committee on the Future Economy wasformed in 2016 to follow up on the ESC’s work and chart a new
growth direction. It admitted that productivity was low in Singapore’s
domestically-oriented sectors even though overall productivity grewby 2.5% per year in 2009-16. In 2017, the Committee announced the
new vision of being “the pioneers of the next generation,” the target of“growing 2-3% per year on average to exceed the performance of mostadvanced economies,” and proposed six key strategies of (i) deepen anddiversify international connections, (ii) acquire and utilize deep skills,(iii) strengthen enterprise capabilities to innovate and scale up, (iv) build
strong digital capabilities, (v) develop a vibrant and connected city ofopportunity, and (vi) develop and implement “industry transformation
maps,” each with specified actions. Strategies (iii) and (iv) particularly
stressed the need to foster SMEs. These strategies were to respond to
significant shifts in the external environment such as the sluggish global
economy and changing global value chains with the rise of China andother rival nations.
In 2018, the Enterprise Singapore, a statutory board under the
Ministry of Trade and Industry, was created by merging the International
Enterprise Singapore, which had helped enterprises to develop overseas
markets, and the Standards, Productivity and Innovation Board(SPRING), which had supported innovation of startups and SMEs.
It became the new one-stop agency to promote SME development,
facilitating innovation, new technologies, overseas market development,
and training of management leadership.

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Chapter 7
JAPANESE PRODUCTIVITY METHODSIN THE VIETNAMESE CONTEXTThis chapter explains Japanese productivity methods in detail, with someoverlaps across sections, as well as how other countries learned fromJapanese models and how Japan teaches them abroad. These cases areoffered to the Vietnamese government and people for studying the possibilityof adoption in Viet Nam with proper selectivity and modification.

7.1. MINDSET CHANGE

It is observed in many developing countries that, even when productivity
tools such as 5S, kaizen, and shindan (see below) are introduced, impact issmall and short-lived. If workers, engineers, managers, and responsible
government officials do not possess the right attitude and dedication
to absorb new knowledge and work hard for improving efficiency,
any productivity tool will prove useless because it is learned only
superficially and soon forgotten. Learners must have a strong internal
urge to adopt new tools. Japanese experts can teach productivity tools
to anyone, but they cannot transform the mindset of Vietnamese people
because mindset is deeper than techniques. Vietnamese and Japaneseworking cultures are different. Japanese experts must fully understand
Viet Nam’s culture and social structure before asking workers andmanagers to change their behavior. Mindset change is hardly possible
if Japanese experts know little about Viet Nam and must speak throughinterpreters. Mindset change should properly be initiated and carriedout by Vietnamese people themselves.
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National characters unfit for economic growth are many. They
include short-termism, selfishness, excessive bureaucracy, inattention
to details, lack of persistence and resolution, lack of upward mobility,
excessive materialism, corruption, extreme individualism which rejects
teamwork, and disregard of laws, rules, and contracts. Vietnamese
people and government currently exhibit these symptoms in varying
degrees. Viet Nam as a nation must transform its mindset greatly before
learning productivity tools listed in the remainder of this chapter. This
is why productivity enhancement must begin with a national awarenesscampaign.
Weak mindset is a problem not unique to Viet Nam. In his book
The Malay Dilemma (1970), Malaysian Prime Minister Mahathir bin
Mohammad lamented that indigenous Malays were burdened withfatalism, formality, and lack of interest in material excellence, which
was unfit for industrialization unlike economically very active Chinese
Malays. Since then, Malaysia has introduced various affirmative actions
for ethnic Malays and encouraged them to be more dynamic, yet theirrelative lack of energy still remains.
In Sri Lanka, the apparel industry emerged in the late 1970s
and young rural labor was recruited to work in Katunayake Export
Processing Zone (EPZ) near Colombo, which was the first EPZ in Sri
Lanka. Young female workers then knew nothing about money, work
ethic, or city life, and some of them, dubbed “Juki girls,” lost decency
and caused social problems. Subsequently, EPZs were built across thecountry so rural workers no longer had to migrate to cities to work.
More importantly, leading Sri Lankan garment firms such as MAS
and Brandix systematically trained and transformed rural Sri Lankans
to become one of the most productive garment workers in the world.
However, great achievement in labor attitude and efficiency in Sri
Lankan apparel did not spread to other industrial sectors.
In Ethiopia, Prime Minister Meles Zenawi asked the Japanesepolicy dialogue mission, “I have studied East Asian policies and ourindustrial policy has improved in the last several years. Why do mypeople continue to pour money into property speculation and not
manufacturing? Why do they not build more factories? Please tell us
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Chapter 7. Japanese productivity methods in the Vietnamese context
how East Asian governments transformed people’s mindset to invest
and learn more.” In response, the Japanese delegate suggested initiationof a national kaizen movement.
Compared with these peoples, the mindsets of Japanese, Korean,
and Chinese (including overseas Chinese) are quite different. They arenaturally dynamic in both commerce and manufacturing. They can learn,
produce, invest, and innovate even without official assistance, and cando these things more effectively if proper official support is rendered.
They do not have to be told to be economically active by the government.
Japan, Korea, and overseas Chinese economies such as Singapore andTaiwan already belong to the high income group, and mainland China iscatching up rapidly since the 1990s. This points to intrinsic differencesin national character which are the results of diverse history as well as
domestic and external conditions. We must start with the premise thatdifferent nations are good at different things, and some nations must startindustrialization with mindset change while others need not.
Changing national mindset is far more difficult than introducing a
new machine or technology, but there are countries that attempted—andeven succeeded in—this feat. Singapore is a prime example (Chapter
6). In 1980, Prime Minister Lee Kuan Yew requested Japan to teachproductivity, and this led to the first comprehensive productivity support
to any foreign country by the Japan International Cooperation Agency(JICA). Cooperation was conducted throughout the 1980s in threephases. Phase I (awareness, 1981-85) implemented a series of national
campaigns to hammer the importance of productivity into the mindsof all citizens until even taxi drivers became aware. This was the mostdifficult phase in which Singaporeans had to be convinced, Japanese had
to adjust, and trust had to be built before any action could be introduced.
In Phase II (action, 1986-88), a number of Singaporean firms were
improved using the Japanese method. Japanese experts coached firms,
and accompanying Singaporeans learned how to do this. In Phase III(ownership, 1989 onward), Singaporeans became able to continue
the productivity movement without Japanese assistance, and theyeven started teaching other countries (with Japanese intermediation).
These three phases are standard for executing a national productivity
movement with Japanese cooperation.
137

VIET NAM PRODUCTIVITY REPORTOne may argue that Singapore is an exception because it is a smallcity state with dominant Chinese population. It is no wonder that it learned
productivity relatively easily and fast. But many other countries withlarge rural population also tried national productivity movements, with orwithout Japanese assistance, with varying degrees of success9. The list of
students is a long one that includes Korea, Thailand, India, Hungary, Brazil,
Argentina, Paraguay, El Salvador, Costa Rica, Tunisia, Egypt, Ethiopia,
Tanzania, Zambia, Ghana, Botswana, Mauritius, and Burkina Faso.
Ethiopia, a low income African nation, asked Japan to teach kaizen
in 2008. A JICA kaizen project, in three phases, has been implemented
since 2009. Prime Minister Meles Zenawi (in office 1995-12) andPrime Minister Hailemariam Desalegn (in office 2012-18) were both
personally and strongly committed to application of kaizen in Ethiopia,
not just as a set of convenient tools but more importantly as a life andwork philosophy to transform the national mindset. Industrial policy
dialogue with Japan was conducted regularly10, the Ethiopian Kaizen
Institute was established with sufficient budget and staff, kaizen awards
were created, September was designated as the Kaizen Month, citywide
kaizen movements were launched, and Ethiopia began to teach kaizen
to other African nations and the African Union. Taxi drivers in Addis
Ababa now know kaizen.
In Viet Nam, mindset change has been tried in scattered occasions
including in-house training at Japanese FDI11, Keiei Juku (business
Apart from JICA cooperation, Japanese-style productivity tools and movement
can be learned via the Ministry of Economy, Trade and Industry (METI), theAsia Productivity Organization (APO), the Japan Productivity Center (JPC), theAssociation for Overseas Technical Cooperation and Sustainable Partnerships(AOTS), the Kaizen Institute (private consultant group), Japanese private
consultants and retired engineers, as well as World Bank and ADB projects fundedby Japan. Moreover, many countries which mastered kaizen, such as Singapore,
India, and Thailand, can also teach Japanese-style productivity methods to others.
10
GRIPS was designated by Prime Minister Meles as the Japanese counterpart ofthis industrial policy dialogue, and Prof. Kenichi Ohno has served as the policy
dialogue leader on the Japanese side since 2008.
11
Many Japanese firms, especially large ones like Toyota, Honda, Denso, Yamaha,
Canon, Kyocera, Daikin, Komatsu, etc., have internal programs to train and re9138

Chapter 7. Japanese productivity methods in the Vietnamese context
executive courses managed by Foreign Trade University supported by
JICA), and training programs at some labor exporting companies for
Vietnamese workers before dispatching them to Japan (gino jisshusei—
see below). But these remain small and local in scope. There has beenno systematic effort to change the mindset of an entire nation like
Singapore or Ethiopia.
Outside government, an interesting mindset-change program for
Vietnamese people is being developed by GKM Lean Management
Institute, a private consultant firm, in Ha Noi. Dr. Nguyen Dang Minh,
its executive, is an automotive engineer who had a working experienceat the Production Technology Department of Toyota Headquarters in
Aichi, Japan for seven years before returning to Viet Nam. He not only
stresses the importance of mindset (TÂM THẾ, in his terminology)
but also teaches individual firms with a practical and concrete program
for transforming company-wide mindset. His method consists of
securing full mandate and commitment from the general director,
intensive discussion with the heads of all departments, drafting ofstandard operation manuals by all departments under his supervision,and isolation of workers who do not cooperate. Details are the businesssecret of GKM Lean Management Institute. Since 2015, Dr. Minh has
successfully transformed the mindsets of several Vietnamese firms
including Truong Hai Auto Corporation (Thaco).

7.2. FIVE S AND KAIZEN

Kaizen is a Japanese word for improvement. In Japanese management,kaizen means continuous and participatory improvement in quality
and productivity involving the entire company from top management
to middle managers and production line workers. It aims to install apermanent process of eliminating muda (waste)12 and maximizing thetrain their new and existing workers for safety, efficiency, technology, customer
service, and proper work ethic in Japan and abroad.
12
According to Toyota Production System, muda—defined as any thing or actionthat does not add value—is classified into seven types: (i) waste of processing,139

VIET NAM PRODUCTIVITY REPORT
use of existing human and nonhuman resources within a firm. It is acontinuous bottom-up effort for improving efficiency without requiring
additional investment, in sharp contrast to other methods that involve
purchase of new machinery or adoption of frontline technology with aconsiderable expenditure (GRIPS Development Forum, 2009).
The origin of Japan’s kaizen movement was the statistical control
method imported from the United States in the late 1950s. Japanesefirms—especially SMEs—at that time did not have sufficient funds andwas seeking methods to improve operation without large investment13.
The management theories and lectures of Professors W. E. Deming andJ. M. Juran were particularly influential. Japan quickly absorbed thisimported technique and modified it to its own management practicewhich became uniquely Japanese. The result was remarkable efficiency
improvement which even surpassed the performance of American
manufacturers. Compared with the original American model which
was top-down, theoretical, and highly statistical, the modified Japanesemethod emphasized process orientation, bottom-up worker participation,and hands-on pragmatism. This method, which came to be known askaizen, spread rapidly among Japanese firms, both large and small, toform the core of Japanese monozukuri (manufacturing) spirit. This was a
private sector-led effort assisted by three non-profit organizations—theUnion of Japan Scientists and Engineers (JUSE), the Japan Productivity
Center (JPC), and the Japan Management Association (JMA)—whichsponsored lectures, seminars, foreign missions, productivity and quality
awards, and other supporting mechanisms (Kikuchi, 2014).
(ii) waste of inventory, (iii) waste of over-production, (iv) waste of waiting,(v) waste of motion, (vi) waste of transportation, and (vii) waste of making defects.
Kaizen may be construed as an endless effort to identify and eliminate these muda.
13
Another method used by Japanese firms from the late 1950s onwards, with official
promotion, was rationalization, or replacing outdated machines and processes withlatest ones to improve productivity. Large manufacturing firms in steel, chemicals,
and other industrial materials embraced this method to achieve competitiveness.
However, such investments were costly and only those firms which had accumulated
sufficient funds during the Korean War boom (1950-55) could afford this strategy.
Most manufacturing SMEs had to resort to other methods which required less money.

140

Chapter 7. Japanese productivity methods in the Vietnamese context
From the 1980s onward, kaizen spread abroad as Japanesemanufacturing firms expanded their production base to the rest of theworld. The introduction of basic kaizen tools became a standard packageof Japanese technical cooperation in developing countries. Such a
package (normally called the “quality and productivity enhancement
project”) is implemented by both private and public hands. ManyJapanese firms teach their own workers at overseas plants and partner
supplier firms through classroom and on-site training, dispatch ofJapanese technicians, training at the mother factory in Japan, andorganizing skills competition among engineers and workers. Thereis also fee-based kaizen instruction by private consulting firms suchas the Kaizen Institute. Kaizen is also promoted strongly by official
agencies such as JICA, AOTS14, and APO in addition to the three NPOs
named above. JICA’s selected kaizen cooperation is listed in Table
7.1. While kaizen is most popular in East and Southeast Asia where
Japanese manufacturing firms have a strong presence, it is also taught
and practiced in other regions including South Asia, Europe, North
America, Latin America, and Africa.
Kaizen is a philosophy equipped with concrete tools to realize it.
The kaizen philosophy inculcates a proactive mindset to endlessly pursue
efficiency and improve one’s life and work with creativity and ownership.
A large number of tools are available in the kaizen toolkit including
5S, quality control circles (QCCs), mieruka (visualization), efficientequipment layout, heijunka (leveled production), jidoka (automation
with human intelligence), kanban, Just-in-Time (JIT), suggestion
system, total quality control (TQC), total quality management (TQM),
total productive maintenance (TPM), Toyota Production System (TPS),
and so on. The precise definition and boundary of kaizen is somewhat
vague. Different experts and organizations use the term kaizen withdifferent scopes and nuances, which sometimes causes confusion.
14

The new AOTS was renamed in 2017 from the Overseas Human Resources andIndustry Development Association (HIDA), an organization created in 2012 by merging
the Association for Overseas Technical Scholarship (original AOTS), which invites
foreign managers, engineers, and workers to Japan for training, and the Japan Overseas
Development Corporation (JODC), which dispatches Japanese experts abroad.

141

Duration

142
Ministry of Industry, Energy and SMEs
Productivity and Quality Improvement Center, Ministry of Trade and Industry

2001 2006
2005 20082007 2011

Productivity Improvement for Enterprises

The Study on Master plan of Quality/Productivity Improvement

Productivity and Quality Improvement Center

The study on quality and productivity improvement (KAIZEN) in the Federal Democratic Republic of Ethiopia
2009 2011
Capacity Building of Facilitators on Improving Productivity and Quality for Small and Medium Enterprise in Central
2009 2013
America and Caribbean Region
Quality/Productivity Improvement
2009 2012

Costa Rica

Tunisia

Egypt

Ethiopia

Zambia Development Agency; KAIZEN Institute of Zambia

2014 2016

Strengthening Manufacturing Enterprises through Quality and Productivity Improvement (KAIZEN）

National KAIZEN Project
Capacity Development for KAIZEN Implementation for Quality and Productivity Improvement andCompetitiveness Enhancement
National KAIZEN Project

Quality and Productivity Improvement (KAIZEN) for SMEs

Tanzania

ZambiaEthiopia

Cameroon

El Salvador

2020 Ethiopian KAIZEN InstituteProductivity Improvement

Enhancement of Productivity and Competitiveness through TQM and KAIZEN Approach for African Countries

KAIZEN Technical Assistance Network for Global Opportunities (KAIZEN TANGO)

National KAIZEN Project Phase2
Strengthening Manufacturing Enterprises through Quality and Productivity Improvement (The KAIZEN Project
Phase Two)
Assistance for Capacity Developing of Facilitators on Improving Productivity and Quality for Small and Medium
Enterprise in Honduras

Malaysia

Malaysia

Argentina

ZambiaHonduras

Tanzania

2018

2017

2017

2017

2016

2016

2016

Improvement of Quality and Productivity of SMEs

Dominican Republic2022

National System of Quality, Technical Secretariat of Planning and External
Cooperation

2020 Ministry of Industry and Trade2020 KAIZEN Institute of Zambia, Limited

2022 National Institute of Industrial Technology

2018 Malaysia Productivity Corporation2018 Malaysia Productivity Corporation

2019 National Institute of Technical and Vocational Training

2019 Unit of Management of National Program of the Quality Promotion

2015

Tunisia

2019 National Commission of Micro and Small Enterprises

2016

●
●
●
●
●

● ●
●
●
● ● ●
● ● ●
●

● ● ●

●

●

● ● ● ● ●

● ● ●
● ● ●

●

● ● ● ●
● ● ●
●

● ● ●

●

● ● ●

● ● ● ●

2018 National Board for Small Scale Industries●
SME Promotion Agency, Ministry of Small and Medium-sized Enterprises, Social
2015 2017●
Economy and Handicraft

2015

2015

National Productivity and Competitiveness Center

National Board for Small Scale Industries

Capacity Strengthening of Support Personnel for Micro, Small and Medium Enterprises focusing on the
Improvement of Enterprise Administration, Quality and Productivity
Quality/Productivity Improvement Phase 2

Ghana

Ministry of Industry and Trade2013 2016

Productivity Improvement in the Republic of Kenya

Kenya

2012 20142012 2015

Formulating a Strategic Model for Quality/Productivity Improvement through Strengthening BDS for MSEs

Ghana

●
●
●
●
●
●
●

● ● ● ●

● ● ● ●
●
● ● ●
● ● ●

● ● ●

● ●
● ● ● ●

Other

Ethiopian KAIZEN Institute, Ministry of Industry

2011 2014

Capacity Building for Dissemination of Quality and Productivity Improvement (KAIZEN)

Ethiopia

Jordan Enterprise Development Corporation(JEDCO)

Dissemination of Quality/Productivity Improvement (Kaizen) Practices for Small and Medium Enterprises

JordanTunisia2010 2013

Technical Instructor and Personnel Training Center

1995 2003

Brazilian Institute of Quality and Productivity Project

BrazilMinistry of Trade and Industry
Center for Quality and Productivity, National Technology University (UTNCEFOF )Unite de gestion programme qualite

Foundation of Thailand Productivity Institute, Ministry of Industry
Brazilian Service for the Support of Micro and Small Enterprises; Brazilian
Institute of Quality and Productivity

Costa Rica

National Productivity Board

Start

1994 2001

Completion

1983 1987

Planneduntil

Productivity Development Project

JICA support component
Training
abroadProductivity Development ProjectCounterpart organization
Expertdispatch

Thailand

Project nameLocal
expenses
Equipment
provision

SingaporeCountry

VIET NAM PRODUCTIVITY REPORT
Table 7.1. JICA’s productivity cooperation(Relatively large projects with institution-building content)

Note: this table shows JICA’s selected projects for introducing kaizen and strengthening its
executing agency which are relatively large, in long duration, and containing institution-building
components. JICA additionally provides numerous kaizen services in many projects without institutionalization.
Source: selected from JICA Knowledge Site (gwweb.jica.go.jp/km/km_frame.nsf), accessed on
November 22, 2018.

Chapter 7. Japanese productivity methods in the Vietnamese context
Nevertheless, in any firm or country, the adoption of kaizen must
begin with 5S which is made up of five “S” words: Seiri, Seiton, Seiso,
Seiketsu, and Shitsuke (translated imperfectly as Sort, Straighten, Shine,
Systematize, and Standardize; other English renditions also exist)15.
These are practical actions for enhancing order, efficiency, and disciplinein the workplace, which are considered so fundamental that all firms mustpractice them as the first step toward improvement. Seiri means removing
all unnecessary things from the workplace. Seiton means placing remaining
things in marked positions for easy pickup. Seiso means sweeping andcleaning. Seiketsu means maintenance of cleanliness. Shitsuke means
spontaneous implementation of these good practices (ownership rather
than coercion). These ideas may seem simple and mundane, and theyrequire no high academic degrees to understand, but are very difficult toactually sustain daily and forever. Kohei Goshi, former chairman of JPC,
said that kaizen “is like a marathon with no finish line.” Even Toyota, theleader of Japanese productivity movement, tries to perfect kaizen daily
and forever. Factories and offices that implement kaizen look very neatand orderly. Japanese firms do not consider doing business with local
supplier firms unless they introduce 5S (or at least the first two or three S
even in a crude form).
In many cases, workers in developing countries must begin witheven more basic things than 5S such as punctuality, smile, not stealing,morning greetings, clear voice, proper attire, and Ho-Ren-So (Report,
Communicate, and Consult which means don’t ignore a problem when
you see it but report to your boss immediately). Safety education, in
which workers experience artificially created dangerous situations tounderstand the importance of safety rules, is another essential ingredientof worker training.
In developing countries, kaizen at workplace is normally taught by
an experienced expert who makes frequent visits to the factory for three
to six months. Initially, classroom courses are usually organized to give
15

In Viet Nam, they are often translated as Sàng lọc, Sắp xếp, Sạch sẽ, Săn sóc, andSẵn sàng.

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VIET NAM PRODUCTIVITY REPORT
basic information and screen candidate firms with proper mindset andpotentiality. The general director is interviewed for his or her businessvision and willingness to learn. Then an internal team is formed ateach targeted firm to implement kaizen in one or two production lines
which will later be rolled out to the entire factory. Japanese experts
do not offer ready answers and solutions. The team is asked to think,identify problems, and suggest solutions with hints provided by thekaizen expert. Weekly homework is given for this purpose. In trainingof trainers, local officials should accompany a Japanese expert to learn
how kaizen is taught on the ground. Kaizen is considered successful
if the firm internalizes the process and can sustain kaizen activities
permanently after the expert leaves.
Two questions commonly raised about kaizen are transferability
across cultures and complementarity with Western methods. Somequestion the validity of kaizen in countries where low literacy, short-termorientation, top-down management, and inattention to details prevail.
If strong hierarchical structure is dominant, workers may hesitate tobring their ideas to supervisors. While these arguments are theoreticallyplausible, experience of numerous kaizen teachings around the worldshows that there is no society in which kaizen fails to improve quality
and productivity. Improvements are immediate and clearly visible in cost
reduction even though the number of best performers may vary acrosscountries. As to the compatibility between kaizen and other methods
such as benchmarking and business process re-engineering, the twoshould in principle be complementary. The Japanese method internalizes
gradual improvement while Western methods aim to create a jump in
performance. However, it is not clear whether bottom-up processes
required by the former can co-exist with top-down decisions assumed by
the latter. Another practical concern is over-burdening of managers andworkers when two methods are introduced simultaneously in a company.
Most Japanese manufacturers operating abroad teach and enforce
kaizen in their own overseas factories and their local suppliers. This is144

Chapter 7. Japanese productivity methods in the Vietnamese context
also true in Viet Nam. Visiting any Japanese factory in Viet Nam, one
can see how workplace is organized and how workers are continuously
trained for discipline and efficiency. Kaizen is implemented not only at
Toyota, Denso, Honda, Yamaha, Panasonic, Canon, Kyocera, Fujitsu,
Lixil, and Daikin but also at virtually all Japanese manufacturing SMEs
in Viet Nam.
From 2012 to 2015, JICA mobilized “senior volunteers”(experienced industrial experts) to improve more than 100 Vietnamese
supporting industry firms (component suppliers) by 5S and QCC
method. Firms achieving good results were listed in the supporting
industry database of the Japan External Trade Organization (JETRO).
However, this project was implemented by Japanese experts only withno participation or learning by Vietnamese officials or experts. The
activities ended when senior volunteers returned to Japan. It is odd that
Viet Nam, which has received a large amount of Japanese FDI in the lastquarter century, has not launched a nationwide productivity movement.
Productivity promotion by the Viet Nam Productivity Institute (VNPI)
is still very small in scale (Chapter 5). As a consequence, kaizen practicein Viet Nam remains random, scattered, and spontaneous.
By contrast, many nations try to internalize and institutionalize
kaizen (or kaizen-equivalent by any other name) by creating a national
productivity agency and training domestic experts (JICA and GRIPS
Development Forum, 2011). Taiwan, Korea, China, and India havelearned kaizen mainly through private channels. Meanwhile, systematic
JICA support was offered to Singapore in the 1980s. These countries nolonger need Japanese help to sustain kaizen. Most ASEAN countries,
including Thailand and Malaysia, were also assisted by JICA. In Africa,
JICA supports kaizen in Tunisia, Ethiopia, Kenya, Tanzania, Zambia,
Ghana, Egypt, and Cameroon as well as the African Union and the New
Partnership for Africa’s Development (NEPAD). Mauritius, Botswana,
and Burkina Faso studied kaizen from other (non-JICA) sources. Among
African countries, Ethiopia is most active and serious in learning andinternalizing kaizen. The Ethiopian Kaizen Institute provides kaizen
145

VIET NAM PRODUCTIVITY REPORT
instructions to firms, offices, public servants, and even an entire city.
September is designated as Ethiopia’s Kaizen Month when many awards
and events are held and the kaizen song and dance are presented. Also,
Ethiopia is beginning to teach kaizen to other African countries.

7.3. HANDHOLDING

Kaizen, when properly implemented, greatly improves efficiency in
any workplace. But the firm’s competitiveness depends on many otherfactors besides efficiency. A firm may weaken if management lacks
vision, if marketing is ineffective, if technology is outdated, if labor
management is defective, and for many other reasons. Handholding(also known as hands-on or yorisoi support) is an assistance program
which is customized and multi-dimensional for a handful of firmsthat show willingness and potentiality to face challenge and produce
excellence. SME assistance is divided into (i) general support open to
any firm on request basis and (ii) customized by-invitation-only support
in which chosen firms are given necessary assistance by an expert team
until a pre-set goal is attained. Handholding is of the second type. It is
widely practiced in East Asia, as explained below, but some Western
economists criticize it as too selective and benefiting only a few.
More precisely, handholding is an official program in which SMEs
are supported with low or no cost to them. It is not high fee-based
advice by MBA-holding consultants. For handholding, there must be ascreening process to identify eligible firms16. For each selected firm, thegeneral director is interviewed for proper mindset and capability; thefirm is diagnosed managerially, technically, and financially; one business16

In most Japanese prefectures and cities, local government officials in charge of SME
support know the features of individual firms they regularly visit, consult, and support
in their jurisdiction. They can readily produce a list of firms with good management
and high potential without conducting any additional survey. In such a case, selectionof candidate firms for handholding is easy and requires no formal process.

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Chapter 7. Japanese productivity methods in the Vietnamese context
goal is set17; then a multiple assistance package is rendered to achieve
the goal. An expert team is organized for each firm, usually consistingof a government official, a private business consultant, and technical orother expert(s) as required. Customized and intensive support is offeredto each firm for two to three years with an expectation of a high successrate. Handholding support is usually non-renewable. It is a very laborintensive and costly program that requires mobilization of many experts
as well as good rapport between the firm and the government.
In Japan, the Japan External Trade Organization (JETRO)
assists approximately 150-200 Japanese SMEs to export every year.
Manufacturing SMEs wanting to export directly (not through a trading
house) to a new market are supported. Eligible sectors include machineryand components, environment and energy industries, agricultural andfishery products, traditional items, household goods and fashion, andothers. Firms with “Only One” (unique and excellent) technology or
products are prioritized. Firm selection is conducted by (i) informal
screening based on daily contacts, expert views, visits, and reports
from other organizations; (ii) filing of an application form by the firm;(iii) interview with the general director; and (iv) evaluation and approvalby the JETRO headquarters selection committee. The support teamconsists of one to a few experts who have special knowledge requiredfor handholding and one JETRO official who provides JETRO-related
services and monitors and coordinates expert activities. Depending on
the firm, a support package may include export strategy formulation,gathering of market information as well as guidance in trade fairparticipation, business negotiation, signing contracts, account settlement,
etc. After a certain preparation period, assistance is provided for two years
which is non-renewable. An export goal is considered as attained when
the firm exports to the same foreign buyer three times or more, or sells
to a foreign agent with payments received. If the firm develops two new17

For handholding, only one goal is set for each firm. It may be a goal related to
product development, commercialization of R&D, improving product quality,
penetration of a foreign market, or investing abroad.

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VIET NAM PRODUCTIVITY REPORT
markets successfully, support is terminated even before two years. About
30% of supported firms “succeed” three years after the end of support.
Even without “success,” most firms make progress.
Since 2012, JETRO has also supported Japanese SMEs to invest
abroad. This has become a very important function of JETRO (as well
as JICA) because the Japanese government nowadays strongly promotes
overseas expansion of SMEs. Thousands of SMEs have been assisted to
go abroad. Chuken (medium-sized and excellent) firms as well as SMEs
seriously interested in investing abroad are targeted. For destination,
developing countries (recipients of Japanese ODA) are preferred. One
JETRO official and a few external experts (a business consultant and an
expert with knowledge of the industry or the targeted foreign market, forexample) form a team to coach a firm. Duration of support is negotiatedwith the firm but should not exceed two years. The firm is asked to appoint
one key person for this project, pay the cost of their own foreign travel andestablishing a company abroad, and submit progress reports. JETRO pays
all expert fees and their travel costs, and provides necessary informationand coordination. In some cases, the expert team may even suggest thefirm to stay in Japan instead of going abroad. JETRO argues that joint
support by a JETRO official who has a broad network and informationand external experts who have specialized knowledge is essential.
Japanese local governments—prefectures and cities—are also
very active in supporting SMEs as one of their key mandates. For
instance, Kobe, a port city with a population of 1.45 million, began
to strongly support overseas investment of SMEs in 2011. The Kobe
Asian Business Support Center was established. Guided by a professor
who had previously worked at Panasonic, the city conducted surveys
to find that Kobe SMEs were increasingly eager to go abroad, and themost popular destinations were Viet Nam, Thailand, and Indonesia.
Information on these three countries was collected, and study tours
were organized to them. Four city officials and 95 external experts wereassigned at the Center to offer yorisoi (handholding) support. A groupof experts, accompanied by a city official, are dispatched to each firm.
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Chapter 7. Japanese productivity methods in the Vietnamese context
Consultation is free of charge up to 10 times a year. Seminars and study
meetings are held, overseas missions are organized, and cooperation
with other support organizations is activated.
The reason why JETRO and other Japanese public agencies
and local governments can provide large-scale handholding support
is because Japan has a large pool of active or retired business andindustrial experts willing to work for public purposes at relatively low
fees. Some are shindanshi and others are former managers or engineers
at large manufacturing firms. Moreover, JETRO has a branch in every
prefecture in Japan and can serve SMEs in any location.
Handholding is also practiced in other Asian countries. The Korea
Trade-Investment Promotion Agency (KOTRA) offers multiple services
to SMEs planning to export. Its services are broader and more generous
than JETRO’s. The screening process includes (i) application filed
by firms, (ii) evaluation and selection by KOTRA’s overseas offices,(iii) service fee payment by the firm and signing of contract agreement,(iv) service provision by the KOTRA overseas office, and (v) evaluationand follow-up by the KOTRA overseas office. KOTRA’s overseas
branches act as local sales representatives of individual Korean SMEs
by giving advice, collecting market information, identifying potential
buyers, business matchmaking, etc. Duration of support is one year
which is renewable up to three years for firms unable to obtain results
quickly. Service fees differ depending on the destination country. In
the case of exporting to Japan, firms must pay about USD 2,500-3,500.
Roughly 50-60 firms are supported annually by the KOTRA officein Japan alone. At extra cost, firms can receive additional marketing
support, recruitment of local sales staff, and office space rental service.
In Malaysia, the Malaysia External Trade Development Corporation(MATRADE) provides handholding to SMEs new to exporting, though
at a much smaller scale18. Eligibility is limited to women, youth, and18

24 SMEs were chosen annually for support at the time of our Malaysia policy
mission in June 2013.

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VIET NAM PRODUCTIVITY REPORT
Bumiputra (ethnic Malay) entrepreneurs only. This program has asocial aim of advancing disadvantaged groups with currently low levelsof foreign market penetration. Support lasts for three years, which is
non-renewable, and covers (i) customized and intensive coaching by
one experienced expert and a MATRADE official, (ii) export skills
seminars, workshops, and symposiums organized by MATRADE on aquarterly basis, (iii) participation in international trade fairs and export
missions for selected SMEs, (iv) allocation of exhibition space for 12months at the Malaysia Export Exhibition Centre inside the MATRADE
headquarters, (v) networking and mentoring sessions between SMEs
and large companies, and (vi) leadership and entrepreneurship training.
MATRADE provides all these services free of charge, including thecost of foreign travel, unlike the cases of JETRO or KOTRA. The
firm screening process uses both internal information (MATRADE
SME database and SME Corp information) as well as actual visits tocompanies.
In Taiwan, the SME Administration (SMEA) has since 1989
operated the One Town One Product project (Taiwan OTOP), copiedfrom Japan’s One Village One Product program, which creates highvalue, high-image local cultural products for tourist and export markets.
This can be regarded as collective handholding for SMEs in one
particular community. SMEA dispatches a group of experts for three
years to (i) identify local needs and missing factors, (ii) build communal
consensus, (iii) conduct training, (iv) strengthen business capacityand develop new products, and (v) sustain growth under community
ownership. Support includes R&D, re-making of traditional products,
workflow re-engineering, branding, packaging, store display, linkage
creation with tourism, and marketing through OTOP shops, website,
media, ads, and trade shows. Hundreds of towns have been successfully
coached to develop high-quality local products.
Viet Nam has no systematic nationwide handholding mechanism
for SMEs. It should build necessary conditions for effective handholding
in appropriate speed and scope. As is clear from the cases in Japan, Korea,
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Chapter 7. Japanese productivity methods in the Vietnamese context
Malaysia, and Taiwan, the success of handholding depends much on
the availability of a large supply of experienced business and industrial
experts as well as highly dedicated SME promotion officials. Viet Nam
must foster such human resources step by step. When a sufficientnumber of experts and officials are trained, handholding in a simple
form may be started, for example, with a limited focus on management
strategy, technology, and kaizen only. Japanese firms and government
can assist in this process.

7.4. SHINDAN (SME CONSULTANCY)

In Japanese, shindan means diagnosis and shindanshi is a certified
person who practices this. Japan’s shindan system (more precisely,
the SME enterprise management consultant system) dates back to thelate 1940s after the defeat in World War II. Under occupation by theAmerican forces (1945-52), devastated Japan tried to boost production
and rebuild industries. Realizing the importance of SMEs in this process,the government established the SME Agency in 1948 to promote finance,
re-organization, and diagnosis of SMEs. For diagnosis, the government
drafted basic diagnostic manuals and tried to mobilize private industrial
experts with deep knowledge and experience.
In 1952, the Ministry of International Trade and Industry (MITI)
began to certify outstanding experts and actively use them in policy
implementation. These experts were given state recognition andregistration numbers. In 1954, the Japan SME Management Consultants
Association (J-SMECA) was founded as a nationwide association ofshindanshi. Headquartered in Tokyo, it had a branch in every prefecture
to promote awareness, use, research, quality improvement, andinternational cooperation in shindan services.
Over time, shindan became quite effective in upgrading SMEs
and was highly appreciated. From the outset, government supported
shindan through legislation, facilitation, and supporting organizations,but operation gradually shifted from the public realm to the hands of the151VIET NAM PRODUCTIVITY REPORT
private sector and NPOs. Administrative and financial support by thegovernment was limited from the beginning.
The SME Basic Act, originally issued in 1963, was amended in
1999. A new law, the SME Support Act, was enacted in 2000. These
new laws increased private sector involvement; enhanced the roleof J-SMECA in shindanshi training, exams, and certification; andexpanded the scope of shindan to include business re-engineering andcredit assessment. In 2004, through merger, activities of the Japan SME
Corporation were transferred to the Organization for SME and Regional
Innovation, Japan (SMRJ), which now is the nationwide apex agency
responsible for SME policy implementation. In 2006, further revisions
were made in exams and registration, which emphasized sufficient
practice of shindan as the requirement for certificate renewal.
The number of registered shindanshi is steadily increasing andstands at 27,000 in 2019. There are primary and secondary shindanshi
exams (Figure 7.1). There are two tracks for becoming shindanshi. The
first is to pass both primary and secondary exams and the second is topass the primary exam then successfully complete all courses at the SME
University. Each year, roughly 20,000 apply for the primary exam andabout 900 pass both exams. Besides this, a few hundred applicants pass
the primary exam and graduate from the SME University. Shindanshi
certificate must be renewed every five years. At least five training sessions
must be attended to update knowledge and at least 30 days of actual SME
shindan consultation must be practiced before each renewal.
The SME University under SMRJ is the most important organization
for training shindanshi. It educates new candidates as well as updates
knowledge of registered shindanshi and the staff of shindan support
organizations. Tokyo SME University, its flagship campus, was founded
in 1962 and eight more regional campuses were created in the 1980s
and 90s. The SME University disseminates practical knowledge neededin actual business operations but does not confer academic degrees.
Students must study a wide range of subjects instead of specializing in
one or a few business areas. As mentioned above, all applicants seeking
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Chapter 7. Japanese productivity methods in the Vietnamese context
shindanshi certification must pass the primary exam, then choose to either
take the secondary exam or study at the SME University. The six-monthcourse at SME University is divided into two parts (Table 7.2). In thefirst part (Business Consulting I), students learn specific management
subjects. In the second part (Business Consulting II), practical diagnostic
and advisory skills on companywide issues are obtained.
Figure 7.1. Shindanshi exam and registration scheme

Source: J-SMECA.

Table 7.2. Curriculum for shindanshi training at Tokyo SME University< Business Consulting I >TheoryManagement strategy To acquire diagnostic and advisory skills in drawing up management
strategies and plans, and executing these strategies and plans.
Marketing and sales
management

To acquire diagnostic and advisory skills in marketing and sales
management, and realizing such strategies and plans.

Human resourcesmanagement

To acquire skills for identifying problems pertaining to humanresources management, together with diagnostic and advisory
skills on solving them, in order to realize the business strategy.

Advice theory

To acquire diagnostic and advisory skills by participating in the corporate
problem identifying and solving process, and earning trust from assistedcompanies, in order for them to achieve their organizational objectives
and goals.
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VIET NAM PRODUCTIVITY REPORT
Finance andaccounting

To acquire diagnostic and advisory skills with regard to corporate
financial positions through analysis and assessment of current
conditions of assisted companies, and evaluation of their futureplans from a financial perspective.

Information
technology

To acquire diagnostic and advisory skills centering on IT planning,by understanding key steps toward introduction of IT systems andadopting IT systems consistent with the management strategy.

Production
management

To acquire the skills for identifying problems pertaining to
production management, together with guidance and advisory
skills for solving them in order to realize the management strategy.

Retail shop
management

To acquire diagnostic and advisory skills with regard to retail shopand store management through an efficient floor and shelf layoutin accordance with the management strategy.

Practice
Manufacturingindustry businessconsulting practice

To develop the ability for identifying management problems bycomprehensively understanding the circumstances surrounding theoperations of small and medium-sized manufacturers, and to acquire
the skills for drawing up management improvement plans to solvethese problems.

Trade and distribution To develop the ability for identifying management problems bybusiness consulting comprehensively understanding circumstances surrounding thepractice
operations of small and medium-sized traders and distributors,
and to acquire the skills for drawing up management improvement
plans to solve these problems.
< Business Consulting II >TheoryIntegrated management To acquire necessary perspective for solving companywide
management problems in order to formulate corporate strategies.
To develop comprehensive strategic thinking through discussioncentered training.
Integrated trade anddistribution business154

To conduct various business analyses of small and mediumsized traders and distributors for proposing overall businessstrategies, and to acquire diagnostic and advisory skills withregard to fully utilizing management resources and proposing
implementation measures.

Chapter 7. Japanese productivity methods in the Vietnamese context
Integrated
To conduct various business analyses of small and medium-sized
manufacturing industry manufacturers for proposing overall business strategies, and toacquire diagnostic and advisory skills with regard to fully utilizing
management resources and proposing implementation measures.
Business start-ups andventure businessSupport of business model building: to acquire diagnostic andadvisory skills tailored to assisted companies through training
centering on discussions on problems and success factors
pertaining to the establishment of business models.

Management innovation Development of advisory skills: to acquire comprehensive
diagnostic and advisory skills by proposing support measures
for a large number of actual cases brought to SME consultation
organizations.
Corporate rehabilitation To acquire diagnostic and advisory skills with regard to corporate
rehabilitation through training centering on discussions
on corporate rehabilitation laws and the design process ofrehabilitation plans.
Business alliance

To propose strategies to corporations endeavoring to form businessalliances across sectors and regions, and to acquire diagnostic
and advisory skills with regard to fully utilizing management
resources and proposing implementation measures.

Internationalization
strategy

To acquire diagnostic and advisory skills with regard to full
utilization of management resources through training centering
on discussions on case studies in which corporations expanded
into or withdrew from overseas markets.

Practice
Management strategy
To acquire skills for clarifying management strategies for SME
and strategic plan design operations, and formulating concrete and practical execution
practice
programs to realize strategic management.
Management strategy
and strategic plan design
practice II
SeminarSeminars

To acquire practical skills through on-site, small-group theoreticaltraining and practice, with the aim of deepening the knowledge
and skills in areas of specialization of individual students.

Source: Business Support Department, SMRJ.

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VIET NAM PRODUCTIVITY REPORTBusiness Clinic, a website managed by J-SMECA which boasts
9,000 shindanshi as members, provides matching service between
J-SMECA member consultants and SMEs free of charge. Fees arisingfrom individual consultation contracts must separately be agreed
and settled by the two parties. Shindanshi usually work closely withfinancial institutions that consider lending to SMEs. The diagnosis
and advice offered by shindanshi is extremely useful information for
financial institutions to evaluate loan applications of SMEs. The Japan
Finance Corporation (JFC), a large state-run financial institution
with 152 branches nationwide, plays a vital role in providing loans
to SMEs, micro enterprises, and individual proprietors. Shindanshi
reports on the business plan and expected profitability of SMEs are
an important consideration for JFC and other financial institutions inapproving SME loans.
The Japanese shindan system is highly sophisticated and difficult
to transfer in its entirety to other developing countries. Its features
include (i) long history with constant evolution in response tochanging social needs; (ii) adequate official involvement and support
especially in early years; (iii) standardized training curriculumand state-authorized exams, registration, and renewal processes;(iv) existence of a wide variety of competent public and private
support organizations including METI, SME Agency, SMRJ, SME
University, JFC, and J-SMECA; and (v) diverse and effective activities
performed by shindanshi as government officials, experts at firms andbanks, individual consultants, consultant firm professionals, and JICA
experts abroad.
There are developing countries that try to import a Japanese-style
SME support system in a simplified or modified way for the purpose ofstrengthening domestic SMEs in general and supporting industries inparticular. In ASEAN, all such policy efforts were assisted by Japanese
official cooperation. Some countries succeeded in creating a system
similar to shindan through trial-and-error, but others failed.
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Chapter 7. Japanese productivity methods in the Vietnamese context
In 1999, JICA implemented a five-year program to introduce ashindan system in Thailand and produced about 450 Thai shindanshi.
Since then, the Thai private sector and universities have taken over
the role of providing various training programs for shindanshi. In
Indonesia, Japan’s industrial support program was initiated in 2003
which included an introduction of a shindan system. Consultants weretrained, and a study was conducted for institutionalizing a training
program and a state certification scheme, and responsible offices at
local levels were also founded. The Indonesian Shindan System wasinaugurated in 2006 and about 300 shindanshi were certified. However,the system evaporated due to the lack of political will and appropriate
incentive. In Malaysia, as part of technical cooperation following theJapan-Malaysia Economic Partnership Agreement in 2005, Japaneseexperts conducted training courses for Malaysian officials for twoand-half years and produced 68 “SME counselors.” Similarly, when
the Japan-Philippines Economic Partnership Agreement was signed in
2006, Japan agreed to help the Philippines to develop a shindan systemand pilot projects were launched in five provinces.
In Viet Nam, no serious policy effort has been made to transplant
the shindan system from Japan with appropriate simplification andadjustments. Shindanshi, or competent Vietnamese experts by any othername, who can diagnose and advice SMEs on broad issues are needed inlarge number to develop SMEs and supporting industries in Viet Nam.
The Vietnamese government should formulate a concrete plan to educate,incentivize, and fully mobilize Vietnamese shindanshi as soon as possible.

7.5. TVET-INDUSTRY LINKAGE19

Skilled workforce is produced not only by internal training of firms
but also by education and training institutions. Universities, colleges,
19This section is based on JICA (2014) and Mori et al. (2013).

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VIET NAM PRODUCTIVITY REPORTand the Technical and Vocational Education and Training (TVET)
institutions can develop strong linkage with targeted industries, firstby keeping abreast with the current and future skill demand of firms
and updating curricula accordingly, and second by assisting theirstudents to obtain jobs where they can fully utilize acquired skills
and earn adequate income. Japan has an education system to do thesethings. Public polytechnic universities, colleges, and centers under
the Ministry of Health, Labor and Welfare have systems of training
process management and employment support that can effectively
incorporate skill needs of the industry into their training programs andensure appropriate job placement of their students. More specifically,
Japanese polytechnic universities provide four-year bachelor courses,
two-year master courses, and various short-term courses to train TVET
instructors. Japanese polytechnic colleges provide two-year diploma
courses for high school graduates to produce competent techniciansand engineers. Polytechnic centers provide a wide range of short-termcourses for job seekers (Ministry of Health Labor and Welfare, 2018).
In Section 7.6, kosen, a five-year technical education program under the
Ministry of Education, Culture, Sports, Science and Technology, will
be separately discussed.
Training process management, featuring the PDCA (Plan, Do,
Check, Action) cycle, enables TVET institutions to understand andanalyze industry skill needs in seven steps: (i) research of industry skill
needs; (ii) selection of training fields; (iii) curriculum development;(iv) preparation for training program implementation; (v) implementation;(vi) evaluation; and (vii) formulation and implementation of actionplans (Figure 7.2).

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Chapter 7. Japanese productivity methods in the Vietnamese context
Figure 7.2. Training process management

Source: Inagawa (2013) and Mori et al. (2013).

Execution of this cycle requires direct and constant interaction
with industry. By visiting firms that have employed their graduates orfirms that may recruit their students in the future, TVET institutions cancollect information on current and future skill needs to design optimal
curricula. This also generates mutual trust between two parties, whichmakes employers more willing to provide information. Furthermore,proactive approaches by TVET institutions encourage firms to thinkahead and anticipate future or latent skill needs. Finally, feedback from
employers on the institute’s courses and graduates is a valuable input tothe evaluation of training courses and the development of action plans.
Close contact with industry is essential also in developing aneffective employment support system. Students are provided withinformation on business trends as well as specific firms and skill needs.
Meanwhile, recruiting firms are able to identify appropriate candidates.
Components of this system are (i) internship; (ii) company study tours;(iii) lectures by TVET graduates; (iv) job fairs; (v) collection and159

VIET NAM PRODUCTIVITY REPORT
circulation of job opportunity information; and (vi) career counseling(Figure 7.3). All of these activities must be conducted in an integrated
and complementary way because implementing just one or a few ofthem is not effective. Internship is very useful to students in enhancing
their practical skills and working attitudes as well as learning about
firms. Company study tours and lectures by TVET graduates provide
students with valuable information in choosing firms for internshipor job application. Lectures by TVET graduates are often organizedat job fairs, where TVET institutions can also collect job opportunity
information which is essential for conducting effective career counselingfor students. With information obtained from these various activities,
lecturers can guide students to select most suitable firms for internshipor recruitment.
Figure 7.3. Employment support system
Internship
ProgramCompany
Study Tour

CareerCounseling

Suitable
Job
Job
Opportunity
Information

Lecture by
Gradates

Job FairSource: Mori et al. (2013).

The employment support system additionally informs TVET
institutions about students’ interests in skills learning and future careers.
By comparing students’ interests and industry needs, TVET institutions
must come up with realistic organizational strategies. In reality,
students’ interests often do not match employers’ skill expectations,partly because students lack sufficient information but also because
students look to long-term career development while firms focus on
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Chapter 7. Japanese productivity methods in the Vietnamese context
immediate needs to fill vacancies or carry out a short-term businessplan. Training programs must balance these two needs.
In Viet Nam, a pilot project was conducted at the Ha Noi Universityof Industry (HaUI), which runs both higher education and TVET
courses, with the technical assistance of JICA. HaUI installed the two
critical systems of training process management and employment
support, and successfully strengthened relations with hiring firms.
From 2010 to 2013, HaUI lecturers and staff visited a total of 233
enterprises to find out employers’ skill needs. Firms in Viet Nam areoften reluctant to receive visitors from TVET institutions, not so muchbecause of their insufficient technical knowledge but mostly because of
their unprofessional behavior. Firms complain that the purpose of visit
is unclear, that appointment request is made at very short notice, andthat TVET people sometimes arrive in inappropriate attire. With JICA
support, HaUI lecturers and staff learned the proper way to contact firms
and convince them of benefits of meeting them. HaUI also invited firms
to visit the campus, which helped to develop mutual understanding.
HaUI lecturers learned much from on-site advice by company experts,
while employers could better understand HaUI’s training programs andfacilities. During the JICA’s project period, two-way visits between
HaUI and industry gradually developed, with a total of 175 enterprises
coming to observe the HaUI campus.
HaUI used information from firms to create new courses or improveexisting ones. The PDCA cycle of training process management enabled it
to design a short-term course on machinery maintenance. New curriculum
and training materials were developed through discussions with the focusedcompany group. In 2012, HaUI organized four rounds of courses inmechanical maintenance and electric system maintenance which attracted
76 external participants from 17 firms, both Japanese and Vietnamese.
After these courses, an evaluation survey was conducted and action plans
to improve the courses were drafted. Besides this, HaUI developed a new
short-term course in quality control, and improved existing courses inmechanical drawing, programmable logic control, and micro controllers.
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VIET NAM PRODUCTIVITY REPORTWith JICA technical assistance, HaUI also improved its employment
support system. The Vietnam-Japan Center (VJC) within HaUI
developed an internship program which combined classroom lectureswith structured on-the-job training in partnership with several Japanesemold and die manufacturers. VJC selected students and provided themwith prior briefing, and closely monitored their internship performancein cooperation with receiving firms.
Additionally, HaUI overhauled its company study tour program
which now runs as follows: (i) a proposal clearly stating objectives
and expected outputs with information from hosting enterprises;(ii) a briefing for students on the firm profile, instruction for dress
code, expected behavior, and study points; (iii) obligation for each
student to ask at least one question following the tour; (iv) a followup workshop where students summarize their findings through group
work and presentation; (v) a report submitted by each student; and(vi) sharing of the collective report with the enterprise. After thisprogram was introduced, many firms became willing to host acomprehensive student tour which included company overview, factory
visit, and Q&A session with the participation of company managementand HaUI graduates. During the JICA project period of 2010-13, HaUI
managed to organize 17 study tours in which a total of 273 students and
82 lecturers participated.
To maintain strong linkage with industry, the organizational andoperational mechanism of TVET institutions must also be renovated.
In 2014, HaUI established the Center for Enterprise Partnership andVocational Skill Assessment to assist all faculties and centers of theuniversity to continue to identify and develop partnership with firms andorganize various employment support activities even after JICA left.
Support by provincial governments is also important. Considering
regional diversity in industrial structure and skill needs, local initiative
may produce better outcome than top-down central instruction. In
Japan, for example, the Monozukuri Business Information-center
Osaka (MOBIO) promotes partnership between manufacturing SMEs
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Chapter 7. Japanese productivity methods in the Vietnamese context
and TVET and higher education institutions in a way most suitable for
the Osaka region (MOBIO, 2018). In Viet Nam, the Dong Nai Industrial
Zone Authority (DIZA) hosts a consortium of Lac Hong University,
Dong Nai Vocational College of High Technology, and Japanesecomponent suppliers to improve courses on 5S and occupational healthand safety with technical assistance from JICA, METI, and variousorganizations from Osaka Prefecture (also see next section).

7.6. KOSEN (TECHNICAL AND VOCATIONAL SCHOOLS)Koto Senmon Gakko (kosen) is a technical and vocational higher
education system in Japan, at the level of college, which was approved
and legalized in 1961. It aims to produce practical and creative engineers
in industrial and technology sectors. It offers a five-year program to postmiddle school students aged 15 to 19, combining general education andspecialized courses with the latter’s weight increasing as curriculum
progresses20. TVET-industry linkage formation (Section 7.5 above) is
one of the core functions of kosen. At present, Japan has 57 kosen, of
which 51 are state-run, three are operated by local governments, andthe remaining three are private. All prefectures in Japan (there are 47 ofthem) have at least one kosen or kosen-equivalent (some kosen have been
converted to universities). In kosen education, theory and practice areintegrated. Moreover, kosen not only teaches theories and technical skills
but also inculcates proper mindset, creativity, problem-solving attitude,
and communication skills. Factory visits, firm internship, and graduation
studies are essential ingredients of kosen education. Roughly 10,000
students enter and graduate from kosen each year with a total student
body of about 50,000 at any time. About 500 of them are foreign students.
20

General education covers math, physics, chemistry, Japanese, English, geography,
politics and economics, history, art and music, and gymnastics. Specialized
courses include mechanical engineering, materials, electrical and electronics, IT,
bio-chemistry, construction, architecture, commercial navigation, and others, fromwhich each student chooses one.

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VIET NAM PRODUCTIVITY REPORTJICA implemented a pilot project to introduce kosen to Viet Namfrom 2013 to 2018, not as a formal education system but as a practicalmodel that could be applied to any existing universities, colleges, andTVET centers. The project was first implemented at the Industrial
University of Ho Chi Minh City (IUH) and later rolled out to threeother institutions (see below). Because kosen was a new concept inViet Nam and also because initial conditions in Viet Nam were quite
different from Japan, the Japanese kosen model had to be adjusted to
fit the reality of Viet Nam without losing the main thrusts of kosen
education.
Specifically, the kosen model in Viet Nam established throughthe JICA project consists of five essential components, namely,(i) technical education in knowledge and skill, (ii) teaching proper
attitude and mindset, (iii) creativity (just doing what is told is not
acceptable), (iv) comprehensive assistance in students’ job search andplacement, and (v) the college’s own capacity building to offer these
services21. Vietnamese Kosen is defined as any education system thatsatisfies all of these components. They are regularly practiced by all
kosen in Japan. In Viet Nam, technical colleges teach knowledge andskills (component (i)), but do not offer components (ii) to (v). These
must be added for Vietnamese technical colleges to become kosen.
Proper mindset such as 5S and kaizen philosophy must be taught
explicitly in Viet Nam. Students must be encouraged to identify problems
and work on solutions themselves rather than passively waiting fora teacher’s instruction. The college must actively contact firms for
curriculum setting, arranging factory visits and internship, receiving
job opening information, and requesting student interviews with firms.
Based on industry needs, the college must improve its programs, staff,
and organization so that graduating students are equipped with skills
truly demanded by industry. These are the missing elements in Viet
Nam’s current education system that must be newly supplied.
21

The JICA project also produced a long list of sub-items and concrete actions thatneed to be implemented in Viet Nam under each of these five components.

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Chapter 7. Japanese productivity methods in the Vietnamese context
Japanese firms at home and abroad teach firm-specific knowledge
and skills to new employees through on-the-job training after they
are recruited. Therefore, they do not want universities and colleges toteach specific technical skills, but need students with proper attitude,
basic knowledge, and communication skills. Because Vietnameseuniversities and colleges teach specialized theories and techniques but
not such basics, there is a mismatch between what Japanese FDI wants
and what technical institutions in Viet Nam teach. Introduction of kosen
is one way to fill this gap.
In Japan, kosen is a legally defined system based on law. In Viet
Nam, kosen is a concept which can be adopted at different levels of
education including universities, colleges, and TVET centers, provided
that the five kosen components noted above are ensured. We do notadvise creating a new and separate legal school entity in Viet Nam.
Instead, Viet Nam should view kosen as a functional model to be adopted
by any educational institute regardless of its legal status. As long as
the five components are properly executed, Viet Nam can achieve thesame positive effects in practical and creative engineering education as
Japanese kosen.
The JICA project at IUH was successfully concluded and highly
evaluated. From 2015, its results began to be rolled out to other institutions,
to Cao Thang Technical College (Ho Chi Minh City), Hue Industrial
College (Thua Thien-Hue) and Phuc Yen College of Industry (Vinh Phuc,now renamed to the College of Industry and Trade). These three colleges,
all under the Ministry of Industry and Trade (MOIT), are enthusiastic
about introducing kosen and exchanging information with one another.
One teacher each from Cao Thang and Phuc Yen was dispatched to Ube
Kosen and Tokuyama Kosen, respectively, in Japan for further learningand establishing relationship with Japanese kosen for future cooperation.
The JICA project is over but Kosen Kiko (meaning Kosen
Organization but its official English name is the National Institute ofTechnology), a summit organization for Japanese kosen, currently
assists Viet Nam, Thailand, and Mongolia. In Viet Nam, Kosen support
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directly follows up on the finished JICA assistance. It supports thethree JICA-assisted schools, namely, College of Industry and Trade(Vinh Phuc, partnered with Hakodate Kosen), Hue Industrial College(partnered with Tsuruoka and Gifu Kosen), and Cao Thang TechnicalCollege (HCMC, partnered with Ariake Kosen) to create Model Core
Curriculum in one chosen course at each school. Ube Kosen supervises
and supports all activities.
Due to the recent administrative reform of the Vietnamese
government, responsibility for kosen was transferred from MOIT
to the Ministry of Labor, Invalid and Social Affairs (MOLISA). It isessential for Viet Nam to establish a national policy and mechanism
for disseminating the Vietnamese kosen model to technical training
institutions all over Viet Nam at all levels, with necessary adjustments
to each local context. MOLISA and MOIT need to cooperate effectively
to realize this objective. One serious issue that needs to be coped withis a general decline of interest among young Vietnamese people intechnical college education22. This trend must be reversed if Viet Nam
is to achieve manufacturing excellence.
Another bilateral TVET cooperation worthy of mention is foundin Dong Nai, in a project conducted by the Pacific Resource Exchange
Center (PREX), an Osaka NPO that trains middle managers indeveloping countries. From 2014 to 2017, with the funding of JICA andlater by METI and the Association for Overseas Technical Cooperationand Sustainable Partnerships (AOTS), the project installed new courses
on 3S and workplace safety (Section 7.2) at Lac Hong University andDong Nai Vocational College of High Technology (formerly Long
Thanh-Nhon Trach Vocational College) with the guidance of industrial
experts from the Kansai area of Japan. Detailed curriculums and22

In Northern Viet Nam, around 2015, the number of young people applying totechnical colleges declined suddenly and significantly. This was due to an acute labor
shortage and the desire by factories to hire as many new workers as possible. Highschool graduates decided to go to work immediately to make money instead of going
to college to acquire technical skills. This does not bode well for Viet Nam’s future.

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Chapter 7. Japanese productivity methods in the Vietnamese context
textbooks suitable for Viet Nam were produced by Vietnamese lecturers,
which were not mere translation of Japanese manuals23. Japanese firms
and experts were impressed with the originally created Vietnameseteaching materials. With an upgraded program, the two model schools
began to approach Japanese firms in Viet Nam and send their graduating
students to them. Some Japanese firms in Viet Nam also want to send
their employees to these schools for training. In the second phase, from2018 to 2020, PREX and DIZA planned to establish the Dong Nai
Monozukuri Core Human Resources Development Instructor Training
Academy (DoMOTA), a school where trained Vietnamese teachersat the model schools teach other teachers. This is to expand the goodresults obtained in the two model schools to other schools. An excellent
program such as this, which promotes linkage between FDI firms andVietnamese students, should be rolled out not just in Dong Nai but tothe entire country.

7.7. MOBILIZATION OF TECHNICAL INTERNS DISPATCHED TO JAPAN (GINO JISSHUSEI)

Gino jisshusei (technical internship) is a system of inviting young
foreign workers, mainly from Asia, to Japan to work at Japanese firms
and learn suitable mindset and skills through on-the-job training before
returning to their homeland. Acceptance of foreign trainees into Japanbegan in the 1960s and the program was legalized in the 1980s under the
Immigration Control and Refugee Recognition Act. In 1991, the Japan
International Training Cooperation Organization (JITCO) was created
to provide support to stakeholders as well as monitor their performance.
In 1997, the staying period of three years was stipulated for technicalinterns. As of 2020, sectors designated for technical internship include
agriculture, fishery, construction, food processing, garment production,
23

In Japan, 3S and safety are widely taught to TVET students and new factory
recruits, but they are so common and obvious they require no textbooks. Dong Nai
lecturers have created such textbooks to teach Vietnamese students.

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VIET NAM PRODUCTIVITY REPORT
mechanical and metal processing, and others (which include many
supporting industries). When properly managed, this program greatly
enhances the technical capacity of young workers of each sending
country. On the Japanese side, this program provides relatively cheap
temporary labor to SMEs that face an acute shortage of manufacturinglabor. Many positive cases are reported in which Japanese SME generalmanagers are so impressed with the working attitude and skill learningof technical interns that they decide to hire them permanently or invest
in their homeland by appointing former technical interns as production
managers. But this system also generates problems as explained below.
The gino jisshusei system is particularly important for Japan
and Viet Nam because the number of Vietnamese technical interns inJapan is rising sharply in recent years, from 13,789 persons in 2011
to 218,727 persons in 2019 (information provided by JITCO). Viet
Nam has overtaken China as the top sending country to Japan (Figure7.4). In the departure lounge of Noi Bai Airport, one can often spot
new Vietnamese technical interns bound for Japan wearing the same
uniform.
The increasing number of Vietnamese technical interns in Japanposes a great opportunity for deepening human ties and industrial
cooperation between the two countries. For Japanese SMEs, Viet Nam
is the most popular country for hiring foreign workers as well as forinvesting abroad. Japanese firms that receive Vietnamese technical interns
are generally satisfied with their quality, attitude, and perseverance. A
plant equipment manufacturing and installation company in Amagasaki(Hyogo Prefecture) built a new factory in Dong Nai in 2010 because
Vietnamese workers it hired were excellent. Another precision metal
working company in Higashiosaka (Osaka Prefecture) invested in Ho
Chi Minh City in 2017 after receiving Vietnamese technical interns
who turned out to be very skillful and diligent. The technical internsystem not only supplies temporary labor for three years in Japan but
also facilitates Japanese SMEs to invest in Viet Nam.
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Chapter 7. Japanese productivity methods in the Vietnamese context
Figure 7.4. Gino Jisshusei (technical interns) in Japan

Source: Japan International Training Cooperation Organization.

According to the JICA survey conducted by the Viet Nam Institutefor Economic and Policy Research (VEPR), the average profile ofVietnamese technical interns in Japan is as follows (JICA, 2017a).
They are from countryside and recruited by brokers or word-of-mouth.
They must study Japanese language and culture for six months before
going to Japan (the quality of such courses varies greatly dependingon the sending company). Dispatching organizations in Viet Nam andsupervisory organizations in Japan take care of them. On average,a technical intern pays USD 5,300 to a broker and/or dispatchingorganization in Viet Nam and carries debt of USD 4,700 upon arrivalin Japan. He or she earns USD 44,500 over three years (if successful)and brings home USD 23,000 after deducting living cost and debt
repayment. Vietnamese technical interns feel the initial cost is too high,but they do not know Japanese firms also incur high cost to hire them.
However, this system also has problems. First, Vietnamese
workers wanting to go to Japan as technical intern do not have sufficientor accurate information which leads to the choice of wrong brokers
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VIET NAM PRODUCTIVITY REPORTand misunderstanding of rules, costs, and risks. Second, there are lowquality intermediary organizations on both sides, in Viet Nam andJapan, that exploit workers without adequate training or support. Third,some Japanese firms—even large ones—regard technical interns asjust temporary cheap labor and do not train them or assign workers
to meaningful tasks, and sometimes even mistreat or underpay them.
Fourth, faced with such problems, some technical interns suffer froma mental problem under pressure, disappear from the workplace, orcommit crime in Japan. These have become one of the largest bilateral
problems between Viet Nam and Japan.
In response, the two governments have started to correct thesituation. Main responsible organizations are JITCO on the Japanese sideand the Department of Overseas Labor (DOLAB) under MOLISA on
the Vietnamese side. A ranking system of Vietnamese sending companies
has been introduced by the Vietnamese Association of Manpower Supply(VAMAS), and best sending companies are officially recognized andpromoted (see below). Guiding and monitoring of Japanese firms andJapanese receiving organizations has been strengthened under the new
Gino Jisshu Act of 2017. The impact of these policies will decide whether
this system will continue to receive popular support in both countries.
The Japanese government under Prime Minister Abe had anotheragenda regarding this system. Faced with severe and structural labor
shortage, the Japanese government decided to rapidly expand the scope,
sectors, and duration of gino jisshusei and also to introduce a new labor
importing mechanism. The Immigration Control Act was revised in
December 2018 and enacted in April 2019. The staying period of ginojisshusei was extended from three to five years, new eligible sectors
such as old age care, shipbuilding, and hostelry were added, and skilled
foreign workers are now granted a longer stay in Japan under certain
conditions. This new policy may partially solve the problem of labor
shortage in Japan even though its hasty introduction has caused delay
and confusion. Meanwhile, its consequence on Viet Nam is uncertain
because more Vietnamese workers may remain in Japan rather than170

Chapter 7. Japanese productivity methods in the Vietnamese context
coming back to Viet Nam. The rights, living conditions, and social andhealth insurance for foreign workers and their families must also be
secured before inviting them under the new rule.
The corona pandemic of 2020, which affected virtually all activitiesof the world, was particularly disruptive to the gino jisshusei program
as travel between the two countries was suspended, Japanese hostfirms faced collapsing demand and financial difficulty, and Vietnamese
workers were trapped in Japan without alternative employment or the
option to return to Viet Nam. Workers who came to Japan for realizing
their dreams are now confronted with poverty and enormous hardship.
This problem must be corrected before the program can resume its
essential functions.
For Viet Nam’s industrialization, the most serious issue regarding
gino jisshusei is the lack of proper mindset and job opportunities oftrained Vietnamese workers after they return to Viet Nam. Many workers
regard going to Japan merely as a chance to earn money and do not think
deeply about using acquired skills for their future career or national
development. After returning, they often go back to the village or take upjobs unrelated to learned skills which is a great loss to the country. Thisis partly a mindset problem of the workers and partly due to insufficient
information and matching service for linking these workers with suitablejobs at Japanese FDI firms and other workplaces in Viet Nam. To makethe best of the gino jisshusei system, the two governments should not
only cope with the problem of improper brokers and host firms and thecorona pandemic in the short run, but also promote effective utilizationof returnees for Viet Nam’s industrialization in the medium to long run.
One of the things that can be done for this purpose is to strongly
support excellent sending companies in Viet Nam while eliminating
low-quality brokers, and supply information on the quality and rankingof various sending companies to all workers considering going to Japan.
This is already started by VAMAS. Two labor sending companies
below have been recognized as excellent and variously supported by
the Japanese embassy and JICA.
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Esuhai Company in Ho Chi Minh City is founded by Mr. Le Long
Son who studied engineering in Japan. Based on his strong belief, hetrains gino jisshusei applicants with great discipline before dispatchingthem to Japan. They are taught on manners, attitudes, Japanese thinking,
5S, and Japanese language. They are carefully monitored during andafter their stay in Japan. Workers are encouraged to use acquired skills
for future. Esuhai also does matching between returning workers andJapanese FDI in Viet Nam.
Hai Phong JSC, a Ha Noi labor exporting firm, was established by
Mr. Nguyen Xuan Tuyen who was himself a gino jisshusei in Shizuoka
Prefecture. Like Esuhai, his company teaches attitudes, 5S, skills, andJapanese language. Hard physical exercise, military style discipline, anddeclaration of purpose in front of many people before going to Japanare part of the pre-dispatch training. Hai Phong’s “Dong Du Moi” (New
Eastern Study) program encourages technical interns to go to Japan not
for quick money but for realizing a great life dream. Strong will, longterm thinking, skill development, and business startup support after
returning to Viet Nam are emphasized. Both Esuhai and Hai Phongcooperate with MOLISA to improve Viet Nam’s labor exporting policy.

7.8. KOSETSUSHI (TECHNICAL SUPPORT CENTERS)

Kosetsushi is short for Kosetsu Shiken Kenkyu Kikan (Public Testing
and Research Organizations) which are technical support centers
for SMEs and venture companies, operated or supervised by local
governments. It performs testing, research, training, technologicalsupport, and advice for enterprises based in each targeted prefecture
or city. Historically, there were different types of kosetsushi such asindustrial centers, handicraft centers, agricultural centers, dairy farming
centers, fishery centers, and forestry centers. There are different
organizational forms and backgrounds. Many kosetsushi date back toa century ago or more. Some were originally established by central or
local governments and were later transferred to NPOs or the private
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Chapter 7. Japanese productivity methods in the Vietnamese context
sector, while others were set up by various NPOs under the supervisionand support by local governments. Because Japan is a manufacturing
country, most kosetsushi targets the manufacturing sector. Under the
recent administrative reform in Japan, some centers were integrated,and some became more independent from governments.
There is at least one industrial kosetsushi in each prefecture(Japan consists of 47 prefectures), and some prefectures have two or
three industrial kosetsushi. In addition, some large cities also operateindustrial kosetsushi. Besides these, a large number of specialized
kosetsushi have been set up by industrial and business NPOs all overJapan. This is counting industrial kosetsushi only. There are also
agricultural, fishery, and other kosetsushi.
Kosetsushi provides services in response to demands of the private
sector. Local governments usually subsidize kosetsushi operation, andSMEs are charged low fees for most services. Some services, such as
initial consultation, are free of charge. Some kosetsushi can self-financethe purchase of latest equipment but others face financial constraints ascollected fees are not enough to upgrade machines. At most kosetsushi,
technical staff are highly competent but receive the salary based on thelocal government pay schedule. They are happy to help enterprises in theirhometowns with relatively low salaries. Because demand for technicalsupport by SMEs is high and the number of technical staff at kosetsushi
is limited, kosetsushi technical staff are usually very busy in providing
various services daily24.
24

As of June 2018, the Saitama Industrial Technology Center (SAITEC), one of thetwo kosetsushi in Saitama Prefecture (population 7.3 million), had 100 technicalexperts whose legal status was regular prefectural officials. Annually, they execute
48,500 requested events (consultations, tests, projects, equipment uses, etc.) plus
ten SAITEC-initiated R&D projects and 30 externally commissioned projects. At
the Technical Support Center of Higashiosaka City, which is a smaller center at
the municipal level (population 240,000), five senior technical staff execute about
4,000 requested technical events per year (no R&D is conducted due to small
budget). These five technical staffs are all retired industrial officials from the Osaka
Research Institute of Industrial Science and Technology (ORIST), a prefecture(higher) level kosetsushi.

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Kosetsushi provides technical service to SMEs which plan todevelop new products, must submit technical certificates to customers,
need special treatment for certain components, or want to investigate
the cause of product failure, but cannot afford expensive equipment
for just one or a few uses. At kosetsushi, they can rent equipment andtechnical expertise of the staff cheaply. Available services differ fromkosetsushi to kosetsushi but normally include the following.
(i) Commissioned or joint research—commissioned research is doneby kosetsushi at the request of an SME for technical innovation,
trouble-shooting, or commercialization of new technology. Joint
research is done by kosetsushi and an SME together.
(ii) Testing and analysis—various tests, analyses, measurements, andspecial treatment of materials and components are performedin response to SMEs’ requests, and test results are certified in
official documents.
(iii) Use of machinery and equipment—SMEs can rent machineryand equipment at kosetsushi for product development orovercoming technical difficulties. Each kosetsushi publicizes
available equipment in the website. Libraries are also open to
SME users for reviewing Japanese Industrial Standards (JIS),
past research results, and results in other prefectures.
(iv) Technical consultation and advice—SMEs can consult withkosetsushi experts regarding any technical problem in products,
production process, or product development.
(v) Technical training and seminars—in order to enhance thecapability of engineers engaged in R&D at SMEs, training
and seminars are offered using kosetsushi’s classrooms andequipment. Details of programs can be viewed in the website.
(vi) Dissemination of technological information—seminars onlatest technology and information useful for overcoming
technical problems or developing new products are offered at174

Chapter 7. Japanese productivity methods in the Vietnamese context
technology workshops. Some kosetsushi send e-newsletters tointerested SMEs.
Kosetsushi specializes in technical support only and does not offer
consultation in management, marketing, accounting, taxes, finance,labor relations, or other non-technical aspects of enterprises.
Technical centers similar to kosetsushi are also found in othercountries. Taiwan has 19 official research institutes including theIndustrial Technology Research Institute, the Institute for Information
Industry, and sectoral institutes for metal, automobile, bicycle,
precision machinery, etc. whose role is to help firms innovate and/or commercialize innovations through both official and privately
commissioned projects. Thailand has about ten specialized institutes intextile, food processing, automobile, electronics, sugar, steel as well as
in SME development, technical training, and management certification.
Among these, the Thai-German Institute has a large number of modern
equipment for training and processing; the Thailand Automotive
Institute works on policy formulation, supporting industries, standards,
certification, and training; and the Electrical and Electronics Instituteoffers product testing, measurement equipment calibration, andfactory quality inspection. In Africa, the Kenya Industrial Researchand Development Institute (KIRDI) has supported SMEs since 1914
with currently over 100 technical staff at the Nairobi headquarters,
the Kisumu regional office, and many satellite offices across Kenya. It
supports food, leather, textile, bio-fuels, cosmetics, and other natural
material-based production. KIRDI offers customized testing, training,product development, and production services for a subsidized fee. It isvery popular with SMEs. KIRDI targets to support 500 firms per year.
All of these institutes in Taiwan, Thailand, and Kenya are national
centers serving the entire nation, not centers under local governments
as in the case of Japanese kosetsushi.
In Viet Nam at present, there is no technical support center that offers
open, broad, and competent services to SMEs at reasonable cost in each
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VIET NAM PRODUCTIVITY REPORT
province or even at the national level. Some specialized analyses andtreatment are unavailable in Viet Nam and have to be conducted abroad.
Manufacturing firms, universities, and research institutes may havestandard production equipment such as lathe, machining, computerized
numerical control (CNC), pressing and stamping, casting, forging, heat
treatment, etc. as well as some basic testing devices, but few have alarge collection of highly specialized testing and analyzing equipment
in one place25.
To establish a network of kosetsushi in all provinces and major
cities in Viet Nam will be very costly and take much time. Moreover,unlike Japan, the pool of competent Vietnamese technical experts who
are willing to work at low salaries in any province is very small. Good
engineers often prefer to work for top companies in or around Ha Noi
or Ho Chi Minh City, or migrate abroad for high salary. Given thisreality, technical support centers in Viet Nam should first be establishedin Ha Noi and Ho Chi Minh City, to be expanded to other areas as morehuman and financial resources become available. Even though the initialline-up of testing equipment may be limited, these two centers should
complement and cooperate with each other, and they should also makearrangements with private firms, universities, and research institutes
that have special equipment which can be made available to SMEs.
MOIT has been studying the possibility of introducing kosetsushi in
Viet Nam with Korean support as well as by sending study missions toa number of kosetsushi in Japan.

7.9. FDI-DOMESTIC FIRM LINKAGE

In Japan, creation of business linkage between FDI and Japanesefirms has never been an issue because Japan did not actively invite
25

At SAITEC, in Saitama Prefecture, Japan, more than 120 types of analysis areavailable with specialized equipment in general analysis, material testing, precision
measurement, non-destructive testing, vibration, microbe, preparation, and so forth.

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Chapter 7. Japanese productivity methods in the Vietnamese context
FDI at any time in its history. Japanese industrialization was achievedby domestic firms with little FDI linkage or support. Outside Japan,
on the other hand, this linkage is critical for Japanese manufacturing
FDI, especially in Southeast Asia. Japanese firms generally seek longterm trust and relationship with reliable local partners, so the choiceof the right local partner is very important. Moreover, international
competitiveness requires component procurement in the host country
with high quality, low cost, and quick delivery (the QCD requirement)
instead of importing them with long lead-time and added transport (andtariff) cost. For survival and competitiveness, Japanese manufacturingfirms seriously look for competent local component suppliers. If local
suppliers are not strong enough, Japanese firms often coach them until
they become more effective (see Section 7.10 for supporting industry
promotion).
For these reasons, Japanese firms have an incentive to find andfoster competent local suppliers for their own benefit, and many local
suppliers also want to work with Japanese firms for upgrading technology
and joining global value chains. However, in a world with imperfect
information, finding the right partner is not easy on either side, requiringmuch time, energy, and cost as well as many trials and failures. Because
effective industrial linkage is important but difficult to realize, governmentis justified to intervene and facilitate matching activities.
There are two types of FDI-local firm matching. The first is
procurement of materials and components between two independent
firms (a buyer and a supplier). The second is finding an appropriate
long-term business partner for joint venture, production cooperation,or long-term contract that go beyond simple component procurement.
Needless to say, the second matching is deeper, more difficult, and moretime-consuming than the first.
Government can promote matching in three ways. First, it can guide(or require) FDI firms to find, support, and transfer technology to local
partners as a condition for granting an investment license or an incentive.
Second, it can run official matching services through trade fairs, reverse
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trade fairs, matching events and seminars, maintenance of a supplier
database, responding to individual inquiries, and so on. Third, it can
subsidize, reduce tax, or otherwise incentivize FDI firms that train andwork substantively with local firms. The first method is sometimes used,
for example in China26 and past Malaysia (see below), but forcing foreign
firms to work with local firms (especially when the latter’s capacity islow) generates discontent and refusal from FDI, and usually fails. Thus,
official matching should be done in the second (direct support) or third(indirect support) way so linkage occurs willingly rather than coercively.
Among ASEAN members, Thailand offers the most advanced(though not perfect) form of official linkage promotion. Figure 7.5
illustrates the policy network for linking Thai and Japanese firms. The
Board of Investment (BOI, an investment agency under the Prime
Minister) and the Ministry of Industry (MOI) are the key official
actors. They flexibly coordinate activities of their affiliated agencies
as well as private bodies such as the Alliance for Supporting Industries
Association (A.S.I.A.) which is an umbrella organization for 12 Thai
industrial associations. This network is a loose one without formal
instruction or explicit rules. Each member organization performs its
tasks separately, and refers client companies to other organizations
for services not rendered by itself. Personal relations among officials
and experts at various organizations ensure the quality and speed ofcollective services. Loose working style such as this is universallyobserved in the Thai government, not just linkage promotion.

26

China has been able to force FDI to transfer technology because foreign investors
often accept undesirable conditions for the privilege of entering China’s hugemarket. This advantage is unique to China, and a country with an “average” market
size, including Viet Nam, cannot avail itself of this bargaining strategy. The US
government severely criticizes this Chinese practice, which has become a principle
cause of the US-China trade war.

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Chapter 7. Japanese productivity methods in the Vietnamese context
Figure 7.5. Thailand: network for linking Thai and Japanese firms

Note: this policy network was created when BOI was placed under MOI at the time of Prime
Minister Yingluck Shinawatra.
Source: Thai BOI slide presented in May 2013.

Within BOI, the BOI Unit for Industrial Linkage Development(BUILD) specializes in matching between FDI and Thai firms. Thisunit, created in 1992, provides one stop service for FDI firms with local
procuring needs or in search of local partners. Main activities of BUILD
are as follows.
(i) Sourcing service—BUILD provides free service to help both Thaiand foreign buyers locate parts and components in Thailand.
When an inquiry is received from a buyer, BUILD announces
required product specification and volume in its website andsolicits application from Thai suppliers. One-on-one meetings
can also be arranged. Inquiries from buyers are received via
email and phone as well as through other Thai bodies working
with foreign buyers including BOI’s Tokyo and Osaka offices.
(ii) SUBCON Thailand—this is a large regional subcontracting
exhibition for industrial components and business matchmaking.
It is organized in Bangkok jointly by BOI, the Thai Subcontracting
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Promoting Association, and UBM Asia (trade fair organizingfirm) in May every year around the same time as Intermach, alarge machinery exhibition.
(iii) ASEAN Supporting Industry Database—this is an e-service
that lists manufacturers of parts and components in the ASEAN
member countries on the internet for global access. BUILD is
responsible for maintaining this regional database in Thailand
which has the largest entries among ASEAN members.
Information includes company profile, investment profile,
employment, customers, products, capacity, processes, rawmaterials, and available machinery and equipment.
(iv) Vendors-Meet-Customers Roadshow—this program assists
Thai part suppliers to participate in overseas trade fairs forwidening their vision, knowledge, and linkage.
BUILD has one director and about ten staff members, with eachstaff assuming responsibility for supporting assigned buyers. According
to the BUILD director, business matching is not an easy task, andpartner search is more difficult than finding local inputs. It sometimes
takes more than a year to locate suitable partner candidates. BUILD
arranges many types of bilateral business partnership including joint
venture, OEM, patent use, and production contract. BUILD does nothave precise information on the number of procurement inquiries
received or successful cases among them. However, about half of the
FDI firms that make inquiries subsequently send a thank-you email andreport the progress to BUILD.
In Malaysia, the Vendor Development Program (VDP), started in
1988, designated Proton, a state-owned national car company, to be an“anchor firm” which was obliged to purchase as many components as
possible from local (Bumiputra) suppliers, offer technical assistance,
and introduce government loans to them. By 2002, anchor firms wereexpanded in number to 85 firms including Malaysian, Japanese, andAmerican companies, and 296 vendors (local suppliers) were registered.
However, foreign assemblers were not enthusiastic about being required
to buy from local vendors which lacked sufficient technology. Their
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Chapter 7. Japanese productivity methods in the Vietnamese context
participation was forced by the request of the Malaysian government
rather than voluntary. VDP was partially successful in the automotive
sector thanks to the existence of Proton and Produa, another state-owned
car maker, but much less successful in the electronics sector where FDI
firms dominated. FDI firms do not like forced localization effort.
Malaysia renewed the policy by introducing the Industrial Linkage
Program (ILP) in 1995, which was a policy instrument to carry out
the Second Industrial Master Plan 1996-2005 with the establishment of
the Small and Medium Industries Development Corporation (SMIDEC,
now renamed to SME Corp. Malaysia). SMIDEC provided (i) “pioneer
status” (standard investment incentive in Malaysia) with five-year
corporate income tax exemption or 60% investment tax allowance,(ii) subsidies for eligible anchor firms, (iii) business matching using
the National SME Database, the SMEinfo Portal, and the SME
Competitiveness Rating for Enhancement (SCORE), and (iv) a support
package consisting of factory site provision, R&D, technology
upgrading, and export market development. Firms eligible for ILP wereexpanded to non-Bumiputra SMEs so long as their Malay capital was
60% or greater. However, Malaysia subsequently abandoned linkage
promotion and began to support value-creating Malaysian SMEs whichwere independent from FDI or large domestic firms.
In Viet Nam, annually in Ha Noi or Ho Chi Minh City, various trade
fairs are organized to match buyers and suppliers. Reverse trade fairs,
where FDI firms display components they want to purchase domestically,
are also held. JETRO has a list of Vietnamese component suppliers thatpossess adequate technology or have been improved through Japanesecooperation. Recently, JICA and the World Bank separately launched
new projects for upgrading Vietnamese suppliers and linking them withforeign buyers. Samsung and the Korean government, also separatelyfrom each other, assist supporting industry development27. In the South,
27

Korean organizations, including the Korea Trade-Investment Promotion Agency(KOTRA), the Korea International Cooperation Agency (KOICA), and chaebols(large private business groups) such as Samsung and LG, tend to work independently
from each other rather than “ALL KOREA.”

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sophisticated matching between Japanese and Vietnamese SMEs
before a head-to-head meeting was also tried28. Overall, however, Viet
Nam’s linkage policy remains fragmented and less systematic than in
Thailand or past Malaysia. Matching events usually ends with businesscard exchange without securing new deals. Viet Nam must not only
strengthen its linkage policy but enhance the capacity of Vietnamese
SMEs so they will acquire skills and technology demanded by FDI.

7.10. SUPPORTING INDUSTRY PROMOTION POLICY

Susono sangyo (supporting industries) is a Japanese term that refers topart and component suppliers located in the home country (not imported
parts and components) that support production of large assembly firms
in automotive, electronics, and other mechanical sectors. Historically,
the most important laws for Japanese supporting industry development
were the Provisional Act to Promote Machinery Industry (Kishin-ho) in
1956 and the Provisional Act to Promote Electronics Industry (Denshinho) in 1957. As the names indicate, these were time-bound laws forfive years and each was renewed two times until 1971. The Japanese
government made it clear that these measures were only for limited
time during which Japanese supporting industries were expected to
grow and achieve global competitiveness. After that, support would be
withdrawn. The years in which these laws were in effect, from 1956/57
to 1971, coincided with Japan’s post-World War II high growth era with
rapid industrialization.
28

A Japanese prefecture sent a list of SMEs to Viet Nam with detailed information
on what type of partnership each desired. For each, a list of potential firms was
prepared on the Vietnamese side. Emails were exchanged between candidate
partners in Japan and Viet Nam, with a Japanese-Vietnamese translator translatingeach email in both directions. By the time Japanese SMEs visited Ho Chi Minh
City, sufficient information had already been gathered and firms could enter
concrete negotiations for partnership. This pilot case proved that good preparation
could produce effective matching. However, the method was very costly, laborintensive, and time-consuming.

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Chapter 7. Japanese productivity methods in the Vietnamese context
Kishin-ho and Denshin-ho had almost identical contents. The basic
thrust of these laws was combining technology support by the Ministryof International Trade and Industry (MITI) with management supportand investment loan provision by the Ministry of Finance (MOF) and theJapan Development Bank (JDB) under MOF. By integrating technical,
managerial, and financial support in one mechanism, eligible SMEs
could receive comprehensive support for investing in new technology
and attaining excellence (Figure 7.6). The typical implementation
sequence ran as follows.
(i) The Machine Industry Deliberation Council of MITI identifies
key components and revises promotion programs annually.
(ii) MITI invites and screens applications from SMEs.
(iii) MITI coaches SMEs on production plan, equipment choice,purchase negotiation with equipment producers abroad, andother technical matters so applications are improved.
Figure 7.6. Integrated SME support under Kishin-ho and Denshin-ho

Source: Prof. Akira Suehiro’s 2006 lecture in Ha Noi, redrawn by the GRIPS Development Forum.

(iv) MITI sends selected applications to JDB or the Japan FinanceCorporation for SME (JASME) for additional scrutiny, after
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VIET NAM PRODUCTIVITY REPORT
which the financial institution provides management advice andinvestment loans to eligible SMEs.
(v) Private commercial banks also lend willingly to SMEs which
receive advice and loans from these public banks.
A few remarks are in order. First, MITI and MOF were not neutral
referees but friendly coaches offering hands-on advice to aspiring SMEs
throughout the application and implementation stages. Firms rejected in
the first round could apply again after improving their documents basedon official instruction29. Second, unlike Southeast Asia today, Japan’s
supporting industries were made up of domestic firms alone and did notinclude FDI component suppliers. As a result, the core policy objective
was assisting the purchase of appropriate equipment embodying
new technology, around which technical, managerial, and financial
supports were arranged. Japan did not need tax incentives to attract
new investors or linkage promotion with FDI, because FDI was not acontributor to Japan’s high growth era. Third, these laws had powerful
effects on modernizing Japanese supporting industries which wereoriginally regarded as weak, outdated, and costly. This in turn bolstered
the competitiveness of large automotive and electronic assemblers
which procured components from improved domestic suppliers. This
also coincided with a period of general trade liberalization under the
GATT Kennedy Round, which exerted external pressure, especially inthe 1960s, to produce better and cheaper components.
In Thailand, on the other hand, supporting industry promotion has
been closely related to FDI attraction and linkage. The need for thispolicy was keenly felt in the late 1980s with the arrival of a large waveof Japanese manufacturing firms. Absence of Thai component supplierswith high quality, low cost, and on-time delivery (QCD) was keenly
29

A similar coaching approach is taken in Taiwan’s Industrial Projects, a competitive
program by the Ministry of Economic Affairs (MOEA) to subsidize commercializationof R&D. Sectoral technical institutes under MOEA help Taiwanese SMEs from project
formulation to subsidy application and implementation, with assigned officials working
closely with targeted SMEs for years until satisfactory results are obtained.

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Chapter 7. Japanese productivity methods in the Vietnamese context
felt, which was detrimental to Thailand’s industrialization. Japanesefirms, MITI, and JICA began to teach Thai workers and Thai suppliercompanies. Meanwhile, the Thai Ministry of Industry (MOI) adopted
a step-by-step approach to the capacity building of Thai supporting
industries. When private firms were weak and small in number, thegovernment directly intervened to guide them and create new support
systems such as 5S, kaizen, and shindan. As private capacity graduallyrose, official hands were withdrawn, and private agents took over.
Specifically, Thai policy development went as follows.
In 1988, Thailand established the Metal-working and Machinery
Industries Development Institute (MIDI) with JICA technical cooperation,and MOI officials began to teach SMEs through MIDI. In 1996, MIDI
was upgraded to the Bureau of Supporting Industry Development (BSID)
with a higher organizational status and broader mandate including plastic
and packaging sectors as well as industrial linkage. This was a good
example of scaling up and institutionalizing the pilot project (supported
by JICA cooperation) by the ownership of the Thai government. Several
more industrial institutes were established under MOI including the ThaiGerman Institute (1992), the Thailand Automotive Institute (1998), theElectrical and Electronics Institute (1998), and the Iron and Steel Institute(2000), which were initially funded by government budget or foreignaid, but currently operate as autonomous and financially self-supporting
NPOs. In 1999, JICA began a five-year program to create a shindan
system in Thailand and produced 450 Thai shindanshi as new experts
to support SMEs (Section 7.4). Since then, Thai universities and private
sector have taken over the role of training shindanshi whose current
number is uncertain but surely in thousands.
In early days, BSID staff directly provided technical and managerial
support to individual companies. When the number of Thai supporting
industry firms grew to about 1,000, BSID created and managed several
thematic “forums” (design, metal, machinery, foundry, etc.) with BSID
serving as their coach as well as secretariat. Over time, these forums
grew to become truly privately-run industrial associations. There were
twelve such industrial associations created by BSID, now providing
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VIET NAM PRODUCTIVITY REPORT
technical support and training to member firms without BSID’s help. In
2008, the Alliance for Supporting Industries Association (A.S.I.A.) wasestablished, again with the guidance of BSID, as an apex organization
to coordinate among existing supporting industry associations, which
now boast a total of over 15,000 member firms.
In Malaysia, supporting industry promotion in the past focusedon providing tax incentives for eligible manufacturing projects andfacilitation of FDI-local firm linkage.
For tax incentives, the main instruments were pioneer status (timebound corporate income tax reduction) and investment tax allowance(offsetting taxable income by eligible capital expenditure) as well as
exemption from import duty, sales tax, and excise duty. The Malaysian
Investment Development Authority (MIDA) publishes a continuously
updated list of promoted activities and products which include many
supporting industry products. Application and approval processes are
standardized, transparent, and relatively quick. MIDA’s relevant industrial
division first reviews the application, whose result is sent to the MIDA’s
weekly Action Committee on Industry for deliberation and decision. To
receive any incentive, the project must be truly manufacturing (not justtrading), value-adding, technology upgrading, and/or linkage forming.
Malaysia in the 1990s also made much effort to foster linkage
between local component suppliers (“vendors”) with FDI or large
state-run assemblers. The principle programs were the Vendor
Development Program (VDP) introduced in 1988 and the Industrial
Linkage Program (ILP) introduced in 1995-96. Subsequently, however,Malaysia abandoned linkage policy and replaced it with the promotionof autonomous and globally competitive SMEs without ties with FDI orlarge state-owned corporations (section 7.9).
These reviews show that each country adopts different methods offostering supporting industries according to initial capacity as well associal and historical conditions. Viet Nam is a late starter in supporting
industry promotion, and the Vietnamese term “công nghiệp hỗ trợ”and its meaning were popularized only in the early 2000s. Since then,186

Chapter 7. Japanese productivity methods in the Vietnamese context
the term has been frequently talked about in media, trade fairs, andsymposiums but there has been little effective policy action to promoteit. Laws and regulations were issued and revised, MOIT was designatedas a responsible ministry, and assistance has been offered by Japan,
Korea, the World Bank, and many FDI firms. However, Viet Nam’s
effort to develop supporting industries has been limited and scatteredwithout a clear target or an integrated framework, and therefore has
not reached all manufacturers in the country. Globally competitive
Vietnamese suppliers are relatively rare even after a quarter century
of vigorous globalization and industrialization. Thailand had 1,000
FDI-linked suppliers when the initial policy phase was completed, andcurrently has about 2,300 competitive suppliers. Viet Nam’s supporting
industry programs need a serious revitalization.
Supporting industry promotion must mobilize many productivity
enhancing tools explained in this chapter. Because of latecomer
advantage, Viet Nam can learn from past successes and failures of othernations and create a mechanism most suitable for its own conditions.
Experiences of Japan, Thailand, and Malaysia cannot be copied directly
to Viet Nam due to different circumstances, but many hints are available
for building the Vietnamese system. The Japanese case suggests thatthe ultimate goal should be an integrated support in management,
technology, and finance under close cooperation of relevant ministries
and agencies. It also points to the usefulness of having a temporary law
to execute this task. Thailand teaches the importance of phasing policies
from direct official guidance to private initiative as domestic capacity
rises. Malaysia shows that transparent and easy-to-use incentives are
essential. Viet Nam can selectively combine relevant aspects of thesepolicy lessons, and also incorporate several productivity tools discussed
above (5S and kaizen, handholding, shindan, kosetsushi, linkage,and others) to create a truly effective national system for promoting
supporting industries. The current system is too narrow in scope andcumbersome in procedure for broad impact.
187

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VIET NAM PRODUCTIVITY REPORTBa bộ và 18 tỉnh thành bị phê bình chậm ban hành kế hoạch thực hiệntái cơ cấu [Three Ministries and 18 Provinces were Criticized forSlow Implementation of Restructuring Plans] (2018). Accessedon January 8, 2019 at: https://baomoi.com/ba-bo-va-18-tinhthanh-bi-phe-binh-cham-ban-hanh-ke-hoach-thuc-hien-tai-cocau/c/28170043.epi

200

APPENDICESAPPENDIX 1. ISSUES ON DATA AND ESTIMATION OF COEFFICIENTS IN THE TFP MODELThe General Statistics Office (GSO) data are used for value added,
capital, and labor of the entire economy and 1-digit level industries
for the period 1991-2019. The data are classified into three economic
sectors of agriculture, forestry and fishery; industry and construction;and services, and by type of ownership including the state sector, thenon-state sector, and the FDI sector. The output of the entire economy(Y or GDP) is calculated in Vietnamese dong at the constant 2010 price.
Labor (L) is the number of persons employed in a specific year.
The Capital Department of GSO provides the data for capital (grosscapital formation) and labor, both of which are used directly in the growthaccounting method. The capital data of GSO is adjusted to constant 2010
price for the whole period 1991-2019. By using this data, the authors do
not need to separately calculate the real value of capital based on someassumption on the depreciation rate of assets.
Besides that, latest GDP data provided by the Capital Department of
GSO newly applies the United Nations standard in GDP calculation byadding the category called “Products taxes minus subsidies on production”.
This change creates a data discrepancy between GDP and GVA (Gross
Value Added) starting from 2010. In order to remove this artificial gap
as much as possible, the values of “Products taxes minus subsidies on
production” for 2010-19 were re-allocated to the value added of selected
sectors, as explained below, so our measurement of labor productivity
201

VIET NAM PRODUCTIVITY REPORT(GDP per worker) remains comparable over the long run, especially for
shift-share analysis. There are two assumptions in our adjustment. First,
we assume that the value of products taxes less subsidies on production is
proportional to the sector’s total value-added, and is therefore allocatedaccording to the relative weight of each relevant sector. Second, only
industry and construction and services as well as the non-state sector
and the FDI sector are given this adjustment. Agriculture, forestry, andfisheries and the state sector are treated differently by the government
from these sectors and are generally not subjected to indirect taxes andsubsidies as defined here.
There are differences in estimated TFP between this Report andVu Minh Khuong (2014, 2016). They may arise from the following two
reasons.
First, there is a data problem associated with the definition of capitalused in Viet Nam’s statistics. According to GSO, “Investment capital ismeasured by social development investment capital, which is the entire
amount of money spent to increase or maintain production capacity andresources to improve the material and spiritual living standards of thewhole society in a certain period of time, including: investment capitalto create fixed assets, investment capital to increase mobile assets,
capital to buy rare and precious assets, reserve gold in the form of goods
and reserve goods in the population and other development investment
capital to improve people’s intellectual standards, enhance social
welfare, improve the ecological environment, support people, etc.”
This measure of investment capital is used to calculate gross capitalformation instead of capital stock. In other words, GSO cannot separate
capital stock from the measurement of capital input flow. In this dataset,
after the Asian financial crisis of 2008, the Vietnamese Government
introduced stimulus packages that might be included in the capital stock
data, leading to an increase of capital in 2009 and 2010. These packages
were ended in 2011, resulting in a fall of capital stock in that year.

202

APPENDICES
Figure A1.1. Gross capital formation(VND billion in constant 2010 price)
5,000,000
4,500,000
4,000,000
3,500,000
3,000,000
2,500,000
2,000,000
1,500,000
1,000,000
500,000
0

Source: GSO. The red circle shows irregularity explained in the text.

Another issue is related to the income share of capital. Vu Minh
Khuong estimates this ratio to be around 0.5, which we think is muchhigher than the typical income share of capital in a developing country
like Viet Nam. In this Report, the ratio of 0.32 is adopted for the entire
economy (Table A1.1). This income share of capital is estimated by
the regression of GDP on capital and labor for the period 1990-2019
using GSO data. A lower income share of capital produces a higher
contribution of TFP to labor productivity growth, as this Report shows.
If we change this ratio to 0.5, the contribution share of TFP becomesmuch lower and very close to the results of Vu Minh Khuong.
Table A1.1. Estimates of income share of capital

SectorEstimated income share of capital
0.32

Agriculture, forestry and fishery

0.27
0.27
0.12

The whole economy
By economic activities
Industry and construction
Services203

VIET NAM PRODUCTIVITY REPORT
By type of ownershipState sector

0.32
0.25
0.42

Non-state sector
FDI sector

Source: authors’ estimates based on GSO data for the period 1990-2019.

APPENDIX 2. GDP GROWTH DECOMPOSITION USING GROWTH ACCOUNTING METHOD

The basic results of GDP decomposition into the contributions ofcapital, labor, and TFP for Viet Nam are presented in tabular form (theunit is percent).
Period1991-20191991-1995
1996-1999
2000-2007
2008-20122013-2019

GDP growth
6.91
8.18
6.99
7.19
5.79
6.46

Contribution of inputs
Capital
Labor
5.23
1.47
11.38
1.60
8.92
1.47
4.81
1.97
1.43
1.77
2.58
0.60

TFP
0.22
-4.80
-3.39
0.42
2.59
3.28

Source: authors’ calculation based on GSO data for the period 1991-2019.

APPENDIX 3. LABOR PRODUCTIVITY FROM THE PERSPECTIVE OF ENTERPRISES30

To supplement and contrast with the results of Chapter 2, selected
findings of JICA (2017b), which explored the relationship between
labor productivity and wage, and Nguyen Tien Dung et al. (2017) arepresented here. Labor productivity is defined as value added per worker.
The value added in each industry is calculated using the informationfrom enterprise surveys, as follows.
30

This appendix is based on selected findings of JICA (2017b).

204

APPENDICESVA=YL + INS + PRF + DEP1 - DEP0
Here VA is value added; YL is labor income consisting of salary, bonus,
and subsidies; INS is payments on social, health, and unemployment
insurance; PRF is firms’ profits; DEP1 and DEPo and are the values ofaccumulated capital depreciation at the end and beginning of the period.
License taxes, taxes on the use of natural resources, and other business
fees, which are not available in the enterprise survey, are not included in
the calculation of value added. These taxes and fees are relatively small
and their omission should not affect the results significantly.
Two measures of value added are adopted. The one excluding
profits and losses arising from financial and asset-related activities, andthe other including them. For each economic sector and industry, laborproductivity is equal to total value added divided by total employment.
The real value of labor productivity is obtained by using industrial GDP
deflators.
Table A3.1 shows the growth rate of labor productivity in nominal
and real terms from 2004 to 2015 by firm size. Small and medium
enterprises experienced slightly higher productivity growth than large
or micro enterprises.
Table A3.1. Labor productivity growth by firm size, 2004-15(Percent per annum)
Labor productivity
Nominal

Real

14.52

4.96

Micro

15.43

5.41

Small

15.60

6.64

Medium

15.71

6.52

Large

14.93

5.20

Total
By firm size

Source: Nguyen Tien Dung et. al (2017).

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VIET NAM PRODUCTIVITY REPORT
Table A3.2. Labor productivity growth by ownership type, 2004-15(Percent per annum)

Period 2004-15
Total
FDI
PrivateState
Subperiod 2004-10
Total
FDI
PrivateState
Subperiod 2010-15
Total
FDI
PrivateState

Nominal growth rate
I
II

Real growth rate
I
II

14.52
10.12
17.63
19.96

12.52
7.66
16.60
17.61

4.96
0.71
8.50
9.74

2.84
-2.04
7.49
7.56

19.43
8.93
25.30
29.72

14.97
3.94
20.78
26.94

7.22
-3.13
14.07
16.72

2.68
-8.42
9.90
14.07

8.89
11.56
9.05
9.21

9.65
12.30
11.78
7.32

2.32
5.51
2.17
1.91

3.04
6.21
4.68
0.24

Note: (I) financial and asset-related profits are not included in value added, (II) they are included in value added.
Source: Nguyen Tien Dung et. al (2017).

Table A3.2 reports the average growth rates of per-worker value
added by economic sector. Using the first measure of value added (I) withfinancial and other profits excluded, labor productivity grew by 4.9% peryear between 2004 and 2015. This is about 0.5 percentage point higher
than estimation using the national account statistics. Labor productivity
growth was high in the latter half of the 2000s but significantly slowed
down subsequently. It reached 7.2% in the first subperiod but dropped
to 2.3% in the second subperiod. The second measure of value added
gives a similar trend but it tends to produce lower estimates of laborproductivity growth.
206

APPENDICES
There are significant differences in labor productivity performanceacross economic sectors. Labor productivity growth was slower in the
FDI sector compared to the private and state sectors. At FDI enterprises,
value added per worker increased only 0.7% per year from 2004 to
2015. Those for the private and state sector were 8.5% and 9.7%,
respectively. These two sectors experienced a large productivity gain in
the first subperiod but productivity growth fell in the second subperiod.
The low productivity growth in the FDI sector was attributed partly
to the sharp contraction in the mining sector, especially crude oil and gas
production. This industry declined sharply from its peak in 2004. Falling
output and prices severely affected oil and gas extracting enterprises,
and FDI enterprises in particular. Our decomposition analysis showsthat productivity gain from the manufacturing sector is largely offset
by the loss in the mining sector. Besides that, the shift toward morelabor-intensive activities negatively affected labor productivity despite
rapid growth in output. These results confirm the finding in Chapter
2 of this Report. However, Nguyen Tien Dung et al. (2017) reportsthat manufacturing FDI performed well, and they even experienced arelatively high productivity growth in recent years. This is somewhat at
odds with Chapter 2 of this Report.
In the state sector, high productivity growth was largely driven
by investment. Between 2004 and 2015, the capital-to-labor ratio
increased at the annual rate of 15.8%, which was considerably higher
than the annual productivity growth of 9.7%. Investment also played an
important role in boosting productivity in private enterprises, where thecapital-to-labor ratio increased at the annual rate of 9.9%. By contrast,
the growth of the capital-to-labor ratio in the FDI sector was far lower,
averaging only 0.4% a year during the same period. This is consistent
with the finding of Chapter 2 of this Report that the activities of FDI
shifted significantly toward more labor-intensive operation in the early
2000s.

207

VIET NAM PRODUCTIVITY REPORT
Table A3.3. Labor productivity growth by industry, 2004-15(Percent per annum)
Labor productivity growth
Nominal
Real
14.52
4.96

Total
By economic sectors
FDI
PrivateState
By firm size
Micro
Small
MediumLarge
By industries

Agriculture
MiningManufactures
Public utilities
Construction
Trade
Hotel
Posts & telecommunications
Transportation
Other services
Within manufacturing
Chemical, rubber, plastics
Electronics
Food processing
Footwear
Garment
Machinery
MetalsTransportation means
Woods and furniture
Other manufactures

10.12
17.63
19.96

0.71
8.50
9.74

15.43
15.60
15.71
14.93

5.41
6.64
6.52
5.20

8.73
6.58
16.36
20.11
15.51
15.87
11.39
3.61
12.08
12.07

-2.33
-7.62
9.43
9.43
6.44
5.04
0.99
-0.67
3.98
-0.63

17.87
15.89
17.35
15.82
16.52
16.69
13.97
14.92
15.70

10.85
8.99
10.36
8.92
9.58
9.75
7.18
8.08
8.82

15.79

8.90

Notes: total labor income, consisting of all wage income, subsidies, bonus and payments on socialand health insurances and unemployment insurance, are used. Financial and asset-related profits are notincluded in value added.
Source: Nguyen Tien Dung et al. (2017).

208

APPENDICES
Manufacturing, water and electricity, and construction experienced
the highest productivity growth of 9.4%, 9.4%, and 6.4% per annum,
respectively. Hotels and restaurants and transportation exhibited low
productivity growth. Labor productivity fell in mining, agriculture, post
and telecommunication, and other services. Within manufacturing, mostsubsectors registered significant improvements in labor productivity. Foodprocessing, garment, footwear, machinery and equipment, and chemicals
exhibited high productivity growth, averaging between 9% and 10% a
year. Meanwhile, metals and transportation means had relatively low
productivity growth. A more detailed analysis of labor productivity in the
manufacturing sector, by ownership and subsector, is given Table A3.4.
Table A3.4. Labor productivity growth in manufacturing, 2004-15(Percent per annum)

Nominal

Real

13.99
14.01
14.47
15.45
14.42
15.72
11.02
10.04
10.58
15.43

7.21
7.23
7.66
8.58
7.61
8.83
4.41
3.49
3.99
8.56

13.37

6.63

18.29
20.21
19.36
19.04
17.21
17.78
18.35

11.24
13.05
12.26
11.96
10.24
10.77
11.30

FDI SECTOR

Total
Chemical, rubber, plastics
Electronics
Food processing
Footwear
Garment
Machinery
MetalsTransportation means
Woods and furniture
Other manufactures

PRIVATE SECTOR
Total
Chemical, rubber, plastics
Electronics
Food processing
Footwear
Garment
Machinery209

VIET NAM PRODUCTIVITY REPORT

Woods and furniture

16.70
19.68
19.69

9.76
12.56
12.56

Other manufactures

17.89

10.87

Woods and furniture

20.51
23.51
13.79
21.21
20.21
16.61
15.16
15.86
13.64
16.24

13.34
16.16
7.01
14.00
13.06
9.67
8.31
8.96
6.87
9.32

Other manufactures

20.51

13.33

MetalsTransportation means

STATE SECTOR
Total
Chemical, rubber, plastics
Electronics
Food processing
Footwear
Garment
Machinery
MetalsTransportation means

Notes: total labor income, consisting of all wage income, subsidies, bonus and payments on socialand health insurances and unemployment insurance, are used. Financial and asset-related profits are notincluded in value added.
Source: Nguyen Tien Dung et al. (2017).

In the FDI sector, high productivity growth is observed inelectronics, food processing, garment, and chemicals, but not in metals,
machinery, and transportation means. In the private sector, high laborproductivity growth was registered in chemical, rubber, plastics;
machinery; transportation means; and woods and furniture. In the
public sector, high labor productivity growth was observed in chemical,
rubber, plastics, and food processing.
Labor productivity growth computed by the enterprise survey
dataset in this appendix is about 0.5 percentage point higher than thosereported in this Report which uses national account statistics. However,
the general trends among economic sectors are quite similar. Thisappendix provided additional information on labor productivity by
210

APPENDICES
enterprise size and manufacturing subsectors. As in the main text, it was
found that FDI enterprises had significantly lower labor productivity
than those of the other sectors, while private enterprises had relatively
high labor productivity levels and more equal performance among
manufacturing subsectors.

APPENDIX 4. SECTORAL CONTRIBUTION TO OVERALL LABOR PRODUCTIVITY:
SELECTED COUNTRIES (%)

Supplementing Section 4.5 of Chapter 4, time-series details of sectoral
contribution to labor productivity for selected Asian economies aregraphically presented here.

10%(b) South Korea(a) Japan
14%

8%

12%

6%

10%
8%

4%

6%

2%

4%
0%

2%

-2%

0%
-2%

-6%

-4%
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017

1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017

-4%

(c) China
15%(d) Singapore
12%
10%
8%

10%

6%
4%

5%

2%
0%

0%

-2%
-4%

-5%

-8%

1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017

-10%

1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017

-6%

211

1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017

212
25%

(i) Cambodia

20%

15%

10%

5%

-5%
0%

-10%

-15%

-20%

-25%

Source: authors’ calculation based on APO data.
2017

2015

2013

2011

2009

2007

2005

2003

2001

1999

1997

1995

-15%
1993

-5%

1991

5%

1989

(g) Philippines

1987(e) Malaysia

1985

-10%

1983

-2%

1981

0%

1979

2%

1977

-5%

1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017

0%

5%

1975

10%

1973

15%

1971

2017

2015

2013

2011

2009

2007

2005

2003

2001

1999

1997

1995

1993

1991

1989

1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017

20%

1987

10%

1985

1983

1981

1979

1977

1975

1973

1971

VIET NAM PRODUCTIVITY REPORT

12%(f) Thailand

10%
8%

6%

4%

-4%

-6%

-8%

15%

(h) Indonesia

10%

0%
5%

-5%
0%

-10%
-10%

-15%

-20%

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