Viet Nam
Productivity
ReportPreliminary Final Edition

2020

VIET NAM PRODUCTIVITY REPORT

Preliminary Final Edition
September 2020
This English edition is complete except we are awaiting data updates in Chapters 2, 3 and 4, andsome style and editorial matters also need to be attended. We print this preliminary edition forcirculating our key findings which will in all probability not be affected significantly by data
updates. This edition is open to public but citation should mention its preliminary nature. A fullreport will be published in due course, in Vietnamese and English, to replace this edition.

ACKNOWLEDGEMENTS
This Report was prepared by researchers of the Viet Nam Institute for Economic and Policy
Research (VEPR), a research institute at the Viet Nam National University in Hanoi, in
cooperation with the GRIPS Development Forum (GDF) of the National Graduate Institute for
Policy Studies (GRIPS) in Tokyo. The drafting team consisted of Dr. Nguyen Duc Thanh, Dr.
Pham The Anh, Ms. Pham Thi Huong, and Ms. Bui Thi Thuy Linh (all from 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 ofSingapore), Ms. Pham Thi Tuyet Trinh (Cornell University, USA), and Ms. Hoang Thi Chinh
Thon (National Economics University, Hanoi) for their valuable comments in the process ofcompleting this study. The authors benefited greatly from the feedback from the participants ofthe consultation workshop organized in 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 of Government 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) andhis research team for cooperating with us in organizing workshops and key events related to
productivity. We would like to acknowledge the continuous support and substantive discussion
by Ambassador Umeda Kunio, Mr. Watanabe Go, Mr. Yamamoto Kohei, and other members of
the economic team of the Japanese Embassy in Hanoi. Ms. Shimamura Masumi at Mitsubishi
UFJ Research Consultant provided information on Singapore’s productivity movement in
Chapter 6. Ms. Vu Thi Thu Hang (VEPR) and Ms. Iizuka Mieko (GDF) provided valuable andefficient administrative, logistic, and editing support in producing this Report. Finally, theauthors thankfully acknowledge the financial support of the JSPS KAKENHI Grant Number
JP17K02006, the Ministry of Economy, Trade and Industry (METI) of Japan, and the Japan
International Cooperation Agency (JICA).

iABOUT THE AUTHORS
Ohno Kenichi is a professor at the National Graduate Institute for Policy Studies. He was at theInternational Monetary Fund, Tsukuba University, and Saitama University before taking up his
current position. He specializes in comparative research on industrial strategies in Asia andAfrica. He conducts policy dialogue with Ethiopia and Viet Nam. He received a PhD in
Economics from Stanford University, USA, in 1987. His recent books include Learning toIndustrialize (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 chief adviser of the Vietnam Institute for Economic andPolicy Research (VEPR), the VNU University of Economics and Business. He was formerly
president of VEPR and member 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 seriesof Vietnam Annual Economic Reports published since 2009.
Pham The Anh is an associate professor at the National Economics University. He has been
Chief Economist of VEPR since 2018. He received an MSc and a PhD in Economics at The
University of Manchester in 2003 and 2007, respectively.
Pham Thi Huong is a researcher of Microeconomic Research Team, VEPR. She received an
MSc in International Cooperation Policy from the Graduate School of Asia Pacific Studies at
Ritsumeikan Asia Pacific University in 2016.
Bui Thi Thuy Linh is a researcher at 4.0 Team, VEPR. She earned a Bachelor of Investment
Economics at the National Economics University in 2018.

ii

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 and how much is produced in terms of goods andservices 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 andmaterial input, productivity is low and the nation is likely to be trapped in either low or middle
income. There are some 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 muchhuman effort. But most other nations devoid of such given advantage, including Viet Nam, must
accumulate knowledge, skills, and technology to climb the industrial ladder, step by step, to highincome. For such nations, attaining high income and improving productivity are essentially thesame 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 from deepening 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 sufficient competitive advantage to copewith the global market. This Report studies Viet Nam’s productivity focusing on laborproductivity and total factor productivity (TFP). It analyzes the process of productivity growthof the entire economy, across sectors and over time, as well as by making comparisons withneighboring countries.
Two remarks are in order. First, we need to differentiate the level and the growth rate ofproductivity. Both are important but point to different aspects of economic performance, and wewill 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 this situation continues, it may takea very long time for Viet Nam to rise to high income. Growth must be accelerated from thecurrent low base.
Second, productivity is a quantity-based measure which asks how many goods andservices are produced per unit of input. In addition to quantity, 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 an advanced economy, andiii

professionally trained and innovative human resources are required to generate them.
Productivity, quality, and innovation 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 earlyindustrialization stage producing garment, shoes, and electronic devices for export under foreign
instruction and management, such as Viet Nam, must attain high efficiency to be integrated into
the global 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 mean quality 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 on 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 biotech, AI, IoT and Industry 4.0. These things will become critical when Vietnamese factories
operate at world-class efficiency and Vietnamese workers are well-trained and disciplined, andwhen Viet Nam is ready to move up from upper-middle income to high income.
Part I of the Report defines productivity and discusses issues related to the measurementof productivity (Chapter 1), then examines the past and current state of labor productivity in Viet
Nam from various angles at both the economy level and sector level (Chapter 2). Growthaccounting and shift-share analysis methods are used on the data from the General Statistics
Office (GSO), the Asian Productivity Organization (APO), and others to estimate the factors
contributing to Viet Nam’s labor productivity growth (Chapter 3). We also compare the statusof Viet Nam’s productivity with those of selected economies in Northeast Asia and ASEAN(Chapter 4). Viet Nam’s past and current policy efforts in improving labor productivity and totalfactor productivity (TFP) are reviewed (Chapter 5). Assessment of the current state ofproductivity 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 Japanese cooperation to introduceiv

globally acknowledged Japanese productivity methods to Viet Nam, with proper selectivity andadjustment. We believe this will become an important pillar of productivity enhancement in Viet
Nam if implemented effectively and sustainably. We examine general principles that need to befollowed 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 Cooperation Agency (JICA), the Japan
Productivity Center (JPC), and other 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 increase thatallows an economic take-off to high income. In absolute value (constant 2010 price), laborproductivity of the whole economy grew from 18.9 million VND per worker in 1991 to 54.4
million VND per worker in 2015, or by 2.88 times. Any rapidly industrializing economy isexpected to attain higher labor productivity growth than this within a quarter century. China,
which had labor productivity similar to Viet Nam in 1991, raised it by 8.9% annually or 7.8 times
by 2015. Thus, Vietnam’s past productivity performance was good but not spectacular. Becauseof 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, Vietnam steadily
eliminated barriers to market and decisively integrated into the international community. These
efforts were behind the initially remarkable growth in Vietnam’s labor productivity, whichpeaked at 7.13% in 1995. This was a reviving of economic growth from past suppression andreturning 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 businessactivities were removed. Meanwhile, labor force remained relatively stable in both quality andquantity. 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 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 intov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 and labor 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 89% in the period 2011-15,
while the contribution of capital intensity declined. The main engine of growth shifted fromheavy investment to true efficiency improvement. However, the reason for this desirable changeremains 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 (tertiary industry). Meanwhile, the agriculture, forestry and fishery sector (primaryindustry) had the lowest labor productivity growth as well as level. Even so, labor productivity
growth of manufacturing and construction, which together accounted for nearly 40% of GDP,was not spectacular by global standards, and it even began to decelerate around 2001 when Viet
Nam was still a low income country. After growing rapidly in the 1990s, manufacturing laborproductivity remained stagnant in the 2000s and 2010s. This slowdown was premature because
dynamism of the manufacturing sector should continue for at least a few more decades to takethe 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 even declining labor productivity of the FDI sector is surprising because FDI was
supposed to bring high technology and global competitiveness to Viet Nam and especially toVietnamese enterprises, which is clearly not happening. A large part of FDI inflow has been into
the manufacturing sector. The disappointing performance of labor productivity of the FDI sector
may largely explain why labor productivity of Viet Nam’s manufacturing has hardly risen since2001, and why Vietnamese enterprises are still unable to participate meaningfully in global value
chains. Suspicion is that the majority of foreign manufacturers regard Viet Nam as a location to
engage in unskilled labor-intensive production—sewing, food processing, parts assembly andother 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 bottomof the Smiling Curve, which illustrates high value 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 of state-owned enterprises. This process eliminated lowvi

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 the years (Chapter 2).
Fifth, the shift-share analysis shows that the driving force of labor productivity in the
period 1991-2015 was the within effect (improvement in each sector) though there was also asubperiod, from 2001 to 2010, when the shift effect (labor movement across sectors) was thedominant contributor. However, the shift effect recently subsided even though a large proportionof Vietnamese labor still remains in rural areas and engaged in low productivity agriculture, andindustrialization is far from complete. 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 labor requirement of globally competitive industries. Put morepositively, there is much room for Viet Nam to improve overall productivity by removing suchbarriers and stimulating labor mobility across sectors. Experiences of early industrializing
economies such as Northeast Asian economies and Singapore show that the within effect and theshift effect should both be dynamic and interact to sustain high productivity growth. In Viet
Nam’s development stage, which is lower middle income, both effects need to be greatly reactivated (Chapter 3).
Sixth, when compared with selected Northeast Asian and ASEAN countries, Viet Nam’slabor productivity is still very low despite reasonably high economic growth in the past two-andhalf decades. In 2015, 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 laborproductivity was the lowest in manufacturing; construction; and transportation, storage, andcommunications. It was the second lowest, only above Cambodia, in agriculture, forestry andfishery; electricity, gas and water supply; and wholesale and retail trade, repair of vehicles andhousehold goods, hotels and restaurants. Meanwhile, Viet Nam’s performance was closer to or
above average in mining and quarrying; financial intermediation, real estate, renting and businessactivities; and community, social and personal services (Chapter 4).
Seventh, Viet Nam has made policy effort to improve labor productivity by establishing
the Viet Nam Productivity Institute (VNPI) in 1997 and preparing conditions for national
productivity enhancement. 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 (2006-2015) expanded and prototyped additionalmodels. In 2010, National Program 712 targeted TFP’s contribution to GDP of at least 35% byvii2020, and this target was achieved already in 2018. After two decades of effort, a policy
framework has been laid and agencies and experts accumulated experience. Nevertheless,productivity movement in Viet Nam is still partial and fragmented, focusing only on the businesssector 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 offered through 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 Report lists ten Japanese productivity
methods which produced good results in Japan and many Asian countries and the rest of theworld—but not yet introduced to Viet Nam in earnest. Viet Nam should study them carefully andchoose 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 tostart with Japan because the Japanese government is ready to cooperate further, and the Japanesebusiness community is also willing. At the same time, the learning must not be passive but
effectively owned and promoted by the Vietnamese side. Viet Nam can learn technical aspects
of productivity from foreigners, but administrative and institutional mechanisms that spreadgood practices must be homemade because political, economic and social circumstances differ
from country to country. Copying foreign tools works only to a certain point, beyond which atruly 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).

viii

PART I
CHARACTERISTICS OF LABORPRODUCTIVITY PROGRESS IN VIET NAM

1

CHAPTER 1
DEFINITION AND MEASUREMENT OF
LABOR PRODUCTIVITY
Productivity is a key indicator of economic effectiveness, revealing how well the resources are
combined and utilized to achieve the desired and expected results (Bain, 1982). Productivity canbe 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 labor productivity. It is theratio of output of goods and services to labor input to produce such output. Another way tomeasure it is by way of capital productivity, which is the ratio between output of goods andservices to physical capital input. It is usually measured by the incremental capital-output 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 explainedby the quantity of various inputs used in production, showing effectiveness in the utilization of
inputs. Compared with the first two productivity measures, which are partial, TFP is acomprehensive 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, producing widelydifferent results across researchers.
Which measurement of productivity should be used depends on the purpose of researchand the availability of data. If there is doubt about the underlying growth process or if the dataof capital stock is unreliable, labor productivity is the most suitable measure to examine thetendency 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.
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 inconnection with the decomposition of labor productivity growth.
According to the International Labor Organization (ILO), economy-wide laborproductivity is the total amount of output (measured by GDP) produced by total labor input(measured by total number of employed person) in a specific reference period. The Organization2

of Economic Cooperation and Development (OECD) defines labor productivity as the ratio of
the output measured by GDP or total value added to total labor input measured in total hours
worked or total number of employed persons (OECD, 2001). Thus, labor productivity can becalculated 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 of international comparison and data availability.
Nonetheless, calculated labor productivity indicators may be influenced by the accuracyof data as well as the method of defining input and output. The first limitation relates to thedefinition 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 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 theother 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 statistical sources are used to measure it in different countries, which can impedeinternational comparability. In principle, the measurement of labor input should take into accountdifferences in workers’ education, qualification, skill, and experience. But in practice, only data
for number of hours worked or number of workers is available.
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 growth accounting method and the shift-share analysis method.

1.1 Decomposition of labor productivity growth
1.1.1 Growth accounting method
The neoclassical growth accounting framework was pioneered by Solow (1957) and has
been used extensively. In this framework, labor productivity 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 innovation). The Asian3

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) decomposeslabor productivity growth into three components: capital deepening, labor quality, and TFP
growth. They considered 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 laborproductivity which is accompanied by increased labor compensation. Vu Minh Khuong (2014)
likewise applies the three-way decomposition, in which labor productivity reflects improvement
in labor skills and proper matching between skills and jobs.
This research, however, uses the more common two-way decomposition of laborproductivity growth into capital deepening and TFP growth (Box 1.1) due to the limitation ofdata availability. Viet Nam lacks information on total hours worked or classification of labor by
education level and skills.

1.1.2 Shift-share analysis method
In this decomposition, productivity for the entire economy is the sum of the productivityof each sector weighted by sectoral employment share. However, labor productivity in eachindustry changes over time and workers also continuously move across sectors. In order to reflect
these two processes, the shift-share analysis method decomposes labor productivity 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 growth within individual
sectors on the economy-wide labor productivity. The shift effect measures the impact ofreallocation of labor to more (or less) productive sectors; productivity changes due to labormobility across sectors. The interaction effect captures the impact of labor reallocation on sectors
with growing productivity (not necessarily high productivity), 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 labor productivity indeveloping economies. It is the movement of labor from less productive sectors, typicallytraditional agriculture, to more productive 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 or4totally eliminated. Another problem is that, even if workers move from agriculture to
manufacturing or service sectors, they may continue to work with low labor productivity due tothe lack of basic knowledge and skills. This trend is further enhanced if manufacturing indeveloping countries is trapped in simple processing or assembly works which require unskilledlabor only. In such circumstances, contribution of internal labor migration to economy-widelabor productivity remains insignificant. Therefore, to accelerate labor productivity growth,developing countries need to improve productivity within each growing sector toward the levelof advanced 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 by worker training in knowledge and skills aswell as by technology transfer or purchase from foreign countries (Molnar & Chalaux, 2015).

5

Box 1.1 Decomposition of labor productivity by growth accounting method
Let the production function be:
𝑌 = 𝐴. 𝐾 𝛼 . 𝐿𝛽

(1.1)

where Y, K, L, A are output, capital, number of employed persons, and TFP, respectively.
Assuming constant return to scale, we have 𝛼 + 𝛽 = 1.
Dividing both side by L, we get𝑌=
𝐿𝐴.𝐾𝛼 .𝐿 𝛽
𝐿 𝛼+𝛽

𝐾 𝛼

= 𝐴. ( 𝐿 )
𝑌

(1.2)
𝐾

Defining 𝑦 = 𝐿 and 𝑘 = 𝐿 , then 𝑦 and 𝑘 are labor productivity per worker and the capitallabor ratio (average capital per worker). Equation (1.2) becomes:
𝑦 = 𝐴. 𝑘 𝛼(1.3)

Taking log and differentiating both side, we have
𝑙𝑛𝑦 = 𝛼𝑙𝑛𝑘 + 𝑙𝑛𝐴∆𝑙𝑛𝑦 = 𝛼∆𝑙𝑛𝑘 + ∆𝑙𝑛𝐴

(1.4)

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 a greater amount of capital for each worker, which improves economy-wide laborproductivity in proportion to the contribution share of capital (coefficient 𝛼) in the production
function. TFP growth enhances labor productivity growth by the ratio of one-to-one.

6

Box 1.2 Decomposition of labor productivity growth by 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.
𝑌

𝑌

𝐿

𝑗

𝑚

𝑃𝑚 = 𝐿𝑚 = ∑𝑛𝑗=1 (𝐿𝑗 ∗ 𝐿 𝑗 ) = ∑𝑛𝑗=1(𝑃𝑗 ∗ 𝑆𝑗 )
𝑚

(2.1)

where Y, L, and P (=Y/L) are output, number of employed persons, and labor productivity of sectorj (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 is
𝑃𝑚𝑡 = ∑𝑛𝑗=1(𝑃𝑗𝑡 ∗ 𝑆𝑗𝑡 )(2.2)

The increase in economy-wide labor productivity for year t relative to base year 0 is
𝑃𝑚𝑡 − 𝑃𝑚0 = ∑𝑛𝑗=1(𝑃𝑗𝑡 ∗ 𝑆𝑗𝑡 ) − ∑𝑛𝑗=1(𝑃𝑗0 ∗ 𝑆𝑗0 )(2.3)

Add and subtract ∑𝑛𝑗=1(𝑃𝑗𝑡 ∗ 𝑆𝑗0 ) , ∑𝑛𝑗=1(𝑃𝑗0 ∗ 𝑆𝑗𝑡 ), and ∑𝑛𝑗=1(𝑃𝑗0 ∗ 𝑆𝑗0 ) on both sides andrearranging, and dividing through by 𝑃𝑚0 , we have equation (2.4) that decomposes economy-widelabor productivity growth in year t relative to base year 0, as follows.
𝑡 −𝑃 0
𝑃𝑚
𝑚
0
𝑃𝑚

=

𝑡
0
0
∑𝑛
𝑗=1[(𝑃𝑗 −𝑃𝑗 )∗𝑆𝑗 ]
0
𝑃𝑚

+

0
𝑡
0
∑𝑛
𝑗=1[𝑃𝑗 ∗(𝑆𝑗 −𝑆𝑗 )]
0
𝑃𝑚

+

𝑡
0
𝑡
0
∑𝑛
𝑗=1[(𝑃𝑗 −𝑃𝑗 )∗(𝑆𝑗 −𝑆𝑗 )]
0
𝑃𝑚

(2.4)

On the right side of equation (2.4), the first component is the within effect, reflecting thecontribution of sectoral labor productivity growth to economy-wide labor productivity, assumingthat labor shares remain unchanged. An increase in sectoral labor productivity leads to an increasein 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 calledvertical economic development.
The second component is the shift effect, which measures the effect of labor reallocation acrosssectors, assuming that labor productivity in each sector remains unchanged. Aggregate laborproductivity increases thanks to the shifting of labor from low labor productivity 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
effect means the within effect and the shift effect are complementary, that is, sectors with anincrease in labor productivity expand, and vice versa. If the interaction effect is negative, the within
effect and the shift effect are substitutes, that is, labor productivity growth is positive in shrinking
sectors and negative in expanding sectors. The interaction effect shows labor movement toproductivity-growing sectors, but not necessarily to high-productivity sectors (Maddison, 1952;
Timmer & Szirmai, 2000; Alam et al., 2008).

7

CHAPTER 2
CURRENT SITUATION OF LABOR PRODUCTIVITY
IN VIET NAM
In this chapter, we calculate and evaluate Viet Nam’s labor productivity using secondary datafrom the General Statistics Office (GSO) (see also Appendix 1). Main trends in the level andgrowth of labor productivity are identified for the period 1991-2015. We examine the entire
economy, three broad economic sectors (agriculture, industry, and services), and their 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) persistenceof 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 was unstable and without making a breakthrough into a very highlevel. In absolute value (constant 2010 price), labor productivity of the whole economy rose from18.89 million VND per worker in 1991 to 54.43 million VND per worker in 2015, or only by
2.88 times. In East and Southeast Asia, any rapidly industrializing economy is expected to attainmuch higher labor productivity growth within a quarter century. Viet Nam’s past productivity
performance was therefore good but not spectacular. Because of this, Viet Nam’s speed ofcatching up with high-income economies has been slow.
Viet Nam’s labor productivity evolved in three distinct stages: high growth (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 eliminated barriers to market anddecisively integrated into the international trading community. These efforts were behind theremarkable 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 weresignificantly removed, encouraging output and investment across all sectors including
manufacturing. This should be regarded as a one-time jump from economic suppression toliberalization. Many policy measures for establishing a multi-sectoral market economy,
stimulating the participation of enterprises and attracting foreign direct investment were key

8

factors in these early years1. Meanwhile, in the 1990s, Vietnamese labor force remained basicallyunchanged in terms of both quality and quantity.
Figure 2.1 The level and growth rate of Viet Nam’s labor productivity(Constant 2010 price)
60

8
7

50

6
40

5

30

4
3

20

2
10

1

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

0

1991

0

Labor productivity for the entire economy (million VND per worker, left)
Growth rate of labor productivity (%, right)
Source: VEPR’s calculation based on GSO data.

Table 2.1 Decomposition of GDP growth into labor productivity and employment growth
Growth rate (%/year)
Labor
productivity

Employment

GDP

All period

1991-2015

4.51

2.47

6.98

Period of highproductivity growth

1991-1995

6.32

2.47

8.79

1996-1999
2000-2007
2008-2012

3.99
4.10
3.18

2.23
3.15
2.65

6.22
7.25
5.83

2013-2015

5.69

0.64

6.33

Period ofproductivity
stagnation
Period ofproductivity
recovery

Source: VEPR’s calculation based on GSO data.
1 The 1990s was marked by the issuance of crucial documents that formed a solid legal framework for the market economy inViet 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 Promotion of Domestic Investment(1994); the State-owned Enterprise Law (1995); the Amendment of the Foreign Investment Law (1996); the Commercial Law(1997); and the Land Law (1987) and its Amendment (1993). Simultaneously, international trade and investment were promotedwith the signing of the trade agreement with EU (1992); normalizing diplomatic relation with the USA (1995); and joining
ASEAN (1995) and APEC (1998).

9However, the growth of labor productivity slowed down in the late 1990s. The external
shock from the Asian financial crisis in 1997-98 disturbed the Vietnamese economy. More
importantly, growth then relied 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 Namin 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 evenprimary reason for the low performance. More fundamentally, a series of economic reforms
introduced in the new millennium had positive quantitative effects on employment and enterpriseregistration but did not generate visible results in quality, productivity, or competitiveness2.
More recently, labor productivity growth started to recover from around 2013
approaching the figures recorded in the mid-1990s. In terms of its decomposition, too, previous
lackluster trends began to reverse with rising contribution of labor productivity growth andfalling contribution of employment growth to overall growth. The cause(s) and sustainability ofrecent 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
performance is thanks to either of the first two factors, economic structure may have shifted forbetter and high growth may continue into the future. But if it is due to sheer luck or a favorable
external shock, it may be just temporary. Program 712, the first national productivity program,
was launched in 2010 with the aim of increasing the contribution of TFP to overall growth(Chapter 4). 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 of the entire economy
in proportion to the amount of labor employed in each sector. Analysis at the sector level is ofgreat importance in understanding the dynamics of a nation’s labor productivity. We may ask
such questions as: what are highly productive industries that sustain productivity growth and thatshould be maintained and strengthened, and what are low-productivity industries that pull down

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 the United States (2001), establishment of stock exchanges (2000) and joining WTO (2007) further expanded
new business opportunities.

10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(group of industries)
Subsectors(industries)

Agriculture,
forestry, and fishery
1. Agriculture
2. Forestry
3. Fisheries

Industry andconstruction
1. Manufacturing
2. Mining
3. Construction
4. Electricity, gas,steam, and air
conditioning
supply5. Water supply,
sewerage, waste
management

Services
1. Wholesale and retail trade; repair ofmotor vehicles and motorcycles
2. Transportation and storage
3. Accommodation and food service
activities
4. Information and communication
5. Financial, banking and insurance
activities
6. Real estate business activities
7. Professional, scientific and technicalactivities
8. Administrative activities and support
services
9. Activities of socio-politicalorganizations; compulsory security;
public administration
10. Education and training
11. Health, social assistance activities
12. Arts and entertainment
13. Activities of households producing
undifferentiated goods and services ofhouseholds for own use
14. Other service activities

Source: General Statistics Office.

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 (Figure 2.2). Among them, agriculture, forestry, and fisheries had the lowest laborproductivity in absolute level while industry and construction had the highest labor productivity.
The latter sector includes activities with high labor productivity such as mining and certain
manufacturing. In 2015, the average labor productivity of industry and construction was 1.33
times higher than that of services and 3.88 times higher than that of agriculture, forestry, andfisheries. This structure of labor productivity across broad sectors is consistent with the expected
dynamism in a developing country such as Viet Nam in which industry is the main driver ofstructural transformation.
Yet, the development of labor productivity was not smooth over time. From 2000
onwards, labor productivity growth slowed down in both the industry and construction sector
11and the services sector, the two sectors that contribute most, more than 80%, to GDP (Figure2.3). Below we will look at the movements of labor productivity at subsector level to gain further
insight.

Figure 2.2 Labor productivity of broad economic sectors(In million VND per worker, at constant 2010 price)
100
90
80
70
60
50
40
30
20
10
0

The whole economy
Agriculture, forestry, and fisheries
Industry and construction
Services

1991

2000

2010

2015

Source: VEPR’s calculation based on GSO data.

Figure 2.3 Contribution to GDP by economic sectors
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

0%

Agriculture, forestry, and fisheries

Industry and construction

Source: same as above.

2.2.2. Agriculture, forestry, and fisheries

12ServicesThe agriculture, forestry, and fisheries sector has the lowest labor productivity but thehighest 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 tohave been influenced by international shocks, market movements, and other external conditions
such as favorable weather, high GDP growth, and good conditions for export. In particular, Viet
Nam’s accession to the World Trade Organization (WTO) in 2007 and a series of free trade
agreements (FTAs) in recent years have facilitated the export of agricultural and aquatic products3.

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

1991

2015

2013

2011

2009

2007

2005

2003

2001

1999

1997

1995

1993

1991

0

Agriculture

Labor productivity (million VND per worker, left)

Forestry

2015

2
0

2013

4

5

2011

6

2009

8

10

2007

10

2005

12

15

2003

14

2001

20

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

1999

16

1997

18

1995

25

1993

Figure 2.4 Labor productivity:
agriculture, forestry, and fisheries(Constant 2010 price)

Fisheries

Growth rate of labor productivity (%, right)

Source: same as above.

Agriculture is the largest creator of value-added in this broad sector (76% in 2015),
followed by fisheries (20%) and forestry (4%) as seen in Figure 2.5. Despite an improving trend
over the years, agricultural labor productivity remains low in absolute terms, at only half of thatof the whole economy in 2015. The fisheries industry has relatively high labor productivity, 2.18
times higher than forestry and 1.50 times higher than agriculture in 2015, thanks to rapid
improvement from 1991 to 2015 (Figure 2.6). Labor productivity of fisheries is sensitive to the3

After joining WTO, Viet Nam concluded a number of free trade agreements such as the Vietnam-Japan Economic
Partnership Agreement (VJEPA) in 2009, the Vietnam-Chile Free Trade Agreement (VCFTA) in 2014, theVietnam-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 andaquatic products which generally have comparative advantage compared to foreign products.

13

world situation because fishing and aquaculture in Viet Nam are mostly export-oriented, to the tuneof over 80% of total sales (Vietfirst securities, 2018), their major markets being the United Statesand Europe.
Figure 2.6 Subsectoral labor productivity:
agriculture, forestry, and fisheries(Constant 2010 price)(a) Agriculture(b) Forestry

-20

0

-5

0

-40

1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015

2015

5

2013

0

2011

5

2009

0

5

2007

10

10

2005

20

10

2003

15

15

2001

15

1999

20

1997

40

1995

20

1993

20

1991

25

(c) Fisheries
40

60

30

40
20

20

0

2015

2013

2011

2009

2007

2005

2003

2001

1999

1997

-40

1995

0

1993

-20

1991

10

Source: same as above.

2.2.3 Industry and construction
The industry and construction sector has the highest labor productivity in the economy.
It registered a relatively robust productivity growth in the 1990s but faced a decline andstagnation in the first ten years of the twenty-first century (Figure 2.7).
Within this broad sector, manufacturing is a critical subsector occupying 46% of sectoralvalue-added in 2015 (Figure 2.8) and expected to play a vital role in job creation and economic
growth and transformation. However, its labor productivity has hardly increased since 2001, a
phenomenon which is shocking and deeply disappointing in an industrializing economy such as Viet
Nam. The reason(s) for this unusual stagnation will be explored more fully in a separate section
below.
14

Mining, having the highest labor productivity level within this broad sector, at 1.4 billion
VND per worker in 2015, experienced low productivity growth and evening a decline around the
mid-2000s but recovered significantly from 2010 onwards (Figure 2.9). To interpret this trend, it
is necessary to understand the special characteristics of this natural resource-based 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(Item 7, 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 suchas coal, iron ore, limestone, and basalt are state-controlled because they are key inputs to pricestabilized goods and services such as electricity, cement, and steel. With output and prices decided
by the government, the labor productivity of mining hinges on the number of workers mobilizedeach year, which fluctuates greatly.
Construction has the lowest labor productivity among this group (Figure 2.9). Recent
negative growth in its labor productivity can be explained by the faster growth of employment
compared with the growth of its value-added. Besides that, performance of the construction
subsector is highly correlated with the cycles of investment and credit in the national economy,
and its declining labor productivity is attributable to slow investment in buildings andinfrastructure. The government’s credit tightening policy, such as raising interest rates andcommercial banks’ reserve ratios, causes a sharp fall in both output and prices in the property
market, with a serious reverberating effect on the construction industry. From 2009 to 2015, theprevalence of non-performing loans in the banking system hindered smooth capital flows into
construction, which reduced value creation in this subsector. This may be the main reason forthe significant decline in labor productivity, measured in market price, of the constructionindustry in recent years.
Labor productivity of electricity, gas, steam, and air conditioning supply, and that of watersupply, 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.

15

Figure 2.7 Labor productivity: industry andconstruction(Constant 2010 price)
15

100%

10

80%

5

60%

0

40%
20%

-5

2015

2013

2011

2009

2007

2005

2003

2001

1999

1997

1991

1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015

1995

0%

-10

1993

100
90
80
70
60
50
40
30
20
10
0

Figure 2.8 Composition of value-added: industry
and construction(Constant 2010 price)

Construction

Labor productivity (million VND per worker, left)

Water supply, waste management,and remediation
activities
Electricity, gas, steam and air conditioning supply

Growth rate of labor productivity (%, right)

Source: VEPR’s calculation based on GSO data.

Manufacturing
MiningSource: same as above.

Figure 2.9 Subsectoral labor productivity: industry and construction(Constant 2010 price)(a) Manufacturing
80

15

70

10

60
50

5

40
0

30
20

-5

10

-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

0

16

(b) Mining
1,600
1,400
1,200
1,000
800
600
400
200
0

(c) Construction
40
30

70

15

60

10

50

20

40

10

30

5
0
-5

20

0

0

-15

1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015

-10

1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015

-10

10

(d) Electricity, gas, steam, air conditioning supply(e) Water supply, sewerage, waste management

800
700
600
500
400
300
200
100
0

140

30

50
40
30
20
10
0
-10
-20
-30

120

20

100

10

80

0

60
40

-10

20
0

1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015

1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015

-20

Source: same as above.

2.2.4 Services
In the services sector, labor productivity hovered around 60 million VND per worker inthe period 1991-2015 (Figure 2.10) without any strong upward trend. Wholesale, retail, and repair
accounts for about 35% of value-added of this sector, while other subsectors carry the weight ofabout 5-10% each (Figure 2.11). The value-added structure of services has remained relatively stable
over the years. The apparent jump in 2013 may reflect the change in the definition of wholesale,retail and repair where one activity belonging to this subsector was moved to the “other” category inthat year, and is therefore artificial and inconsequential.

17

Figure 2.10 Labor productivity: services(Constant 2010 price)
80

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

10
8
6
4
2
0
-2
-4
-6
-8
-10

70
60
50
40
30
20
10

90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1990
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

2015

2013

2011

2009

2007

2005

2003

2001

1999

1997

1995

1993

1991

0

100%

Labor productivity (million VND per worker, left)
Growth rate of labor productivity (%, right)

Wholesale, retail trade and repair

Transportation and storage

Accommodation and food service activities

Real estate activities

Education and training

Other service activities

Source: same as above.

Labor productivity of wholesale, retail trade, and repair exhibited no long-term trend
either upward or downward, with medium-term cycles, during the entire period (Figure 2.12).
This can be explained by the particular nature of Vietnamese consumers and those who cater totheir needs. According to the 2017 Economic Census, this subsector was dominated byunincorporated individual traders who outnumbered commercial enterprises by 11 times. The
value-added of each individual trader is insignificant and tends to decrease over time. Their
operation is very small, with an average capital size of 136.5 million VND and labor size of 1.5
employees, and this situation remained basically the same across different Census years. Theirbusiness is spontaneous, fragmentary, and without modern business methodology. Yet thissegment attracts a large 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 subsectorsthat have recorded high labor productivity, not just among services but even in the entire
economy. Yet, both showed significant volatility. Real estate business had very high laborproductivity from 2003 to 2009 when the Vietnamese 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 long-term improvement was also observed in othersubsectors. Other than transportation and storage, which had a mild upward trend, it is difficult18

to detect any steady improvement in labor productivity of the services sector as well as its
subsectors.

Figure 2.12 Subsectoral labor productivity: services(Constant 2010 price)(a) Wholesale, retail trade, and repair
70
60
50
40
30
20
10
0

-10

(c) Information and communications

100
80
60
40
20

1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015

0

2015

2013

10
5
0
-5
-10
-15
-20

(e) Financial, banking, and insurance
450
400
350
300
250
200
150
100
50
0

2011

80
70
60
50
40
30
20
10
0

2007
2009
2011
2013
2015

25
20
15
10
5
0
-5
-10
-15
-20

120

2009

(d) Accommodation and food service

1991
1993
1995
1997
1999
2001
2003
2005

140

2007

1991

-15

1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015

-20

2005

-15

-5

2003

-10

0

2001

-5

5

1999

0

10

1997

5

15

1995

10

1993

70
60
50
40
30
20
10
0

(b) Transportation and storage(f) Real estate
200

2,000

150

140
120
100
80
60
40
20
0
-20
-40

1,500

100
1,000
50
500

0
-50

1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015

1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015

0

19

(g) Professional, scientific and technical activities
250

120
100
80
60
40
20
0
-20
-40
-60

200
150
100
50

1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015

0

Source: same as above.

2.3 Labor productivity by type of ownershipThis section examines labor productivity by type of ownership, namely, the state sector, the nonstate sector, and the FDI sector.
During the quarter century from 1991 to 2015, labor productivity of the FDI sector
increased 1.26 times, that of the non-state sector 2.48 times, and that of the state sector 3.76 times(Figure 2.13). However, this end-to-end comparison conceals unusual in-between developments,
especially in the FDI sector.
From 1991 to 2001, labor productivity of all ownership types increased gradually, thoughfrom different initial levels. In these years, labor productivity of the FDI sector was far higher thanthose of the two domestic ownership types. However, the situation changed suddenly anddramatically in 2002 when the labor productivity of the FDI sector began to decline significantly
for several years. By 2015, it was overtaken and surpassed 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 thegovernment had succeeded in reducing the number of SOEs and retaining only the most efficientones in the state 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 support and monopolistic price-setting powers, whichallowed them to generate apparently high labor productivity unlike most private firms whichwere smaller, less capital-intensive, and under strong market competition. To the extent thatremaining privileges were more critical than the success of SOE reform, the steady improvement20

of labor productivity in the state 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 of overtaking either of them. This sector is a
mixture of traditional and modern firms, and the former dominate in terms of number. There areinnovative and dynamic private firms in Viet Nam, but their good performance cannot
compensate for the majority of firms with small-size, low-capital, and pre-modern operations.
The non-state sector is the largest sector in terms of employment, and should take the driver’s
seat in producing value and competitiveness 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)
450
400
350
300
250
200
150
100
50

State sector

Non-state sector

Source: VEPR’s calculation based on GSO data.

21

FDI sector

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

0

Figure 2.14 Labor productivity by ownership (level and growth)(a) State sector(b) Non-state sector

250

20

35

12
10
8
6
4
2
0
-2
-4
-6

30

200

15

25

150

20

10

15

100

10

5

50

5
0

1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015

0

1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015

0

(c) FDI sector
450
400
350
300
250
200
150
100
50
0

30
20
10
0
-10
-20
-30
-40

1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015

-50

Source: VEPR’s calculation based on GSO data.

2.4 The labor market and Lewis’ turning point
The dual economy model of Arthur Lewis postulates that industrialization of a labor-abundant
traditional society is accomplished by expansion of modern industry which absorbs rural surplus
labor through rural-urban migration (Lewis, 1954). If this process proceeds smoothly, idle orunderemployed workers will eventually be eliminated. This is Lewis’ “turning point” at whichlabor surplus turns to labor shortage in the national economy. Beyond this point, wages start torise and the total wage bill expands, which shifts income distribution in favor of labor. However,the process may stall if agriculture cannot supply sufficient food for urban workers, if industrial
growth is too weak or narrow to absorb 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’ growthtrajectory, and whether and when the labor market tightens and workers’ wages and welfare
begin to rise.
22

The labor structure of Viet Nam has changed greatly from 1991 to 2015 (Table 2.3).
Labor moved from agriculture, forestry, and fisheries to industry and construction as well as toservices. The manufacturing and construction subsectors, which accounted for the bulk ofindustrial activity, saw their combined labor share increase from 10.0% to 21.8% between 1991
and 2015. If manufacturing alone, it went up from 7.7% to 15.3%. 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 4.2% in the same period. The proportion of workers in the non-state
sector was more stable, staying around 86-87% during the entire period. Thus, in Viet Nam,reallocation of labor across different industrial and ownership sectors seems to have played amajor role in promoting labor productivity 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 (%)
1991

2000

2010

2015

Agriculture, forestry, and fisheries

72.35

67.77

49.50

44.02

Industry and construction

11.20

12.03

20.95

22.74

Mining

0.86

0.59

0.61

0.45

Manufacturing

7.68

8.55

13.51

15.30

Construction

2.32

2.54

6.34

6.49

16.45

20.20

29.55

33.24

Wholesale, retail, repair

4.87

7.34

11.31

12.70

Transport and storage

2.16

2.51

2.89

3.01

Accommodation and food service activities

1.40

1.84

3.49

4.62

Information and communications

0.27

0.25

0.52

0.64

Financial, banking and insurance activities

0.23

0.18

0.52

0.69

Real estate activities

0.13

0.30

0.21

0.31

Professional, scientific and technical activities

0.13

0.09

0.44

0.48

State sector

12.90

11.70

10.40

9.80

Non-state sector

86.34

87.30

86.10

86.00

FDI sector

0.76

1.00

3.50

4.20

By economic activity

Services

By type of ownership

Source: VEPR’s calculation based on GSO data.

23

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 the bilateral 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 in2002. Most of these FDI projects were in the industry and construction sectors, which occupied
70.5% of cumulative registered FDI capital as of December 2017 (GSO data). Due to this huge
FDI inflow, a large amount of agricultural land had to be converted to industrial land. In thisurbanization process, rural workers migrated to cities and their surrounding areas in search of cash
income, many of whom ended up in industrial zones.
Figure 2.16 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 laborproductivity. Apparently, it takes a certain amount of time and effort for rural workers and previous
farmers to adjust their working style, adapt to new job requirements, and improve productivity, aprocess which is captured by the within effect in the decomposition analysis of Chapter 3. However,
it is worrisome that the 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 defined by job duty and required certification, rose from 7.1% to 11.1% in
agriculture, from 55.5% to 65.5% in industry and construction, and from 30.5% to 56.4% inservices. Skill training lags behind the rapidly rising demand for skilled workers. Although
Vietnamese population is large and still relatively young, labor force remains mostly unskilled andits conversion to skilled workers has been slow.

24

Figure 2.15 Distribution of labor between rural and urban areas (%)
100
80
60
40
20
0
2005

2006

2007

2008

2009

2010

Rural

2011

2012

2013

2014

2015

Urban

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 paceof this movement is neither very fast nor accelerating to satisfy the growing demand for industrial
labor. Wages are rising and acute labor shortage has emerged in large cities, while workers still
appear plentiful and superfluous in rural villages and remote areas. Hanoi 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 increasingly scarce due to past industrialization, despite the appearance ofcontinuing 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.
Viet Nam’s villages are turning to non-farm activities faster than population data suggests,
as revealed by income structure of rural households. Based on the Viet Nam Household Living
Standards Survey, Newman and Kinghan (2015) found that, on national average, income derived
from agriculture, forestry, and fisheries declined from 28.6% in 2002 to 19.9% in 2012. 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 2014, the decrease of households
specializing in agriculture on the one hand and the increase of households engaged in both
agriculture and wage labor on the other were almost matched in magnitude. Meanwhile,
households combining farm income and enterprise activity fell significantly. Other income
25

categories remained relatively stable. This data suggests that the main source of rural income isshifting from agriculture to industry and services, mostly in the form of hired labor, without
necessarily leaving the village or abandoning agriculture.

Table 2.4 Economic activities of household (%)
2008

2010

2012

2014

Agriculture

25.16

22.38

20.59

19.53

Labor

4.09

4.45

5.73

5.64

Enterprise

2.39

3.03

3.58

3.76

Agriculture & labor

40.62

41.91

43.15

45.62

Agriculture & enterprise

11.41

12.10

9.35

6.79

Labor & enterprise

2.44

2.93

2.43

3.39

11.50

10.04

10.45

10.36

3.39

3.16

4.72

4.91

Single source

Double source

Triple source
Agriculture, labor & enterprise
No activity

Source: adapted from Newman and Kinghan (2015).

Disparity in earning opportunity between big cities and rural villages is the main
motivation for labor migration. However, in Viet Nam, the income gap between the two areas
has gradually narrowed, which is good for attaining shared growth (Table 2.5). This may partiallyexplain why rural-urban labor migration is not as vigorous as can be expected from thequantitative expansion of modern industry.

Table 2.5 Urban-rural income gap (thousand VND)

Whole country
Urban
Rural
Urban/rural ratio

2002
356
622
275
2.3

2004
484
815
378
2.2

2006
636
1,058
506
2.1

2008
995
1,605
762
2.1

2010
1,387
2,129
1,070
2.0

2012
1,999
2,989
1,579
1.9

Source: World Bank Group (2016).

From the above data, though limited in scope and not necessarily up-to-date, it can beconcluded that labor migration from agriculture to industry and services is currently in progress
in Viet Nam driven by ongoing industrialization, with or without physical migration into cities.
26

Some actually move to cities permanently, temporarily, seasonally, or irregularly while others
take up non-farm jobs without leaving the village. This was a phenomenon commonly observedin 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, Hanoi, 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 in a more massive way to fill this regional labor gap, to the extent thatrural villages are almost emptied of young workers, as we historically observed 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 withindustrial skills, the narrowing income gap between cities and villages, and the existence of somemobility 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 an industrializing economy, and its
labor productivity growth is expected to lead the overall performance of the national economy.
In fact, this is precisely what happened in many high-performing Asian economies. In Viet Nam
also, the labor productivity of Vietnamese manufacturing in 2015 was 62.56 million VND per
worker, which was 15% higher than the average of the whole economy. However, the shocking
fact is that manufacturing labor productivity has hardly increased in Viet Nam since 2001, as
illustrated in Figure 2.9(a) in Section 2.2.3 above.
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 andup until 2001, labor productivity of the FDI sector was far higher than that of the state or nonstate sector, and was rising strongly. However, it suddenly began a steep fall in 2002, whichlasted for several years, then stabilized thereafter. In 2015, labor productivity of the FDI sector
was overtaken by that of the state sector. Other studies also corroborate our finding. Nguyen Tien
Dung et al. (2017), using micro data from the Vietnam Enterprise Census, report that value-added
per worker in the FDI sector increased only 0.7% per year between 2004 and 2015 while that ofthe private and state sector rose 8.5% and 9.7% per year, respectively, during the same period. This27

dramatic and unexpected development in the labor productivity 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, 58.4% of
cumulative FDI inflow at the end of 2017 was in the manufacturing sector. Disappointing
productivity performance of the FDI sector can be attributed partly to the contraction of 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.
Since 2000, however, FDI in export-oriented, labor-intensive, large-scale manufacturing
suddenly and greatly increased. Many of such firms were engaged in garment, footwear,
electronics, and food processing which hired a large number of unskilled workers in productionlines. Within two years, the number of employees at FDI firms more than doubled, from 339,100
in 2001 to 770,900 in 2003, which started to cause labor shortage in and 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 129.33 billion VND in 2001 to 153.18 billion VND in 2003. This
explains a sharp decline in labor productivity of the FDI sector which began in 2003 (Figure
2.14(c)).
Subsequently, from around 2006, foreign investors began to focus more on services,
some of which achieved high growth, and labor productivity of the FDI sector began to pick up.
Looking at the composition of GDP, contribution of the FDI sector continued to grow steadily,
though slightly, even in recent years despite the weak performance of labor productivity (Figure2.16). In 2015, the FDI sector accounted for 15% of GDP while corresponding figures for the
non-state and the state sector were 50% and 35%, respectively. Quantitative expansion of output
and employment more than offset the stagnant labor productivity in the FDI sector, resulting in
an increasing share of GDP.
28

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

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

State sector

Non-state sector

FDI sector

Source: VEPR’s calculation based on GSO data.

We now turn to the crucial question of why the labor productivity of 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 bottomof the famous Smiling Curve 4 . Many foreign investors view Viet Nam as a middle-stream
workshop, not as an executor of upstream or downstream processes whose value creation isgreater, and therefore do not expect experienced engineers or skilled workers from Viet Nam,and do not even feel the need to train them as such. For this reason, the labor productivity of
manufacturing FDI declined significantly as labor-intensive export-oriented FDI began to arrivein 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 and satisfied with the current situation

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.) whilevalue creation is low in middle stream (simple assembly and processing). This is generally true in many
manufacturing sectors in which Viet Nam excels such as apparel, footwear, and electronic device assembly.

29

without any motivation to improve it themselves or asking the Vietnamese government toremedy it.
Low domestic value creation is a common feature of any latecomer economy in the earlystage of FDI-led industrialization, but most governments introduce policies to entice FDI firms
to produce more domestic 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, but Viet
Nam has not yet produced visible results in this area (Section 7.10). Moreover, there are othermeasures that need to be adopted, including the general leveling-up of domestic workers andenterprises as proposed in detail in Chapter 7, selective attraction of value-creating foreign
investors, incentivizing FDI firms to transfer knowledge and technology, promotion of appliedscience and pragmatic engineering at universities and research centers, importing skilled foreignlabor, and support 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 from around 2003 to aggressively invest in laborintensive export-oriented processes—especially in garment, footwear, smart phones, and otherelectronic products—in Viet Nam which generated a downward trend in the labor productivityof 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 die-and-mold and other metal andplastic components required by these processes. Japanese firms also engage in the production ofgarment, 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 inwhich multinational corporations do not declare the true costs of imported materials andintermediate 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, foreign subsidiaries 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, and tea 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 found 2,688.5 billion VND of false
declaration and 86.8 billion VND of unwarranted reduction and deduction, resulting in 2,611
30

billion VND of fine and retrospective tax collection. In one incident, by inspecting 16 garment
enterprises alone suspected of transfer pricing, the City Tax Department annulled the reported
loss of 367.8 billion VND and collected 11.3 billion VND 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 that transfer 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 thissection, 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 number of 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 byrelying only on this labor feature. One reason for this is that Viet Nam’s population is sure toage and the ratio of working population will shrink in the future. But the more serious reason isthat, after so many years of rapid industrialization, the quality 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 and experience who can compete effectively withthe world. There is little 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 (2015) report that the ratio ofworkers 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 in the 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 and hardworking, toshortsighted materialism instead of technology learning for long-term goals. Around 2015, thenumber of applicants to technical and vocational colleges in Northern Viet Nam suddenly andsignificantly declined, threatening such colleges with operational difficulty and the risk of31

bankruptcy. In a tightening urban labor market, high school graduates rushed to find easy jobs toearn quick cash rather than go to school for additional years to acquire technical skills. This mindsetof the Vietnamese youth is worrisome, as it is not conducive to the 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 with increased value creation, more
and better jobs, proper specialization and positioning in the global economy, and the spillover
effect of technology 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 amount ofthese benefits accruing to the home country varies considerably depending on where and how thecountry participates in global value chains, whether and how fast the country moves from lowvalue to high-value processes, and the existence or absence of strategy to participate more deeply
and effectively in the global production system on the part of 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
total export, 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 theirdefinitions 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, and not 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 andalso consistent with stagnant manufacturing labor productivity discussed above.
Table 2.6 Viet Nam’s participation in global value chains
Year

Forwardparticipation(%)

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

32

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 computer and electronic devices, garment and footwear, foodand beverages, and electrical machinery. We may judge that the policy of supporting industry
promotion thus generated good results at least in these products. However, these industries aremainly engaged in labor-intensive middle-stream 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 of foreign component suppliers rather than
Vietnamese ones. As a result, these export-oriented subsectors contribute greatly to Viet Nam’s
gross export value, but much less to domestic value-added.
Why does this situation persist for so long? One explanation is that Viet Nam has been
largely unable (or did not make enough effort) to upgrade itself and graduate from the status of asimple assembly factory of the world after it gained such a status in the 1990s. The otherexplanation is that foreign investors and buyers jealously guard high value processes in producing
Made-in-Vietnam exports, such as product development and design, input procurement, logistics
and distribution, and branding and marketing. They have neither desire, incentive, nor pressure to
give these processes to the Vietnamese side unless Vietnamese managers and engineers greatly
improve their skills to be 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 mustcome from the Vietnamese side because most foreign firms do not see any clear incentive to change
and upgrade Viet Nam; they have other investment destinations to migrate to.

2.7 Summary
The economy-wide labor productivity of Viet Nam has risen over time but it absolute levelremains low in comparison with economies that have attained high income and technology inEast and Southeast Asia. Viet Nam’s productivity performance is not poor but about averageamong regional economies. The nation has not experienced a spell of very rapid increase inproductivity to overcome a middle income trap and move up quickly to high income. As a result,
Viet Nam’s speed of catching up with and overtaking other regional economies has been slow.

33

In terms of sectors, the labor productivity of industry and construction has been thehighest, followed by services, while that of agriculture, forestry and fisheries has been the lowest.
Within industry and construction, which constitute nearly 40% of GDP, performance of laborproductivity 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 level and growth rate though they were very sensitive to businesscycles, price fluctuation, 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, labor productivity 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, the increase in laborproductivity of the state sector partly came from a series of state enterprise reform which
streamlined and equitized many of such enterprises, retaining only good performers in the state
hand and thus pushing up their average productivity. Other reasons for a relatively good progressof state-sector labor productivity include a high capital-labor ratio and various privileges andprotection offered by the government.
This chapter additionally featured four remarkable facts surrounding Viet Nam’s laborproductivity, 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 labor in rural areas which however migrates only moderately to urban areas
or to industrial and services sectors, despite acute labor shortage in these areas and sectors.
Second, in the early 2000s, labor productivity of manufacturing stopped rising and thatof 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 and workers. The government has not introduced policies to rectify thisundesirable situation. Great national effort is required for Viet Nam to get out of this trap andmove forward.
Third, the quality of Vietnamese workers is not improving rapidly, and some data suggestthat it is even deteriorating, in recent years. This is shown by the lack of technical training among34

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 theabove-mentioned fact that Viet Nam is stuck with low-value activities on the Smiling Curve, andmost foreign investors have little motivation to change this situation.

35

CHAPTER 3
SOURCES OF LABOR PRODUCTIVITY GROWTH
This chapter provides two types of labor productivity decomposition based on growth accounting andshift-share analysis, using data mostly from the General Statistics Office (GSO), to investigate thefactors 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 canbe decomposed into the change in capital intensity and TFP growth. As narrated in Section 2.1,
Viet Nam’s labor productivity 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 labor productivity growth as shown in Figure 3.1(level), Figure 3.2 (growth), and Table 3.1 (period average).

Figure 3.1 Growth accounting: decomposition of labor productivity growth (%)
15
10
5
0
-5

TFP

Capital intensity

Source: VEPR’s calculation based on GSO data.

36

Labor productivity

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

-10

Figure 3.2 Growth rates of labor productivity, capital intensity, and TFP
60
50
40
30
20
10
0
-10

1990
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

-20

Labor productivity

Capital intensity

TFP

Source: VEPR’s calculation based on GSO data.

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 eliminatedbarriers to market and decisively integrated into the international trading community with thesigning 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 measuresfor 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 quantityand quality. This led to a strong rise in capital intensity (i.e., the ratio of capital to labor). As eachworker 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 torely heavily on capital investment, even though the initial temporary effect of re-introducing themarket economy and re-opening to the world had mostly been exhausted. Aggressive investment,
though less sudden and spectacular than the previous period, sustained growth quantitatively
without corresponding improvement in labor skill or institutional quality. Low efficiency of capital
was indicated by a high incremental capital-output ratio (ICOR), which implies that large
investment was needed to support an additional growth of 1% (see below for more discussion).
37

Meanwhile, TFP growth continued to stay in 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 (%)
Labor
productivity
growthAll period
Period ofhighproductivity
growthPeriod ofproductivity
stagnation
Period ofproductivity
recoveryContribution of
Capital
TFP
intensity

Contribution share
Capital
TFP
intensity

1991-2015

4.51

4.23

0.28

93.89

6.11

1991-1995

6.32

11.05

-4.73

174.90-74.901996-1999
2000-2007
2008-2012

3.99
4.10
3.18

6.35
3.02
0.73

-2.36
1.08
2.45

159.0273.64
22.97-59.02
26.36
77.03

2013-2015

5.69

2.03

3.66

35.73

64.27

Source: VEPR’s calculation based on GSO data.

Figure 3.3 ICOR and TFP growth

2014

2012

2010

2008

2006

2014

2004

-10

2002

0

2000

-8

1998

1

1996

-6

1990

2

2012

-4

2010

3

2008

-2

2006

4

2004

0

2002

5

2000

2

1998

6

1996

4

1994

7

1992

6

1990

8

1994

(b) TFP growth (%)1992(a) Incremental Capital-output Ratio (ICOR)

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

Lackluster productivity performance continued into the new millennium. 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 2.59%. The contribution of capital
investment to GDP 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
38

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 increase in 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 positivein 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 arising contribution of TFP growth to labor productivity, while the contribution of capital intensity,
which was overwhelming in 1991-95, declined. After 2007, TFP growth replaced heavy capital
investment as the leading contributor to labor productivity growth.
It must be noted that TFP calculation is subject to error and variation. Our calculation, using
the official data of GSO, reveals that TFP growth had contributed significantly to labor productivity
growth in the period 2000-2012, or 41% on annual average. Meanwhile, according to Jorgenson
and Vu (2013), TFP contributed 50.8% to labor productivity 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 growth during this period. APO (2015)
estimates that TFP contributed about 26% to Viet Nam’s annual labor productivity growth at thattime. Both studies show much lower contribution of TFP growth than the present report. Thisdifference may be due to the use of different assumptions or datasets in estimation (Appendix 1).
Be that as it may, the decomposition exercise of labor productivity growth clearly indicatesthat advancement of labor productivity is not always a sign of efficiency improvement in the true
sense but may also be generated by excessive capital investment without any efficiency
improvement (Ohno, 2016). To properly assess labor productivity growth, additional informationmust be consulted, among which the incremental capital-output ratio (ICOR) is most handy anduseful. It is the ratio of the investment rate (investment/GDP) divided by the growth rate of GDP,showing how much additional capital is needed to produce an additional GDP growth of 1%. A high
ICOR implies low efficiency in using capital, and vice versa. Viet Nam’s ICOR rose significantly inthe 1990s and 2000s, then fell somewhat in recent years, as illustrated in Figure 3.3, with thefollowing average: 2.32 during 1991-95, 4.93 during 1996-2012, and 4.51 during 2013-2015.
The high ICOR in the past may be explained partly by high demand for 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 in39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) and South
Korea (3.0) during 1961-80. It was also considerably higher than China’s (4.0) in its high growthera of 2001-16 and Thailand’s (4.1) during 1981-95. Evidence is strong that Viet Nam’s investment
was not used effectively after the economy was liberalized and opened up in the early 1990s, evenif 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 19912000 was also clearly visible in agriculture, 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, not just 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, manufacturing labor productivity was not strongly driven by TFP growth evenin the new millennium, which resulted in weak performance.

Figure 3.4 Decomposition of labor productivity growth: selected subsectors (%)(a) Agriculture(b) Forestry
40
30
20
10

-40

40

2015

2012

2009

2006

2003

2000

1997

1994

1991

2015

2012

2015

2012

2009

2006

2003

2000

1997

1994

1991

-15

-20

-30
-40

2009

-10

2006

-5

0

2003

0

20

0
-10
-20

2000

5

40

1997

10

1994

15

60

1991

20

(c) Fisheries

(d) Manufacturing(e) Construction

10
0
-10

10

150

0
100

-5

2015

2012

2009

2006

2003

2000

1997

1994

2015

2012

2009

2006

2003

2000

-50

1997

-20

1994

0

1991

-15

1991

50

-10

Source: VEPR’s calculation based on GSO data.

In terms of type of enterprise ownership, capital intensity had a large influence on laborproductivity growth in all sectors in the 1990s, though this effect was slightly less prominent and morevolatile 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, especially in the non-state sector. However, TFP
contribution was unstable weak in the FDI sector, as its labor productivity fell greatly in the early
41

2015

2012

(k) Financial, banking and insurance
activities
200

5

2015

2012

2006

2003

2000

1997

2009

2009

2006

2003

2000

1997

1994

1991

2015

(j) Accommodation and food service

-50

2015

-15

2012

-20

0

2009

-10

2006

-15

50

2003

-5

100

2000

-10

(i) Real estate business activities
150

1997

0

1994

1991

2015

2012

2009

2006

2003

2000

1997

1994

-20

1991

-5

2012

5

2009

0

2006

10

2003

5

2000

15

1997

20

(h) Transportation and storage

10

1994

30

1994

(g) Wholesale, retail and repair

1991

40

1991

2015

2012

2009

2006

2003

2000

1997

1994

20
15
10
5
0
-5
-10
-15

1991

20
15
10
5
0
-5
-10
-15

(f) Mining

2000s—especially in 2003—and then stagnated subsequently, a phenomenon we analyzed in detail inthe previous chapter.

Figure 3.5 Decomposition of labor productivity growth by ownership type (%)(b) Non-state sector

2015

2015

2012

2009

2006

2003

2000

1997

1994

1991

2015

2012

2009

2006

2003

2000

1997

1994

1991

-15

2012

-10

2009

-5

2006

0

2003

5

30
20
10
0
-10
-20
-30
-40
-50

2000

10

1997

15

1994

25
20
15
10
5
0
-5
-10
-15
-20

(c) FDI sector

1991(a) State sector

Source: VEPR’s calculation based on GSO data.

In sum, it may be concluded that Viet Nam’s labor productivity was initially driven by heavy
investment, which included infrastructure development, but the contribution of capital intensity
gradually fell and was overtaken by TFP growth around the turn of the century. This transition ofcontributing factors was expectable and welcome. However, the manufacturing sector and the FDI
sector, the two overlapping 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 labor productivity growth. Labor
productivity for the entire economy is the sum 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 two processes, shift-share analysis
decomposes labor productivity growth into three elements, namely, (i) the within effect, (ii) theshift effect, and (iii) the interaction effect.
The within effect reflects the impact of labor productivity growth in each sector on the laborproductivity of the national economy assuming that sectoral labor allocation remains constant. If42there is an 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. Overall laborproductivity rises and falls as labor moves from low-productivity to high-productivity sectors, andvice versa. Meanwhile, the interaction effect shows the secondary impact of labor movement acrosssectors with different speeds of labor productivity growth. This effect will be positive if labor
migrates from sectors with low 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 proceedstrongly until high income is achieved. We will examine whether this presumed pattern is observedin Viet Nam.
Deploying GSO data, aggregate labor productivity is calculated from economic sectors thathave sufficient information. There are some sectors with limited output and labor indicators,
especially those where household labor, self-production, and self-service are dominant, for which
industrial labor data is unavailable. We will use the remaining 21 sectors that have sufficient dataon value-added and number of employed workers. Although aggregate labor productivity thus
calculated is lower than that based on GDP per worker, the difference is small enough for analytical
purposes; both share similar trends and patterns.
In Viet Nam, labor productivity for the entire economy grew 4.24% per year in the periodof 1991-2015. During most of this period, the within effect played a key role in promoting nationwide labor productivity (Figure 3.6).

43

Figure 3.6 Shift-share analysis: decomposition of labor productivity growth (%)
10
8
6
4
2
0
-2
-4

Within effect

Shift effectInteraction effect

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

-6

Labor productivity growth rate

Source: VEPR’s calculation based on GSO data.

From 1991 to 2000, the within effect contributed between 1.49 and 6.01 percentage points,
or 57-94% of total, to overall labor productivity growth. The shift effect was between 0.88 and 1.36
percentage points, or 14-52% 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 thosewith declining labor productivity, but in insignificant magnitude. A series of Doi Moi policies basedon the “supply-side” theory contributed to the activation of the within effect, which led to strong
productivity performance in this early stage. They included removal of internal trade barriers,
approval of private commercial establishments, dissolution and/or merger of weak state enterprises,
external opening, and attraction of foreign investment (Pham The Anh and Dinh Tuan Minh, 2013).
In the next decade, from 2001 to 2010, the shift effect became more important and overtook
the within effect as the main driving force of labor productivity, contributing 65.9% to overall laborproductivity growth. This is because a large number of workers migrated from sectors with low
labor productivity, especially traditional farming with surplus labor, to sectors with higher laborproductivity such as industry, construction, and certain services. Between 2000 and 2010, theproportion of labor engaged in agriculture, forestry, and fisheries fell from 67.8% to 49.5%, whilethat of the industry and construction sector nearly doubled, from 12.0% to 21.0%, and that of theservices sector also expanded from 20.2% to 29.6%. Contribution of the within effect decreased andbecame 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
44effect. The policy initiatives introduced in this period, such as the Enterprise Law, the bilateral trade
agreement with the United States, joining the World Trade Organization, and the accelerated
equitization of state-owned enterprises created an enabling environment for quantitative businessexpansion. They stimulated domestic investment and FDI inflow, which drew labor from lessproductive sectors, without necessarily strengthening labor productivity within individual sectors.
From 2011 to 2015, contribution of the shift effect became less clear than in the previous
decade, dropping to 21.0% in 2015. The within effect regained its leading position in driving laborproductivity growth, explaining almost all labor productivity growth in 2013-15. Thus,
productivity improvement within individual sectors, which had been more subdued during 200110, was re-ignited. The interaction effect was still negative but small.
These results, featuring the declining shift effect and the revival of the within effect in recent
years, are also confirmed by the Viet Nam Productivity Institute in its annual Vietnam 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 the following period of 2010-2017, labor mobility
slowed down, contributing 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 negativevalues 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 forthe period of 2001-05.
We conclude that, overall and as a rough approximation, Viet Nam’s labor productivity was
driven mostly by productivity gain in individual sectors, supplemented by labor movement fromindustries with low labor productivity to those with high labor productivity. As noted earlier, these twoforces are those naturally arising in any latecomer developing economies. We normally anticipate thatthe within effect first dominates, then the shift-share effect catches up as labor starts to migrate in large
number with a lag, and both should play strong and interactive influences throughout theindustrialization 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 thecause(s) of this peculiar and worrisome phenomenon. We can only suggest, as we did in Section 2.4
above, some possible candidates such as disguised labor shortage in rural villages, insufficient incentive

45

for workers to migrate to cities or to learn required skills, or the existence of some hidden barriers tolabor migration.

3.4 Shift-share analysis: subsectors
During the period of soaring labor productivity, which subsectors were the major drivers ofnationwide productivity in terms of the strength of sectoral productivity performance as well as thedestination of surplus labor migration? This section examines subsectoral data to try to answer thisquestion. Figure 3.7 graphically illustrates annual contributions of key subsectors to laborproductivity 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 forselected years of 2000, 2010, and 2015. 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 (%)
Other
Agriculture, forestry, and fisheries
Real estate business activities
Financial, banking and insurance activities
Accommodation and food service activities
Wholesale, retail trade, repair
Construction

10

8

6

4

2

0

-2

Source: VEPR’s calculation based on GSO data.

46

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

-4

Table 3.2 Subsector contribution to economy-wide labor productivity growth: period
average (%)
19912000

20012010

20112015

19912015

Whole economy

100.00100.0

100.00100.00Agriculture

8.07

9.38

10.35

9.05

Forestry

0.64

-1.05

0.64

-0.04

Fisheries

1.86

1.77

5.35

2.52

Mining

12.91

12.35

21.58

14.42

Manufacturing

25.91

20.01

13.77

21.12

Electricity, gas, steam, and air conditioning supply

3.88

3.54

6.58

4.29

Water supply, sewerage, waste management

0.59

0.54

0.91

0.63

Construction

7.93

8.73

-0.81

6.50

Wholesale and retail trade, Repair

13.70

19.32

-1.12

12.98

Transportation and storage

3.44

3.78

-1.51

2.59

Accommodation and food service activities

3.18

7.13

0.38

4.20

Information and Communication

0.86

1.17

-0.50

0.71

Financial, Banking and Insurance activities

1.80

2.47

21.25

5.96

Real estate business activities

4.12

2.06

12.14

4.90

Professional, scientific and technical activities

0.61

0.76

4.28

1.40

Administrative activities and support services

0.30

0.16

0.93

0.37

Activities of Communist Party, socio-political organizations

2.82

3.65

-0.46

2.49

Education and training

3.30

1.00

3.66

2.45

Health and social assistance activities

1.53

0.57

2.96

1.43

Arts, entertainment and entertainment

0.52

0.14

1.29

0.52

Other service activities

2.03

2.51

-1.66

1.48

Source: VEPR’s calculation based on GSO data.

Five subsectors that had, generally and throughout the entire period, largest impact onoverall labor productivity are (i) manufacturing; (ii) mining; (iii) wholesale, retail, and repair; (iv)agriculture, forestry, and fisheries; and (v) construction. They collectively accounted for roughly
70% of overall labor productivity growth in the 1990s and 2000s though their impact was reduced
to about 50-60% in the 2010s.
47

Manufacturing was the largest contributor to overall labor productivity growth in the entire
period of 1991-2015 as well as in the first two subperiods of 1991-2000 and 2001-2010, accounting
for more than 20% of total labor productivity gain. However, in the subperiod of 2011-2015, its
contribution fell to 13.8% and was surpassed by those of mining and financial, banking andinsurance 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 of manufacturing was 22.3% in 2000, -27.7% in 2010, and 5.1% in 2015, 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 14.4% in theentire period, but from around 2006, it became very volatile year to year. Its subperiod contribution
was 12.9% in 1991-2000 and 12.4% in 2001-10, but jumped to 21.6% in 2011-15. Decomposition
for both 2000 and 2015 shows a large within effect of 23-24% which was partly offset by a negative
shift-share effect. But decomposition of 2010 reports a huge within effect, at 76.0%, which isdifficult to interpret. As discussed earlier, the mining subsector is dictated by government plans
and global price gyration.
Wholesale, retail, and repair contributed 13.0% to the overall labor productivity growth in
the entire period, but it too had an inexplicable decline to -1.1% in the most recent subperiod, witha huge negative contribution in 2013 alone. The within effect was also volatile, but rising from 4.9% to 9.3% and 12.1% across the subperiods. The shift-share effect was always positive thoughalso volatile, at 15.5%, 21.2%, and 1.4%, which may reflect the fact that this subsector has been
an important absorber of surplus or discharged labor from traditional agriculture as well as modern
industry and services.
Agriculture’s contribution was more stable, at 9.1% for the entire period and 8.1%, 9.4%,
and 10.4% in three subperiods. Contributions by forestry and fisheries were smaller. The within
effect of agriculture was also unstable. What is more important yet baffling is the shift effect ofagriculture which evolved from 22.9% to -25.5% and -7.3% in selected years. We expect a constantexit of labor from this subsector and thus consistent negative signs throughout the period.
Construction contributed 6.5% to overall labor productivity growth in the entire period, but
its contribution in the last subperiod was negative. Shift-share decomposition is also difficult tointerpret.

48

Table 3.3 Subsector shift-share decomposition for selected years (%)
2000
Total

WithineffectShifteffect2010
Interaction
effectTotal

WithineffectShifteffect2015
Interaction
effectTotal

WithineffectShifteffectInteraction
effectWhole economy
100.0
94.7
24.1
-18.7
100.0
42.5
90.2
-32.7
100.0
83.9
21.0
-4.9
Agriculture
10.0
-12.2
22.9
-0.7
23.7
52.3
-25.5
-3.1
12.3
20.3
-7.3
-0.7
Forestry
0.8
-0.2
1.0
0.0
0.1
1.4
-1.3
-0.1
0.6
-0.1
0.7
0.0
Fisheries
2.3
49.0
-30.2
-16.5
5.4
0.2
5.2
0.0
3.2
15.9
-10.0
-2.7
Mining
14.6
23.1
-7.5
-0.9
51.0
76.0
-19.0
-6.1
12.0
24.9
-11.3
-1.6
Manufacturing
29.4
22.3
6.7
0.4
-26.1
-27.7
1.7
-0.1
18.3
-5.1
23.9
-0.5
Electricity, gas, steam, and air conditioning
4.4
5.5
-1.0
-0.1
-0.6
2.5
-3.0
-0.1
3.6
0.8
2.8
0.0
supplyWater supply, sewerage, waste management
0.7
0.6
0.0
0.0
0.0
-2.1
2.5
-0.4
0.5
-0.2
0.8
0.0
Construction
9.0
7.5
1.4
0.1
10.7
-16.0
29.3
-2.7
5.6
2.7
2.8
0.1
Wholesale and retail trade, Repair
10.4
-4.9
15.5
-0.2
31.0
9.3
21.2
0.5
13.6
12.1
1.4
0.1
Transportation and storage
2.6
1.1
1.5
0.0
1.8
5.5
-3.5
-0.2
3.0
1.4
1.6
0.1
Accommodation and food service activities
2.4
-0.1
2.5
0.0
-7.6
-14.7
8.0
-0.9
3.9
0.5
3.4
0.0
Information and Communication
0.7
-0.5
1.1
0.0
0.6
-2.0
2.8
-0.2
0.8
0.1
0.7
0.0
Financial, Banking and Insurance activities
1.4
2.6
-1.1
-0.1
1.9
-2.3
4.4
-0.2
5.6
2.7
2.8
0.1
Real estate business activities
3.1
-5.9
9.6
-0.6
2.9
-33.1
53.0
-17.0
5.5
1.6
3.7
0.1
Professional, scientific and technical
0.5
1.1
-0.6
0.0
0.5
1.2
-0.6
0.0
1.4
1.3
0.1
0.0
activities
Administrative activities and support
0.2
0.0
0.3
0.0
0.2
-0.2
0.4
0.0
0.4
0.0
0.4
0.0
services
Activities of Communist Party, socio2.1
1.9
0.2
0.0
2.1
6.3
-3.9
-0.3
2.7
2.5
0.2
0.0
political organizations
Education and training
2.5
2.4
0.1
0.0
0.5
-1.8
2.3
-0.1
3.0
2.2
0.8
0.0
Health and social assistance activities
1.2
1.5
-0.3
0.0
-0.5
-5.9
6.5
-1.0
1.7
-0.6
2.3
-0.1
Arts, entertainment and entertainment
0.4
0.3
0.1
0.0
0.0
-0.8
0.9
-0.1
0.6
0.3
0.3
0.0
Other service activities
1.5
-0.3
1.9
0.0
2.4
-5.7
8.9
-0.8
1.6
0.6
1.0
0.0
Source: VEPR’s calculation based on GSO data.
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.

493.5 Additional analysis on manufacturing
Nguyen Thi Tue Anh et al. (2016) analyzed the contribution of “structural change” to the laborproductivity growth of manufacturing from 2008 to 2013. We will selectively quote from theirresearch to supplement our results. They defined the sum of the shift effect and the interaction
effect as the impact of structural change on labor productivity of the whole economy or any
particular sector, whichever the case may be. The research used data from the Statistical
Yearbook and the Vietnam Enterprise Census of GSO, and examined 35 activities withinmanufacturing, placing emphasis on six activities with the largest contribution to laborproductivity growth as well as employment. They are (i) food processing, (ii) textile, (iii) shoes
and leather, (iv) manufacture of products from other non-metallic minerals, (v) manufacture of
products from precast metals except machinery and equipment, and (vi) manufacture ofelectronic products and micro-machines optical products and products5. Decomposition results
are presented in a re-formatted form in Table 3.4. Since annual decomposition fluctuates greatly,
the following discussion focuses on five-year averages.

Table 3.4 Contribution of selected activities to manufacturing labor productivity growth(%)
Subsector (classification code)
Food processing (10)Total
Within effect
Shift effectInteraction effectTextile (14)Total
Within effect
Shift effectInteraction effect
Shoes and leather (15)
Total
Within effect
Shift effectInteraction effect

2008

2009

2010

2011

2012

Five-year
average

10.6
-2.6
13.3
-0.1

-27.7
-23.7
-3.7
-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
138.2
-1.6
-1.4

-68.4
-70.4
2.9
-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
88.0
5.2
3.5

-51.4
-56.4
7.1
-2.1

-25.9
-24.5
-1.6
0.2

3.8
1.9
1.6
0.3

5

OECD classifies food processing, textile, and footwear as low-tech sectors, non-metallic mineral products andprefabricated metal as mid-tech sectors, and electronic 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.

50

Products from other non-metallic
minerals (23)
Total
Within effect
Shift effectInteraction effectProducts from precast metals excl.
machinery and equipment (25)
Total
Within effect
Shift effectInteraction effectElectronic products, micro-machines,
optical products (26)
Total
Within effect
Shift effectInteraction effect

86.7
75.3
8.5
2.8

32.5
54.2
-27.6
5.9

-45.5
-20.8
-27.6
2.9

29.4
30.7
-1.1
-0.3

-53.5
-39.0
-17.7
3.1

9.9
20.1
-13.1
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
27.9
11.0
3.6

26.5
44.3
-31.0
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.

Contributions of three labor-intensive light manufacturing activities—food processing,textile, 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, textile had the largest
contribution of 10.6% per year. The within effect of these activities was positive but relatively
small, which was insufficient to improve national productivity performance substantially. The“structural change,” or the sum of the shift effect and the interaction effect, was negative for foodprocessing and small positive for textile and shoes and leather. This indicates that these low-techlight manufacturing activities were not a large contributor to overall labor productivity throughlabor migration. Labor may have moved from agriculture to these activities, but if their laborproductivity was stagnant or not so different from traditional 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.

51

Manufacturing of electronic products, computers and optical products 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 amount of surplus labor for productive works. The most prominent entry inthis subsector was Samsung that invested in Viet Nam in 2009 to establish new global production
sites for smart phones, coupled with many other electronic and computer-related projects before
and during this period, most of which were from Japan and South Korea. Thus, it may be said
that this subsector successfully avoided the pitfall that other light manufacturing activities, suchas textile and footwear, had fallen. Even in this subsector, however, the initiators and managers
of value creation remain mostly foreigners, and large value-added mainly belong to them rather
than Vietnamese managers, engineers, or workers.
Two other subsectors, not listed in Table 3.4, are worthy of additional mention.
Chemicals and chemical products, a capital-intensive subsector which constitutes a part ofmaterials 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 andmore low-tech activity, tended to contribute more to job creation rather than to the growth of
manufacturing labor productivity. The difference between the two may stem from the degree of
integration into globally competitive and dynamic modern industries. The chemicals industry, as
an essential upstream process, supplies many crucial inputs to downstream manufacturers andassemblers while furniture is consumer-oriented and has no deep industrial linkage.
The study by Nguyen Thi Tue Anh et al. (2016), though the period of 2008-12 was neither
long nor up-to-date, revealed an important diversity among manufacturing subsectors in theircontributions to overall productivity either through their own productivity gain or through labormobility. Some traditional light manufacturing subsectors such as food processing, textile,footwear, and furniture do not show remarkable contribution even when they are operated by
FDI. Meanwhile, electronic assembly, an activity equally or even more labor-intensive understrong foreign control, contributes greatly to overall productivity and has become the central
pillar of Viet Nam’s industrialization. As for upstream processes (i.e., supporting industries) suchas metal, non-metal, and chemical subsectors, their contributions to overall manufacturing
productivity are quite large, though not as striking as that of electronic assembly. Degrees of52

global competitiveness and integration into global value chains seem to matter in producing thesedifferences.

3.6 Concluding remarks
Findings in this chapter, based on two types of decomposition of labor productivity, weregenerally consistent with the facts and trends obtained in Chapter 2 for the whole economy aswell 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, was dominant in theintervening period of 2001-10 (shift-share analysis decomposition). More recently, the shift effecthas declined even though 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 full industrialization with advanced technology. Some barriers to further
labor mobility are suspected. Strong and dynamic interaction between the within effect and the shifteffect must continue to take the economy to upper middle income and eventually to high income.
Manufacturing was the greatest contributor to economy-wide labor productivity while
agriculture, forestry, and fisheries and wholesale, retail, and repair also made considerable
contributions. The contribution of construction was less significant, 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 a high productivity path and global competitiveness. The unwelcome stagnation of
manufacturing labor productivity and weak performance of the FDI sector, fully discussed in Chapter
2, were also visible in subsector 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, textile, footwear, and furniture, to national productivity
were small. Upstream subsectors that supply inputs to mechanical and electronic assemblers(known as supporting industries), such as metal, non-metal, and chemical products, also had

53significant contributions. This diversity among manufacturing subsectors should be duly notedwhen policies to promote productivity and labor migration are formulated.

54

CHAPTER 4
VIET NAM’S LABOR PRODUCTIVITY IN
THE INTERNATIONAL CONTEXTIn this section, using the Asian Productivity Organization (APO) data and industry classification,
Viet Nam’s labor productivity is compared with those of selected countries in Northeast andSoutheast 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-share analysis 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 subsectors within manufacturing to overall labor productivity growthis additionally studied for each country.

4.1 Data
For international comparison, we use the APO Dataset 2017 which contains data up to 2015.
GDP and sectoral value added are measured in constant 2011 price at purchasing power parity(PPP) exchange rates.
The advantage of using the APO Dataset is that both GDP and total employed persons oflisted countries are divided into nine identical categories: (i) agriculture, hunting, forestry, andfishing; (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 andrestaurants; (vii) transport, storage and communications; (viii) financial intermediation, realestate, renting, and business activities; and (ix) community, social and personal services. Since
GDP and labor input are categorized into these groups, economy-wide labor productivity can becalculated as a sum of per-worker GDP (labor productivity) of each industry weighted by theemployment share of each industry.
However, as APO’s statistics are collected from national accounts of reporting countries,
national differences may arise in the precise definition and classification of the sectors or theway 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 usefuldata source for cross-country comparisons.
In the following part, labor productivity levels and growth rates of Viet Nam and otherselected countries are shown at both economy and industry level. Furthermore, labor productivity
55

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 spurtthat could significantly raise its international standing among neighboring countries (Figure 4.1
and Table 4.1).
In 1991, measured in constant 2011 USD at purchasing power parity exchange rates, theper-worker labor productivity of Viet Nam was $3,219, close to China’s $3,264. In the same
year, the labor productivity levels of Japan and South Korea were respectively 20.8 times and8.8 times higher than that of Viet Nam. ASEAN5 countries also had higher labor productivity
than Viet Nam. Specifically, the labor productivity of Singapore and Malaysia was 21.1 times
and 10.9 times higher, and Thailand, Philippines, and Indonesia were 4.4 times, 3.5 times and4.1 times higher than that of Viet Nam, respectively.
Figure 4.1 Labor productivity of Viet Nam and selected countries(a) High income economies
140
120
100
80
60
40
20

Japan

Korea

Singapore(b) Middle income economies

56

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

0

80
70

China

ThailandPhilippines

Indonesia

Campuchia

Viet Nam

Malaysia

60
50
40
30
20
10

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

0

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

Table 4.1 Labor productivity growth in Viet Nam and selected countries
CountryJapan
South Korea
China
Singapore
ThailandPhilippines
Malaysia
Indonesia
Cambodia
Viet Nam

1991-2000
0.91
4.74
8.75
4.12
2.92
1.35
2.65
1.56
2.64
5.48

2001-2010
-0.32
3.40
10.19
3.20
3.26
2.55
1.93
3.29
3.50
3.54

2011-2015
2.18
1.15
7.13
0.96
3.97
5.38
1.78
3.94
4.46
4.79

1991-2015
0.46
3.41
8.96
2.70
3.02
2.22
2.04
2.80
3.39
4.67

Source: authors’ calculation based on statistics from APO.

Furthermore, over time, Viet Nam’s labor productivity growth remained low incomparison with high-performing economies in the region. As noted above, in 1991, the laborproductivity of Viet Nam was similar to that of China. Thereafter, China attained a high averagelabor productivity growth of 8.96% during 1991-2015, and especially in the first decade of thiscentury when its labor productivity growth surpassed 10% annually. As a result, China increasedlabor productivity by 7.8 times from 1991 to 2015 while Viet Nam’s rose only 2.8 times. Viet
Nam needs to accelerate labor 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 countries
In this section, Viet Nam’s labor productivity is compared with other selected countries for nine57

sectors based on the APO industrial classification. Labor productivity in each sector is calculated
as the ratio of value added to the number of employed persons in that sector.
The results show that, in 2015, the labor productivity of Viet Nam in almost all sectors
was at the lowest range in comparison with the selected Northeast and Southeast Asian countries(Figure 4.2). Viet Nam’s labor productivity was the lowest, even below Cambodia, in threesectors, namely manufacturing; construction; and transport, storage and communications. It was
the second lowest, only above Cambodia, in agriculture, forestry, and fishery; electricity, gas,
and water supply; and wholesale and retail trade, repair of vehicles and household goods, hotels
and restaurants. In contrast, Viet Nam had relatively high labor productivity in three sectors,
including mining and quarrying; financial intermediation, real estate, renting and businessactivities; and community, social and personal services. The following subsections will examine
more fully Viet Nam’s standing in individual sectors.

58

Figure 4.2 Labor productivity by sector(a) Agriculture, forestry, and fishery(b) Mining and quarrying(c) Manufacturing(d) Electricity, gas and water supply(e) Construction(f) Wholesale, retail, repair, etc.

(g) Transport, storage, and communications(h) Financial intermediation, real estate, renting, andbusiness activities(i) Community, social and personal services

700
-300

Japan

South Korea

China

Singapore

ThailandPhilippines

Note: measured in thousand USD/worker in constant 2011 PPP dollars; Cambodia’s data is from 1993.
Source: author’s calculation based on the statistics from APO.

59

Malaysia

Indonesia

Cambodia

Viet Nam

4.3.1 Agriculture, forestry and fishery
In 2015, Viet Nam’s labor productivity in agriculture was approximately $4,115 per
worker, only higher than that of Cambodia ($3,913) and 52% of that of China ($7,886).
Malaysia’s labor productivity in this industry was nearly 12 times higher than that of Viet Nam.
Despite the relatively high average growth rate in the period from 1991 to 2015, Viet Nam’s
agricultural productivity continued to remain in the 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 andfeatures adopted in each mining country. In 2015, Viet Nam’s labor productivity in this sector
was higher than that of Cambodia (11.5 times), Philippines (4.3 times), Japan (2.5 times), andChina (2 times).

4.3.3 Manufacturing
From 1991 to 2015, Viet Nam’s labor productivity in manufacturing increased from $3,108
to $10,032 per worker with an average growth rate of 5.0% per year. China had manufacturinglabor productivity growing at 9.7% per year in the same period to achieve the level 4.4 times higher
than that of Viet Nam by 2015. Other countries that were far more productive than Viet Nam in2015 include Singapore (15.8 times), South Korea (11.5 times), Japan (11.0 times), and Malaysia(8.2 times). Cambodia had a higher per-worker labor productivity than Viet Nam by $290 in 2015,
but grew more slowly than Viet Nam in the whole period at 3.65% per year.

4.3.4 Electricity, gas and water supply
In 2015, Viet Nam’s labor productivity in this sector reached $72,195 per worker withan average growth rate of 6.44% per year in the period 1991-2015 and 8.82% per year in the
period 2011-2015. Labor productivity in this sector of Japan, South Korea, and China was 3.4
times, 4.9 times, and 1.6 times higher than that of Viet Nam, respectively. China experienced themost impressive growth among the compared countries, at 11.75% per year in the period 19912015, but grew at a slower pace at 7.34% per year compared to Viet Nam in the period 20112015. China’s labor productivity was $117,560 per worker in 2015.

4.3.5 Construction
Similar to manufacturing, in 2015, Viet Nam’s labor productivity in construction was$9,299 per worker which was lower than that of Cambodia, at $9,623 per worker. However, it

60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 2.92% per year in the period 1991-2015 and 5.29% per year in the period 2011-2015. In thisindustry, China had the highest growth rate among the countries, at 6.55% per year in the period
1991-2015 and 7.34% per year in the period 2011-2015.

4.3.6 Wholesale and retail trade, repair of vehicles and household goods,
hotels and restaurants
Labor productivity of this industry in Viet Nam reached $7,839 per worker in 2015,
growing at an average rate of 2.12% per year in the period 1991-2015 and 3.9% per year in the
period 2011-2015. Singapore’s labor productivity was 18.7 times higher than that of Viet Nam.
The ratio relative to Viet Nam was ten times for Japan, four times for Malaysia and Korea, andnearly three times for China in 2015. Viet Nam recorded a moderate growth rate of laborproductivity in this industry. China had the highest growth rate at 5.82% per year in the period
1991-2015 and 3.78% per year in the period 2011-2015.

4.3.7 Transport, storage, and communications
Labor productivity of Viet Nam’s transport, storage, and communications was the lowest
among the selected countries. In 2015, Singapore’s labor productivity was 13 times higher, andJapan and Malaysia were about nine times more productive than Viet Nam. In the period 19912015, Viet Nam had the fourth highest growth rate in this sector at 4.69% per year, behind China(7.56% per year), Indonesia (6.1% per year), and South Korea (4.76% per year).

4.3.8 Financial intermediation, real estate, renting, and business activities
In 2015, for this sector, Viet Nam had labor productivity 1.25 times higher than South
Korea, 1.9 times higher than Malaysia and Philippines, and 2.5 times higher than Cambodia.
This is somewhat surprising, but there are also countries that show far higher labor productivity
than Viet Nam in this sector such as Singapore, Japan, and China. The reasons for this great
variation and why Viet Nam is more productive than South Korea, for example, needinvestigation. 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 thesecountries. 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 2015, labor productivity in community, social and personal services of Viet Nam, at61

$8,745 per worker, was superior only to that of Cambodia. Labor productivity of South Korea,
Singapore, and Japan in this industry was respectively 5.5 times, 4.6 times, and 4.4 times higher
than Viet Nam’s. The average growth rate of labor productivity in Viet Nam was 2.4% per year
in the period 1991-2015 and 3.43% per year in the period 2011-2015, ranking third after China
and Malaysia during these periods.
In conclusion, the labor productivity of Viet Nam in almost all industries is at the lowest
level in comparison with those of selected countries in the region. In agriculture, forestry andfishery, 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 1.1, labor productivity growth can be decomposed into the within effect,
which reflects labor productivity improvement within individual sectors, the shift effect, which
captures labor movement across sectors with different labor productivity performance, and theinteraction effect, which is the secondary impact generated by these two effects. This section
compares the results of the shift-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 years of high growth waslargely driven by the within effect (Figure 4.3).
In Japan, from 1971 to 1991, the within effect was always positive and contributed
greatly to the growth of labor productivity with an average annual contribution share of 86.9%.
The shift effect and the interaction effect contributed 13.0% 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 labor productivity. Meanwhile, the shift effect had anegative impact in some years.
In South Korea, the within effect gradually dominated labor productivity growth. Since
1980, the labor productivity of individual sectors had improved and contributed 78.6% to thecountry’s labor productivity growth. The shift effect continued to contribute positively at the rateof 26% while the interaction effect was mostly negative with annual contribution of -4.6%.
In China, the contribution of the shift effect was generally smaller than that of the within
effect. Furthermore, China sustained a positive interaction effect, except 1984 and the period 199862

2002, suggesting that Chinese labor generally migrated from sectors with stagnant laborproductivity growth to those with rising labor productivity growth.
Thus, for Northeast Asian countries, the within effect has been the main driver of laborproductivity growth with its contribution to overall labor productivity growth about 80% in eachcountry. Observations in South 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 effectwith the contribution share of 94% while the shift effect and the interaction effect contributed
8% and -2%, 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 contributing 89% to labor productivity
growth. During this period, the within effect contributed only 17.8%. After 2010, the within
effect gradually rose and surpassed the shift effect, accounting for 78% and 32% of laborproductivity growth, respectively. These results are consistent with the results obtained from thenational data (Chapter 3). The shift effect had a decreasing trend in recent years. Meanwhile, theinteraction 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 in the early stage ofdevelopment, then moved gradually to depend on the within effect. The within effect was
positive in most economies in the period 1991-2015 (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, theinteraction effect was mostly negative for ASEAN countries.
The general pattern of contribution shares of different growth components is clearly seenamong the selected countries. In the ASEAN, Singapore is the country that has a very highcontribution of the within effect, reaching over 80% after 1998. The contribution of the within
effect was also quite high in Thailand, Indonesia, and Malaysia, and relatively stable in the caseof the Philippines. Meanwhile, the shift effect still plays a significant role in Thailand,
Philippines, and Malaysia. In the period 1994-2015, Cambodia had a pattern of contribution ofthese effects to labor productivity growth quite similar to Viet Nam.

63

Figure 4.3 Shift-share decomposition: Northeast Asia and Viet Nam(a) Japan(b) South Korea(c) China (from 1979)(d) Viet Nam (from 1991)

Source: VEPR’s calculation based on the statistics of APO.

64

Figure 4.4 Shift-share decomposition: selected ASEAN countries(a) Singapore(b) Malaysia(c) Thailand(d) Philippines(e) Indonesia(f) Cambodia (from 1994)

Source: author’s calculation based on the statistics from APO. Cambodia’s data begins from 1994.

65

4.5 Sectoral contribution to labor productivity growth
In this section, we deploy the APO dataset to calculate the contribution of economic sectors tolabor productivity growth in Viet Nam for the following periods: 1971-1980, 1981-1990, 19912000, 2001-2010, and 2011-2015 (Figure 4.5). For comparison, sectoral contributions are also
examined for selected Asian countries (Table 4.2).
In Viet Nam, mining and quarrying was the leading contributor to labor productivity
growth in the 1990s when economy-wide labor productivity grew around 6%. Back then, laborproductivity growth was also supported by such sectors as financial intermediation, real estate,renting and business activities; manufacturing; wholesale and retail trade, repair of vehicles andhousehold 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 thecontribution of a few service-related sectors.
In the period 2001-2010, 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 sharply deteriorated in certain years (2003, 2005-08 and 2013).
Wholesale and retail trade, repair of vehicles and household goods, hotels and restaurants had afairly stable contribution over the years while the contributions of agriculture; construction; andfinance, real estate and business activities went down. In this period, no economic sectors madeproductivity breakthrough large enough to stir up the labor productivity of the whole economy
to a higher trajectory, and the Vietnamese economy continued to grow but not at a spectacularrate.
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 the dominant driverof 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 notbeen observed in Viet Nam.

66

Figure 4.5 Sectoral contribution to overall labor productivity growth
Community, social and personal services
Financial intermediation, real estate, renting and business activities
Transport, storage and communications
Wholesale and retail trade, repair of vehicles and household goods, hotels and restaurants
Construction
Electricity, gas and water supply
Manufacturing
Mining and quarrying
Agriculture，hunting，forestry and fishing
The growth rate of labor productivity in the whole economy
8%
7%
6%
5%
4%
3%
2%
1%
0%
-1%

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

-2%

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 and business 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.
In China, Thailand, and Viet Nam, the contribution of agriculture to labor productivity growthis still significant in comparison with Japan and South Korea.
In Japan, the labor productivity growth of the whole economy in the period 1971-1980
came mostly from manufacturing as well as financial intermediation, real estate, renting andbusiness activities. Manufacturing continued to expand in the next two periods before it turned
to a downward trend in the period 2001-2010. The same tendency was observed for the financial
intermediation, real estate, renting and business activities. Meanwhile, wholesale and retail trade,67

repair of vehicles and household goods, hotels and restaurants continued to increase contribution
to labor productivity growth.
In South Korea, sectors that contributed most to the growth of labor productivity in 19711980, 1981-1990, and 1991-2000 were financial intermediation, real estate, renting and businessactivities; 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 laborproductivity growth.
Regarding China, the contribution of manufacturing tended to decline but it was still themost important sector buttressing labor productivity growth of the whole economy, accounting
for 32.6% in the period 2001-2010 and 36.3% in the period 2011-2015. Over time, contributionsof construction; agriculture; and community, social and personal services fell sharply while theshare of financial intermediation, real estate, renting and business activities increased
significantly.
In Thailand, in 1971-1980 and 1981-1990, the manufacturing sector 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 andconstruction had a sharp increase in the proportion in 2001-2010 with the corresponding
contribution of 43.5% and 33.5%. The construction sector’s contribution grew particularly
sharply in the period 2001-2010 but subsequently declined to 8.7% in the period of 2011-2015.
In Viet Nam, the manufacturing sector steadily rose to produce the largest contribution
to labor productivity growth of about 30% in the period 2011-2015. The contribution ofagriculture to the growth of economy-wide labor productivity decreased to 7.52% in the periodof 2011-2015, 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 laborproductivity growth of Viet Nam in 1991-2000, but there was a sharp decline in the following
periods. This result is different from the analysis obtained from the GSO data, which shows thatmining and quarrying 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 of vehicles and household goods, hotels and restaurants;
and community, social and personal services whose contributions rapidly increased. These threeservice sectors still explain much of Viet Nam’s labor productivity growth, with a total
contribution of 39.8% to economy-wide labor productivity growth in the period 2011-2015.
68

Table 4.2 Sectoral contribution to overall labor productivity growth: selected Asian
countries (%)
Japan
Agriculture，hunting，forestry and fishing

1971-80

1981-90

1991-00

2001-10

2011-15

-1.58

0.90

26.43

2.02

1.81

Mining and quarrying

1.30

-0.60

1.66

-0.06

-0.05

Manufacturing

26.21

27.03

149.20

40.12

36.15

Electricity, gas and water supply

3.03

2.70

25.04

-0.43

8.10

Construction
Wholesale and retail trade, repair of vehicles andhousehold goods, hotels and restaurants
Transport, storage and communications
Financial intermediation, real estate, renting andbusiness activities
Community, social and personal services

15.47

0.83

-12.25

-8.00

17.01

18.70

16.11

-82.13

55.94

10.61

-5.78

8.62

23.96

-6.62

12.94

25.13

26.01

-35.30

7.92

3.27

17.51

18.40

3.40

9.11

10.17

Whole economy

100.00100.00100.00100.00100.001971-80

1981-90

1991-00 2001-10

2011-15-23.79

3.29

Korea
Agriculture，hunting，forestry and fishing

0.11

1.09

-2.56

Mining and quarrying

-0.87

-0.79

-0.77

-0.21

-0.13

Manufacturing

23.92

23.41

26.93

39.28

42.03

Electricity, gas and water supply

1.74

2.27

3.53

2.95

1.78

Construction
Wholesale and retail trade, repair of vehicles andhousehold goods, hotels and restaurants
Transport, storage and communications
Financial intermediation, real estate, renting andbusiness activities
Community, social and personal services

3.79

8.94

-5.60

2.18

-6.28

12.20

15.08

6.80

3.77

14.40

8.11

4.41

11.47

8.79

10.44

39.02

22.68

34.33

23.00

26.14

35.88

20.72

23.20

19.15

14.17

100.00100.00100.00100.00100.001971-80

1981-90

1991-00 2001-10

2011-15

Agriculture，hunting，forestry and fishing

NA

29.66

Mining and quarrying

NA

2.23

4.99

6.06

1.27

Manufacturing

NA

18.33

36.00

32.63

36.27

Electricity, gas and water supply

NA

1.05

3.90

2.82

2.03

Construction
Wholesale and retail trade, repair of vehicles andhousehold goods, hotels and restaurants
Transport, storage and communications
Financial intermediation, real estate, renting andbusiness activities
Community, social and personal services

NA

1.33

5.77

7.00

7.91

NA

7.77

8.32

10.99

12.51

NA

5.41

8.00

6.85

7.00

NA

23.89

9.80

12.25

12.54

NA

10.33

15.66

16.22

15.63

Whole economy…

100.00100.00100.00100.001971-80

1981-90

1991-00

2001-10

2011-15

20.39

-2.67

8.12

-16.84-16.49Whole economy
China

ThailandAgriculture，hunting，forestry and fishing

7.55

5.19

4.84

Mining and quarrying

6.11

7.77

3.08

-21.55

5.18

Manufacturing

26.75

35.17

28.84

12.40

70.99

Electricity, gas and water supply

-0.68

2.64

3.31

-10.32

3.06

Construction

4.49

9.15

9.35

33.49

8.72

69

Wholesale and retail trade, repair of vehicles andhousehold goods, hotels and restaurants
Transport, storage and communications
Financial intermediation, real estate, renting andbusiness activities
Community, social and personal services

16.49

13.96

43.49

13.93

10.20

6.08

6.84

12.32

7.69

12.31

6.88

22.15

34.02

8.16

-2.56

18.49

4.34

12.99

-1.23

100.00100.00100.00100.00100.001971-80

1981-90

1991-00

2001-10

2011-15

Agriculture，hunting，forestry and fishing

NA

NA

11.97

7.89

7.52

Mining and quarrying

NA

NA

31.84

-0.48

2.96

Manufacturing

NA

NA

12.96

24.57

28.35

Electricity, gas and water supply

NA

NA

2.92

6.08

7.05

Construction
Wholesale and retail trade, repair of vehicles andhousehold goods, hotels and restaurants
Transport, storage and communications
Financial intermediation, real estate, renting andbusiness activities
Community, social and personal services

NA

NA

4.91

11.46

4.29

NA

NA

8.75

18.26

21.68

NA

NA

2.75

6.27

4.82

NA

NA

16.12

13.66

10.09

NA

NA

7.79

12.29

13.23

Whole economy…

…

100.00100.00100.00Whole economy
Viet Namfrom 1991

22.98

Source: VEPR’s 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. Withouta breakthrough into a high growth 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 of Viet Nam was at orjust above the lowest level in regional comparison. Viet Nam’s labor productivity was lowest
among the compared countries, including Cambodia, in three sectors including manufacturing.
It ranked the second from the bottom, just above Cambodia, in other three sectors including
agriculture. Meanwhile, Viet Nam had better labor productivity than two or more comparator
countries in the three remaining sectors only.
When decomposing labor productivity growth using the shift-share method, a clear
pattern emerges. In Northeast Asian countries and Singapore, the within effect has been the main
driving force of labor productivity 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 thewithin effect. Viet Nam and other selected ASEAN countries relied on the shift effect in the earlystage of their development, 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 need to exhibit negative correlation between
70

productivity level and growth—you need to grow faster at low income to catch up with highincome 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 lowermiddle 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.

71

CHAPTER 5
PRODUCTIVITY ENHANCEMENT POLICY IN
THE DOI MOI PERIODThis chapter has three purposes. First, the Vietnamese authority’s perspective on the role ofproductivity is provided. Second, we will describe Viet Nam’s efforts to improve productivity at
the national and enterprise level. Lastly, the achievements and limitations of the government’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 thoseof other countries globally and even regionally. It was not until 1986 that Viet Nam officiallydecided to abandon inefficient central planning and adopted market mechanisms. After that, thevital 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, theagricultural reform known as Resolution 10 (Resolution 10-NQ/TW 1988) was introduced,
transferring production materials to farmers. Prior to that, agricultural production was stagnant,food production declined, hunger was prevalent, and Viet Nam had to import millions of tons offoodstuff every year. Resolution 10 immediately incentivized farmers, and within only two yearsof implementation, Viet Nam stopped importing food and started 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 fromthe 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 events and 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, with
6

The authors would like to express gratitude to Ms. Nguyen Thi Le Hoa, Mr. Nguyen Dang Minh, and Ms. Nguyen
Thi Tue Anh for valuable comments in the process of completing this chapter.

72

the participation of the Asian Productivity Organization (APO), and the ISO 9000 Forum were
held in Hanoi. When Viet Nam joined the APO in 1996, Viet Nam’s productivity movement canbe said to have begun. The First Quality Decade 1996-2005 was launched by former Vice
President Nguyen Thi Binh, which set the goal of encouraging organizations and enterprises toapply 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 thecentral 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 international organizations such as the World Bank, theInternational Monetary Fund (IMF), and the Asian Development Bank (ADB). Diplomatic
relation with the United States was also normalized. This wave of global reintegration led to theformation of Viet Nam’s first specialized organization 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 realized that productivity improvement tools
presented at the conference were urgently needed in Viet Nam, and a special agency to introduce
these tools was also essential. The VPC (later VNPI) was thus created under the Directorate forStandards, Metrology, and Quality (STAMEQ) of the Ministry of Science and Technology(MOST). This structure imposed multiple layers of management over the VNPI, which was
cumbersome and different from much simpler structure in other countries. The Japan
Productivity Center (JPC) was directly under the Government of Japan, and the Malaysia
Productivity Corporation (MPC) was under the management and financial support of the
Ministry of International Trade and Industry. Placing a national productivity agency undermultiple layers of management may impede its functions and effectiveness, as we see below.
One important activity in the First Quality Decade was the establishment of the Viet Nam
Quality Award by the STAMEQ, which annually selected and rewarded enterprises exceling inquality 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 quality73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, andsocial responsibility were applicable to all types of business. However, Vietnamese enterprises
often did not produce or keep data on productivity and efficiency, making it difficult for
managers to understand the current situation or take corrective measures. Due to slow applicationof new systems and tools, Vietnamese enterprises were slower to improve competitiveness thanrival companies in the region and the world. This partially explains why Viet Nam’s growth of
7-8% at that time was not accompanied by remarkable productivity improvement. In the second
half of the First Quality Decade, the contribution 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 wasformally and clearly stated for the first time in the Resolution of the Tenth Party Congress, whichbecame one of the key pillars of the Socio-Economic Development Plan 2006-2010. Productivity
targets were integrated into industrial and sectoral orientation, 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 the Second Quality Decade was less about the introduction of
productivity enhancing systems and tools and more about their application to improve thecompetitiveness of domestically manufactured products against overseas products. Anotherimportant difference was that the previous emphasis on quality was replaced by the idea that
quality and productivity should go together.
In May 2010, the Prime Minister officially approved the National Program on Improving
Productivity and Quality of Products and Goods 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 under a national action program.
At the Eleventh Party Congress in 2011, the central issue shifted to 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“total factor productivity contributing to the growth of about 35%.” The Second Quality Decadecarried out a series of activities including (i) raising awareness of society about productivity; (ii)74completing the legal framework on the Quality Measurement Standards; (iii) guiding andsupporting enterprises to improve productivity and quality; and (iv) strengthening technicalinfrastructure 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 was little coordination among
different policy measures, the legal documents in some sectors remained ambiguous, and only asmall number of enterprises participated in the programs. Therefore, the movement did not
generate a significant 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,” in which 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 theCommunist 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 from “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 the growth model to improve the qualityof growth, labor productivity, and competitiveness of the economy. It also set productivity
targets for the 2016-2020 period, including (i) annual average productivity growth should behigher 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% tothe average growth in the period 2016-2020; and (iv) narrowing the competitiveness gap with
the ASEAN4 countires (Malaysia, Thailand, Indonesia, and Philippines).
To concretize this policy, in February 2017, Resolution No. 27/NQ-CP of theGovernment issued the Action Program of the Government for policy innovation, growth model,
improving labor quality and competitiveness for the economy. It assigned 16 major tasks and75

120 specific tasks to ministries, sectors, and localities. The Ministry of Planning and Investment(MPI) was designated as the lead agency to facilitate 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 contribution of within-industry productivity,
which previously was carried out by the VNPI under MOST. In turn, MOST was given the taskof building and operating a database to benchmark best productivity practices for enterprises.
However, progress so far has been limited. MPI was slow to issue implementation details.
Designated ministries were also slow to elaborate 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 aministry to work with another agency under a different ministry, procedure must go throughmany 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 laborproductivity. 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 andthe Central Institute for 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 inViet 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 Prime Minister Nguyen Xuan Phucrecommended that the Government should establish the National Productivity Council to lead a
productivity movement (Le Nguyen, 2018). The council was officially formed but it has notstarted its assigned activities as of the end of 2020.
In February 2020, the Prime Minister’s Instruction for Solving National Labor
76

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,
business and labor organizations, and local government units. These orders call for proposing,establishing, promoting, and coordinating various things, which are however broad, general, andwithout implementation or monitoring details. As such, the Instruction shares the same problem
as past policy actions which lacked enthusiasm, incentives, and clear structure with concretenessand 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 (1996Second Quality Decade (2006-2015)
From 20162005)
European
Asian
Deep
The
Joining Global
Industry 4.0
publicdebt
financial integration economy WTO financial
crisis;crisisinto world continues
crisisdomestic
Context
economy to achieve
economyhighrecovers
growthslowlyFirst Viet Nam Quality
Sixth Viet Nam Quality Conference Resolution No. 05-NQ
Major
Conference/TW, Resolution
documents/
No.27 / NQ-CP,
eventsInstruction No.7 / CTTTg
Ministry of Science andMinistry of Science andMinistry of Planning
Technology (leading)Technology (leading)and Investment
Leading and(leading)
implementing
agencies
Ministry of Scienceand Technology
To promote and motivate
To create quality reputation,
To innovate growthorganizations and enterprises
improve the competitiveness ofmodel, improve labor
Goal
to apply management systems "Made-in-Vietnam" goods
productivity and theand productivity improvement
economy’stools
competitiveness- Establishment of VNPI under - VNPI: continuing to guide- VNPI: continuing tasks
Ministry of Science andproductivity improvement tools for as in the previous
Technology
enterprises and starting conducting period- VNPI plays role in supporting research on productivity- MPI is responsible forMain
and guiding productivity- Continuing to maintain the Vietcalculating andactivities
improvement tools for
Nam Quality Award
researching labor
enterprises- Launching Program 712 (Phase 1)
productivity- Establishment of Viet Nam- Program 712 (Phase 2)
Quality Award
Source: illustration by the authors.

77

Viet Nam’s past policy efforts are summarized in Table 5.1. In summary, it can beadmitted 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, and nationwide.

5.2 Key policy components
Below we will examine in detail the VNPI and Program 712, the two core institutional
components of the current productivity policy of Viet 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, Japaneseexperts 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 Socio-economic Focus (2015-16),
and Workplace Improvement and Satisfaction of Employees (2016-18). At the end of 2018,
VNPI had a total of 25 Vietnamese experts, of whom 15 had attended the two-year training
program hosted by JPC in Viet Nam. In addition, most experts participated in short-term training
courses in Japan through the annual APO program.
The VNPI has a president, a vice president, and seven departments. Besides that, twodivisions are located in Ho Chi Minh and Da Nang. The VNPI’s missions are (i) conducting
research to 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 publicationof 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 laborproductivity, TFP, and the current state of productivity of 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, measurementof TFP of the industrial sector, policy proposals, and development of the “One Village, One
Product” and other models. By the end of 2018, the VNPI had also provided consultation to more
78

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 andquality.
 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 of experts andproductivity 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 withindicators and solutions; calculating, evaluating productivity; providing excellent operating models.
 Assessment and issuing certificates: assessing firms and issuing certificate for Good Executive Planof 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 forsustainable 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.

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

79

productivity movement which it is supposed to manage, and (iii) limited visibility, budget, andstaffing.

5.2.2 National Program 712
The Government introduced Program 712, whose full name was “Improving Productivity
and Quality of Products and Goods of Vietnamese Companies to 2020,” as the first national
program for productivity and as part of the Second Decade of Quality, approved under Decision
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 chaired by its Minister, withVice Minister and the Director of the Directorate for Standards, Metrology, and Quality serving
as vice chairpersons. Other members were representatives from various ministries and theVietnam Chamber of Commerce and Industry (VCCI). Program 712 carried out nine projects, ofwhich eight were managed by MOST and other 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 the quality of results
was problematic. The Program’s summary report stated that the number of national standards
established exceeded the target and other 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 the Program wasinsufficient. 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.

80

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 standards

Forming teams of experts and consultants

Applying national standards with 100%coverage of products which may violate codeof sanitization and adulterate the habitat

60,000 companies will be guided to apply
technological advancement, managing
system, tools to enhance productivity andquality

Establishing network of organizations to test
the compliance of core products with national
standards

40% of enterprises that produce coreproducts will have and execute a plan toboost productivity

Creating productivity and quality movement
at cities and provinces

Increasing the contribution of TFP to
GDP to 35% by 2020

Working Framework
Directorate for Standards,
Metrology and Quality(initiate standards)

Introduce the Program

Ministry of Scienceand Technology andsix other ministries(supervise 8 projects)
1. Setting and applying standards
2. Promoting productivity and quality activities
3. Increasing the productivity of industrial products
4. Increasing the productivity of agricultural products
5. Increasing the productivity of communication andinformation products
6. Increasing the productivity of construction sector
7. Increasing the productivity of heath care products
and services
8. Increasing the productivity of transport

People’s Committees(Supervise 1 project)

9. Promoting quality of goods
produced by SMEs in region

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

81

5.3 Methods to improve enterprise productivity
To improve national productivity, enterprise productivity is first priority. Many measures andactions have been adopted for this purpose. This section describes institutes, centers, andconsultative businesses that train 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 goal of guiding 60,000 enterprises, relevant ministries andthe People’s Committees of provinces and major cities were to create action programs foragencies under their authorities.
For example, under the project of “Improving the productivity and quality of industrial
products,” the Ministry of Industry and Trade (MOIT) developed the “Business Support Program”
for the period 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) issuing certificates for enterprises applying ISO14001:2015.
Training courses on productivity improvement tools were announced to the business
community. Lecturers were invited to teach 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 foreignorganizations7. Enterprises 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. Among them, 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 and7

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 Vietnam Certification
Center (QUACERT), and the Vietnam-Germany Technology Training and Transfer Centre (HwC). Private sector
supporting organizations include GKM Vietnam 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.

82models are introduced to solve one or two of these three factors, or even all three. As a latecomer
nation, Viet Nam must learn models and tools for enterprise productivity improvement fromforeign sources, especially from those that are famous for their productivity 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 method fromthe 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 and TPM are the most popular tools in Viet Nam. The ISO management system is the firsttool that most enterprises apply (at different levels). If enterprises additionally meet therequirements of 5S, lean production, or TPM, they will be rewarded a prize or a certificate ofgood practice.

5.4 Summary: achievements and limitations
Based on the discussion in this section, let us summarize Viet Nam’s productivity efforts up tonow, with its achievements and limitations.

5.4.1 Achievements
Even though the awareness raising process of productivity has been slow in Viet Nam incomparison with other countries in Southeast Asia, Viet Nam has prepared basic conditions toinitiate 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 the concern of policymakers
in the days of central economic planning, has been dissolved. The First Decade of Quality 19962005 introduced a number of new methods to Vietnamese enterprises, with the aim of improving
productivity while ensuring quality. The Second Decade of Quality 2006-2015 expanded various
prototyped models to improve productivity for businesses. Program 712 was implemented withthe goal 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 planning and 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.
83

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 focused only on the business sector, while theproblem of productivity is pervasive in the government, businesses, educational institutions, andhouseholds. Moreover, as the initial productivity policies were concerned with the quality aspect,other aspects of productivity such as labor productivity were largely neglected. As a result, the2015 ILO Report ranked 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 stillmarred by traditional top-down plan thinking rather than the bottom-up approach driven byindividual firms and organizations.
In designing and implementing policies, communication and coordination 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 made to establish
an independent agency, such as the National Productivity Council, directly under theGovernment to preside over various programs and support organizations. This proposal has beenformally adopted, but an active use of this mechanism requires continued commitment of 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 for enterprises, Viet Nam
has received technical and financial support from many countries, especially Japan, and a numberof international organizations. 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
successful foreign models usually solves the technical problem, but administrative procedureand 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 need a model of productivity improvement that is truly “Made in Vietnam.”
Viet Nam has worked on productivity for many decades, and there have been a series ofhigh-level resolutions. The Party Congress and the Government are seriously concerned about
productivity. Even so, the results of many policies remain ineffective due to serious weaknesses
in Viet Nam’s policy making process. They include (i) the lack of continued commitment andsupport by national leadership, (ii) the lack of incentives for firms, workers, and individuals toparticipate, (iii) in implementing concrete projects, the lack of detail design—only broad84

directions are given—and proper mechanisms, staffing, and budgets, (iv) government andministerial 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.

85

PART II
JAPANESE PRODUCTIVITY ENHANCINGMEASURES AND THE POSSIBILITY OF THEIRADOPTION IN VIET NAM

CHAPTER 6
SELECTIVELY ADOPTING JAPANESEPRODUCTIVITY TOOLSThe productivity movement in Viet Nam has been small and fragmented, 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, productivity-promoting projects and events,
bottom-up initiative, smooth labor mobility, strong support organizations, better businessenvironment—and a sustained national productivity movement that executes these activities andlasts 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 for economic development. In Part II of this Report, ten productivity methods
originating in Japan and introduced to many countries are described in concrete detail. In sodoing, the context and experience of Viet Nam and other Asian nations in adopting these
Japanese models are carefully and extensively explained. This will assist Viet Nam to learn andmodify 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 longand rich 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 thenext chapter will present ten Japanese methods in full detail.

6.1 Learning from Japan
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 of87

them go back more than a century, many were created in the post-World War II high growth eraof the 1950s and 60s, and others were introduced more recently. By now, many of theseproductivity tools have been taught and emulated in the rest of the world, especially in Asia
where Japanese FDI has large presence, but also in Europe, North America, Latin America, andAfrica 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 the world. Some countries have graduated from Japanese assistance and carryout 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 othercountries (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 asJapanese such as teamwork, long-term orientation, and manufacturing dexterity. In fact, there
are very few nations in the world who resemble Japanese in their life and work style. Even so,kaizen works effectively in India, Argentina, and Ethiopia where popular cultures are very
different from Japanese. Basic work 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 suit domestic society. Mindless copying-andpasting is unadvisable. Because each society is different, foreign ideas and systems must be
adjusted to fit the reality of the home country without losing the intended core function. When
Maruti Suzuki taught efficiency to Indian automotive engineers, the latter spontaneously createdan 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 5S from the Japan International Cooperation Agency (JICA), but it created a standard
dissemination procedure unique to Ethiopia for speed and volume, and began to coach entire
cities consisting of many public and private entities and schools, which is very different from theJapanese way of customizing guidance to each individual firm.
Viet Nam opened up to the Western world more than a quarter century ago, and sincethen has received many Japanese business investments and cooperation projects. Bilateral humanexchange 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 Japan88

Productivity Center (JPC), and other institutions have implemented many productivity programsin Viet Nam, but these were random and mutually unrelated, and the scale was usually small(Chapter 5). These have not been integrated into Viet Nam’s national productivity movement forinternalization, scale-up, and sustainability. Productivity programs conducted by the Japaneseside alone are insufficient, and impact often evaporates when the program ends8. In order topromote productivity in greater scale for visible results, Viet Nam should launch a national
productivity movement under close cooperation among the Party, the Government, and thebusiness 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 receiver of 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 ofconcrete productivity measures in the world and there are already thousands of Japanese firms
operating in Viet Nam. Moreover, Japanese firms and government are generally willing tocooperate 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) establishment of a national model with proper local adjustments, (iii) training of domestic experts andconsultants, (iv) creation of a national institutional mechanism with sufficient mandate, staffing, and budget, (v) fullnationwide 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 othersteps.

89

Table 6.1 Japanese productivity tools for domestic adoption and dissemination abroad
1

Tool
Mindset change

2

5S and kaizen

3

Handholding

4

Shindan5

TVET-industry
linkage

6

Kosen

Key feature
Proper mindset must be inculcatedbefore productivity enhancement is
attempted. Some countries havetransformed national mindset fully or
partially. A national productivity
movement requires mobilization ofmultiple tools and actions for at least
several years under the top leader’sstrong commitment.
Kaizen is a philosophy with a set ofconcrete tools for eliminating muda
(any wasteful action or thing) fromthe workplace. 5S is the most basic
practice for implementing kaizen.
The teaching method is standardized
but variation exists across different
firms and experts.
A customized and comprehensive
support for selected SMEs for 2-3
years with a clear target, covering
management, marketing, technology,
product development, finance, etc. as
needed (not just kaizen).
A state-certified SME consultant
system with standardized training,
tests, and renewal. Shindan experts(shindanshi) can be officials or
private citizens. They actively assist
SMEs often at relatively low fees.
TVET institutions in Japan not only
teach skills to students but work
closely and constantly with hiringfirms to improve programs andfacilitate internship and job
placement of students. Graduating
students are highly demanded byindustry.
Kosen is a Japanese education
system for producing engineers withpractical skills and proper attitude.
The Vietnamese kosen model isdefined as TVET institutions
teaching technical knowledge andskills, proper mindset and creativity
as well as supporting students for

90

Existing or related programs
Some nations adopted national
productivity movements withvarying degrees of success.
Singapore and Ethiopia launchedsuch national campaign withJapanese help. In Viet Nam, nosystematic national effort has been
introduced.
Japanese FDI, JICA, Japan
Productivity Center, and private
consultants have taught 5S andkaizen in many countries withvisible improvements. In Viet Nam,efforts exist but they are not yet
widespread or integrated.
In Japan, JETRO and local
governments routinely provide
handholding support to SMEs.
Similar support is also available in
Taiwan, Korea, Malaysia, etc. Not
yet practiced in Viet Nam.
Japan has 27,000 shindanshi who
work at home and abroad. JICA has
introduced shindan in many
Southeast Asian nations including
Thailand, Indonesia, and Malaysia,
with some difficulties.
This linkage formation is astandard content in Japanesecooperation for TVET institutions.
JICA assisted Hanoi University ofIndustry, Industrial University of
HCM, and other schools forlinkage formation (Kosen below
also contains linkage elements).
JICA Kosen Project (2013-2018)created pilot kosen schools at
Industrial University of HCM, Cao
Thang Technical College (HCMC),
Hue Industrial College and PhucYen College of Industry (VinhPhuc, now renamed to College ofIndustry and Trade). Kosen Kiko

7

Mobilization ofgino jisshusei(technical interns
in Japan)

8

Kosetsushi(technical support
centers for
SMEs)

9

FDI-domestic
firm linkage

10

Revitalizing
supporting
industry
programs

internship and employment.
Gino jisshusei are foreign workers
learning technical skills at specificfirms in Japan for three years. Japanis revising this system to receive
more workers in broader sectors andfor longer periods. Returning
workers should be actively mobilized
for fatherland’s industrialization, but
this is often not happening.
Kosetsushi are local technical centerswith official technical experts andanalytical equipment. They provide
various technical service such as
testing, analysis, certification,
product development, processing,problem finding, etc. to SMEs at
subsidized cost.
Support for FDI to find local firms
for part procurement or long-term
partnership. Direct official support
such as trade fairs, matching events,
database, and individual firm
assistance, as well as subsidizing
private effort, are commonly used.
Meanwhile, forced linkage against
firms’ will usually does not work.
Integrated support for management,
technology, and finance should begiven to candidate firms. In
latecomer nations, policy should startwith direct technical support andmove to indirect private guidance as
domestic capacity rises. Transparent
and easy-to-use incentives andlinkage formation support should
also be offered.

will continue support.
Viet Nam sends the largest numberof gino jisshusei to Japan. JapaneseSMEs are generally impressed with
their attitude and skill learning.
Japan and Viet Nam are working tostrengthen monitoring andeliminate improper receiving firms
and labor brokers.
Japan has a long history of
kosetsushi with at least one inevery prefecture. Some nations
have similar technical centers, but
often only at central level.
Vietnamese MOIT is studying thepossibility of setting up kosetsushi
with Korean help, visits to Japan,
etc.
Thai BUILD/BOI conducts
matching services. Malaysia tried
VDP and ILP in the past. Viet Nam
has trade fairs, databases, andmatching events but produced little
result due to the scattered nature ofthese activities and the lack of local
firm capacity.
Japan, Thailand, and Malaysia
promoted supporting industries
each in its own way. Viet Nam’s
current system is primitive,
cumbersome, and highly limited inscope. For broader impact, it
should be significantly reformed by
selective adoption of international
best practices.

6.2 Three issues in learning productivity policy
In this section, three issues that must be considered in introducing productivity methods fromJapan and elsewhere are presented: (i) policy organization, (ii) features and instruments of anational productivity movement, and (iii) distinction between direct policy support and indirect
guidance and incentives.

91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 best arranged depends on the nature of politics, administrative capacity, private
dynamism, social structure, popular mindset, and other unique features 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 the late 1950s was driven by the business community although public
policy also played a supportive role. Three NPOs—the Japan Productivity Center (JPC), theUnion of Japanese Scientists and Engineers (JUSE), and the Japan Management Association(JMA)—facilitated learning from 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 (carassembler) and the 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 the 2010s were executed as top-down policy with thePrime 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 not strongly pursuing or requesting productivity actions, theVietnamese government must be the initiator of a national productivity movement.
During the long process of industrialization, Japan has developed a thick layer ofenterprise supporting organizations. The current situation can be described as follows. At thepolicy 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 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 willing to 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 first and gradually introduce additional functions as92

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 throughpolitical leadership, sufficient mandate, and active use for policy making purposes.
On the implementation side, Viet Nam needs a competent and dynamic agency toimplement and monitor the policies decided by the National Productivity Council. There aredifferent 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. This requires significant
strengthening of the VNPI’s capacity and elevating the official status of the VNPI to the level
above ministries. The second is to create a new agency directly under the Prime Minister toreplace (and absorb the current functions of) the VNPI. The third is to create a new agency undera ministry (which ministry needs to be carefully examined) but having sufficient authority to
execute a nationwide 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 teach Vietnamese firms, workers, and new experts on the ground. Trained experts
must be properly incentivized to engage in tasks contributing to Viet Nam’s industrialization fora long time.
For creating these necessary institutions and human resources, cooperation of Japaneseorganizations such as JICA, JPC, and the Japan SME Management Consultant Association (JSMECA), 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 experiences of national productivity
movements in various countries. Singapore, Ethiopia, Botswana, India, and Mauritius wereactually visited for meetings with core organizations and experts. Japan, Korea, Tunisia,
Argentina, and other countries were studied through records, documents, and interviews withresponsible experts. Some countries brilliantly succeeded in achieving national productivity
goals while others 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

93

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 well as 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 requirecontinued effort for several years or more. The movement must start with awareness raising andmindset change, which is the first and usually the most difficult stage. This elevates popular
mindset toward efficiency, discipline, and good planning, and convince all citizens of the crucial
importance of productivity for themselves as well as for the nation. This stage is followed by onsite productivity improvement guidance at factories and other workplaces by international
experts and the learning of this practical 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 teachother nations, the national productivity movement can come to a successful completion.
Second, the top national leader’s strong commitment and involvement, usually at thelevel 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 and equally enthusiastically byPrime 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 personally oversees the progress.
Leaders at the ministerial or lower level are unable to overcome difficulties that require interministry 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 in and benefits from theproductivity 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 the base of the productivity
movement. Some people work very hard for national development and/or psychologicalsatisfaction but most others need higher salaries, bonuses, promise of promotion, and other94

material paybacks to sustain the movement for a long time. This applies to all stakeholders
including public servants, experts, teachers, managers, engineers, and workers. Without suchincentives, 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 implementation must be createdand 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 andcenters. Support functions should include providing useful information and analysis for thecreation of a national model and standards; producing standard textbooks, programs, and othermaterials (see below); organizing a massive mindset campaign, worker and teacher training
programs, productivity awards and outreach to all sectors and regions; productivity certification;inter-agency coordination; receiving international cooperation; and developing the capacity ofthe private sector.
Sixth, a large number of practical instruments and materials must be created. This is tobe done by learning various international best practices, then producing a new model mostsuitable for domestic reality by selecting, adjusting, and combining foreign components.
Commonly used instruments and materials for a national productivity movement include thefollowing.
(i) Slogans, symbols, mascots, posters, etc. for popular awareness-raising. Singapore
adopted a bee as a visual symbol of productivity and teamwork, and “Together We
Work Better” as a 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 werecreated.
(ii) Creation of standardized teaching materials which include curriculum, courses,
textbooks, manuals, visual aids, e-contents, TV programs, movies, and stories
describing successful nations, firms, and individuals. These can be translated fromforeign sources or newly created by national experts, and made available to publicthrough 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 theirtrainers.

95

(iv) Seminars, lectures, symposiums, ceremonies, and other publicity events conducted bynational and regional leaders as well as productivity experts.
(v) Competition for productivity awards at the national, regional, sectoral, and even firmlevel to recognize and promote excellent people and actions. How to organize suchcompetition can be learned from Japan and other nations which regularly hold such
events.
(vi) Creation of Productivity Month in which productivity-related events such as the prime
minister’s address to the nation, kaizen rallies, award-giving ceremonies, seminarseries, 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 sector expands and becomes more competitive. However, it iscommon 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 depth of government learning determines how fast and far the nation
rises in industrialization (Oqubay and Ohno, 2019).
Meiji Japan began industrialization by importing and installing the exact replicas ofWestern 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 this way mostly in the 1870s.
But in 1880, government decided to privatize most of these projects (except military and public
utility facilities) to emerging zaibatsu such as Mitsui, Sumitomo, and Mitsubishi throughcompetitive bidding. These zaibatsu quickly transformed former loss-making government
projects into profitable businesses. Japan’s transition from official involvement to private action
was very quick, and the Japanese government has ever since supported the private sector mainly
through indirect means.

96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 theMachinery 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 for mutual help and receiving policy support. Now industrial policy and cooperation
are implemented through these private associations and their summit organization. Similarly, ashindan system introduced from Japan to Thailand was gradually privatized so Thai shindan
support is now conducted mostly by private shindanshi (experts and consultants).
Even at a high income level, government should play an important role in encouraging,assisting, and coordinating private activities. This 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 internal fight between the
Ministry of Industry, which wants to promote domestic industry, and the Ministry of Finance,
which opposes generosity for budgetary reasons. Clear leadership, a sense of proper balance, andprioritization are needed to solve this perpetual conundrum. A strong national leader who canrule over different ministerial interests can offer a solution. Otherwise, an inter-ministerial
mechanism must be established to decide on the exact position a country should take between
industrial promotion and fiscal soundness. In some countries, the parliament is the place wheresuch policy debate takes place.
The art of offering incentives and subsidies must be learned by comparing international
best practices. The standard methods include time-bound reduction and/or exemption of
corporate income tax, import duties, (special) sales tax, and other tax obligations as well as
provision of soft loans and direct subsidies, provided that firms satisfy certain conditions suchas investment, training, technology, export, or ICT. In some countries, privileges areadministered professionally and carefully to produce great outcomes. In others, they are given
incompetently with no 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 tomanufacturing 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 and process improvement, obtaining quality certification, etc. The list of eligible actions
was very long. Company actions were monitored after three, six, and twelve months and benefits
97were withdrawn if non-implementation was detected. This was an example of well-designed
SME support incentive policy with transparent and concrete conditions.
In some cases, financial privileges can be offered without any loss of fiscal revenue. In
Singapore, the Skills Development Fund was 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 S$4,500 of gross monthly
remuneration at the levy rate of 0.25%, or S$2 per worker, whichever is higher. The government
then provides 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 andprivate donations, but this requires the existence of convincing policy visions and proposals.

6.3 Singapore’s productivity movement with Japanese cooperation
As 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 tosupport the manufacturing sector. In 1967, the National 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 of 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 laborintensive industries, Singapore had to graduate from labor-intensive production to the use ofhigher 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 inadvancing 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 from the Western model. In 1981, Prime Minister Lee Kuan Yew met Mr. Kohei Goshi,
98Figure 6.1 Singapore: evolution of productivity supporting organizations
1964

1967

1972

1983

1995

1996

2001

2002

2018

2019

Productivity
Unit within
EDB
National Productivity
Center under EDB(1967-72)
National Productivity Board(1972-95)
Productivity
Standard Board(1996-2001)

Singapore Trade Development Board (1983-)  International
Enterprise Singapore (-2018)

Standards,
Productivity andInnovation
Board(SPRING)(2002-2018)

EnterpriseSingapore(2018)

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

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 from the 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.

6.3.2 Japanese cooperation in the 1980s
In the 1980s, Singapore began full-fledged productivity promotion with Japanesecooperation. 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) wasestablished as its policy formulation and monitoring organization whose members came fromgovernment, 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 the first 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
99

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 inthree principles, namely, (i) productivity improvement should increase employment in the longrun, (ii) government, employers, and workers must work together to implement productivity
measures, and (iii) fruits of improved productivity must be distributed fairly among management,labor, and consumers (JICA and GRIPS Development Forum, 2011).
Singapore’s Productivity Movement evolved in three phases: Phase I (awareness, 19811985), Phase II (action, 1986-1988), and Phase III (ownership, 1989-1990s). Phase I spread theawareness of importance of productivity among firms and workers featuring flexible thinking,positive attitude, and teamwork. Phase II performed concrete productivity improving guidance
to selected firms targeting both managers and workers. Phase III shifted the main role ofsustaining and expanding the productivity movement to private hands (Figure 6.2).
Initially, there was difficulty for Singaporean officials and managers, who werecomfortable with Western management style, to learn and adopt the Japanese productivity model.

Figure 6.2 Singapore: evolution of Productivity Movement

Source: JICA and GRIPS Development Forum (2011).

100

Overcoming this took nearly entire Phase I. In time, however, the Japanese way graduallypenetrated the Singaporean mind. The Productivity Movement supported by Japan and deeplycommitted by Prime Minister Lee Kuan Yew became very active, and the domestic system tosustain productivity improvement was installed. In the 1990s, with Japanese support andintroduction, Singapore even began to offer international cooperation to developing countries in
Asia and Africa to share its experience in productivity development.
The factors contributing to the success of Singapore’s productivity advancement included(i) strong commitment and effective oversight by the highest national leader, (ii) acomprehensive and integrated strategy with many internal linkages, (iii) strong collaboration
among government, private firms, labor unions, industrial associations, and educational andprofessional institutions, (iv) vigorous learning from best practices, especially from Japan,
through international cooperation, (v) the support of workers who understood the need to change
and embrace a productivity culture, and (vi) the idea that an ambitious goal could only beachieved through an effective combination of sound policies and strategic institutional design,emphasizing cross-sectoral collaboration and sustained efforts (Vu Minh Khuong, 2014).

6.3.3 Continued effort
Singapore continues to improve productivity even beyond the Japan-assisted
Productivity Movement in the 1980s. The Singaporean policy formulation generally and always
starts with establishment of 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 in proper steps. A vision, quantitative targets, andconcrete strategies are specified with effective mutual linkage.
In 2010, the Economic Strategies Committee (ESC) launched the vision 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 vibrantand diverse corporate ecosystem, (iv) innovation and commercialization of R&D, (v) a smart
energy economy, (vi) enhanced land productivity, and (vii) building a distinctive global city andan endearing home.
Subsequently, the Committee on the Future Economy was formed 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 grew by 2.5% peryear in 2009-2016. In 2017, the Committee announced the new vision of being “the pioneers of101

the next generation,” the target of “growing 2-3% per year on average to exceed the performanceof most advanced economies,” and proposed six key strategies of (i) deepen and diversify
international connections, (ii) acquire and utilize deep skills, (iii) strengthen enterprisecapabilities to innovate and scale up, (iv) build strong digital capabilities, (v) develop a vibrantand connected city of opportunity, 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 and otherrival nations.
In 2018, the Enterprise Singapore, a statutory board under the Ministry of Trade andIndustry, 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.

102

CHAPTER 7
JAPANESE PRODUCTIVITY METHODS IN
THE VIETNAMESE CONTEXTThis chapter explains Japanese productivity methods in detail, with some overlaps acrosssections, as well as how other countries learned from Japanese models and how Japan teaches
them abroad. These cases are offered to the Vietnamese government and people for studying thepossibility of 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 is small 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 astrong 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 thantechniques. Vietnamese and Japanese working cultures are different. Japanese experts must fully
understand Viet Nam’s culture and social structure before asking workers and managers tochange their behavior. Mindset change is hardly possible if Japanese experts know little about
Viet Nam and must speak through interpreters. Mindset change should properly be initiated andcarried out by Vietnamese people themselves.
National characters unfit for economic growth are many. They include short-termism,
selfishness, excessive bureaucracy, inattention to details, lack of persistence and resolution, lackof 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 awareness campaign.
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 with fatalism, 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 more103

dynamic, yet their relative 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 thefirst EPZ in Sri Lanka. Young female workers then knew nothing about money, work ethic, orcity life, and some of them, dubbed “Juki girls,” lost decency and caused social problems.
Subsequently, EPZs were built across the country so rural workers no longer had to migrate tocities 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 Japanese policy dialogue mission,“I have studied East Asian policies and our industrial policy has improved in the last several
years. Why do my people continue to pour money into property speculation and not
manufacturing? Why do they not build more factories? Please tell us how East Asian
governments transformed people’s mindset to invest and learn more.” In response, the Japanesedelegate suggested initiation of a national kaizen movement.
Compared with these peoples, the mindsets of Japanese, Korean, and Chinese (including
overseas Chinese) are quite different. They are naturally dynamic in both commerce andmanufacturing. They can learn, produce, invest, and innovate even without official assistance,and can do these things more effectively if proper official support is rendered. They do not haveto be told to be economically active by the government. Japan, Korea, and overseas Chinese
economies such as Singapore and Taiwan already belong to the high income group, and mainland
China is catching up rapidly since the 1990s. This points to intrinsic differences in national
character which are the results of diverse history as well as domestic and external conditions.
We must start with the premise that different nations are good at different things, and somenations must start industrialization with mindset change while others need not.
Changing national mindset is far more difficult than introducing a new machine ortechnology, but there are countries that attempted—and even 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 three phases. Phase I (awareness, 1981-85) implemented a series of national
campaigns to hammer the importance of productivity into the minds of all citizens until even taxi
drivers became aware. This was the most difficult phase in which Singaporeans had to be104

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 Japanesemethod. Japanese experts coached firms, and accompanying Singaporeans learned how to do
this. In Phase III (ownership, 1989 onward), Singaporeans became able to continue theproductivity movement without Japanese assistance, and they even started teaching othercountries (with Japanese intermediation). These three phases are standard for executing anational productivity movement with Japanese cooperation.
One may argue that Singapore is an exception because it is a small city state withdominant Chinese population. It is no wonder that it learned productivity relatively easily andfast. But many other countries with large rural population also tried national productivity
movements, with or without Japanese assistance, with varying degrees of success 9. 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, now in its third phase, has been implemented since 2009. Prime Minister Meles
Zenawi (in office 1995-2012) and Prime Minister Hailemariam Desalegn (in office 2012-2018)
were both personally and strongly committed to application of kaizen in Ethiopia, not just as aset of convenient tools but more importantly as a life and work philosophy to transform thenational 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, andEthiopia 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-housetraining at Japanese FDI11, Keiei Juku (business executive courses managed by Foreign Trade
University supported by JICA), and training programs at some labor exporting companies for
9

Apart from JICA cooperation, Japanese-style productivity tools and movement can be learned via the Ministry of
Economy, Trade and Industry (METI), the Asia Productivity Organization (APO), the Japan Productivity Center(JPC), the Association 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 funded by Japan. Moreover, many countries which mastered kaizen, such as Singapore, India, andThailand, can also teach Japanese-style productivity methods to others.
10
GRIPS was designated by Prime Minister Meles as the Japanese counterpart of this 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 re-train their new and existing workers for safety, efficiency,
technology, customer service, and proper work ethic in Japan and abroad.

105

Vietnamese workers before dispatching them to Japan (gino jisshusei—see below). But theseremain small and local in scope. There has been no systematic effort to change the mindset of an
entire nation like Singapore or Ethiopia.
Outside government, an interesting mindset-change program for Vietnamese people isbeing developed by GKM Lean Management Institute, a private consultant firm, in Hanoi. Dr.
Nguyen Dang Minh, its executive, is an automotive engineer who had a working experience atthe 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 fortransforming company-wide mindset. His method consists of securing full mandate andcommitment from the general director, intensive discussion with the heads of all departments,
drafting of standard operation manuals by all departments under his supervision, and isolationof workers who do not cooperate. Details are the business secret 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 continuousand participatory improvement in quality and productivity involving the entire company fromtop management to middle managers and production line workers. It aims to install a permanent
process of eliminating muda (waste)12 and maximizing the use of existing human and nonhumanresources within a firm. It is a continuous 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 a considerable expenditure (GRIPS
Development Forum, 2009).
The origin of Japan’s kaizen movement was the statistical control method imported fromthe United States in the late 1950s. Japanese firms—especially SMEs—at that time did not havesufficient funds and was seeking methods to improve operation without large investment13. The
12

According to Toyota Production System, muda—defined as any thing or action that does not add value—isclassified into seven types: (i) waste of processing, (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 beconstrued 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 with latest ones to improve productivity. Large manufacturing firms
in steel, chemicals, and other industrial materials embraced this method to achieve competitiveness. However, suchinvestments 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 lessmoney.

106

management theories and lectures of Professors W. E. Deming and J. M. Juran were particularly
influential. Japan quickly absorbed this imported technique and modified it to its own
management practice which became uniquely Japanese. The result was remarkable efficiency
improvement which even surpassed the performance of American manufacturers. Comparedwith the original American model which was top-down, theoretical, and highly statistical, themodified Japanese method emphasized process orientation, bottom-up worker participation, andhands-on pragmatism. This method, which came to be known as kaizen, spread rapidly among
Japanese firms, both large and small, to form the core of Japanese monozukuri (manufacturing)spirit. This was a private sector-led effort assisted by three non-profit organizations—the Union
of Japan Scientists and Engineers (JUSE), the Japan Productivity Center (JPC), and the Japan
Management Association (JMA)—which sponsored lectures, seminars, foreign missions,productivity and quality awards, and other supporting mechanisms (Kikuchi, 2014).
From the 1980s onward, kaizen spread abroad as Japanese manufacturing firms expanded
their production base to the rest of the world. The introduction of basic kaizen tools became astandard package of Japanese technical cooperation in developing countries. Such a package(normally called the “quality and productivity enhancement project”) is implemented by bothprivate and public hands. Many Japanese firms teach their own workers at overseas plants andpartner supplier firms through classroom and on-site training, dispatch of Japanese technicians,
training at the mother factory in Japan, and organizing skills competition among engineers andworkers. There is also fee-based kaizen instruction by private consulting firms such as 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 manufacturingfirms 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 workwith creativity and ownership. A large number of tools are available in the kaizen toolkit
including 5S, quality control circles (QCCs), mieruka (visualization), efficient equipment layout,
heijunka (leveled production), jidoka (automation with human intelligence), kanban, Just-in-

14

The new AOTS was renamed in 2017 from the Overseas Human Resources and Industry 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 theJapan Overseas Development Corporation (JODC), which dispatches Japanese experts abroad.

107

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

1983 1987

National Productivity Board

Productivity Development Project

1994 2001

BrazilBrazilian Institute of Quality and Productivity Project

1995 2003

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

Productivity Improvement for Enterprises

2001 2006

Technical Instructor and Personnel Training Center

Tunisia

The Study on Master plan of Quality/Productivity Improvement

2005 2008

Ministry of Industry, Energy and SMEs

Egypt

Productivity and Quality Improvement Center2007 2011

Productivity and Quality Improvement Center, Ministry of Trade and Industry

Ethiopia

Tunisia

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

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

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

2010 2013

Jordan Enterprise Development Corporation(JEDCO)

Ethiopia

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

2011 2014

Ethiopian KAIZEN Institute, Ministry of Industry

Ghana

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

2012 2015

National Board for Small Scale Industries

Kenya

Productivity Improvement in the Republic of Kenya

2012 2014

National Productivity and Competitiveness Center

Tanzania

Strengthening Manufacturing Enterprises through Quality and Productivity Improvement (KAIZEN）

2013 2016

Ministry of Industry and Trade

Zambia2014 2016

Ghana

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

Cameroon

Quality and Productivity Improvement (KAIZEN) for SMEs

Costa Rica

Ethiopia

2015

Zambia Development Agency; KAIZEN Institute of Zambia
2020 Ethiopian KAIZEN Institute● ●● ● ● ●● ● ●● ● ● ●
●
● ● ●
● ● ●
● ● ● ●
●
●
●
●
●
●
●

● ● ●
●
●
●
●
●

● ●
●
●
● ● ●
● ● ●
●

● ● ● ●

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

20162019 National Commission of Micro and Small Enterprises

● ● ●

2015

Other

Productivity Development Project

Thailand

Local
expenses
Equipment
provision

Singapore

Training
abroadCounterpart organization

Expertdispatch

Planneduntil

Completion

Project name

Start

Country

JICA support component● ●Tunisia

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

20152019 Unit of Management of National Program of the Quality Promotion

Dominican Republic

Improvement of Quality and Productivity of SMEs

20162019 National Institute of Technical and Vocational Training

Malaysia

Productivity Improvement

20162018 Malaysia Productivity Corporation● ● ● ●
● ● ●●Malaysia

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

20162018 Malaysia Productivity Corporation●

Argentina

KAIZEN Technical Assistance Network for Global Opportunities (KAIZEN TANGO)

20172022 National Institute of Industrial Technology

ZambiaNational 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

20172020 KAIZEN Institute of Zambia, Limited

● ● ●
● ● ●

2017

2020 Ministry of Industry and Trade● ● ● ● ●2018

National System of Quality, Technical Secretariat of Planning and External
2022
Cooperation●

El Salvador

Tanzania
Honduras●

Source: selected from JICA Knowledge Site (gwweb.jica.go.jp/km/km_frame.nsf), accessed on November 22, 2018.
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.

108

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 with different scopes and nuances, which sometimes causes confusion.
Nevertheless, in any firm or country, the adoption of kaizen must begin with 5S which ismade 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 discipline in the workplace,which are considered so fundamental that all firms must practice 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 they require no high academic degrees to understand, but are very
difficult to actually sustain daily and forever. Kohei Goshi, former chairman of JPC, said thatkaizen “is like a marathon with no finish line.” Even Toyota, the leader of Japanese productivity
movement, tries to perfect kaizen daily and forever. Factories and offices that implement kaizen
look very neat and orderly. Japanese firms do not consider doing business with local supplierfirms 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 with even 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 experienceartificially created dangerous situations to understand the importance of safety rules, is anotheressential ingredient of 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 areusually organized to give basic information and screen candidate firms with proper mindset andpotentiality. The general director is interviewed for his or her business vision and willingness tolearn. Then an internal team is formed at each 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

15

In Viet Nam, they are often translated as Sàng lọc, Sắp xếp, Sạch sẽ, Săn sóc, and Sẵn sang.

109

with hints provided by the kaizen 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 andcomplementarity with Western methods. Some question the validity of kaizen in countries where
low literacy, short-term orientation, top-down management, and inattention to details prevail. Ifstrong hierarchical structure is dominant, workers may hesitate to bring their ideas to supervisors.
While these arguments are theoretically plausible, experience of numerous kaizen teachings
around the world shows that there is no society in which kaizen fails to improve quality andproductivity. Improvements are immediate and clearly visible in cost reduction even though thenumber of best performers may vary across countries. As to the compatibility between kaizen
and other methods such as benchmarking and business process re-engineering, the two should 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 bottomup processes required by the former can co-exist with top-down decisions assumed by the latter.
Another practical concern is over-burdening of managers and workers 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 is 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 Japanesemanufacturing 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 databaseof the Japan External Trade Organization (JETRO). However, this project was implemented by
Japanese experts only with no participation or learning by Vietnamese officials or experts. The
activities ended when senior volunteers returned to Japan. It is odd that Viet Nam, which hasreceived a large amount of Japanese FDI in the last quarter century, has not launched anationwide productivity movement. Productivity promotion by the Viet Nam Productivity
Institute (VNPI) is still very small in scale (Chapter 5). As a consequence, kaizen practice in Viet
Nam remains random, scattered, and spontaneous.
110

By contrast, many nations try to internalize and institutionalize kaizen (or kaizenequivalent 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 wasoffered to Singapore in the 1980s. These countries no longer 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, andCameroon 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 instructions to firms, offices,public servants, and even an entire city. September is designated as Ethiopia’s Kaizen Monthwhen 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 thefirm’s competitiveness depends on many other factors 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 firms that 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 byan expert team until a pre-set goal is attained. Handholding is of the second type. It is widelypracticed 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 withlow or no cost to them. It is not high fee-based advice by MBA-holding consultants. For
handholding, there must be a screening process to identify eligible firms 16. For each selected
firm, the general director is interviewed for proper mindset and capability; the firm is diagnosed

16

In most Japanese prefectures and cities, local government officials in charge of SME support know the featuresof individual firms they regularly visit, consult, and support in their jurisdiction. They can readily produce a list offirms 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.

111managerially, technically, and financially; one business goal is set17; then a multiple assistancepackage is rendered to achieve the goal. An expert team is organized for each firm, usuallyconsisting of a government official, a private business consultant, and technical or other expert(s)as required. Customized and intensive support is offered to each firm for two to three years withan expectation of a high success rate. Handholding support is usually non-renewable. It is a very
labor-intensive 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 (notthrough a trading house) to a new market are supported. Eligible sectors include machinery andcomponents, environment and energy industries, agricultural and fishery products, traditional
items, household goods and fashion, and others. 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 ofan application form by the firm; (iii) interview with the general director; and (iv) evaluation andapproval by the JETRO headquarters selection committee. The support team consists of one toa few experts who have special knowledge required for handholding and one JETRO official
who provides JETRO-related services and monitors and coordinates expert activities. Dependingon the firm, a support package may include export strategy formulation, gathering of market
information as well as guidance in trade fair participation, 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 thesame foreign buyer three times or more, or sells to a foreign agent with payments received. If
the firm develops two new 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 becomea 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 seriouslyinterested in investing abroad are targeted. For destination, developing countries (recipients ofJapanese ODA) are preferred. One JETRO official and a few external experts (a business17

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.

112

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 negotiated with the firm but should
not exceed two years. The firm is asked to appoint one key person for this project, pay the costof their own foreign travel and establishing a company abroad, and submit progress reports.
JETRO pays all expert fees and their travel costs, and provides necessary information andcoordination. In some cases, the expert team may even suggest the firm to stay in Japan insteadof going abroad. JETRO argues that joint support by a JETRO official who has a broad network
and information and 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 AsianBusiness 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 the most popular destinations were Viet Nam, Thailand, and Indonesia. Informationon these three countries was collected, and study tours were organized to them. Four city officials
and 95 external experts were assigned at the Center to offer yorisoi (handholding) support. A
group of experts, accompanied by a city official, are dispatched to each firm. Consultation is freeof charge up to 10 times a year. Seminars and study meetings are held, overseas missions areorganized, and cooperation with other support organizations is activated.
The reason why JETRO and other Japanese public agencies and local governments canprovide large-scale handholding support is because Japan has a large pool of active or retired
business and industrial experts willing to work for public purposes at relatively low fees. Someare 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) evaluation and 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. Durationof 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 to113

Japan, firms must pay about $2,500-3,500. Roughly 50-60 firms are supported annually by the
KOTRA office in 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 Cooperation (MATRADE)
provides handholding to SMEs new to exporting, though at a much smaller scale18. Eligibility islimited to women, youth, and Bumiputra (ethnic Malay) entrepreneurs only. This program has asocial aim of advancing disadvantaged groups with currently low levels of foreign market
penetration. Support lasts for three years, which is non-renewable, and covers (i) customized andintensive coaching by one experienced expert and a MATRADE official, (ii) export skills
seminars, workshops, and symposiums organized by MATRADE on a quarterly basis, (iii)
participation in international trade fairs and export missions for selected SMEs, (iv) allocationof exhibition space for 12 months 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 the cost of foreign travel, unlike the cases of JETRO or
KOTRA. The firm screening process uses both internal information (MATRADE SME databaseand SME Corp information) as well as actual visits to companies.
In Taiwan, the SME Administration (SMEA) has since 1989 operated the One Town One
Product project (Taiwan OTOP), copied from Japan’s One Village One Product program, which
creates high-value, high-image local cultural products for tourist and export markets. This canbe regarded as collective handholding for SMEs in one particular community. SMEA dispatchesa group of experts for three years to (i) identify local needs and missing factors, (ii) build
communal consensus, (iii) conduct training, (iv) strengthen business capacity and develop new
products, and (v) sustain growth under community ownership. Support includes R&D, re-makingof 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, Malaysia, and Taiwan, the success of handholding depends muchon 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

18

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

114

step. When a sufficient number of experts and officials are trained, handholding in a simple form
may be started, for example, with a limited focus on management strategy, technology, andkaizen 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 the late 1940s after the defeat in World War II. Under occupation by the American
forces (1945-1952), 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 topromote finance, re-organization, and diagnosis of SMEs. For diagnosis, the government draftedbasic 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 and registration numbers. In 1954, the Japan SME Management Consultants
Association (J-SMECA) was founded as a nationwide association of shindanshi. Headquarteredin Tokyo, it had a branch in every prefecture to promote awareness, use, research, quality
improvement, and international 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, andsupporting organizations, but operation gradually shifted from the public realm to the hands ofthe private sector and NPOs. Administrative and financial support by the government was limited
from the beginning.
The SME Basic Act, originally issued in 1963, was amended in 1999. A new law, theSME Support Act, was enacted in 2000. These new laws increased private sector involvement;enhanced the role of J-SMECA in shindanshi training, exams, and certification; and expanded
the scope of shindan to include business re-engineering and credit assessment. In 2004, throughmerger, 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 and stands at 27,000 in 2019.
There are primary and secondary shindanshi exams (Figure 7.1). There are two tracks for115becoming shindanshi. The first is to pass both primary and secondary exams and the second is
to pass the primary exam then successfully complete all courses at the SME University. Each
year, roughly 20,000 apply for the primary exam and about 900 pass both exams. Besides this, afew 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 bepracticed 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, wasfounded in 1962 and eight more regional campuses were created in the 1980s and 90s. The SME
University disseminates practical knowledge needed in actual business operations but does notconfer 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 shindanshi certificationmust pass the primary exam, then choose to either take the secondary exam or study at the SME
University. The six-month course 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
Primary exam
A. Economics andeconomic policy
B. Finance andaccounting
C. Corporate
management
D. Corporate
operations
E. Management law
F. Management
information
systems
G. SME management
and government
policySecondary exam
Written examination(case method on
diagnosis and advice)
Oral presentation

Consulting practice at
SME for 15 days or morein an internship program
Actual businessconsulting at SME for 15
days or more

Practical training programs hosted by SMRJ (SME
Universities) or other designated organizations

Source: J-SMECA.

116

Shindanshi
registration(certified byandregisteredwith theMinister of
Economy,Trade andIndustry)

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 human resourcesmanagement, together with diagnostic and advisory skills on solving them, inorder 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 andgoals.

Finance andaccounting

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

Information
technology

To acquire diagnostic and advisory skills centering on IT planning, byunderstanding key steps toward introduction of IT systems and adopting 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 inorder to realize the management strategy.

Retail shop
management

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

Practice
Manufacturingindustry businessconsulting practice

To develop the ability for identifying management problems bycomprehensively understanding the circumstances surrounding the operationsof small and medium-sized manufacturers, and to acquire the skills fordrawing up management improvement plans to solve these problems.

Trade and distribution To develop the ability for identifying management problems bybusiness consulting
comprehensively understanding circumstances surrounding the operations ofpractice
small and medium-sized traders and distributors, and to acquire the skills fordrawing up management improvement plans to solve these problems.

117

< 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 discussion-centered training.

Integrated trade anddistribution businessTo conduct various business analyses of small and medium-sized traders anddistributors for proposing overall business strategies, and to acquire diagnostic
and advisory skills with regard to fully utilizing management resources andproposing implementation measures.

Integrated
manufacturingindustry

To conduct various business analyses of small and medium-sized
manufacturers for proposing overall business strategies, and to acquire
diagnostic and advisory skills with regard to fully utilizing management
resources and proposing implementation measures.

Business start-ups and Support of business model building: to acquire diagnostic and advisory skills
venture businesstailored to assisted companies through training centering on discussions on
problems and success factors pertaining to the establishment of businessmodels.
Management
innovation

Development of advisory skills: to acquire comprehensive diagnostic andadvisory 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 of rehabilitation plans.

Business alliance

To propose strategies to corporations endeavoring to form business alliancesacross sectors and regions, and to acquire diagnostic and advisory skills withregard to fully utilizing management resources and proposing implementation
measures.

Internationalization
strategy

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

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

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

Source: Business Support Department, SMRJ.

118

Business 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 ofcharge. Fees arising from individual consultation contracts must separately be agreed and settled
by the two parties. Shindanshi usually work closely with financial 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 FinanceCorporation (JFC), a large state-run financial institution with 152 branches nationwide, plays avital 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 in approving 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 to changing social needs; (ii) adequate official involvement and support especially inearly years; (iii) standardized training curriculum and state-authorized exams, registration, andrenewal 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 and banks, 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 of strengthening domestic SMEs in general andsupporting industries in particular. In ASEAN, all such policy efforts were assisted by Japanese
official cooperation. Some countries succeeded in creating a system similar to shindan throughtrial-and-error, but others failed.
In 1999, JICA implemented a five-year program to introduce a shindan system inThailand and produced about 450 Thai shindanshi. Since then, the Thai private sector anduniversities 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 were trained, and a study was conducted forinstitutionalizing a training program and a state certification scheme, and responsible offices at
local levels were also founded. The Indonesian Shindan System was inaugurated in 2006 andabout 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 the JapanMalaysia Economic Partnership Agreement in 2005, Japanese experts conducted training
courses for Malaysian officials for two-and-half years and produced 68 “SME counselors.”
119

Similarly, when the Japan-Philippines Economic Partnership Agreement was signed in 2006,
Japan agreed to help the Philippines to develop a shindan system and pilot projects were launchedin five provinces.
In Viet Nam, no serious policy effort has been made to transplant the shindan systemfrom Japan with appropriate simplification and adjustments. Shindanshi, or competent
Vietnamese experts by any other name, who can diagnose and advice SMEs on broad issues areneeded in large 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 andtraining institutions. Universities, colleges, and the Technical and Vocational Education andTraining (TVET) institutions can develop strong linkage with targeted industries, first by keeping
abreast with the current and future skill demand of firms and updating curricula accordingly, andsecond by assisting their students to obtain jobs where they can fully utilize acquired skills andearn adequate income. Japan has an education system to do these things. Public polytechnic
universities, colleges, and centers under the Ministry of Health, Labor and Welfare have systemsof training process management and employment support that can effectively incorporate skill
needs of the industry into their training programs and ensure appropriate job placement of theirstudents. More specifically, Japanese polytechnic universities provide four-year bachelorcourses, 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 technicians and engineers. Polytechnic centers provide a wide range of shortterm courses 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 and analyze 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 action plans (Figure 7.2).

19This section is based on JICA (2014) and Mori et al. (2013).

120

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 or firms that may recruit their students in the future,
TVET institutions can collect information on current and future skill needs to design optimal
curricula. This also generates mutual trust between two parties, which makes employers more
willing to provide information. Furthermore, proactive approaches by TVET institutions
encourage firms to think ahead and anticipate future or latent skill needs. Finally, feedback from
employers on the institute’s courses and graduates is a valuable input to the evaluation of training
courses and the development of action plans.
Close contact with industry is essential also in developing an effective employment
support system. Students are provided with information on business trends as well as specificfirms 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 and circulation of job opportunity information; and (vi)career counseling (Figure 7.3). All of these activities must be conducted in an integrated andcomplementary way because implementing just one or a few of them is not effective. Internshipis 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 internship or job application. Lectures by TVET

121

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).

graduates are often organized at job fairs, where TVET institutions can also collect job
opportunity information which is essential for conducting effective career counseling forstudents. With information obtained from these various activities, lecturers can guide students toselect most suitable firms for internship or recruitment.
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 immediate needs to fill vacancies or carry out a short-term business plan. Training programsmust balance these two needs.
In Viet Nam, a pilot project was conducted at the Hanoi University of 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
are often reluctant to receive visitors from TVET institutions, not so much because of theirinsufficient technical knowledge but mostly because of their unprofessional behavior. Firms
complain that the purpose of visit is unclear, that appointment request is made at a very short
notice, and that 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 of122

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 and facilities. 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 improve existing 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 throughdiscussions with the focused company group. In 2012, HaUI organized four rounds of courses
in mechanical 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.
With JICA technical assistance, HaUI also improved its employment support system. The
Vietnam-Japan Center (VJC) within HaUI developed an internship program which combinedclassroom lectures with structured on-the-job training in partnership with several Japanese moldand die manufacturers. VJC selected students and provided them with prior briefing, and closely
monitored their internship performance in cooperation with receiving firms.
Additionally, HaUI overhauled its company study tour program which now runs asfollows: (i) a proposal clearly stating objectives and expected outputs with information fromhosting 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 follow-up workshop where students summarize their findings throughgroup work and presentation; (v) a report submitted by each student; and (vi) sharing of thecollective report with the enterprise. After this program was introduced, many firms became
willing to host a comprehensive student tour which included company overview, factory visit,
and Q&A session with the participation of company management and HaUI graduates. During
the JICA project period of 2010-2013, HaUI managed to organize 17 study tours in which a totalof 273 students and 82 lecturers participated.
To maintain strong linkage with industry, the organizational and operational mechanismof TVET institutions must also be renovated. In 2014, HaUI established the Center for EnterprisePartnership and Vocational Skill Assessment to assist all faculties and centers of the university
to continue to identify and develop partnership with firms and organize various employment123support activities even after JICA left.
Support by provincial governments is also important. Considering regional diversity inindustrial structure and skill needs, local initiative may produce better outcome than top-down
central instruction. In Japan, for example, the Monozukuri Business Center Osaka (MOBIO)
promotes partnership between manufacturing SMEs 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 Japanese component suppliers to improve courses
on 5S and occupational health and safety with technical assistance from JICA, METI, andvarious organizations 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 thelevel of college, which was approved and legalized in 1961. It aims to produce practical andcreative engineers in industrial and technology sectors. It offers a five-year program to post-middle
school students aged 15 to 19, combining general education and specialized courses with thelatter’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 arestate-run, three are operated by local governments, and the remaining three are private. All
prefectures in Japan (there are 47 of them) have at least one kosen or kosen-equivalent (some kosen
have been converted to universities). In kosen education, theory and practice are integrated.
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, andgraduation studies are essential ingredients of kosen education. Roughly 10,000 students enterand graduate from kosen each year with a total student body of about 50,000 at any time. About
500 of them are foreign students.
JICA implemented a pilot project to introduce kosen to Viet Nam from 2013 to 2018, not
as a formal education system but as a practical model that could be applied to any existing
universities, colleges, and TVET centers. The project was first implemented at the Industrial
University of Ho Chi Minh City (IUH) and later rolled out to three other institutions (see below).
Because kosen was a new concept in Viet Nam and also because initial conditions in Viet Nam

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 andelectronics, IT, bio-chemistry, construction, architecture, commercial navigation, and others, from which each
student chooses one.

124

were quite different from Japan, the Japanese kosen model had to be adjusted to fit the reality ofViet Nam without losing the main thrusts of kosen education.
Specifically, the kosen model in Viet Nam established through the JICA project consistsof five essential components, namely, (i) technical education in knowledge and skill, (ii) teachingproper attitude and mindset, (iii) creativity (just doing what is told is not acceptable), (iv)comprehensive assistance in students’ job search and placement, and (v) the college’s own
capacity building to offer these services21. Vietnamese Kosen is defined as any education systemthat satisfies all of these components. They are regularly practiced by all kosen in Japan. In Viet
Nam, technical colleges teach knowledge and skills (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 thanpassively waiting for a 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 systemthat must be newly supplied.
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 wantuniversities and colleges to teach specific technical skills, but need students with proper attitude,
basic knowledge, and communication skills. Because Vietnamese universities and colleges teachspecialized 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 not advise
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 the same
positive effects in practical and creative engineering education as Japanese kosen.
21

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

125

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 (VinhPhuc, 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 dispatchedto Ube Kosen and Tokuyama Kosen, respectively, in Japan for further learning and 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 of Technology), a summit organization for Japanese kosen,currently assists Viet Nam, Thailand, and Mongolia. In Viet Nam, Kosen support directly follows
up on the finished JICA assistance. It supports the three JICA-assisted schools, namely, Collegeof Industry and Trade (Vinh Phuc, partnered with Hakodate Kosen), Hue Industrial College(partnered with Tsuruoka and Gifu Kosen), and Cao Thang Technical College (HCMC,
partnered with Ariake Kosen) to create Model Core Curriculum in one chosen course at eachschool. 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 is essential for Viet Nam to establish a national policy and mechanism fordisseminating 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 tocooperate effectively to realize this objective. One serious issue that needs to be coped with is a
general decline of interest among young Vietnamese people in technical college education 22.
This trend must be reversed if Viet Nam is to achieve manufacturing excellence.
Another bilateral TVET cooperation worthy of mention is found in Dong Nai, in a project
conducted by the Pacific Resource Exchange Center (PREX), an Osaka NPO that trains middle
managers in developing countries. From 2014 to 2017, with the funding of JICA and later by
METI and the Association for Overseas Technical Cooperation and Sustainable Partnerships(AOTS), the project installed new courses on 3S and workplace safety (Section 7.2) at Lac Hong
University and Dong Nai Vocational College of High Technology (formerly Long Thanh-Nhon

22

In Northern Viet Nam, around 2015, the number of young people applying to technical 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. High school 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.

126

Trach Vocational College) with the guidance of industrial experts from the Kansai area of Japan.
Detailed curriculums and 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 Vietnamese teaching materials. With an upgradedprogram, the two model schools began to approach Japanese firms in Viet Nam and send theirgraduating students to them. Some Japanese firms in Viet Nam also want to send their employees
to these schools for training. In the second phase, from 2018 to 2020, PREX and DIZA plan toestablish the Dong Nai Monozukuri Core Human Resources Development Instructor Training
Academy (DoMOTA), a school for Vietnamese teachers at the model schools to teach otherteachers. This is to expand the good results obtained in the two model schools to other schools.
An excellent program such as this, which promotes linkage between FDI firms and Vietnamesestudents, should be rolled out not just in Dong Nai but to the 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 Japan began in
the 1960s and the program was legalized in the 1980s under the Immigration Control andRefugee 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 technical interns. As of 2020, sectors
designated for technical internship include agriculture, fishery, construction, food processing,garment production, mechanical and metal processing, and others (which include many
supporting industries). When properly managed, this program greatly enhances the technicalcapacity 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 manufacturing labor.
Many positive cases are reported in which Japanese SME general managers are so impressedwith the working attitude and skill learning of 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 thenumber of Vietnamese technical interns in Japan is rising sharply in recent years, from 13,789

23

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

127

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 (Figure 7.4). In the departure lounge of Noi

Figure 7.4 Gino Jisshusei (technical interns) in Japan

Source: Japan International Training Cooperation Organization.

Bai Airport, one can often spot new Vietnamese technical interns bound for Japan wearing thesame uniform.
The increasing number of Vietnamese technical interns in Japan poses a great opportunity
for deepening human ties and industrial cooperation between the two countries. For JapaneseSMEs, Viet Nam is the most popular country for hiring foreign workers as well as for investing
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 technicalinterns who turned out to be very skillful and diligent. The technical intern system not only
supplies temporary labor for three years in Japan but also facilitates Japanese SMEs to invest inViet Nam.
According to the JICA survey conducted by the Viet Nam Institute for Economic andPolicy Research (VEPR), the average profile of Vietnamese technical interns in Japan is asfollows (JICA, 2017a). They are from countryside and recruited by brokers or word-of-mouth.

128

They must study Japanese language and culture for six months before going to Japan (the qualityof such courses varies greatly depending on the sending company). Dispatching organizations inViet Nam and supervisory organizations in Japan take care of them. On average, a technicalintern pays $5,300 to a broker and/or dispatching organization in Viet Nam and carries debt of$4,700 upon arrival in Japan. He or she earns $44,500 over three years (if successful) and brings
home $23,000 after deducting living cost and debt repayment. Vietnamese technical interns feelthe 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 sufficient or accurate information which leads to the choiceof wrong brokers and misunderstanding of rules, costs, and risks. Second, there are low-quality
intermediary organizations on both sides, in Viet Nam and Japan, that exploit workers without
adequate training or support. Third, some Japanese firms—even large ones—regard technicalinterns as just 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, sometechnical interns suffer from a 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 the situation. Main responsibleorganizations are JITCO on the Japanese side and 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 and promoted (see below). Guiding and monitoringof Japanese firms and Japanese receiving organizations has been strengthened under the new
Gino Jisshu Act of 2017. The impact of these policies will decide whether this system willcontinue to receive popular support in both countries.
The Japanese government under Prime Minister Abe has another agenda regarding thissystem. Faced with severe and structural labor shortage, the Japanese government has decided
to rapidly expand the scope, sectors, and duration of gino jisshusei and also to introduce a newlabor importing mechanism. The Immigration Control Act was revised in December 2018 andenacted in April 2019. The staying period of gino jisshusei 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 iscausing delay and confusion even after one year. Meanwhile, its consequence on Viet Nam is129uncertain because more Vietnamese workers may remain in Japan rather than coming back to
Viet Nam. The rights, living conditions, and social and health insurance for foreign workers andtheir families must also be secured before inviting them under the new rule.
The COVIT pandemic of 2020, which affected virtually all activities of the world, wasparticularly disruptive to the gino jisshusei program as travel between the two countries was
suspended, Japanese host firms faced collapsing demand and financial difficulty, andVietnamese workers were stuck in Japan without training or financial support. Workers whocame to Japan for realizing their dreams are now confronted with enormous uncertainty andhardship. This problem must be overcome before the program can resume its essential functions.
For Viet Nam’s industrialization, the most serious issue regarding gino jisshusei is thelack of proper mindset and job opportunities of trained Vietnamese workers after they return toViet Nam. Many workers regard going to Japan merely as a chance to earn money and do notthink deeply about using acquired skills for their future career or national development. After
returning, they often go back to the village or take up jobs unrelated to learned skills which is agreat loss to the country. This is partly a mindset problem of the workers and partly due toinsufficient information and matching service for linking these workers to suitable jobs at
Japanese FDI firms and other workplaces in Viet Nam. To make the best of the gino jisshusei
system, the two governments should not only cope with the problem of improper brokers andhost firms in the short run, but also promote effective utilization of 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 thequality and ranking of various sending companies to all workers considering going to Japan. Thisis already started by VAMAS. Two labor sending companies below have been recognized as
excellent and variously supported by the Japanese embassy and JICA.
Esuhai Company in Ho Chi Minh City is founded by Mr. Lê Long Sơn who studied
engineering in Japan. Based on his strong belief, he trains gino jisshusei applicants with great
discipline before dispatching them to Japan. They are taught on manners, attitudes, Japanese
thinking, 5S, and Japanese language. They are carefully monitored during and after their stay inJapan. Workers are encouraged to use acquired skills for future. Esuhai also does matching
between returning workers and Japanese FDI in Viet Nam.
Hai Phong JSC, a Hanoi labor exporting firm, was established by Mr. Nguyễn XuânTuyến who was himself a gino jisshusei in Shizuoka Prefecture. Like Esuhai, his company
teaches attitudes, 5S, skills, and Japanese language. Hard physical exercise, military style130discipline, and declaration of purpose in front of many people before going to Japan are part ofthe 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, long-term thinking, skill development, and business startup support after returning to Viet
Nam are emphasized. Both Esuhai and Hai Phong cooperate 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, technological support,
and advice for enterprises based in each targeted prefecture or city. Historically, there weredifferent types of kosetsushi such as industrial centers, handicraft centers, agricultural centers,
dairy farming centers, fishery centers, and forestry centers. There are different organizational
forms and backgrounds. Many kosetsushi date back to a century ago or more. Some wereoriginally established by central or local governments and were later transferred to NPOs or theprivate sector, while others were set up by various NPOs under the supervision and support by
local governments. Because Japan is a manufacturing country, most kosetsushi targets the
manufacturing sector. Under 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, somelarge cities also operate industrial kosetsushi. Besides these, a large number of specialized
kosetsushi have been set up by industrial and business NPOs all over Japan. 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, and SMEs are charged low fees for mostservices. Some services, such as initial consultation, are free of charge. Some kosetsushi canself-finance the purchase of latest equipment but others face financial constraints as collected
fees are not enough to upgrade machines. At most kosetsushi, technical staff are highly
competent but receive the salary based on the local government pay schedule. They are happy tohelp enterprises in their hometowns with relatively low salaries. Because demand for technicalsupport by SMEs is high and the number of technical staff at kosetsushi is limited, kosetsushi

131technical staff are usually very busy in providing various services daily24.
Kosetsushi provides technical service to SMEs which plan to develop 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 ora few uses. At kosetsushi, they can rent equipment and technical expertise of the staff cheaply.
Available services differ from kosetsushi to kosetsushi but normally include the following.
(i) Commissioned or joint research—commissioned research is done by kosetsushi at therequest 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, and special treatment ofmaterials and components are performed in response to SMEs’ requests, and test
results are certified in official documents.
(iii) Use of machinery and equipment—SMEs can rent machinery and equipment at
kosetsushi for product development or overcoming technical difficulties. Eachkosetsushi 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 with kosetsushi experts
regarding any technical problem in products, production process, or productdevelopment.
(v) Technical training and seminars—in order to enhance the capability of engineers
engaged in R&D at SMEs, training and seminars are offered using kosetsushi’sclassrooms and equipment. Details of programs can be viewed in the website.
(vi) Dissemination of technological information—seminars on latest technology andinformation useful for overcoming technical problems or developing new products areoffered at technology workshops. Some kosetsushi send e-newsletters to interested
SMEs.
Kosetsushi specializes in technical support only and does not offer consultation in24

As of June 2018, the Saitama Industrial Technology Center (SAITEC), one of the two kosetsushi in Saitama
Prefecture (population 7.3 million), had 100 technical experts 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 ofHigashiosaka 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 fivetechnical staffs are all retired industrial officials from the Osaka Research Institute of Industrial Science andTechnology (ORIST), a prefecture (higher) level kosetsushi.

132

management, marketing, accounting, taxes, finance, labor relations, or other non-technicalaspects of enterprises.
Technical centers similar to kosetsushi are also found in other countries. Taiwan has 19
official research institutes including the Industrial Technology Research Institute, the Institutefor Information Industry, and sectoral institutes for metal, automobile, bicycle, precision
machinery, etc. whose role is to help firms innovate and/or commercialize innovations throughboth official and privately commissioned projects. Thailand has about ten specialized institutes
in textile, food processing, automobile, electronics, sugar, steel as well as in SME development,
technical training, and management certification. Among these, the Thai-German Institute has alarge number of modern equipment for training and processing; the Thailand Automotive
Institute works on policy formulation, supporting industries, standards, certification, andtraining; and the Electrical and Electronics Institute offer product testing, measurement
equipment calibration, and factory 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 materialbased production. KIRDI offers customized testing, training, product development, andproduction services for a subsidized fee. It is very popular with SMEs. KIRDI targets to support
500 firms per year.
All of these institutes in Taiwan, Thailand, and Kenya are national centers serving theentire 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, andcompetent services to SMEs at reasonable cost in each province or even at the national level.
Some specialized analyses and treatment are unavailable in Viet Nam and have to be conductedabroad. Manufacturing firms, universities, and research institutions may have standard
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 a large 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

25

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

133

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 Hanoi or Ho Chi Minh City, or
migrate abroad for high salary. Given this reality, technical support centers in Viet Nam should
first be established in Hanoi and Ho Chi Minh City, to be expanded to other areas as more humanand financial resources become available. Even though the initial line-up of testing equipment
may be limited, these two centers should complement and cooperate with each other, and theyshould also make arrangements with private firms, universities, and research institutes that havespecial equipment which can be made available to SMEs. MOIT has been studying the possibilityof introducing kosetsushi in Viet Nam with Korean support as well as by sending study missions
to a number of kosetsushi in Japan.

7.9 FDI-domestic firm linkage
In Japan, creation of business linkage between FDI and Japanese firms has never been an issue
because Japan did not actively invite FDI at any time in its history. Japanese industrialization
was achieved by 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 long-term trust and relationship with reliable local partners, so the
choice of the right local partner is very important. Moreover, international competitivenessrequires 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 addedtransport (and tariff) cost. For survival and competitiveness, Japanese manufacturing firms
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 and foster 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, requiring much time, energy, andcost as well as many trials and failures. Because effective industrial linkage is important but
difficult to realize, government is 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 matching134

is deeper, more difficult, and more time-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 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 and work substantively with local firms. The first method issometimes 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 is low) generates discontent andrefusal 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 andJapanese 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 activitiesof 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 notrendered by itself. Personal relations among officials and experts at various organizations ensure
the quality and speed of collective 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 huge market. This advantage is unique to China, and a country withan “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.

135

Figure 7.5 Thailand: network for linking Thai and Japanese firms

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

Within BOI, the BOI Unit for Industrial Linkage Development (BUILD) specializes inmatching between FDI and Thai firms. This unit, 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 Thai and 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 Thaibodies 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 Promoting Association, and UBM Asia (trade fair organizingfirm) in May every year around the same time as Intermach, a large machinery
exhibition.

136

(iii) ASEAN Supporting Industry Database—this is an e-service that lists manufacturersof 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 toparticipate in overseas trade fairs for widening their vision, knowledge, and linkage.
BUILD has one director and about ten staff members, with each staff assuming
responsibility for supporting assigned buyers. According to the BUILD director, businessmatching is not an easy task, and partner 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 not have precise information on the number of procurement inquiries
received or successful cases among them. However, about half of the FDI firms that makeinquiries subsequently send a thank-you email and report the progress to BUILD.
In Malaysia, the Vendor Development Program (VDP), started in 1988, designatedProton, a state-owned national car company, to be an “anchor firm” which was obliged topurchase as many components as possible from local (Bumiputra) suppliers, offer technicalassistance, and introduce government loans to them. By 2002, anchor firms were expanded in
number to 85 firms including Malaysian, Japanese, and American 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 participation wasforced by the request of the Malaysian government rather than voluntary. VDP was partiallysuccessful in the automotive sector (thanks to the existence of Proton and Produa, another stateowned 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 using137

the National SME Database, the SMEinfo Portal, and the SME Competitiveness Rating forEnhancement (SCORE), and (iv) a support package consisting of factory site provision, R&D,
technology upgrading, and export market development. Firms eligible for ILP were expanded 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 which were independent from FDI or large domestic firms.
In Viet Nam, annually in Hanoi or Ho Chi Minh City, various trade fairs are organized
to match buyers and suppliers. Reverse trade fairs, where FDI firms display components theywant to purchase domestically, are also held. JETRO has a list of Vietnamese component
suppliers that possess adequate technology or have been improved through Japanese cooperation.
Recently, JICA and the World Bank separately launched new projects for upgrading Vietnamese
suppliers and linking them with foreign buyers. Samsung and the Korean government, also
separately from each other, assist supporting industry development27. In the South, sophisticatedmatching 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 systematicthan in Thailand or past Malaysia. Matching events usually ends with business card 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 to part 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 theProvisional Act to Promote Machinery Industry (Kishin-ho) in 1956 and the Provisional Act toPromote Electronics Industry (Denshin-ho) in 1957. As the names indicate, these were timebound laws for five 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

27

Korean organizations, including the Korea Trade-Investment Promotion Agency (KOTRA), the Korea
International Agency (KOICA), and chaebols (large private business groups) such as Samsung and LG, tend to work
independently from each other rather than “ALL KOREA.”
28
A Japanese prefecture sent a list of SMEs to Viet Nam with detailed information on what type of partnership eachdesired. 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 translating each 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, labor-intensive, and time-consuming.

138

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, coincidedwith Japan’s post-World War II high growth era with rapid industrialization.
Kishin-ho and Denshin-ho had almost identical contents. The basic thrust of these laws
was combining technology support by the Ministry of International Trade and Industry (MITI)
with management support and investment loan provision by the Ministry of Finance (MOF) andthe Japan Development Bank (JDB) under MOF. By integrating technical, managerial, andfinancial support in one mechanism, eligible SMEs could receive comprehensive support forinvesting 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 andrevises promotion programs annually.
(ii) MITI invites and screens applications from SMEs.
(iii) MITI coaches SMEs on production plan, equipment choice, purchase negotiation withequipment producers abroad, and other 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 Hanoi, redrawn by the GRIPS Development Forum.

139

(iv) MITI sends selected applications to JDB or the Japan Finance Corporation for SME(JASME) for additional scrutiny, after which the financial institution provides
management advice and investment 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 andimplementation stages. Firms rejected in the first round could apply again after improving their
documents based on official instruction 29 . Second, unlike Southeast Asia today, Japan’s
supporting industries were made up of domestic firms alone and did not include 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 a contributor to Japan’s high growth era. Third, theselaws had powerful effects on modernizing Japanese supporting industries which were originallyregarded 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 in the 1960s, to produce better andcheaper components.
In Thailand, on the other hand, supporting industry promotion has been closely related to
FDI attraction and linkage. The need for this policy was keenly felt in the late 1980s with thearrival of a large wave of Japanese manufacturing firms. Absence of Thai component supplierswith high quality, low cost, and on-time delivery (QCD) was keenly felt, which was detrimental
to Thailand’s industrialization. Japanese firms, MITI, and JICA began to teach Thai workers andThai supplier companies. Meanwhile, the Thai Ministry of Industry (MOI) adopted a step-bystep approach to the capacity building of Thai supporting industries. When private firms wereweak and small in number, the government directly intervened to guide them and create new
support systems such as 5S, kaizen, and shindan. As private capacity gradually rose, official

A similar coaching approach is taken in Taiwan’s Industrial Projects, a competitive program by the Ministry of
Economic Affairs (MOEA) to subsidize commercialization of 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.
29

140

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 Thai-German
Institute (1992), the Thailand Automotive Institute (1998), the Electrical and Electronics
Institute (1998), and the Iron and Steel Institute (2000), which were initially funded bygovernment budget or foreign aid, but currently operate as autonomous and financially selfsupporting NPOs. In 1999, JICA began a five-year program to create a shindan system inThailand 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 individualcompanies. 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 technical support and training to member firms without BSID’s help. In
2008, the Alliance for Supporting Industries Association (A.S.I.A.) was established, again withthe 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 focused on providing tax
incentives for eligible manufacturing projects and facilitation of FDI-local firm linkage.
For tax incentives, the main instruments were pioneer status (time-bound 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 weekly141

Action Committee on Industry for deliberation and decision. To receive any incentive, the project
must be truly manufacturing (not just trading), 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 andreplaced it with the promotion of autonomous and globally competitive SMEs without ties with
FDI or large state-owned corporations (section 7.9).
These reviews show that each country adopts different methods of fostering supporting
industries according to initial capacity as well as social and historical conditions. Viet Nam is alate starter in supporting industry promotion, and the Vietnamese term “công nghiệp hỗ trợ” andits meaning were popularized only in the early 2000s. Since then, the term has been frequently
talked about in media, trade fairs, and symposiums but there has been little effective policy action
to promote it. Laws and regulations were issued and revised, MOIT was designated as a
responsible ministry, and assistance has been offered by Japan, Korea, the World Bank, andmany FDI firms. However, Viet Nam’s effort to develop supporting industries has been limited
and scattered without a clear target or an integrated framework, and therefore has not reached all
manufacturers in the country. Globally competitive Vietnamese suppliers are relatively rare evenafter a quarter century of vigorous globalization and industrialization. Thailand had 1,000 FDIlinked suppliers when the initial policy phase was completed, and currently 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 other nations 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 that the 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 theimportance 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 these policy lessons, and also incorporate
several productivity tools discussed above (5S and kaizen, handholding, shindan, kosetsushi,
142

linkage, and others) to create a truly effective national system for promoting supporting
industries. The current system is too narrow in scope and cumbersome in procedure for broad
impact.

143

REFERENCES
Alam, A., P. A. Casero, F. Khan & C. Udomsaph (2008). Unleashing Prosperity: Productivity
Growth in Eastern Europe and the Former Soviet Union. Washington, DC: WorldBank.
Asian Productivity Organization (APO) (2004). Total Factor Productivity Growth: Survey
Report. Tokyo: APO.
(2015) APO Productivity Databook 2015. Tokyo: APO.
(2016) APO Productivity Databook 2016. Tokyo: APO.
(2017a) APO Productivity Databook 2017. Tokyo: APO.
(2017b). APO Dataset 2017. Accessed on April 10, 2018 at:
http://www.apo-tokyo.org/wedo/measurement
Bain, D. (1982). The Productivity Prescription: The Manager’s Guide to Improving
Productivity and Profits. New York: McGraw-Hill Book Company.
Breu, M., R. Dobbs, J. Remes, D. Skilling & J. Kim (2012). Sustaining Vietnam’s Growth: theProductivity Challenge. McKinsey Global Institute.
Collins, S. M. & B. P. Bosworth (1996). Economic Growth in East Asia: Accumulation versus
Assimilation. Brookings Papers on Economic Activity, 27(2), 135-204.
Committee on the Future Economy of Singapore (2017). Report of the Committee on the
Future Economy: Pioneers of the Next Generation. Government of Singapore.
Development and Policies Research Center (DEPOCEN) (2013). Ước lượng sản lượng tiềmnăng cho Việt Nam [Potential Output Estimation Study for Vietnam].
Dinh Van An & Nguyen Thi Tue Anh (2008). Tăng trưởng năng suất lao động Việt Nam 16
năm (1991-2006) từ góc độ đóng góp của các ngành kinh tế và chuyển dịch cơ cấu
ngành [Labor productivity growth in Viet Nam in 16 years (1991-2006) from theperspective of sectoral contribution and sectoral structure change]. Labour Publishing
House.
Do Thi Dong & Pham Thi Huyen (2010). Shindanshi: the Japanese Business Management
Consultant System. Unpublished paper. Vietnam Development Forum.
Economic Strategies Committee of Singapore (2010). Report of the Economic Strategies
Committee: High Skilled People, Innovative Economy, Distinctive Global City.
Economic Strategies Committee. Government of Singapore.
Fujita, Takeshi (2016). Learning from Productivity Movement and its Network in Asia for
KAIZEN Dissemination and Network in Africa. JICA KAIZEN Knowledge Sharing
Seminar presentation. Japan Productivity Center. March 23.
General Statistics Office (GSO). Statistical Yearbook of Vietnam 2012, 2015 & 2016. Hanoi:
GSO.
(2016). Năng suất lao động của Việt Nam: Thực trạng và giải pháp [Vietnam’s Labor
Productivity: Current Situation and Solutions].
144

(2017). THÔNG CÁO BÁO CHÍ VỀ TÌNH HÌNH KINH TẾ-XÃ HỘI NĂM 2017
[Report of Socio-economic Situation in 2017].
GRIPS Development Forum (2009). Introducing Kaizen in Africa. A document compiled for
Ethiopia-Japan Industrial Policy Dialogue. Tokyo: GRIPS Development Forum.
Hall, R. E. & M. Lieberman (2012). Economics: Principles and Applications, 6th edition.
Cengage Learning.
Inagawa, F. (2013). Hanoi kogyo daigaku ni okeru sangakurenkei ni yoru ginosha ikusei shien
project no gaiyo [Outline of the Technician Training Project through Industryuniversity Partnership at Hanoi University of Industry]. Ch.3 in Viet Nam ni okeru
Kougakukei Gakusei no Shokugyo eno Ikou to Sangakurenkei ni kansuru Chosa[Research Report on Engineering Students’ Transition to Work and Partnership
between Industry and Educational and Training Institutions] (in Japanese). Shiryo
Series 127. Tokyo: Japan Institute for Labor Policy and Training (JILPT).
International Labor Organization (ILO). Key Indicator of Labor Market. Accessed on April 10,2018 at:http://www.ilo.org/ilostat/faces/oracle/webcenter/portalapp/pagehierarchy/Page3.jspx?
MBI_ID=49&_afrLoop=915675381923086&_afrWindowMode=0&_afrWindowId=lw
g8pl6iq_1#!%40%40%3F_afrWindowId%3Dlwg8pl6iq_1%26_afrLoop%3D91567538
1923086%26MBI_ID%3D49%26_afrWindowMode%3D0%26_adf.ctrlstate%3Dlwg8pl6iq_45
ILO & Asian Development Bank (2015). ASEAN Community 2015: Managing Integration for
Better Jobs and Shared Prosperity. Accessed on January 8, 2019 at:https://www.adb.org/sites/default/files/publication/42818/asean-community-2015managing-integration.pdf
Japan SME Management Consultants Association (J-SMECA) (2008). A Guide to J-SMECA.
A pamphlet published by J-SMECA.
Japan International Cooperation Agency (JICA) (2014). Promoting Tripartite Partnerships to
Tackle Skills Mismatch: Innovative Skills Development Strategies to Accelerate Viet
Nam’s Industrialization. Hanoi: JICA Viet Nam Office.
(2016). History of Friendship and Cooperation: the 50th Anniversary of JapanSingapore Diplomatic Relations. brochure.
(2017a). Data Collection Survey for Strengthening of Japan-Viet Nam Human Exchanges
Applied with Return Trainees of Technical Intern Training Program. A JICA
commissioned research report conducted by Vietnam Institute for Economic and Policy
Research (VEPR).
(2017b). Wages and Labor Productivity in Vietnam. A JICA commissioned research
report conducted by VEPR.
JICA & GRIPS Development Forum (2011). Kaizen National Movement: A Study of Quality
and Productivity Improvement in Asia and Africa. A document compiled for EthiopiaJapan Industrial Policy Dialogue.

145

Jorgenson, D. W. & K. J. Stiroh (2000). Raising the Speed Limit: US Economic Growth in the
Information Age. Brookings Papers on Economic Activity, 2000(1), 125-210.
Jorgenson, D. W. & Vu, K. M. (2013). The Emergence of the New Economic Order: Growth in
the G7 and the G20. Journal of Policy Modeling, 35(3), 389-399.
Kikuchi, T. (2014). ‘Chukaigata’ Gijutsuiten ni kansuru Kosatsu: 3 Dankai Model no Kochiku
to Tekiyo [A study on ‘Intermediary’ Technology Transfer: Creation and Application of
the Three-stage Model. A doctoral dissertation at Takushoku University.
Kinki Bureau of Economy, Trade and Industry (2018). Kosetsushi no Susume [Invitation to
Kosetsushi].
Le Xuan Ba & Nguyen Thi Tue Anh (2010). Tăng trưởng kinh tế Việt Nam nhìn từ góc độ chấtlượng và năng lực cạnh tranh [Economic growth in Viet Nam from the perspective of
quality and competitiveness]. Labour Publishing House.
Maddison, A. (1952). Productivity in an expanding economy. Economic Journal, 62(247), 584594.
Mahathir bin Mohamad (1970). The Malay Dilemma. Times Books International.
Ministry of Health, Labor and Welfare (2018). Kokyo Shokugyo Kunren ni tsuite [Public
Vocational Education and Training] (in Japanese). Accessed atwww.mhlw.go.jp/seisaku/2013/11/01.html
Ministry of Planning and Investment (2017). Quyết định số 442/QĐ-BKHĐT [Decision No.
442/QD-BKHDT]. Accessed on 08/01/2019 at:
http://vbqppl.mpi.gov.vn/Pages/default.aspx?properties=7c984383-f8fa-44e5-8a72ad89d99f08a1&list=documentProperties
Ministry of Science and Technology (2014). Quyết định số 1385/QĐ-BKHCN [Decision No.
1385/QD-BKHCN]. Accessed on 08/01/2019 at:https://thuvienphapluat.vn/van-ban/Linh-vuc-khac/Quyet-dinh-1385-QD-BKHCN2018-cong-bo-Tieu-chuan-quoc-gia-ve-Chat-luong-nuoc-383824.aspx(2015). Kỷ yếu hội nghị tổng kết thập niên chất lượng lần thứ hai (2006-2015) và tổng kết
giai đoạn (2010-2015), Chương trình quốc gia năng suất chất lượng [Proceedings of
the Conference on Summarizing The Second Quality Decade (2006-2015) andSummarizing the Period (2010-2015), the National Program of Quality Productivity].
(2016). Nghị quyết 05-NQ/TW [Resolution No. 05-NQ/TW]. Accessed on January 8,
2019 at:https://thuvienphapluat.vn/van-ban/Dau-tu/Nghi-quyet-05-NQ-TW-chu-truong-chinhsach-lon-nham-doi-moi-mo-hinh-tang-truong-suc-canh-tranh-nen-kinh-te-329067.aspx(2017). Quyết định ban hành kế hoạch hành động của Bộ Khoa học và Công nghệ thựchiện nghị quyết số 27/NQ-CP ngày 21/02/2017 của chính phủ [Decision to Issue Action
Plan of Ministry of Science and Technology Implementing Resolution No.27/ NQ-CP
dated February 21, 2017 of the Government]. Accessed on January 8, 2019 at:https://luatvietnam.vn/chinh-sach/quyet-dinh-636-qd-bkhcn-bo-khoa-hoc-va-congnghe-114091-d1.html#noidung

146

Molnar, M. & T. Chalaux (2015). Recent Trends in Productivity in China: Shift-share Analysis
of Labor Productivity Growth and the Evolution of the Productivity Gap. OECD
Economics Department Working Papers, 1221. Paris: OECD Publishing.
Monozukuri Business Information-center Osaka (MOBIO) (2018). About MOBIO (inJapanese). Accessed at:www.m-osaka.com/jp/service/
Mori, J., Nguyen, V. T., Vu, D. T. & Vu, T. K. (2013). Final Project Report on the Project for
Human Resource Development of Technicians at Hanoi University of Industry (HaUI),
Hanoi: HaUI and JICA.
Newman, C. & Kinghan, C. (2015). Economic transformation and the diversification of
livelihoods in rural Viet Nam (No. 2015/064). WIDER Working Paper.
Nguyen Anh Tuan & Le Hoa (2014). Năng suất: nền tảng cạnh tranh và phát triển
[Productivity: a competitive and developing platform]. Labour and Social Publisher.
Nguyen Ba Ngoc & Pham Minh Thu (2014). Năng suất lao động Việt Nam nhìn từ góc độ cơcấu lao động và kỹ năng [Labor productivity in Viet Nam: a view from perspectives ofthe labor’s structure and skill]. Labour Science and Social Affairs, 41(1), 5-13.
Accessed on 08/01/2019, at:
http://admin.ilssa.org.vn/UserFiles/files/BanTinKhoaHoc/Ban-tin-khoa-hoc-so-51.pdf
Nguyen Thi Thu Hoai & Duong Van An (2015). Chuyển giá trong các doanh nghiệp FDI:
Thực trạng và giải pháp [Transfer pricing of FDI enterprises: situation and solution].
Tạp chí tài chính [Journal of Finance], số 623, 12/2015, 17-20.
Nguyen Thi Tue Anh, Tran Toan Thang, Hoang Thi Hai Yen & Nguyen Van Tung (2016).
Chuyển dịch cơ cấu ngành và chất lượng tăng trưởng kinh tế Việt Nam [Sectoral
structure change and the quality of economic growth in Viet Nam]. Labour Publishing
House.
Nguyen Tien Dung, F. Yamauchi, Nguyen Duc Thanh, Pham Thi Tuyet Trinh & Nguyen
Thanh Tung (2017). Labor Productivity and Wage Growth in Viet Nam. Ha Noi: VEPR
and JICA.
Nguyen Viet Khoi & Shashi Chaudhary (2019). Viet Nam’s Participation into the Global Value
Chains. Chapter 4, Nguyen Duc Thanh and Nguyen Cam Nhung, eds. Viet Nam Annual
Economic Report 2019. Ha Noi: VEPR.
Ohno, K. (2016). “Shifting from Quantity to Quality Growth: Roles of New Policy Procedure
and Organization”. Viet Nam Annual Economic Report 2016, chapter 4. Ha Noi: VEPR.
Oqubay, A. & K. Ohno, eds. (2019). How Nations Learn: Technological Learning, Industrial
Policy, and Catch-up. Oxford University Press.
Organization for Economic Co-operation and Development (OECD) (2001). Measuring
Productivity OECD Manual: Measurement of Aggregate and Industry-level
Productivity Growth.
Pham The Anh & Dinh Tuan Minh (2013). Những chính sách trọng cung nhằm thúc đẩy tăngtrưởng dài hạn [The Supply-side Policies to Promote Long-term Growth]. Accessed on
February 22, 2019 at:147https://docs.google.com/viewer?a=v&pid=sites&srcid=ZGVmYXVsdGRvbWFpbnx0a
GVhbmg5ODJ8Z3g6MjljZWE1OWZjYmEyYzYyNQPham Van Dai & Nguyen Duc Thanh (2012). The Efficiency and Growth of Vietnam’s
Economy. Ch.3, Vietnam Annual Economic Report 2012. Hanoi: VEPR.
Prokopenko, J. (1987). Productivity Management: A Practical Handbook. Geneva: ILO.
Sargent, T. C. & E. R. Rodriguez (2001). Labor or Total Factor Productivity: Do We Need to
Choose? Working Papers, 41-44. Department of Finance, Canada.
Solow, R. (1957). Technical Change and the Aggregate Production Function. The Review of
Economics and Statistics, 39(3), August, 312-320
Steindel, C. & K. J. Stiroh (2001). Productivity: What Is It, and Why Do We Care About It?
Federal Reserve Bank of New York Staff Reports, 122, April, 13-31.
Timmer, M. P. & A. E. Szirmai (2000). Productivity Growth in Asian Manufacturing: The
Structural Bonus Hypothesis Examined. Structural Change and Economic Dynamics, 4,371-391.
Truong Quang Hung (2012). FDI ở Việt Nam: Tác động và chính sách [FDI in Viet Nam:
Impact and Policy]. PowerPoint slides. Accessed on 08/01/2019, at:https://fsppm.fuv.edu.vn/cache/MPP04-552-L17V-2012-11-16-16501294.pdf
Vietnam Development Forum & Goodwill Consultant JSC (2011). Survey on Comparison of
Backgrounds, Policy Measures and Outcomes for Development of Supporting
Industries in ASEAN: Malaysia and Thailand in Comparison with Vietnam. Hanoi:
Publishing House of Communication and Transport.
Vietnam National Productivity Institute (2016). Vietnam Productivity Report 2016. Ha Noi:
VNPI.
Vu Minh Khuong (2014). Boosting Vietnam’s Productivity as a Strategic Approach to
Deepening Economic Reforms: Urgency, International Experience, and Policy
Recommendations (draft, December 17).
Vu Minh Khuong (2016). Việt Nam và bài toán năng suất trong nỗ lực đẩy mạnh công cuộcphát triển kinh tế [Vietnam and the Issue of Productivity in an Attempt to Boost
Economic Development], VNU Journal of Science, 32(18), 190-201.
World Bank (2012). Vietnam Development Report 2012.
World Bank Group (2016). Transforming Vietnamese Agriculture: Gaining More for Less.
World Bank.

Official documents obtained electronicallyChương trình nâng cao năng suất chất lượng sản phẩm, hàng hóa của doanh nghiệp đến năm2020 [Program to Raise Producitivity and Quality of Products and Commodities ofenterprises up to 2020 (2010). Accessed on January 8, 2019 at:
http://business.gov.vn/tabid/130/catid/820/item/13468/ch%C6%B0%C6%A1ngtr%C3%ACnh-n%C3%A2ng-cao-n%C4%83ng-su%E1%BA%A5t-ch%E1%BA%A5tl%C6%B0%E1%BB%A3ng-s%E1%BA%A3n-ph%E1%BA%A9m-h%C3%A0ng-

148

h%C3%B3a-c%E1%BB%A7a-doanh-nghi%E1%BB%87p-%C4%91%E1%BA%BFnn%C4%83m-2020.aspx
Đại hội đại biểu toàn quốc lần thứ XI Đảng Cộng sản Việt Nam [The 11th National Congressof the Communist Party of Vietnam] (2015). Accessed on January 8, 2019 at:
http://www.dangcongsan.vn/tu-lieu-van-kien/tu-lieu-ve-dang/dai-hoi-dang/lan-thuxi/doc-192620158594746.html
Dự án hợp tác JPC-JICA-VNPI [Cooperation Project JPC-JICA-VNPI]. Accessed on January
25, 2019 at:
http://vnpi.vn/du-an-hop-tac-jpc-jica-vnpi.htm
Kế hoạch hành động thực hiện nghị quyết số 27/NQ-CP của Bộ Kế hoạch và Đầu tư [Action
plan to implement Resolution No. 27/NQ-CP of the Ministry of Planning andInvestment] (2017).
Prime Minister (2010). Quyết định số 712/QĐ-TTg [Decision No. 712/QD-TTg]. Accessed on
08/01/2019 at:https://www.most.gov.vn/vn/Pages/ChiTietVanBan.aspx?vID=28407&TypeVB=1
Politburo of the Communist Party of Viet Nam (1998). Nghị quyết số 10-NQ/TW, Nghị quyếtvề đổi mới quản lý nông nghiệp [Resolution No.10-NQ/TW, Resolution on Renovating
Agricultural Management]. Accessed on January 8, 2019 at:https://thuvienphapluat.vn/van-ban/Thuong-mai/Nghi-quyet-10-NQ-TW-1988-doi-moiquan-ly-kinh-te-nong-nghiep-202545.aspx
Resolution of the 10th Party Congress (2006). Accessed on January 8, 2019 at:
http://www.chinhphu.vn/portal/page/portal/chinhphu/NuocCHXHCNVietNam/ThongTinTongHop/noidungvankiendaihoidang?categoryId=10000715&articleId=10038386
Resolution 27/NQ-CP (2017). Accessed on January 8, 2019 at:https://thuvienphapluat.vn/van-ban/Dau-tu/Nghi-quyet-27-NQ-CP-Chuong-trinh-hanhdong-05-NQ-TW-doi-moi-co-cau-lai-nen-kinh-te-2017-340333.aspx

News articles (by issue date)
Thanh Hoan. (2009). Khi nào kết thúc gói kích thích kinh tế? [When the economic stimulus
package is ended]. Access on 18/04/2019 at https://anninhthudo.vn/kinh-doanh/khinao-ket-thuc-goi-kich-thich-kinh-te/353232.antdChương trình hỗ trợ nâng cao quản lý miễn phí của Nhật Bản [Program to Support
Management Improvement Free of Change in Japan] (2012?). Accessed on January 25,
2019 at:http://www.isovietnam.vn/tin-tuc-nghanh/514-ho-tro-tu-nhat-ban.html
Le Thu (2015). Thập niên chất lượng lần thứ hai năng suất chất lượng đi vào chiều sâu [InThe Second Quality Decade, Productivity and Quality Go into Depth]. Accessed on
January 8, 2019 at:
http://nistpass.gov.vn/tin-chien-luoc-chinh-sach/1459-thap-nien-chat-luong-lan-thu-hainang-suat-chat-luong-di-vao-chieu-sau.html
Lewis, W. Arthur (1954). Economic development with unlimited supplies of labour.
Manchester School, 22:2, pp.139-191 (May).
149

Ngu Hiep & Van Nguyen (2015). Năng suất – Chìa khóa Hội nhập và Phát triển [Productivity– Key to Intergretion and Development]. Accessed on January 8, 2019 at:
http://truyenthongkhoahoc.vn/vn/Nang-suat-Chat-luong-chia-khoa-Phat-trien-va-Hoinhap-c1044/Nang-suat-Chat-luong-chia-khoa-Phat-trien-va-Hoi-nhap-n8014
Hiện trạng năng suất chất lượng ở một số ngành công nghiệp [Current Situation of
Productivity and Quality in Some Industrial Sectors] (2015). Accessed on January 8,
2019 at: http://nscl.vn/wp-content/uploads/2016/10/B14_Hien-trang-nang-suat-chatluong-o-mot-so-nganh-cn-L.pdf
Productivity Consultancy Trainers Training in Mekong Region with Socio-economic Focus
was Accomplished in Ho Chi Minh City, Viet Nam (January 29, 2016). Accessed on
January 25, 2019 at: https://www.jpc-net.jp/eng/news/2015_11.html
Dự án nâng cao năng suất và chất lượng sản phẩm hàng hóa ngành công nghiệp [Project on
Improving Productivity and Quality of Industrial Products]. (2017). Accessed on
January 8, 2019 at: http://nscl.vn/wp-content/uploads/2016/11/2017-2018-DA3.pdf
Bao Yen (2018). Làm rõ nguyên nhân của năng suất lao động Việt Nam còn thấp [Clarifying
the Causes of Why Vietnam’s Labor Productivity is Still Low]. Accessed on January
14, 2019 at: http://quochoi.vn/tintuc/Pages/tin-hoat-dong-cua-quochoi.aspx?ItemID=37931
Bich Ngoc (2018). Chuyên gia quốc tế gợi ý Việt Nam lập Hội đồng năng suất Quốc gia [TheInternational Expert Suggested Viet Nam Set Up a National Productivity Council].
Accessed on January 2, 2019 at:https://vnexpress.net/khoa-hoc/chuyen-gia-quoc-te-goi-y-viet-nam-lap-hoi-dong-nangsuat-quoc-gia-3845622.html
Le Nguyen (2018). Tổ tư vấn kinh tế của Thủ tướng đề xuất thành lập Hội đồng Năng suấtQuốc gia [The Prime Minister’s Economic Advisory Group proposes to establish a
National Productivity Council]. Accessed on January 14, 2019 athttps://vietnamfinance.vn/to-tu-van-kinh-te-cua-thu-tuong-de-xuat-thanh-lap-hoi-dongnang-suat-quoc-gia-20180504224207746.htm
Ba bộ và 18 tỉnh thành bị phê bình chậm ban hành kế hoạch thực hiện tái cơ cấu [Three
Ministries and 18 Provinces were Criticized for Slow Implementation of Restructuring
Plans] (2018/10/15). Accessed on January 8, 2019 at:https://baomoi.com/ba-bo-va-18-tinh-thanh-bi-phe-binh-cham-ban-hanh-ke-hoachthuc-hien-tai-co-cau/c/28170043.epi

150

APPENDICES
Appendix 1. Issues on data and estimation of coefficients in the TFP model
The 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 1991-2015. 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, the non-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 person employed in a specific year.
The Capital Department of GSO provides the data for capital (gross capital formation) andlabor, both of which are used directly in the growth accounting method. The capital data of GSO
is adjusted to constant 2010 price for the whole period 1991-2015. By using this data, the authors
do not need to separately calculate the real value of capital based on some assumption on the
depreciation rate of assets.
The difference in estimated TFP between this Report and Dr. Vu Minh Khuong’s study
may arise from the following two reasons (Vu Minh Khuong, 2014, 2016).
First, there is a data problem associated with the definition of capital used in Viet Nam’s
statistics. According to GSO, “Investment capital is measured by social development investment
capital, which is the entire amount of money spent to increase or maintain production capacity
and resources to improve the material and spiritual living standards of the whole society in acertain period of time, including: investment capital to create fixed assets, investment capital toincrease 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 themeasurement of capital input flow. In this dataset, after the Asian financial crisis of 2008, theVietnamese Government introduced stimulus packages that might be included in the capitalstock data, leading to an increase of capital in 2009 and 2010. These packages were ended in2011, resulting in a fall of capital stock in that year.

151

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

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

0

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

Another issue is related to the income share of capital. Dr. Vu Minh Khuong estimates thisratio to be around 0.5, which we think is much higher than the typical income share of capital in adeveloping country like Viet Nam. In VEPR’s Report, a lower ratio of 0.28 was adopted for theentire economy (Table A1.1). This income share of capital is estimated by the regression of GDP
on capital and labor for the period 1990-2015 using GSO data. A lower income share of capital
produces a higher contribution of TFP to labor productivity growth, as this Report shows. If wechange this ratio to 0.5, the contribution share of TFP becomes much lower and very close to theresults of Dr. Vu Minh Khuong.

Table A1.1 Estimates of income share of capital
SectorEstimated income share of capital

The whole economy
By economic activities
Agriculture, forestry and fishery
Industry and construction
Services
By type of ownership

0.28
0.25
0.26
0.07

State sector
0.34
Non-state sector
0.2
FDI sector
0.3
Source: VEPR estimates based on GSO data for the period 1990-2015.

152

Appendix 2. GDP growth decomposition using growth accounting method

PeriodGDP growth

1991-2015

6.98

1991-1995
1996-1999
2000-2007

8.79
6.22
7.25

2008-20122013-2015

5.83
6.33

Contribution of inputs
Capital
Labor
5.00
1.70
11.96
1.67
7.08
1.54
3.96
2.18
1.47
1.85
2.22
0.43

TFP
0.28
-4.84
-2.41
1.11
2.51
3.68

Source: VEPR’s calculation based on GSO data for the period 1991-2015, unit: %.

Appendix 3. Labor productivity from the perspective of enterprises30
Below, the relationship between labor productivity and wage is explored. Labor productivity isdefined as value added per worker. The value added in each industry is calculated using theinformation from enterprise surveys, as follows.
𝑉𝐴 = 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; and𝐷𝐸𝑃1 and 𝐷𝐸𝑃0 are the values of accumulated 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 arisingfrom financial and asset-related activities, and the other including them. For each economic
sector and industry, labor productivity 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 from2004 to 2015 by firm size. Small and medium enterprises experienced slightly relatively highproductivity growth than large or micro enterprises.

30

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

153

Table A3.1 Labor productivity growth by firm size, 2004-15(Percent per annum)
Labor productivity
Nominal
Real
14.52
4.96

Total
By firm size
Micro
Small
Medium
Large

15.43
15.6
15.71
14.93

5.41
6.64
6.52
5.2

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

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

Nominal growth rate

Real growth rate

I

II

I

II

Total

14.52

12.52

4.96

2.84

FDI

10.12

7.66

0.71

-2.04

Private

17.63

16.60

8.50

7.49

State

19.96

17.61

9.74

7.56

Total

19.43

14.97

7.22

2.68

FDI

8.93

3.94

-3.13

-8.42

Private

25.30

20.78

14.07

9.90

State

29.72

26.94

16.72

14.07

Total

8.89

9.65

2.32

3.04

FDI

11.56

12.30

5.51

6.21

Private

9.05

11.78

2.17

4.68

State

9.21

7.32

1.91

0.24

Period 2004-15

Subperiod 2004-10

Subperiod 2010-15

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

Table A3.2 reports the average growth rates of per-worker value added by industry andeconomic sector. Using the first measure of value added (I) with financial and other profits
excluded, labor productivity grew by 4.9% per year between 2004 and 2015. This is about 0.5
percentage point higher than estimation using the national account statistics. Labor productivity
154

growth was high in the latter half of the 2000s but significantly slowed down subsequently. Itreached 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.
There are significant differences in labor productivity performance across economic
sectors. Labor productivity growth was slower in the FDI sector compared to the private andstate 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 fellin 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 shows that
productivity gain from the manufacturing sector is largely offset by the loss in the mining sector.
Besides that, the shift toward more labor-intensive activities negatively affected laborproductivity despite rapid growth in output. These results confirm the finding in Chapter 2 ofthis Report. However, Nguyen Tien Dung et al. (2017) reports that manufacturing FDI
performed well, and they even experienced a relatively 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 wasconsiderably higher than the annual productivity growth of 9.7%. Investment also played an
important role in boosting productivity in private enterprises, where the capital-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.

Table A3.3 Labor productivity growth by industry, 2004-15(Percent per annum)

Labor productivity growth
Nominal
14.52

Total
By economic sectors
FDI
Private

10.12
17.63

155

Real
4.96
0.71
8.50

StateBy 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

19.96

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
15.79

10.85
8.99
10.36
8.92
9.58
9.75
7.18
8.08
8.82
8.90

Notes: total labor income, consisting of all wage income, subsidies, bonus andpayments on social and health insurances and unemployment insurance, areused. Financial and asset-related profits are not included in value added.
Source: Nguyen Tien Dung et al. (2017).

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. Food processing, 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.

156

Table A3.4 Labor productivity growth in manufacturing, 2004-15(Percent per annum)

NominalReal

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

13.99
14.01
14.47
15.45
14.42
15.72
11.02
10.04
10.58
15.43
13.37

7.21
7.23
7.66
8.58
7.61
8.83
4.41
3.49
3.99
8.56
6.63

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

18.29
20.21
19.36
19.04
17.21
17.78
18.35
16.70
19.68
19.69
17.89

11.24
13.05
12.26
11.96
10.24
10.77
11.30
9.76
12.56
12.56
10.87

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

20.51
23.51
13.79
21.21
20.21
16.61
15.16
15.86
13.64
16.24
20.51

13.34
16.16
7.01
14.00
13.06
9.67
8.31
8.96
6.87
9.32
13.33

Notes: total labor income, consisting of all wage income, subsidies, bonus and payments
on social and health insurances and unemployment insurance, are used. Financial andasset-related profits are not included in value added.
Source: Nguyen Tien Dung et al. (2017).

157

In the FDI sector, high productivity growth is observed in electronics, food processing,garment, chemicals, but not so in metals, machinery, and transportation means. In the private
sector, high labor productivity 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 isabout 0.5 percentage point higher than those reported in the main Report which uses national
account statistics. However, the general trends among economic sectors are quite similar. Thisappendix provided additional information on labor productivity by enterprise size andmanufacturing 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.

158

Appendix 4. Sectoral contribution to overall labor productivity: selected
countries (%)(a) Japan
Community, social and personal
services

10%

Financial intermediation, realestate, renting and businessactivities
Transport, storage andcommunications

8%

6%
Wholesale and retail trade, repair,
etc.

4%

Construction

2015

2013

2011

2009

2007

2005

2003

2001

1999

1997

1995

1993

1991

1989

The growth rate of laborproductivity in the whole
economy

1987

-6%
1985

Agriculture，hunting，forestry
and fishing

1983

-4%

1981

Mining and quarrying

1979

-2%

1977

Manufacturing

1975

0%

1973

Electricity, gas and water supply

1971

2%

(b) South Korea

14%

Community, social and personal
services

12%

Financial intermediation, real estate,renting and business activities

10%

Transport, storage andcommunications

8%

Wholesale and retail trade, repair, etc.

6%Construction

4%

Electricity, gas and water supply

2%

Manufacturing0%

Mining and quarrying-2%
Agriculture，hunting，forestry andfishing

159

2015

2013

2011

2009

2007

2005

2003

2001

1999

1997

1995

1993

1991

1989

1987

1985

1983

1981

1979

1977

1975

1973

1971

-4%

Labor productivity growth in thewhole economy

(c) China (from 1979)

16%

Community, social and personal
services

14%

Financial intermediation, real estate,renting and business activities

12%

Transport, storage andcommunications

10%

Wholesale and retail trade, repair,
etc.

8%

Construction
6%
Electricity, gas and water supply

4%
2%

Manufacturing0%

Mining and quarrying-2%

Agriculture，hunting，forestry andfishing-4%

Labor productivity growth in thewhole economy(d) Singapore
Community, social andpersonal services

10%

Financial intermediation, realestate, renting and businessactivities
Transport, storage andcommunications

8%
6%
4%

Wholesale and retail trade,
repair, etc.

2%Construction

0%

-2%

Electricity, gas and watersupply-4%

Manufacturing-6%
Agriculture，hunting，
forestry and fishing

-8%

1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014

-10%

160

Labor productivity growth in
the whole economy

(e) Malaysia (from 1983)
Community, social and personal
services

12%

Financial intermediation, realestate, renting and businessactivities
Transport, storage andcommunications

10%
8%
6%

Wholesale and retail trade,
repair, etc.

4%Construction

2%

Electricity, gas and water supply

0%
Manufacturing-2%

Mining and quarrying-4%

Agriculture，hunting，forestry
and fishing-8%

Labor productivity growth in thewhole economy

1983
1984
1985
1986
1987
1988
1989
1990
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

-6%

(f) Thailand (from 1972)
12%

Community, social and personal services

10%

Financial intermediation, real estate,renting and business activities
Transport, storage and communications

8%
6%

Wholesale and retail trade, repair, etc.

4%2%Construction

0%Electricity, gas and water supply-2%

Manufacturing-4%

Mining and quarrying-6%
Agriculture，hunting，forestry and fishing

161

2014

2012

2010

2008

2006

2004

2002

2000

1998

1996

1994

1992

1990

1988

1986

1984

1982

1980

1978

1976

1974

1972

-8%

Labor productivity growth in the whole
economy(g) Philippines
Community, social and personal services

10%

Financial intermediation, real estate,renting and business activities

5%

Transport, storage and communications
Wholesale and retail trade, repair, etc.

0%Construction
Electricity, gas and water supply-5%

Manufacturing

Mining and quarrying-15%

Agriculture，hunting，forestry andfishingLabor productivity growth in the whole
economy

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

-10%

(h) Indonesia (from 1977)
Community, social and personal
services

15%

Financial intermediation, realestate, renting and businessactivities
Transport, storage andcommunications

10%

5%

Wholesale and retail trade, repair,etc.

Construction

0%Electricity, gas and water supply-5%
Manufacturing-10%
Mining and quarrying-15%

Agriculture，hunting，forestry
and fishingLabor productivity growth in thewhole economy

-20%

162

(i) Cambodia (from 1994)

Community, social and personal services

10%

Financial intermediation, real estate,renting and business activities

8%

Transport, storage and communications
6%
Wholesale and retail trade, repair, etc.
4%Construction

Electricity, gas and water supply

2%

Manufacturing0%

Mining and quarrying-2%
Agriculture，hunting，forestry andfishing-4%

Labor productivity growth in the whole
economySource: author’s calculation based on APO data.

163