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Industrial Policy Formulation in Thailand,
Malaysia and Japan
Lessons for Vietnamese Policy Makers

Vietnam Development ForumPDF created with pdfFactory trial version www.pdffactory.com

Publication of this volume was supported by the 21st Century Centreof Excellence (COE) Program of Japan’s Ministry of Education,
Culture, Sports, Science and Technology (MEXT).

ã Vietnam Development Forum, 2006
Printed in Vietnam
All rights reserved. No part of this publication may be reproduced ortranslated into another language in any form or by any means,including photocopy or website uploading, without permission inwriting from the Vietnam Development Forum.

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Contents
Preface......................................................................................................vii
Mission Dates and Members.....................................................................ix
Chapter 1 Integral Manufacturing: The Way Forward for Vietnam.........1
by Kenichi Ohno
Chapter 2 Industrial planning in Vietnam and lessons from overseas....17
by Le Van Duoc and Cao Xuan Thanh
Chapter 3 Thailand.................................................................................33
by Vietnam Development Forum
Chapter 4 Malaysia................................................................................45
by Vietnam Development Forum
Chapter 5 Japan......................................................................................61
by Vietnam Development ForumAppendix: Meeting Records...................................................................73(1) Thailand(2) Malaysia(3) Japanv

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Preface
The Vietnam Development Forum (VDF) is a policy research project
between the National Graduate Institute for Policy Studies (GRIPS) in
Tokyo and the National Economics University (NEU) in Hanoi. It isfunded by the Japanese government.
Since its establishment in early 2004, VDF has cooperated very closelywith the Ministry of Industry (MOI) of Vietnam. The central theme of ourcooperation is exploring the way to improve the methodology ofindustrial policy formulation.
In Vietnam, a significant gap has emerged between the old policy
method based on quantitative planning and the designation of public
investment projects on the one hand, and the rapidly changing reality
under market-orientation and global integration on the other. Many MOI
officials are well aware of this gap, and seek concrete and practicalintellectual inputs to revise their policy method.
To support this effort, VDF and MOI have organized three joint
missions to Thailand, Japan and Malaysia from early 2005 to early
2006. In each country, we collected key industrial policy documents,
and asked how policies were designed, implemented, and reviewed.
We also learned how the government and the business community
talked to each other, what organizational structure was adopted to draft
policy documents, and how inter-ministerial coordination was ensured.
By publishing this report, we would like to share our findings with abroader community of policy makers and researchers in Vietnam.
While political situations and policy methods may shift over time ineach surveyed country, we believe that information gathered by our
missions, when regarded as clues to improve policy formulation, hasvalue largely invariant to such changes.

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VDF takes full responsibility for the content of this report. No
assertion in this volume should be construed as the official views ofeither MOI or the organizations and people whom we interviewed. The
titles of the officials and other participants of our research are those at
the time of the interview.
Tokyo, May 2006
Kenichi Ohno
Co-leader, VDF

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Mission Dates and Members
Mission to Thailand
Location: Bangkok and vicinity
Period:February 28 to March 4, 2005
Members: Ministry of Industry:
Mr. Le Van Duoc (Director, Department of Planning)
Mr. Hoang Trong Hieu (Expert, Department ofPlanning)
Ms. Nguyen Thi Doan Hanh (Expert, Department ofInternational Relations)
Mr. Hoang Bac (Expert, Department of Mechanics,
Chemicals and Metallurgy)
Vietnam Development Forum:
Prof. Kenichi Ohno (Project co-leader)
Mr. Mai The Cuong (Researcher)
Mr. Ngo Duc Anh (Researcher)
Mr. Pham Truong Hoang (Researcher)
Ms. Duong Kim Hong (Researcher)
Mr. Vu Huy Thong (Lecturer, National Economics
University)
Mission to Malaysia
Location: Kuala Lumpur and vicinity, and Penang
Period:January 9 to 13, 2006
Members: Ministry of Industry:
Dr. Cao Xuan Thanh (Deputy Director, Department oflanning)
Mr. Trinh Dinh Thang (Senior Expert, Department ofInternational Cooperation)
Mr. Hoang Trong Hieu (Expert, Department ofPlanning)ix

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Vietnam Development Forum:
Prof. Kenichi Ohno (Project co-leader)
Mr. Mai The Cuong (Researcher)
Mr. Ngo Duc Anh (Researcher)
Mr. Nguyen Ngoc Son (Researcher)
Mission to Japan
Location: Tokyo
Period:May 30 to June 3, 2005
Members: Ministry of Industry:
Mr. Le Van Duoc (Director, Department of Planning)
Mr. Cao Xuan Thanh (Deputy Director, Department ofPlanning)
Joining from Japan:
Prof. Kenichi Ohno (VDF co-leader/GRIPS)
Ms. Nguyen Thi Xuan Thuy (GRIPS/MOI)
Mr. Pham Truong Hoang (Yokohama National
University)
Mr. Junichi Mori (Fletcher School, Tufts University)x

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Chapter 1 Integral Manufacturing:
The Way Forward for Vietnam
Kenichi Ohno
Vietnam Development Forum andNational Graduate Institute for Policy Studies
Our research missions to Thailand, Malaysia and Japan in 2005 and2006 studied the different policy formulation methods of thesecountries, including both their strengths and weaknesses, to draw
concrete lessons for Vietnam. In this chapter, the framework of
thinking within which this research was Conducted, as well as myconclusion after the missions, are presented.

1. The need for new industrial policy
Vietnam is deeply committed to global and regional integration, and no
one doubts the seriousness of this commitment. Vietnam has alreadytaken many steps to realize this goal, including the completion of the
AFTA process, the conclusion of the bilateral trade agreement with theUnited States, intense negotiation for WTO accession, and preparationfor other free trade areas (FTAs). Work is also progressing in the legalarea, as the government doubles its effort to create or amend a large
number of laws for consistency with international practices. All this ishighly commendable.
However, diplomatic and legal preparations are not enough. In orderfor Vietnam to truly enjoy the fruits of international integration, its real
sector must also be prepared. Vietnamese firms need to be competitive
enough to survive and even prosper in the new open environment whereimport protection and special favors are, in principle, no longer
allowed. And this is the area in which Vietnam’s preparation is theweakest.
In a market economy, the natural selection of enterprises is not only
acceptable but also desirable. Ill-managed firms go bankrupt while new1

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Industrial Policy Formulation ...

firms emerge incessantly, giving dynamism to the national economy. In
this sense, we do not expect all existing domestic enterprises to survive
the integration shock. However, globalization also carries the risk ofde-industrialization and getting stuck with primary commodity
production and simple assembly. If a large chunk of Vietnameseindustries is wiped out and the domestic market is dominated byimports and FDI firms, and if this trend continues year after year
without any sign of reversal, is it acceptable to the Vietnamese people?
Of course, this may not happen. Vietnamese producers may prove to bestronger than we think. But should outcome be left to chance? At
present, Vietnam cannot assess or cope with the integration risk
properly since there is no clear vision, analysis, target setting or
promotion policy. In Thailand and Malaysia, the government and thebusiness community create joint strategies to meet the challenge ofinternational competition. But in Vietnam, no such strategy exists. Thisgap must be filled by industrial master plans.
Free-market advocates may argue that, once the economy is open andfree, the market mechanism will activate the ingenuity of the Vietnamese
people and the national economy will grow and become more efficient.
This argument is too naive, and the majority of Vietnamese policy
makers already know it. The fact is that the balance of power between
large advanced economies and latecomer developing countries is
lopsided. Vietnamese firms cannot at present compete squarely with
Toyota, Panasonic, LG or Intel in the global market. Instead, they must
work with these multinational corporations (MNCs) to improve theirabilities and become crucial suppliers in their global value chain. A good
policy is needed to encourage and support this effort.
But what kind of policy, more concretely? The days of planning areover. Vietnam can no longer use rigid control to maintaininternational isolation. The strategy of infant industry promotion,
adopted by Japan and Korea in the early postwar period, is also out ofquestion. Under this strategy, domestic industries were protected andnurtured until they became sufficiently competitive. But Vietnam
cannot introduce such protection because of its commitments to WTO
and various FTAs.

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Chapter 1: Intergral manufacturing...

Even the strategy of FDI-led growth, exercised by ASEAN4 in the
1970s-90s, is no longer applicable to latecomers like Vietnam.
Although Malaysia, Thailand, Indonesia and the Philippines
vigorously absorbed FDI, they were slow to remove their tariffs, import
restrictions and localization requirements. In these countries, FDI
promotion and industrial protection coexisted for at least a few
decades. External barriers were lifted only after they achieved
significant industrial agglomeration. But Vietnam is asked to remove
barriers now, before such agglomeration occurs.
For this reason, Vietnam’s industrial policy in the 21st century must be
new and different from those of other countries in the past. It mustreflect the fact that even newcomers must open up very fast.
Globalization is inevitable, and Vietnam must position itself to becomea meaningful player in the global arena, making sure that its
contribution to East Asia and the world will rise over time. What kindof policy can that be? That is the key question for the Ministry ofIndustry (MOI) in particular and the Vietnamese government ingeneral to consider. That is also the question we wanted to addresswhen we traveled to Malaysia, Thailand and Japan.

2. Weaknesses in Vietnam’s policy formulation
To design and implement industrial policy in the age of strong
globalization pressure, Vietnam must overcome two methodologicalproblems. At present, master plans are designed and drafted by a small
group of officials assigned for the task. They work very hard but
cannot produce desired results, because crucial information andcooperation are lacking. More concretely, the weaknesses of Vietnam’s
industrial policy mostly stem from the following two missing links.
(i) The lack of cooperation with stakeholders (i.e., concerned
groups) in the entire drafting and implementation process. In thecase of industrial master plans, the most important stakeholder isthe business community.
(ii) The lack of inter-ministerial coordination within the government
in deciding concrete action plans.

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Industrial Policy Formulation ...

These problems are unique to Vietnam as they are not observed in otherhigh-performing East Asian countries. In our missions to Thailand,
Malaysia and Japan, no serious problems were reported in either
government-business cooperation or inter-ministerial coordination in
formulating industrial policy.
The main problem caused by the lack of cooperation with stakeholders
is that policy is not supported by the business community and therefore
not implementable. This problem is particularly acute in sectors where
private and FDI firms-which are not under MOI’s directsupervision-dominate, such as motorbikes, automobiles, andelectronics. Even in areas where state-owned enterprises (SOEs) used
to play key roles, such as steel and cement, the share of private and FDI
production is rising. The drafting process must involve all key players,
especially private and FDI firms. Without solid channels to absorb
their information and concerns, policy remains ineffective.
Another problem caused by the lack of stakeholder involvement is that
information and analysis are neither to-the-point nor up-to-date. Even
if MOI drafters are intelligent and hard working, it is difficult for asmall team to gather all relevant information. This is particularly true
with external information such as global industrial trends or the latest
strategies of MNCs. Such information should be obtained throughclose and continuous contact with the business community. A good
policy cannot be built on outdated information.
On the other hand, the main result of the lack of inter-ministerial
coordination is that supporting measures are simply mentioned without
details. Measures outside the authority of MOI, such as tariffs and tax
incentives or a reform of technical schools and universities, areespecially hard to prescribe in detail, since there is no mechanism to
discuss and agree on policy measures among related ministries in close
consultation. At present, ministries interact only superficially throughcommenting on mutual drafts and exchanging basic information. Thisis another reason why timely and effective policy implementation is sodifficult in Vietnam.

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Chapter 1: Intergral manufacturing...

3. Good policy, modest results
All three countries featured in this report-Thailand, Malaysia andJapan-have constructed effective channels for stakeholder involvement
and inter-ministerial coordination in industrial policy making.
Thailand has set up industry-specific institutes and official committees
to link the government, businesses, and experts. Malaysia has athree-layer structure consisting of the Industrial Planning Committee,
the Steering Committee, and technical resource groups, which together
mobilize several hundred people to draft an industrial master plan. In
Japan, deliberation councils and industry associations have long been
the key instruments for sharing information among all stakeholders at
any time. The functions of these institutions are explained in detail in
the following chapters.
The experiences of these countries make it clear that Vietnam is far
behind them in industrial policy formulation and that it has much tolearn from them. It must be admitted that Vietnam’s policy making
method is in the early stage of development. It is still primitive anddefective, and inherits many characteristics of the planning days which
are no longer valid. Another crucial fact is that the way to achieve good
involvement and coordination is not one, and that Vietnam should
design a mechanism which is most suitable for its situation and needs.
This means that Vietnam must selectively import the good practices ofneighboring countries, with necessary revisions and additions, to suit
its circumstances. Since institutional evolution is difficult to forecast orplan with any precision, the adaptive process will inevitably be a longone with many trials and errors.
However, there is also a negative lesson from Thailand and Malaysia
that is worth attention. While industry-led growth of Thailand andMalaysia has been remarkable by the standards of developing countries
in general, it falls short of East Asia’s high performance criteria. These
two countries are still unable to break through the “glass ceiling” after
several decades of industrialization. The glass ceiling here refers to thedifficulty in moving from the second to the third stage in the path of5

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Industrial Policy Formulation ...

industrialization that I have described on another occasion1.
A developing country in the catch-up process typically starts withsimple assembly to fulfill foreign orders (stage 1), builds industrial
agglomeration and supporting industries (stage 2), graduates fromforeign guidance to master technology and management (stage 3), andfinally achieves innovative, original design capacity (stage 4). I argue
that none of the ASEAN countries has graduated from foreigndependency despite their quantitative achievement. They still rely
heavily on foreign managers and engineers to run their factories andmaintain quality. Since core competence and value creation are notinternalized, there is always a risk that industries will shift to China or
elsewhere when situations change.

Figure 1-1. Breaking the Glass Ceiling

Source: see footnote 1

1

Kenichi Ohno, “Designing a Comprchensive and Realistic Industrial Strategy”, chap.1,
Kenichi Ohno and Nguyen Van Thuong, eds, Improving Industrial Policy Formulation,
Publishing House of Political Theory, 2005 (pp.24-26).

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Chapter 1: Intergral manufacturing...

The governments of Thailand and Malaysia are acutely aware of thisproblem and trying to remedy the situation as a matter of top national
priority, as the following chapters indicate. Specifically, this requires
strengthening SMEs and creating linkages among them, developing
industrial skills, promoting supporting industries, stimulating R&D,
and other efforts in human resource development. Nevertheless, local
capability of Thailand and Malaysia still falls short of the highrequirements of Japanese manufacturing FDI. This is a problem thathas been recognized for a long time-at least for two decades-but
remains unresolved.
At the risk of over-simplification, we may even say that Thailand andMalaysia are the countries whose governments have succeeded inoffering good policy frameworks but whose domestic businesses
remain less dynamic than expected. The gap between good policy andmodest results is especially striking when we look at the performanceof Taiwan and Korea. From the situation of war devastation and direpoverty, they emerged as leading manufacturers of high-quality
products in a few decades. They received foreign technical assistanceat first, but the time they spent for learning was relatively short. As
soon as they mastered technology, they sent foreign advisors home.
R&D, product design, enterprise management, and factory operation
are now carried out entirely by locals. They invest vigorously abroad toexpand production networks, and have become Japan’s formidable
competitors. And all this was achieved in no more than the time it took
for Thailand and Malaysia to reach their current levels.
Why did Taiwan and Korea move up so fast, while Thailand andMalaysia learned more slowly? The reason may be the difference innational character or the difference in policy quality. If Taiwanese andKorean people are genetically more suitable for high-quality
manufacturing than Thai and Malaysian people, there is not much thegovernment can do to change people’s DNA. But if industrial policies
adopted by Taiwan and Korea have been superior in matching national
aspiration with needed actions, we are compelled to study much
deeper into policy design and implementation to improve the7

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Industrial Policy Formulation ...

industrial policy framework and content of Vietnam2.
Vietnam at present is a country of weak policy formulation. However,Vietnamese people are frequently praised as skillful, diligent andpersistent in comparison with other peoples in the region. This points
to a possibility of greatly upgrading the industrial capability ofVietnam once policy weaknesses are removed.

4. Coping with China
How to cope with China, with its enormous size and rapidly expanding
manufacturing capacity, has become one of the most urgent issues allover the world. China has large numbers of managers, scientists,
engineers and unskilled workers, ample industrial materials, a
relatively high level of technology backed by a long history ofindustrialization drive, and a thick network of overseas Chinese
businesses. The China challenge looms large in the industrial policy
debates of Thailand, Malaysia and Japan. It must also be a top issue informulating Vietnam’s new industrial policy.
It is clearly unwise to directly compete with Chinese products in the
global market. To avoid this, a country must differentiate its products
from Chinese, and position itself as a producer complementary to
China rather than competing with it. If this is done successfully, thecountry can form a production partnership with China and use Chinese
low-cost inputs to its advantage. The crucial question is how to do thisconcretely. The proper positioning requires a clear understanding of the
fields in which China excels and the fields in which it does not.
Since China is a big country, it is not easy to find industrial categories
that are not produced by it. One needs to go into the level of individual
products and even different grades of the same products, to find aniche. Even then, there is no guarantee that China will not produce that2

Two facts complicate such a study. First, the policies adopted by Taiwan and Korea werevery different in that the former promoted dynamism of SMEs while the latter featured large
business groups (chaebols) supported by large banks. Second, state-led industrialization
strategy adopted by Korea, in particular, is no longer available to latecomer countries of today
under the globalization pressure.

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Chapter 1: Intergral manufacturing...

product next year. Many countries want to promote “high-tech”
industries to upgrade its skills and compete with China. However, thepopularity of this strategy must be evaluated against the following
precautions: (i) there is a significant gap between national aspiration
and actual capability; (ii) no differentiation will occur if all countries
adopt this strategy; and (iii) China is also targeting such areas.
Thus, finding a niche in terms of specific products, including “hightech” products, has certain limits. The better way to distinguish oneself
is to analyze China’s strengths and weaknesses from the viewpoint ofbusiness architecture, as explained below.

5. Integral manufacturing
We would like to propose one concrete industrial strategy for Vietnam
in order to overcome the difficulties addressed in earlier sections. The
strategy is targeted at building domestic capability in assembly-type
manufacturing, such as electronics and electricals, motorbikes, andautomobiles, and the production of parts and components of theseindustries3. Although assembly-type manufacturing industries differ
from one another in some aspects, they are common in the sense that(i) they extensively use metal, plastic and rubber parts; (ii) productquality heavily depends on the quality of these parts; (iii) they also
require labor-intensive assembly with precision; and (iv) innovationand model changes are quick and frequent. For this reason,
assembly-type manufacturing industries can to a large extent share thesame supporting industries and human resources. That is why theyshould be grouped together in strategic planning.
Vietnam’s workforce is particularly suited to labor-intensive assemblywith precision mentioned above, and that is why such FDI inflows areaccelerating in recent years. However, Vietnam must also learn andinternalize the other aspects, (i) (ii) and (iv) above, to fully take3

Assembly-type manufacturing has been the driving force of economic transformation ofJapan, Taiwan, Korea, ASEAN4 and China, and it is also expected to play the same role inVietnam. For other industries, such as garment, footwear, food processing, software, energy,
industrial materials, construction, logistics, trade, telecom, finance, tourism, etc, otherstrategies must be sought since the argument in this section is not applicable to them.

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Industrial Policy Formulation ...

advantage of the strength of assembly-type manufacturing. If this isdone successfully, assembly-type manufacturing will surely become
the main pillar of Vietnam’s industrialization, providing jobs,
improving skills, and raising national income.
Even without any further policy reform, FDI will probably continue tocome to Vietnam and, given sufficient time, the country will reach theincome and industrial levels of Thailand and Malaysia today. However,as argued above, these ASEAN neighbors remain heavily dependent on
foreign technology and management. Despite many decades of
supporting industry and SME promotion, their human resources andlocal parts makers remain too weak to break through the “glass ceiling”
and reach the level of Taiwan or Korea. If Vietnam does not have agood policy, it is also likely to stop at the level of Thailand andMalaysia today.
Another important consideration noted earlier is that Vietnam isrequired to integrate much faster than ASEAN4. Thailand andMalaysia absorbed a large amount of FDI, but they were not “open” inthe sense that they kept high tariffs, localization requirement, import
restrictions, etc. for a long time. They used these measures for at leasta few decades to develop and protect their industrial base. But Vietnam
must open up now, before building such an industrial base, and face
global competition. Vietnam’s industrial strategy must therefore bedifferent from and bolder than those of Thailand and Malaysia.
Let us now propose a new manufacturing strategy for Vietnam basedon the above considerations.
(1) Vietnam should liberalize its trade and investment regimes
unconditionally and more decisively than ASEAN4 did in the past,create the most free and low-cost business environment in East
Asia, and attract a large amount of FDI without selectivity4. Thisdecisive openness should be the strongest selling point in FDI
marketing.

4

The only permissible reasons for rejecting FDI are environment, cultural indecency, andnational security. This rule should be applied sparingly under transparent criteria.

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Chapter 1: Intergral manufacturing...

(2) Linkage between domestic firms and foreign multinationals
should be promoted as a matter of highest priority. Vietnamese
firms should double efforts to become suppliers of FDI
manufacturers and foreign buyers, and improve their capabilities.
The government should support their effort.
(3) Vietnam should learn the monozukuri5 spirit of Japan’s
integral manufacturing, as explained below, as quickly as
possible. Vietnam should aim to become a reliable developing
country partner in high-quality manufacturing with Japan andother developed countries producing integral products.
Prof. Takahiro Fujimoto of Tokyo University and his research teamhave come up with the business architecture theory to explain the
differences among the manufacturing industries of major economies
such as Japan, China, the United States, Korea, Taiwan, and ASEAN
countries. This theory has a significant implication for Vietnam’s
industrial strategy. According to Prof. Fujimoto, there are two basicarchitectural types in manufacturing-modular architecture and integral
architecture. In modular architecture, the modality of interaction
among components is standardized for easy connection. For example,
desktop computers are a typical modular product in which globallycommon components from various companies are freely combined. By
contrast, in integral architecture, the complexity of interaction ishappily accepted, and improvements are achieved through numerous
trials and errors. For example, automobiles must be manufactured withintegral architecture if multiple objectives such as performance,
comfort, fuel efficiency, safety, etc. are to be attained simultaneously.
Generally speaking, modular architecture is suitable for obtaining
quick results at low cost while integral architecture is appropriate forthe pursuit of ever-higher quality in the long run.

5

Monozukuri literally means “making things” or “manufacturing”.

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Figure 1-2. Modular versus Integral Manufacturing

Correspondence between products and business architecture is not
fixed; it evolves dynamically with the business strategy of each firmor country, technical progress, and consumer tastes. In addition,business architecture often has structural layers in which, forexample, modularization may proceed in final assembly while
integration may deepen in components.
Japan is a country of integral architecture, intensely interested inefficient factory operation and product integrity. By contrast, theUnited States excels in modularization and is good at slicing the
supply chain of a product into appropriate elements, standardizingthem and making profits by the novelty of combination. China is alsoa country of modular architecture, but its comparative advantage lies inlabor-intensive modular products rather than knowledge-intensive
modular products as in the case of the United States. Prof. Fujimoto
considers China to be a country of quasi-modularity since its
manufacturing features mass production of products with copied
design and technology rather than original innovation.
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Chapter 1: Intergral manufacturing...

Since the United States and China are both modular countries withdifferent development levels, they are complementary production
partners. The former can supply technology and capital while the latter can offer cheap labor to produce modular products. Meanwhile,
Japan is a country of integral manufacturing with high technology,
high wages and aged population looking for a developing country
partner. Using cheap unskilled labor in China and ASEAN is notenough to fully exploit the potentiality of integral manufacturing. If
ASEAN, the traditional destination of Japanese FDI, learns tobecome a manufacturing partner with long-term vision and strong
aspiration for high quality, Japan and ASEAN can form a strategic
alliance in manufacturing integral products which are differentiatedfrom Chinese products. However, this alliance remains a possibility
since no ASEAN country has acquired necessary skills and attitude
for Japanese-style manufacturing. As noted above, Thailand andMalaysia are currently struggling to become full-fledged
manufacturing countries. They still need Japanese managers andengineers to stay, and depend heavily on FDI parts producers.
To become a partner in integral manufacturing requires ability todesign and operate factories efficiently; maintain, adjust and repair
machines; design parts; produce precision molds and dies; educate
highly skilled industrial Meisters, and so on. These requirements are
not new. But the point is that they must be accomplished well withpurpose and tenacity. This will enable ASEAN to graduate from simple
assembly by foreign orders to participation as an indispensable player
in the global manufacturing network. This will also upgrade theJapan-ASEAN economic relationship to a higher level.
Among ASEAN countries, Vietnam and Thailand are top candidates
for this feat. Vietnam should set a clear goal with appropriate actionplans, and the Japanese government and business community should
actively provide technical assistance and business cooperation for thispurpose.
This perspective explains why supporting industries (especiallyhigh-quality plastic and metal processing industries) and humanresource development (especially high-level production managers and13

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Industrial Policy Formulation ...

engineers) are so crucial for Vietnam. They are needed to significantly
raise domestic manufacturing capability, and to differentiate Vietnam
from China and other ASEAN countries. It also means that copying
China’s manufacturing style or receiving Chinese technical assistanceis not desirable for Vietnam since it only leads to low-price,
low-quality competition yielding little profit, as well as a direct clash
with Chinese products.
Figure 1-3. Production Alliances Based on Business Architecture

Source: Prof. Takahiro Fujimoto’s explanation to the joint VDF-MOI mission in Tokyo, June 2005

6. Anticipated skill shortages in Japan
Japan desperately needs a developing country partner in integral
manufacturing but has found none so far. It needs such a partner since
its wages are too high and its population is aging, making it very
difficult to find young engineers and production managers in sufficientnumber and quality inside Japan. The postwar baby boomers, born in
1947-49, with high skills are reaching the retirement age soon. The
1947 babies will become 60 years old in 2007 and begin to leave

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Chapter 1: Intergral manufacturing...

factories (the “2007 problem”). Their skills must be transferred to thenext generation but Japan lacks a sufficient number of successors.
According to the White Paper on Monozukuri6, the number ofmonozukuri workers in Japanese manufacturing was 1.93 million in2005. When asked if the “2007 problem” (retirement of skilledworkers) was a serious concern, 30.5% of the manufacturing firms
responded yes. Among them, main reasons for their concern included
long time required for skill transfer (68.5%), lack of younger engineers
with enthusiasm (64.5%), and difficulty in communication between
teacher and student due to a large age or skill gap (41.9%).
Figure 1-4 shows the worker shortages for the ten largest basic
industrial skills in Japan. As of 2005, worker shortages are not yet
severe, with only 25.6% of the respondent firms reporting skill
shortages in quantity or quality (or both), 47.9% reporting adequacy,
and 1.7% reporting surpluses (these numbers are averages for the tenskills). However, as time progresses, skill shortages are likely toworsen. Many firms are expected to retain skilled workers beyond theretirement age, which will delay the impact of the 2007 problem forseveral years. But in the long run, Japan will inevitably face skill
shortages unless fundamental solutions are found.
I have highlighted Japan as a principal monozukuri partner for
Vietnam, since Japan is the only country in East Asia that has achieved
a high level of integral manufacturing. In addition, Japan is already themost important manufacturing investor in Vietnam. Moreover, if
Vietnam masters integral manufacturing, it can also cooperate more
effectively with, for example, German automobile producers or Italianmachinery companies. That is why I sincerely hope that high aspiration
for assembly-type integral manufacturing be incorporated as one of thestrategic pillars of Vietnam’s overall industrial master plan.

6

Ministry of Economy, Trade and Industry; Ministry of Health, Labor and Welfare; andMinistry of Education, Culture, Sports, Science and Technology, White Paper on Monozukuri,
2005. Data in the text were obtained from the survey by the Ministry of Health, Labor andWelfare on enterprises with five or more regular employees.

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Figure 1-4. Shortages and Surpluses of Monozukuri Workers
in Japan

Source: see footnote 6Note: These are the survey results on the ten basic industrial skills with largest numbers of workers
in 2005. Shortage 1, 2 and 3 are shortage in quantity, shortage in quality, and shortage in bothquantity and quality, respectively.

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Chapter 2 Industrial Planningin Vietnam and Lessons from Abroad
Le Van Duoc and Cao Xuan Thanh
Ministry of Industry

Among economic policy instruments, planning is essential in assisting
the government to regulate and manage the economy effectively andachieve socio-economic goals for each stages of development. This
chapter first reviews historical transformation and problems inindustrial planning of Vietnam. In Section 2, experiences from othercountries are reviewed. Finally, Section 3 draws lessons for Vietnam
from these experiences.

1. Changes in industrial planning in Vietnam
Vietnamese industrial planning in principle has followed the generalrules required by economic planning. Historically, industrial planningcan be divided in to three stages: (i) central planning period from 1955
to 1975, (ii) initial renovation period from 1976 to 1985; and (iii)
innovation period from 1986 to present.

1.1 Central planning period from 1955 to 1977
In the early period, Vietnam was divided into two regions. The North,after liberation, started to construct socialism while the South
continued to fight for unification. In the North, the government applied
planning methodology originated in the Soviet Union with thefollowing characteristics:(i) Resource allocation was prioritized to two main economic sectors,
namely the state and collective sectors, to achieve plan objectives.
(ii) Plan objectives were mandatory. There were a large number ofcommodity targets which were closed and balanced within eachsector and within each region. The state budgeted both inputs andoutputs in production and enterprise operation.
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(iii) The state managed and controlled economic activities throughcentral directives. Concrete objectives were determined byplanners. Resources such as capital and materials and productdistribution among sectors were decided by criteria which rarelychanged.
(iv) The plan building process was characterized by hai len ba xuong(two ups and three downs-the sequence of top-down provision ofnumerical targets, bottom-up checking and drafting, top-down
revisions, bottom-up redrafting, and top-down synthesis andfinal approval; see Figure 2-1).
(v) The highest planning authority was the State Planning Committee
whose main function was to synthesize key plan contents from allindustries and all local governments while giving a focus on
strategic economic areas, essential economic objectives, andimportant products and projects for the national economy. As thenext authorities in charge, ministries and general offices also
compiled their plans by giving directives to their lower units.
Provinces and cities were responsible for constructing andsynthesizing plans for their own areas.

Figure 2-1. Designing and Approving Process of Planning(“2 up 3 down” Modality)

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The centrally planned mechanism represented state power and legalityof economic objectives, and assured fundamental balances of the entire
economy as well as principal industrial and agricultural products.
Concrete objectives of the government were mainly aimed atreconstructing, improving, and developing the socialist economy in the
North while simultaneously supporting the South to fight for theunification of the country.
However, from 1975 as the socio-economic situations changed
significantly, planning based on old methodology began to show many
constraints and meet many obstacles, which tended to deter economic
development. These constraints and obstacles included the following:(i) The system of rigid commodity targets reduced enterprises'
flexibility and creativity. Enterprises reacted perfunctorily,
passively and unwillingly, and hence could not play the role ofthe engine of economic development.
(ii) Plans were subjected to the discretion of leaders and planners.
(iii) Scientific foundation, such as the use of growth projection,
master plans and IO tables, was lacking.
(iv) Objective rules were not recognized and applied properly.
To overcome these constraints for the sake of production andeconomic efficiency, initial changes in planning method wereintroduced during the post-unification period, particularly at the
beginning of 1980s.

1.2 Initial renovation period from 1976 to 1985
In this period, Vietnam implemented two five-year plans: the Second
Socio-economic Development Five-year Plan (1976-1980) and theThird Socio-economic Development Five-year Plan (1981-1986).
In the period 1976-1980, planning was still highly administrative,
direct and material. For instance, Parliament Decision dated December
28, 1977 approved the basic tasks of the five-year state plan from 1976
to 1980 with numerical targets such as 21 millions tons of cereals, 1.8
million laborers to open new economic regions, 3,500 million eggs,
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16.5 millions pigs, 1 million tons of meat, 1 million tons of sea fish, 14
million square meters of housing (excluding houses built by people),
450 million meters of cloth, etc. Needed resources were mainly
supplied from abroad.
In the period 1981-1985, renovation was initiated with Decision No.25CP and No.26-CP dated January 13, 1981, which introduced "three-partindustrial planning." The planning mechanism changed from direct toindirect. A system of mandatory targets was reduced and graduallyreplaced by an indicative system of informative guidance. Enterprises
were given self-control based on market demand and economic
contracts. Some targets were retained for key products. Profit andfinancial policies were changed to encourage enterprises toproactively develop self-balance plans. The chairman of the Interministerial Committee issued Instruction No.3-CT on January 11,
1982, which required a change in the design of the five-year plan
1981-1985 with respect to the content and modality of planning.
According to the Instruction, plans were designed at three levels,
namely central, provincial and lower units. Designing and collecting
plans were to start from lower units. This encouraged the spontaneityof the lower level while securing the consistent central management of
the state. At the central level, the State Planning Committee remained
the national planning authority, which ensured the macro balance of theeconomy. Provinces and cities designed and collected plans from theirlower units and districts. They were to implement the state's legal
targets while promoting capital accumulation for provinces. Lower
units (enterprises, cooperatives, farms, etc) were required to beproactive and creative in their business and production based on theprinciple of self-finance while executing state's policies, regulations,and targets.
Planning methodology changed dramatically in this period. Importance
was now placed on basic surveys, socio-economic forecasts, masterplans, technical and economic norms, and selection of most effective
projects. Productivity, quality, efficiency in all activities of the value
chain began to be considered essential. Legitimacy of plans wasstrengthened, various economic measures were mobilized to encourage
enterprises to achieve their potential, and linkage was created between
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the economic plan and the technical progress plan, and between thematerial plan and the value plan.
The drafting process of plans was shortened. The State Planning
Committee propagated work direction and numerical indicators to bechecked, which became more selective and shorter. It held guidance
seminars for ministries, provinces, and cities. Ministries, general
offices, provinces, and cities guided lower units, synthesized plans that
had legality and self-balance, and sent them to the government and theState Planning Committee. The State Planning Committee presented
the synthesized national plan to the Prime Minister, the Central
Executive Committee of the Communist Party, and the Parliament.
After approval, the plan was promulgated.
Some minimum and maximum plan targets were applied in thefive-year plan. Material balance was calculated according to the state's
minimum technical and economic norms, for both national andprovincial levels. The drafters of the five-year plan were ministries,
general offices, and provinces. In some cases, ministries and general
offices asked large enterprises to build their own five-year plans.
Planning in the period 1975-1985 did not bring positive impact on theeconomy. Despite new renovating measures, the Vietnamese economy
fell into recession due to the low level of the economy, heavy
consequences of war, termination of external resources and somemistakes in economic policies. National income increased slowly at anannual 3.7% in the period 1976-1985. In details, national income
growth was 2.8% in 1977, 2.3% in 1978, 2.0% in 1979, 1.4% in 1980,
2.3% in 1981, 8.8% in 1982, 7.2% in 1983, 8.3% in 1984, and 5.7% in
1985. Industrial output increased only 5.2% annually in the same
period. In details, increases were 10.8% in 1977, 8.2% in 1978, 4.7%
in 1979, 10.3 % in 1980, 1.0% in 1981, 8.7% in 1982, 13.0% in 1983,
13.2% in 1984, and 9.9% in 1985. Mistakes in distribution caused
chaos in the market and led to high inflation, reaching 700% in someyear. The lives of people became increasingly difficult. In the planning
period 1981-1985, Vietnam had conducted two rounds of price, salaryand monetary adjustments but the result did not fulfill expectation. The
economy remained in recession.

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1.3. Renovation period, 1986-now
In December 1986, the VIth Communist Party Congress evaluated theten years of national socio-economic construction and development in
1975-1985. Some lessons were drawn and causes were discussed. This
congress provided a historical turning point as it recognized the way todevelop Vietnam into a new era including renovating economic
mentality, developing a multi-sector commodity economy, andeliminating the centrally planned subsidy economy.
The VIIth Communist Party Congress reconfirmed that the “economic
mechanism of Vietnam was the socialist-oriented market mechanismwith state adjustment”. This mechanism required diversification of
economic sectors, equitization of SOEs, private sector development,
use of the market mechanism as a tool to regulate production, and useof market prices as a basis for production, consumption and resource
allocation.
Planning in this period can be characterized as follows: (i) a shift fromresource allocation planning to resource exploitation planning withtargets for individual economic sectors; (ii) a shift from direct planning
to indirect planning; (iii) a shift from closed planning in each sector
and/or province to strategic orientation with harmonization andcombination among sectors and provinces.
The following documents provided the background for compiling plans.
(1) Government guidance on orientation, target and main tasks ofsocio-economic plan and guidelines of MPI on planning
framework; Decision No.16/2000/CT-TTg dated September 19,
2000 on designing five-year socio-economic plan 2001-2005.
(2) Viewpoint and modality of the Communist Party is expressed in
the Ten-year Strategy 2001-2010 including industrialization andmodernization, sovereignty, proactive integration, rationalizationof economic structure, and linkage between economic
development and socio-cultural development.
(3) Objectives, targets, and tasks of socio-economic development

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and main self-balance in the economy are used to direct thedevelopment of sectors.
(4) The current situation of each sector and region, the ability to
expand domestic and foreign markets, and the ability to mobilize
internal resources and attract foreign capital.
(5) Development orientation of each sector and province, andregional and sectoral master plans have been established andupdated.
Planning now considers the macro balance of the economy such as labor,
capital, budget and finance, etc. Its content is more closely linked with theimplementation of policies. Economic and social issues are better
integrated. Planning has been renovated by shifting dramatically towardoriented planning with quantitative models. Indicators such as savings,
investment, ICOR, unemployment, etc. are applied. Macro planningtargets such as GDP, trade balance, etc are reconstructed to follow
general practices of the region and the world. Instead of top-down
assigning of numerical indicators to be checked, there have been meetings
to share foreign and domestic information and policies.
Sector management of each ministry has been enhanced, and discretionary
functions have gradually been eliminated. The central government
together with ministries are now responsible for overall master plans andconsolidating and optimizing plans of general corporations andenterprises. Provinces are in charge of provincial socio-economic andsectoral development master plans. The Ministry of Planning andInvestment is responsible for synthesizing and balancing the entire
national plan and reporting it to the Prime Minister. The government
submits it to the Parliament in the form of the Socio-economic
Development Plan in the second parliamentary session of the fiscal year.
Several issues are being deliberated on the current planning method,
including the role of planning, methodology of planning, content ofplanning, the proper way to use targets, and allocation of budget andresources.

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Figure 2-2. Designing and Approving Process (1986 - now)

2. Experiences of planning in other countries
2.1 France: improving forecast efficiency and planningflexibility.
Indicative planning was first adopted in France. France's first five-yearplan (1947-1951) aimed at recovering the economy after the War. The
subsequent five-year plans up to the fifth plan (1967-1971) gave
important orientations for France to achieve economic growth based on
the advances of science and technology, gradually integrating the
French economy into the regional and global economy. The capitalist
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recession in the early 1980s highlighted the need to reform economic
structure and planning. The French planning reform emphasized
improving forecast accuracy and replaced long-term planning bystrategic developing plans that permitted more flexible responses.

2.2 Japan: providing information to compile flexible rolling
plans under long-term commitments
Japan is one of the typical capitalist countries that achieved a miracle
in economic development by combining the market mechanism andgovernment planning. The Japanese government began to directly
control the economy in the 1930s. After WW and the dropping of two
atomic bombs, Japan had lost 30% of its economic potential. In May
1948, Japan implemented the five-year plan (1949-1953) to recover the
economy. After attaining economic recovery and stability, Japanterminated direct control of the economy but maintained economicplanning. From then until 2000, Japan implemented 14 consecutive
five-year plans.
Japanese five-year plans had the following characteristics: (i) plans
were constructed by the methodology which could quickly adapt tochanging domestic and international conditions, (ii) plans were always
accompanied with economic policies and measures that reflected
government's commitment to carry out stated plans, and (iii) plans
informed firms and people of official priority in resource allocation as
well as changes in market conditions.
The role of planning in the market economy was explained as follows.
First, plans provided information and economic forecast which helped
private firms to make their decisions. Second, plans constituted
government's long-term commitment regarding goals andexpenditures. Third, plans were a consistent and sufficient source of
information for the government and private firms alike, creating
reliable environment for production, commerce and consumption.

2.3 Russia: one authority exercising all planning functions
In transition to a market economy, planning remains crucially
important for Russia. Concerned authorities need to predict the
progress of privatization, breaking monopolies, formation of various
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means of production under different ownerships, and advance oftechnology. Previous planning method is no longer applicable in thetransition period and must be replaced by new strategic planning. Boththe administrative branch and the legislative branch must take part inthis. The legislative branch creates legal foundations for the state's
adjustments, forecast, and strategic planning, and approves the federal
budget which is the backbone of state general planning. The
administrative branch, namely the government, implements plannedtasks in all aspects of socio-economy. This branch includes the
Ministry of Economy, the Ministry of Finance, the Ministry of Scienceand Technology, the Ministry of Natural Resources, the Ministry ofIndustry, the Ministry of Agriculture and Food, the Ministry of Fueland Energy, the Ministry of Labor and Social Development, theMinistry of Science and Education, the Ministry of Transport, as wellas the federal committees such as the Communication and Post
Committee, the Environment Protection Committee, the Housing
Policy Committee, the National Reserve Committee, and the Measureand Standard Committee. Among them, the Ministry of Economy
stands out as the central coordinator.
The main role of the Ministry of Economy is to draft forecasts andstrategic planning programs. Together with related authorities, theMinistry of Economy compiles and synthesizes socio-economic
development reports for regions, industries, and economic sectors,
drafts financial balance sheets to ensure a balanced budget, checks thedemand-supply situations of goods markets and equilibria for essential
goods, and thus plays the leading role in planning work in Russia. The
Ministry of Economy guides all other related authorities formethodology, coordinates them in drafting and implementing national
goals, and sets up a list of objectives with specified priority in federal
budget allocation.

2.4 China: reducing the scope of planning and adopting
indirect plans
China has a socio-economic development strategy which reflects
China's unique socialism that always stresses the role of planning.
Central planning has existed in China for a long time, counting 926

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five-year plans. Despite some initial achievements, China's earlycentral planning caused serious problems and the economy stagnated.
The five-year plan of 1976-1980 which advocated “fourmodernization” ended the era of central planning.
Generally speaking, China seems to handle properly the relationshipbetween the market mechanism and macroeconomic planning, which
requires an appropriate combination of theory and practice. As toplanning methodology, China has shifted from central planning toindirect development planning. The scope of planning has been
reduced with an intention only to orient or guide. Previous material
targets for commodities have been replaced by value targets.
Allocation of targets to individual firms has been reduced, andplanning gradually shifted to balancing macroeconomic indexes byapplying economic forecasting models and policy instruments.

2.5 Korea: industrial planning is the core of planning withcommitments in long-term supporting investments
South Korea implemented its first five-year plan (1962-1966) featuring
import substitution industrialization strategy. Its main purpose was toproduce industrial goods such as textile, shoes and food for domestic
consumption. However, high GDP growth of 8.5% in this period failed
to strongly upgrade economic structure or improve the trade balance.
This prompted Korea to quickly move to export-oriented
industrialization strategy. The second five-year plan (1967-1971) andthe third (1972-1976) endeavored to develop labor-intensive industries
for export such as textile, leather, wood, paper, glass, plastic,
beverages, and food processing. At the same time, they also preparedfor export-oriented industrialization by increasing investment inindustrial foundations with high science and technology contents.
Thanks to this preparation, Korea was later became one of the Newly
Industrializing Countries. At the end of 2000, Korea completed theeighth five-year plan which featured modernization and tradeliberalization.
In Korean planning, the government was able to build proper
strategies, be flexible in responding to changes, and apply strategies

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creatively. Korea's planning can be regarded as national industrial
planning which succeeded in achieving strong export-led growth.

2.6 Malaysia: industrial master plans to promote basic
industries and later to create high value-added
Malaysia's overall economic development plans carry such objectives
as employment, broadening and diversification of economic structure,and economic growth through export-orientation. During the last four
decades, Malaysia has experienced a series of structural shifts, movingfrom primary commodities to a more diversified economy with a strong
industrial base.
In the early 1960s, the strategic orientation of Malaysia was to speed
up import substitution in manufacturing, encourage the use ofdomestic natural resources, and create jobs through oil, wood, andrubber products. With adaptable and cheap labor, financial incentives,
good infrastructure and political stability, Malaysia attracted a large
number of foreign investors, especially in export-oriented andlabor-intensive sectors such as textile and electronics. Export-oriented
strategy brought a remarkable increase in exports from 22% of GDP in
1980 to 80% of GDP in 1995. Nevertheless, Malaysia is still strongly
dependent on foreign technology.
In the 1980s, Malaysia tried to develop export industries and diversify
economic sectors by promoting manufacturing industries that requiredlarge investments such as steel and cement, and strategic firms such as
Proton, a national car project, and HICOM, to stimulate industrial
development.
The Industrial Master Plan (IMP) of 1986-1995 was a landmark forgovernment's industrial strategy. IMP was successful in accelerating
growth; the manufacturing sector grew 13.5% annually andunemployment declined from 6.9% in 1985 to 2.8% in 1995. From anagriculture- and resource-based economy, Malaysia became a major
exporter of industrial goods, achieving three-fourths of the way
targeted by national competitiveness drive, which advocated threeprinciples of enhancing factors [of production], investment, andreform.
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The second IMP of 1996-2005 aimed at accelerating growth throughthe internal strength of manufacturing and, at the same time,emphasized the need to accumulate, specialize and diversify supporting
industries, and strengthen linkage among them. The orientation ofIMP2 was to coordinate the management of manufacturing according
to the “value chain” for competitiveness, productivity and industrial
linkage. The industrial clustering model in IMP2 provided theoreticalsolutions to the marketing problem and the creation of strong linkages
and economic foundations. In other words, the industrial clusteringmodel ensured consistency among “value chain” activities such as
R&D, design, and marketing. This model also provided a theoreticalbasis for domestic investment, including SMEs, to achieve economic
balance under regional and global competition.
Malaysia's eighth planning cycle (2001-2005) ushered in a new period
in industrial development which called for stability and growth of
production sectors. In this period, industrial sectors had to face newchallenges from free trade and high mobility of capital, knowledge,
and technology. To become a meaningful part of the global economy,
Malaysian firms were asked to utilize IT and participate in e-business.

2.7 Philippines: combining planning with budget
Planning in the Philippines is characterized by the combination ofplanning with the budget in the market economy.
In 1986, to achieve higher, broader and more sustainable economic
growth, the Philippine government began a structural reform program
which contained short-term policies for macroeconomic stability andlong-term policies to restructure various sectors. The short-term target
was a balanced budget. To conduct sectoral restructuring, thegovernment carried out import liberalization, tariff reform, andprivatization of SOEs.
In 1992, the government announced the Medium-term Philippine
Developing Plan (MTPDP) for the period of 1992-1998 to attainsustainable growth and social reform. In building infrastructure,essential projects were short-listed for implementation even under a

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tight budget. In social reform, the plan attached priority to spending in
education, health care, and poverty alleviation.
In the MTPDP of 2001-2004, the government considered reduction of
the budget deficit as an urgent task. The MTPDP draft for 2004-2010,
announced in 2002, continued to regard balancing the national budget
as top priority.
MTPDP informs the public of the rules and policies that the authority
is committing to achieve sustainable and equitable growth. The
government makes adjustments using tax and expenditure policies.
Financial assistance is needed in social investment such as roads,
bridges, education, health care, and environment protection. Since themarket does not solve the income inequality problem, without
government intervention income gaps are likely to persist from thisgeneration to the next. Subsidies are also needed in secondary anduniversity education and vocational training. Compared with thecentral government, local governments better understand people's needand should be able to respond to them more quickly if they are given
authority and resources.
The Medium-term Public Investment Program (MTPIP) accompanies
MTPDP. This is a list of investment projects to be implemented byministries and state organizations to realize the policy proposed in
MTPDP. MTPIP sets maximum resource allocation for each sector.
Within this limit, ministries and lower agencies make out their
proposals. To offer additional financial support, the central government
sometimes on-lends ODA funds to local governments through state
financial bodies.
The Medium-term Expenditure Framework (MTEF) translates MTPIPapproved projects into annual budgets. Meanwhile, the Parliament has
the right to ratify the budget. The government must somehow commit
to provide funding for projects listed in MTEF even if the allocatedbudget is not enough for them. Although MTEF may be a good device
for improving project implementation, it is dependent on theavailability of fiscal resources. In addition, MTEF cannot succeed
without parliamentary support.

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3. Lessons of foreign experiences for Vietnam
Admittedly, experiences from countries reviewed above may not beenough to give an apt answer to Vietnam's industrial planningproblems. Furthermore, Vietnam should not copy mechanically any
given experience because background and conditions are different
across countries. However, these experiences can be useful references
for transition economies like Vietnam. Here is the summary of somelessons.
First, socio-economic development planning should be regarded as aseries of processes. It not only proposes national agenda fordevelopment but also shares a vision on "where we are going together,"and encourages all parties to take part in it. In this aspect, planningplays an important role by creating consensus and empowering all
participants.
Second, a development plan itself is just a document. The success ofthe plan depends on the implementation which is closely related to the
management capability of the state. Plan implementation shouldclosely link planning and budget as in Korea and the Philippines.
Third, planning should be based on markets, but at the same time itshould orient, aid, and encourage synchronous establishment anddevelopment of various markets including goods and service markets,
factor markets, and domestic and foreign markets. In addition, it isessential to create and strengthen organizations that provide consistentand accurate socio-economic information.
Fourth, it is necessary to apply outcome-oriented planning (ortarget-oriented planning). This method helps planners to prepare a
logical program that can incorporate consultations with concerned
parties. It can also combine many targets from different levels into asystem, link resource allocation with desired outcome throughprioritization, and make it convenient to monitor and supervise plans.
Besides this, application of computerized methods such as general
growth models, IO tables, project evaluation and cost-benefit analysis,
is required.

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Fifth, dynamism of all economic sectors should be mobilized, in which
the private sector and FDI play essential roles in achieving plan
objectives. For this reason, plans need to be announced broadly to the
public and call all economic sectors to join forces. At the same time,
the government should build required mechanisms and a businessenvironment that can accelerate and encourage their participation in
the process of industrial development.
Sixth, since plans are built on master plans and strategies, it isnecessary to improve the drafting of these documents and ensure
consistency among the strategy, the master plan and the plan.
Simultaneously, plan management and implementation should be
guided by appropriate policy and mechanisms to mobilize all resources
for development.
Fifth, it should better to exercise the whole power from all economic
sectors, in which private sector and FDI play essential role in obtaining
objectives. Therefore, plan need to be announced broadly to the
public to call all economic sectors to take part in. At the same time,government needs to build required mechanism and create businessenvironment to speed up and encourage them to participate inindustrial development process.
Sixth, since plans are built on scheme and strategy foundations, it isnecessary to succeed from construction and management of scheme
and respect the systematic of planning. At the same time, planmanaging and implementing should be based on policy and mechanism
foundations to explore all resources for development.

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Chapter 3 Thailand
1. Top-down decision making
The entire working of the Thai government changed significantly four
years ago when the Thaksin administration came into power and began
to run the country in a new way. Previously, most Thai governments
were weak and uncoordinated. But Mr. Thaksin's government is strong
and decisive. He determines the general direction and orders ministries
and related organizations to work out the details and implement
actions. This top-down decision making is quick and affects the entire
scope of policy making including industrial strategy formulation. The
role of economic ministries now is to concretize predetermined policy
orientation rather than build policies from bottom up. Since
Mr. Thaksin was recently re-elected for the second term, this policy
style is likely to continue for four more years. Further administrativereform is expected to accelerate the Thaksin policies7.
In Thailand, the National Economic and Social Development Board(NESDB) drafts the five-year plan. The ninth five-year plan
(2002-2006) is currently in place8. It sets an overall guideline with anemphasis on good governance, human resources, social protection,
environment, macroeconomy, competitiveness, and science andtechnology. However, the strategic role of this plan appears to bediminishing as a result of the prime minister's strong governing style.
Some even speculate that NESDB and the five-year plan will beabolished in the near future. But others note that they are still needed
to balance economic and social needs and give overall consistency topolicy formulation.
7

This chapter reflects information at the time of our visit (Feb.-Mar. 2005). Although thepolitical situation changed in 2006, we retain our original analysis since the political change
does not invalidate policy lessons we draw from Thailand.
8
Government of Thailand, The Ninth National Economic and Social Development Plan
(2002-2006), compiled by the National Economic and Social Development Board, Office of
the Prime Minister.

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Many officials positively evaluate Mr. Thaksin's initiative. As in manyother countries, Thai ministries did not talk to each other and theirpolicies were often contradictory and ineffective in the past. At present,
policies have become more integrated under Mr. Thaksin's visions. He
wants to run a country as if it were a business enterprise. Some officials
boast that their decision making is now faster than private sector
decision making, and dialogue among concerned ministries, domestic
and foreign firms and international partners has been activated. It issaid that policy direction is now much more clear and transparent.
However, critical opinions also exist. Some say that Mr. Thaksin is very
good at public relations and image-building but whether his visions canbe actually implemented is an entirely different matter. Some argue
that corruption is still rampant or even intensifying under Mr. Thaksin's
government.

2. Liberalization and local capability
Although the governing style of the current Thai government iscentralized, it is very different from developmental states frequently
observed in the history of East Asia. The governments of Park Chung
Hee (Korea), Deng Xiao Ping (China), Lee Kuan Yew (Singapore),
Chiang Kai Shek (Taiwan) and Dr. Mahatir (Malaysia) were moreinterventionist in the sense that they tried to enhance or supplement themarket mechanism by a powerful state hand, fiscal and financial
measures, public investment, protectionism, discriminatory
preferences, and so on, with the ultimate aim of bolstering indigenous
industries.
But the Thaksin government is seriously committed to international
integration9, various FTA initiatives, and equal treatment for all
enterprises including domestic and foreign, large and small. Local
content requirement was abolished in 2000 when WTO commitments
were fully executed. Thailand has no law requiring technical transfer.
We heard more than once that the current government had no interest
9

Within-ASEAN tariffs (CEPT) for manufactured products are already very low. However,some non-ASEAN tariffs and non-tariff barriers on services are still high.

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Chapter 3: Thailand

in the nationality of companies operating in Thailand, whether they are
Japanese, Korean, European, American or Thai. This is in sharp
contrast to most other developing countries, including Vietnam, whichearnestly desire to strengthen indigenous industries. The Thaigovernment is also uninterested in which products or companies will
win competition. Its principle is “let the market decide”.
However, it is not entirely true that the Thai government isuninterested in local capability. On the contrary, the main pillars ofcurrent industrial strategy are human resource development (HRD) andsupporting industry promotion with a particular emphasis on small andmedium enterprise (SME) promotion. While this sounds somewhat at
adds with the statement that Thailand has no interest in the nationalityof its industries, it is not really so. Firms operating in Thailand andThai-owned firms should be clearly distinguished. The government
wants to strengthen the former which can include any nationalities. It
hopes to support several targeted industries with high domestic value(see below), but support measures will remain broad,nondiscriminatory and available to firms of any size or nationality.
This is a new style of policy formulation which may be suited to theopen character of Thai people as well as the requirements ofglobalization. It also goes well with the policy advice of internationalorganizations like the World Bank, IMF and WTO. It is clear thatheavy-handed interventionism of Japan and Korea in the past is nolonger permissible in the current international environment. In thissense, Thailand's industrial policy combining top-down liberalzation
with general support measures may set a new standard for othercountries to follow.
But some ambiguity remains. If Thai firms grow strongly along withforeign firms, all is well. But if local firms are eliminated and theindustrial base continues to be dominated by foreign firms due to thelack of competitiveness or ineffective policy, will Thailand still besatisfied? The current government seems to be saying yes, if it is theresult of global competition. But is it really politically and sociallyacceptable? All depends on the quality of human resources,
entrepreneurship and policy measures on the Thai side. However, it is35

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frequently pointed out by Japanese manufacturers that Thai workers
and managers have fundamental weaknesses. Can it overcome thislong-term problem and realize its visions? Are today's open policies
enough? It remains unclear10.

3. Targeted industries and policy formulation
The current government of Thailand is fairly clear about how thecountry wants to position itself in an increasingly competitive world. It
hopes to promote industries that have high domestic value-added (i.e.,creating more jobs) and can find niches in the world economy (i.e., notcompeting directly with China and others). The following list more orless exhausts the targeted industries and their slogans:
Automobiles and automobile parts (“Detroit of Asia”)
Agro-industry (“Kitchen of the World”)
Fashion, such as jewelry, leather goods and Thai silk (“Hub of
Tropical Fashion”)
High value-added services, such as healthcare, spa and long-stay
tourism
Electronics and ITC
Energy and renewable energy (newly added)
While the criteria for industrial targeting (value-added and nicheseeking) are well specified, the listing of targeted industries is left toeach ministry and agency to decide. As a result, the names of
10

Kenichi Ohno pointed out this “glass ceiling” problem in his VDF discussion paper,“Designing a Comprehensive and Realistic Industrial Strategy” (June 2004, pp.17-18) notingthat no ASEAN countries have grown out of dependency on foreign technology andmanagement, unlike Korea and Taiwan who can manufacture products by themselves. Thisissue was also raised in Industrialization Strategy of Vietnam (edited by K. Ohno and N.
Kawabata, Yuhikaku, 2003, in Japanese), as follows: “Since the late 1980s, some countries
have succeeded in significant industrial agglomeration including Thailand (automobile) and
Malaysia (electronics)... But ASEAN has not really internalized industrial capability evenafter decades of FDI absorption... While manufacturing dominates economic activity,
technology and management have not been localized. Since value-added tends to grow lessrapidly than wages in these countries, industrialization cannot break through a certain level...
To avoid this trap, a country must eventually graduate from simple processing and masterskills, talents and systemic innovation. Can this be accomplished under free trade and eternal
FDI-dependency?” (pp.65-66).

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promoted industries and how they are grouped differ slightly from one
government body to another depending on their scope of authority. For
instance, “electronics and ITC” and “energy and renewable energy” arein the list of BOI but not in the list of MOI. Tourism is sometimes
listed separately from high value-added services.
The policy style of Mr. Thaksin is to impose broad-and often
ambiguous-visions rather than micromanage the contents of policy
measures. After visions are set, relevant ministries and agencies are
required to work out detailed targets and action plans. They mustdesign, implement, monitor, revise and trouble-shoot them asnecessary. For example, no one can clearly explain what the
automotive slogan of becoming a “Detroit of Asia” means. But in the
MOI's master plan of the automobile industry 2002-2006, several
numerical policy objectives are stated (see below). Then, at the level ofannual plans, concrete projects and budgetary allocation aredetermined. As new situations and problems arise, strategies areadjusted through ongoing consultation between the government and theprivate sector.
To facilitate coordination among government, businesses, andindustrial experts, the Thaksin government created nine industryspecific non-profit institutes under MOI including steel, food,automobile, electronics, textile, etc. These institutes are required toplay key roles in the design and implementation of Thai industrial
strategies. After five years of establishment (which is about now), they
are required to become financially independent from the government
budget. However, whether that is really possible or even desirable is an
open issue; to make enough money while contributing to the society
and economy at large is a tough requirement. Other issues include
whether these institutes can really play the expected role and whether
their subsidized activities will not crowd out private research andconsultancy. At any rate, it seems too early to evaluate their overall
performance. In Vietnam, the option of creating central institutes with
sufficient mandate and human and financial resources should beseriously considered. Vietnam also has many institutes andassociations for each industry and under each ministry, with apre-specified scope of research to support policy makers. Unlike37

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Thailand, their main purpose does not include providing linkage
between the private sector and the government. Their activities often
remain ineffective because information and resources are scattered.
One of the most salient features of Thai industrial policy formulationis the depth of involvement of the private sector. Policy design,
implementation and adjustment are conducted through a close andcontinuous cooperation between the government and the business
community with the private sector taking the lead. This is in sharp
contrast to Vietnam where information channels between governmentand businesses are severely limited. In Thailand, the work on a masterplan begins with the government listening to the private sector. The
content and targets of the master plan are proposed by the business
community. At every stage of implementation, revision andproblem-solving, the private sector has many opportunities to voice its
opinions. For this reason, there is very little dispute among various
stakeholders once the master plan is agreed. In fact, Thai master plans
do not require any official approval (like the Prime Minister's approvalin Vietnam) to become effective. The official author is MOI but theideas are shared among all in the process of drafting.
Another important initiative by the Thai government is theestablishment of industry-specific government committees forindividual key industries. They now meet frequently (every 1.5
months, for instance) and are actively attended by relevant officials andgeneral directors of major producers. In these committees, current
situations are evaluated, new issues are identified, and special
subcommittees are set up to draft required solutions. Since the masterplan sets only broad objectives, and since each committee
continuously adjusts the implementation of the master plan, there is noneed to revise the master plan itself. For example, the automotive
master plan 2002-2006 has not been revised during implementation.
Vietnam also has official meetings between the government andinvestors, but they tend to be very formal and infrequent. In Vietnam,
the private sector is not asked to draft a master plan at all; they are only
asked to comment on the policy which the government is
implementing or has decided to implement.

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4. Automotive master plan 2002-2006
Let us examine the content of the current automotive master plan ofThailand which was produced jointly by the government and theprivate business community11. The drafting rocess took about one year.
It has several characteristics that are different from theautomobile master plan of Vietnam12.
First of all, the Thai master plan is longer than Vietnam's. In theoriginal language, the Thai version is over 300 pages, of which 60% isdedicated to tables for detailed implementation. The Vietnameseversion is 63 pages long. Its executive summary version which wasapproved by the prime minister is 15 pages long.
The Thai master plan has the structure similar to what Ohno
recommended in his MOI seminar in February 200413. It starts with theanalysis of the global and regional automobile industry and theassessment of current domestic capability of Thailand. Then it sets
several broad numerical objectives to be achieved by 2006. Finally, themaster plan contains a thick section delineating action plans to achievethese objectives.
The objectives set by the automotive master plan for 2006 are as
follows (actually, these objectives were already achieved in 2005, one
year ahead of the schedule):
To produce one million cars per year (valued at more than 500
billion baht)

11

KSOE privatization was completed in Thailand about a decade ago and all manufacturingfirms are now private. The only remaining issue in SOE reform is when and how to privatize
the power company.
12
The Master Plan for Thai Automotive Industry 2002-2006, proposed to the Office ofIndustrial Economics, Ministry of Industry by Thailand Automotive Institute, September
2002. On the Vietnamese side, the relevant document is the Master Plan for Developing
Vietnam's Automobile Industry, October 2004.
13
Kenichi Ohno, “Designing a Comprehensive and Realistic Industrial Strategy”, VDF
Discussion Paper No.1, June 2004. Reprinted in VDF's Improving Industrial Policy
Formulation, edited by Kenichi Ohno and Nguyen Van Thuong, and published by the
Publishing House of Political Theory, 2005.

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To export 40% of the cars produced
To produce two million motorcycles (valued at more than 100
billion baht)
To export 20% of the motorcycles produced
To export more than 200 billion baht of international quality parts
To achieve localization of 60%
Here, two points should be stressed in comparison with Vietnam's
automobile master plan.
First, the Thai government only specifies total production and totalexports as objectives rather than the number of cars by each category(cars with 5 seats or less, cars with 6-9 seats, less-than-2-ton trucks,
2-7 ton trucks, etc). It does not also care who (local, joint venture, or
foreign firms) produce and export cars to achieve these objectives.
There is no national car project or designation of individual producers.
As far as objectives are concerned, there is no more detail than given
above. As mentioned before, Thailand lets the market decide
winning firms and products.
Second, by contrast, the Thai automotive master plan is very detailed in
implementation. While the Vietnamese master plan also states
supporting measures, it is only 3 pages long (Part II, chapter 4,
pp.49-51). In the Thai master plan, a large number of tables areattached over 180 pages to specify strategies, action plans, output, key
success indicators and responsible organizations.
The main differences between the Thai and Vietnamese automobile
master plans are summarized below.
Automotive experts at Thammasat University confirmed that policy is
now designed and implemented collectively and continuously between
the government and private firms. Although private firms sometimes
try to bargain with policy makers, severe confrontation does not
happen in Thailand. According to the Thammasat University
researchers, localization requirements used in the past were noteffective in improving Thai capability due to loopholes in regulationand juggling by producers which only led to inefficiency. To
bolster local capability, supporting local producers and inducing
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foreign firms to productively increase local procurement are crucial,
but the Thai government did not succeed in creating these conditions.
The Thai researchers noted that Vietnam's current automobile market(about 40,000 cars per year, as against over 1 million in Thailand) was
too small to require producers to procure parts locally. They felt that
the Vietnamese target to raise the localization ratio from the current
20% to 60% by 2010 was “very ambitious”.
Table 3-1. A Comparison of Thai and Vietnamese Automobile
Master Plans

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5. Electrical and electronics industry
The Electrical and Electronics Institute (EEI) was established in July
1998 in the wake of the Asian financial crisis. While Thai electronics
exports are large (one-third of total exports), they remain unstable due to
weak domestic foundations in technology and supply chain. Someelectronics firms exit from Thailand and go to China. EEI is expected toassist the government and private companies to cope with this situation.
One of the major functions of EEI is the operation of a testing centerfor electrical and electronics products, which was taken over fromanother organization. The main purpose of this center is to conduct
mandatory tests of products and parts, both local and imported, toprotect Thai consumers. While EEI is expected to earn income fromfees and charges and become independent from fiscal subsidies by
now, equipment for officially required tests continues to be provided by
the state. EEI received 100 million baht (about $2.5 million) from thegovernment in the last five years, which EEI considered was small
relative to its required tasks. While product tests follow international
standards, EEI tests are not yet widely accepted abroad. EEI also faces
tough competition from private (mostly foreign) laboratories which
certify products for export.
In policy areas, EEI is executing part of the Industrial Restructuring
Plan (IRP) of the government, with an emphasis on SMEs, clusteringand environmental protection. While Thailand already has anindustrial base in plastic and metal processing, supporting industries
with higher value remain very limited. A huge technology gap still
exists between local and foreign firms. The “technology foresightstudy” was produced by EEI with a support from Japan (JODC). EEI
has also learned scenario planning with American assistance and“technology road-mapping" (TRM) from a Korean expert14 under an
APEC scheme. TRM first analyzes trends in market, technology andproduct. It then identifies the products to be produced domestically andthose to be outsourced from abroad.
14

Dr. Byeong Won Park, senior researcher, Korea Institute of Science and Technology
Evaluation and Planning (KISTP).

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EEI is not sure why electronics was not included in the MOI's targetedindustries. However, the BOI's list of target industries does include
electronics and ITC.

6. FDI policy
The Board of Investment (BOI) is the central agency for promoting
FDI. For long it was directly under the Government Office but the
recent administrative reform moved it under MOI. The policies andoperations of BOI are not affected by this change, but coordination
with other ministries has become a little more complicated. It should
also be noted that, while FDI absorption was a top priority in the past,
the current government also emphasizes promotion of domestic
capability and SMEs.
In the last five decades, laws and policies for FDI attraction haveconstantly been revised to respond to changing development objectives
and investor needs. Investment promotion laws have usually beenrevised every five years at the time of a new five-year plan. BOI hopes
to revise the law within this fiscal year (by September 2005).
One of the differences between Thailand and Vietnam is that FDI
incentives and approval are centralized in Thailand. Unlike Vietnam
where local authorities can approve small FDI projects, all projects arereviewed and approved centrally at BOI. Incentives are also determined
by BOI and local governments are not allowed to offer special
privileges. However, FDI firms in rural areas are generally given more
incentives by a zone system in which zone 1 (Bangkok), zone 2 (near
Bangkok) and zone 3 (all other areas) offer increasingly generous
incentive packages.
Another difference between Thai BOI and Vietnamese MPI is thestrength of FDI marketing. Information on economic data, Thailand's
main attractions and opportunities, promotion policies, investment
incentives, international cost comparison, BOI services, approval
procedure, and so on, are conveniently summarized in the brochure,website and slide presentation which are updated frequently.
Investment application forms are downloadable from the BOI

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website which features six languages (English, German, French,
Japanese, Chinese and Thai). The slide presentation to our mission was
clear and effective. BOI believes that its welcoming attitude is thegreatest attraction for foreign investors. Vietnam can learn much from
BOI in the area of country and land marketing.
BOI follows the government policy of openness and nondiscrimination
among all businesses. Localization requirement has already beenabolished. It thinks that measures to require technology transfer are"tricky" since overregulation irritates investors and causes them toleave the country.

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Chapter 4 Malaysia
1. The evolution of development policy
Since independence in 1957, Malaysia has attained significant
industrialization and economic development. Preliminary data showsthat, in 2005, per capita GDP reached $4,930 and the ratio of
manufactured goods in total export was 84%. Among them, electricaland electronics (E&E) products occupied 64% of total export.
Malaysia, with the population of 26 million, has successfully
graduated from the status of a primary commodity-based economy into
an upper middle-income industrialized country.
As industrialization proceeded and external circumstances changed,
policy orientation also evolved in stages.
Initially, from 1957 to 1969, the import substitution of consumer goods
was attempted under the strong performance of primary commodity
exports (petroleum, tin, rubber, timber, palm oil, etc). The economic
environment was largely liberal and without forced measures such asimport bans or SOE creation. However, the gap between the ethnic
Chinese, who were rich and urban, and the ethnic Malays, who werepoor and rural, continued to grow, which erupted in the racial riot of
May 1969.
In the 1970s, a clear policy shift was made from laissez-faire to
ethnicity-based affirmative actions to ease social tension and secure
national unity. The New Economic Policy (NEP) imposedcomprehensive rules in allocating public positions, business
management, workforce, and other incentives in favor of Bumiputra(indigenous Malays).
With the coming of power of Dr. Mahathir in 1981, and underrecessionary pressure of the early 1980s, aggressive industrial
policy was introduced. Look East Policy and heavy industrialization,
including automobiles, were initiated. With the help of the yen
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appreciation starting in 1985, Malaysia succeeded greatly inabsorbing manufacturing FDI and turning itself into the world's
major electronics exporter. However, heavy industrialization wasless successful15.
Since 1986, policy emphasis shifted back partly from social equity towealth creation. There was a gradual easing of Bumiputra policy, andmore pro-market, outward-oriented measures were adopted. Industrial
Master Plan 1 (IMP1, 1986-95) laid the foundation of manufacturingindustries and promoted the processing of natural resources instead ofexporting them in raw form. Industrial Master Plan 2 (IMP2,
1996-2005) tried to broaden manufacturing capability through thestrategies of cluster-based industrial development and manufacturing
plus plus. Industrial Master Plan 3 (IMP3, 2006-2020), which iscurrently being prepared, is likely to further broaden the scope by
including services and featuring functional targets such as SMEs,
HRD, technology, logistics, marketing, and so on. IMP2 and IMP3 will
be discussed in detail below.

Figure 4-1. Real GDP Growth

15

Today, few of the heavy industries prosper or even survive. Proton, the only major
exception, also remains uncompetitive and faces serious difficulty as Malaysia integrates
further into the global market-see below.

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Many interviewees agreed that Malaysia was a lucky country enjoying
political stability, strong leadership, no prolonged war of
independence, a rich endowment of natural resources relative to the
population size, administrative mechanisms inherited from the colonialera, high transparency and low corruption, and so forth, which enabled
the country to rise to the current level. Business environment in
Malaysia is ranked as one of the best in the world16. The timing of large
FDI inflows (late 1980s) and the unique response to the Asiancrisis (1997-98) may also be counted as fortunate occurrences.
The prominent feature of Malaysia is multi-ethnicity, which must be
handled with care to maintain economic growth and social stability. At
present, the three major ethnic groups (Malays 51%, Chinese 24%,
Indians 7%) seem to live in harmony and mutual respect.

2. New challenges
Malaysia has achieved much, but its days of FDI-led high growth may
be over. For an upper middle-income industrialized country, further
development requires stepping up from mere industrial agglomeration
to strengthening of domestic capability. The challenge of transition fromquantity to quality is also faced by Thailand, but at a higher income
level, Malaysia's challenge is more urgent. The Malaysian governmentis well aware of this and formulating policies to overcome it.
Like Thailand, Malaysia has absorbed manufacturing FDI for many
decades, especially in E&E. FDI inflows accelerated greatly two
decades ago. However, during the last decade, the Asian crisis, the riseof China, and progress in regional and global integration posed new
problems which must be resolved by improving domestic capability
and moving into a new development phase. However, it can be said that
Malaysia, like Thailand, has largely failed in this “leveling-up” after
many decades of FDI absorption-or at least its process has been

16

The mission asked the representative of JETRO Kuala Lumpur to list main constraints forforeign investors. He paused, and replied that he could think of none as far as policies andinstitutions were concerned.

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excruciatingly slow. To break away from foreign dependency inmanagement and technology, and to become more self-sufficient indesign, production management, marketing, and other value-creating
activities is the core issue for Malaysia. The success or failure of thisendeavor will determine whether its economy will continue to rise or
slow down, or even stagnate17.
Researchers at the Malaysia Institute of Economic Research (MIER)
emphasized that the key problem for Malaysia was the quality ofeducation. Under Bumiputra policy, quantitative allocation was
pursued at the cost of qualitative excellence. Education in particularand the quality of human resources in general are surely at the heart of
the Malaysian question. Whether this difficulty comes mainly from thecharacteristics of the people which are deeply embedded in society andhistory, or from policy inadequacy which could be amended relatively
more quickly, is an open question.
Malaysia has begun to lose some FDI to China and other newly
emerging destinations, including Vietnam, through relocation ofexisting factories and a reduced inflow of new investors. In a sense,
this is natural and even welcome since Malaysia is already an upper
middle-income country with relatively high wages. Labor-intensive
operations should leave Malaysia, as it happened in Singapore, Hong
Kong, Taiwan and Korea in the past. But at the same time, newindustries and services must be created to match the now higher wages.
Technology-intensive FDI should be attracted and, more importantly,
local firms should innovate and produce more value. This is aninevitable process in economic development, and Malaysia should
worry more about improving productivity than losing FDI to China.
This is yet another way to state that building domestic capability is
crucial.

17

See the discussion on breaking the “glass ceiling” for ASEAN countries in chapter 1(pp.24-26) of VDF's Improving Industrial Policy Formulation, edited by Kenichi Ohno andNguyen Van Thuong, and published by the Publishing House of Political Theory, 2005. Also
see the section on Proton at the end of this chapter.

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3. Key documents
Malaysia's planning documents are organized as follows.
Vision 2020, set by Former Prime Minister Dr. Mahathir in 1991,
remains the overarching national goal. It aims to develop Malaysia into
a “fully developed country” by 2020 and nine challenges for thispurpose are listed in general language18. Vision 2020 itself does notcontain numerical targets, and the path and criteria to become a fully
developed country are to be concretized by other documents listed
below, with continuing revisions and adjustments. One practical
criterion often mentioned is to surpass the per capita income of$10,000, which is supposed to be the condition to be admitted into
OECD. This particular hurdle will be cleared if Malaysia sustains
moderate growth in the next fifteen years19.
Other key documents include the Malaysia Plans (MPs) and theOutline Perspective Plans by the Economic Planning Unit (EPU) of the
Department of Prime Minister, and the Industrial Master Plans (IMPs)of the Ministry of International Trade and Industry (MITI). MPs are
five-year plans with second-year review and a broad coverage which
includes social issues and infrastructure. IMPs are documents focusedon the manufacturing sector with a longer time scope, namely ten years
for IMP1 and IMP2 and fifteen years for IMP3. Generally, MPs containmore targets than IMPs.
The scope of authority of the Malaysian MITI is far broader than thatof the Vietnamese MOI in the sense that MITI covers international
trade, FDI and SMEs, which are handled by other ministries inVietnam. Under MITI, there are special agencies for these functions,such as MIDA (FDI), SMIDEC (SMEs), MATRADE (trade), and MPC

18

The nine central strategic challenges are national unity, confidence, democracy, moral andethics, tolerance, science and technology, caring culture, economic justice, and prosperity.
19
Simple exponential computation shows that from the base of $4,930 in 2005, an annual
average growth of 4.8% is sufficient to achieve this. However, inflation, exchange rate
movement, and unexpected shocks must be taken into account. Some interviewees mentioned
an average growth of 7% as a necessary condition, but we do not know where this number
comes from.

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(productivity). But MITI's authority is narrower than the Vietnamese
MOI in the sense that it oversees manufacturing only. It does notsupervise utilities, mining or construction.
IMP3 is currently in the final stage of preparation. It was supposed tobe finished by December 2005 but expected completion is now moved
to the spring of 2006. According to MITI, 80% is already finished andpostponement is due to the time needed to obtain data up to 2005 in theremaining 20% of the draft. IMP3 is being prepared in parallel with
EPU's 9MP. EPU and MITI feel that consultation between them issufficiently frequent to produce mutually consistent output. The
official language of IMPs is English.
Figure 4-2. Key Policy Documents

4. Industrial Master Plans
IMP1 (1986-95) laid the foundation for manufacturing to become theleading sector of the economy. Its main objectives were (i) accelerated
growth of manufacturing; (ii) efficient utilization (i.e., domestic
processing) of the nation's natural resources; and (iii) development ofindigenous technological capability. The plan overlapped with a periodof high growth driven by increased FDI inflows. Export growth, theshare of manufacturing in GDP, and the growth of value-added in
manufacturing all exceeded plan targets.
IMP2 (1996-2005), whose implementation just ended, was 453 pages
long and had a clear policy orientation. The first two chapterspresented challenges and an analytical framework. Its basic message
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was to improve the competitiveness of manufacturing by broadening
and raising its base. Its two key thrusts, which were closely related,were manufacturing plus plus and cluster-based industrial
development.
Figure 4-3. Manufacturing Plus Plus

Manufacturing plus plus expresses a two dimensional desire to (i)expand along the value chain to encompass higher value-added
activities; and (ii) uplift the whole value chain to raise productivity.
Since Malaysia started as a conventional assembler, which was thelowest point in the value chain, it wanted to master R&D, design,
product development, distribution, marketing, etc. horizontally, andalso improve skills vertically.
Cluster-based industrial development broadens the concept of industry.
A cluster is defined to be “an agglomeration of inter-linked or related
activities comprising industries, suppliers, critical supporting businessservices, requisite infrastructure and institutions” (IMP2, p.23). Eightclusters were identified and analyzed in chapters 3 to 10 of IMP2:
E&E, textiles and apparel, chemicals, resource-based industries, foodprocessing, transportation equipment, materials, and machinery andequipment.
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The fact that the background paper was prepared by one researcher at
the Malaysian Institute of Economic Research (MIER) perhaps gave
IMP2 a lucid academic style20. In more common language, thisframework is basically saying that Malaysia must enhancecompetitiveness, improve productivity, and promote supporting
industries and related services. But placing them in value-chain
language provided more focus and consistency.
The mission raised three questions regarding IMP2: (i) application of
one analytical procedure to all industries seems too mechanical andignores specific features of each industry; (ii) there is no selectivity
since eight clusters cover virtually all key industries of Malaysia; and(iii) aiming to broaden and raise all industries and related services is afull-set orientation which goes against international division of labor
under globalization and FTAs. Some officials replied that theseconcerns were not addressed at the time of drafting IMP2, but they
thought that the analytical framework was flexible enough toaccommodate global linkage or each industry's specific issues.
IMP3 (2006-2020) is in the final stage of preparation and its content
has not been released. However, MITI officials discussed its generalorientation. Its objective will continue to be achieving international
competitiveness under global integration. IMP2 tried to strengthenclusters across the board and IMP3 will also continue to do so, withadded emphasis on inter-cluster linkages. At the same time, IMP3 will
introduce some new elements. It will designate subsectors within eachcluster to be targeted more selectively. For example, within E&E,
nano-technology, photonics, microelectronic mechanisms, etc. will belisted. Bio-technology and pharmaceuticals will also be mentioned.
There will be more emphasis on services such as marketing,utilities, environment, and attracting regional headquarters andinternational procurement offices (IPOs) to Malaysia. Human resource
to carry out innovation will be promoted. “Networking” (any form ofcooperation between local and foreign companies) and “cross-borderinvestment” (outward FDI) will also be featured.
20

By contrast, IMP3 has been produced in a more decentralized fashion, with each chapter
written by a different group without a common structure imposed from above-see below.

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5. Drafting and review processes
IMP2 and IMP3 were prepared by a three-level organization. Figure
4-4 shows the case of IMP3. Teams at the bottom level correspond to
proposed chapters. IMP2 was drafted by a similar mechanism, but thethree levels were then called, from top to bottom, the Industrial
Coordination Council, the Industrial Policy and Incentive Committee,
and the Industry Task Forces.
Figure 4-4. Drafting Mechanism for IMP3

Source: MITI website
Note: Numbers in parentheses indicate the number ofmembers in each committee or group

The total number of people mobilized in the three levels was 338
although there are some overlaps among members. Besides this, undereach Technical Resource Group (TRG), secretariat, writers, research
assistants, and so on, were arranged as needed. Under the generalguidance and coordination of the Steering Committee, how eachchapter was drafted was largely left to each TRG.
Compared with Vietnam where small official teams draft master plans,
this is a very complex organization. The mission asked how
consistency was ensured under this system involving a large number ofpeople. The general answer from concerned officials was that, sincecommunication among relevant ministries and agencies was active,
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information was shared and potential conflicts were solved in daily
contacts, and there was little scope of remaining serious differences by
the time an IMP began to be drafted. Since various views, including
those from businesses, are absorbed in advance, top-down directives do
not generate any friction at lower levels. This sounds ideal, but we did
not have sufficient time to confirm that the process actually proceeded
as smoothly as described. However, it is undeniable that interministerial consultation in Malaysia is far more frequent and effective
than in Vietnam.
More specifically, MITI officials explained the process of drafting
IMP3 as follows.
Figure 4-5. Drafting Process of IMP3

The overall direction of IMP3 was initially set by the Industrial
Planning Committee (IPC) headed by the MITI minister. Ideas emerged
naturally from many previous meetings. Unlike IMP2, they were notformed by one person or one report. There was no serious disagreement
about the content. After this, the Steering Committee (SC) was set up.
SC in turn established TRGs and coordinated drafting. TRGs submitted
first drafts to the MITI secretariat, which were reviewed by the private
sector as well as within MITI. There were no foreign experts at IPC, SC
or MITI level, but TRGs were free to invite them if necessary. The
private sector was deeply involved through TRGs and at the first-draft
brainstorming. Many issues were raised by the private sector, while
MITI tried to add long-term policy concerns. The budget for
conducting the whole process was probably RM5-10 million, of which
RM2-3 million went to fees and publication21.
21

One US dollar is approximately 3.7 Malaysian ringgit.

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Chapter 4: Malaysia

The mission also met with the writers of chapters in three TRGs:
macro-framework, SME development, and marketing and branding.
The positions of the writers varied from public servant to researcher
and private consultant. Each team had a series of intensive meetings
and the drafters worked hard with little remuneration. In the case of
TRG on SME development, work began in July 2004 and the draft wascompleted in December 2005. Members met monthly over eightmonths to discuss different aspects such as marketing, technology, andfinance. Coordination among related agencies required effort.
Theoretical ideas by academicians had to be modified for morepracticality. TRG also requested the Department of Statistics to conduct
a new business census since data on SMEs was lacking or out of date.
The writer had to draft the chapter while doing her regular work, which
she said was very tough.
The co-writers of another chapter were worried that IMP3 had muchless focus than IMP2 because there were “too many cooks”. They
thought that MITI should have steered the process more effectively tokeep wild ideas away and produce clear messages. They also felt thatfixation with Vision 2020 was inappropriate and the planning period offifteen years was too long and impractical. They reported difficulty inobtaining necessary data.
Compared with the drafting process, implementation and review
processes are less well-organized. IMP3 does not contain detailed
action plans or policy matrices. It may contain a chapter on
implementation, but this will not be detailed. Concrete implementationis left to annual budgets, MPs (five-year plans), and measures of
relevant committees, ministries and agencies.
Similarly, there is no structured mechanism to monitor, assess, or revise
an IMP. IMPs are not revised during implementation. MITI officials we
met expressed satisfaction with the performance of IMP2, but it is also
reported that the MITI Minister herself was unhappy with some aspectsof the result. More than one observer outside MITI, belonging todifferent organizations, also felt that IMP2 fell short of achieving
targeted cluster development.
A number of people told us that IMP2 had not been reviewed but IMP355

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Industrial Policy Formulation ...

would be reviewed every five years. In fact, according to the MITI
website we witnessed in 2005, IMP2 did have a mid-term review in2001 where numerical targets and cluster-based industrial development
were assessed, and actions to improve the performance were
proposed 22. The final review of IMP2 may now be similarly
conducted. But the fact that most people do not recall the mid-term
review of IMP2 suggests the amount of attention that it receives.
The lack of proper review may be considered a serious flaw in the
Malaysian IMP. It may lead to missed lessons and insufficient designin the future. However, it may also be argued that spending more timeon designing new policies than evaluating old ones is natural andunderstandable. If new challenges are already identified in daily
contacts among officials and with the private sector, as the Malaysian
officials claim, resources should be directed mainly toward meetingthese challenges rather than assessing the goals which were set ten or
fifteen years ago and may now be obsolete. On this issue, the mission
remained divided. We can at least say that proper balance between
design, implementation and review is essential since time andresources are limited.
Another related question is how we should interpret missed targets.
Some macro targets of IMP2 such as growth were underachieved, andthe desired domestic investment share of 60%, as opposed to FDI, was
not realized. However, it is fairly clear that this was largely due toexternal shocks, especially the Asian crisis and the rise of China. It is
hard to quantify the effects of policy weakness relative to external
circumstances. If the latter is dominant, scrutinizing past policies may
not produce a proper response.
22

In the first five years of IMP2, the following targets were met or almost met (targets inparentheses): manufacturing export growth 16.6% (16%), annual manufacturing investments
RM27.4 billion (RM25 billion), and the employment share of manufacturing 27.6% (27.9%).
Two clusters achieved targeted value-added shares and three clusters had high productivity
growth. Capital investment per employee rose remarkably in three clusters. On the negativeside, R&D remained low at 0.5% of GDP, researchers and skills remained scarce, and thenumber of local patent registration was small. Only 20% of manufacturing firms undertook
innovation. Participation in global supply chain was weak, and ICT and integrated logistics
were
not
used
widely.
This
information
was
obtainedfromwww.miti.gov.my/miti-imp3speech, which now is removed.

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6. FDI policy
The Malaysian Industrial Development Authority (MIDA) is thecentral agency for FDI promotion, equivalent to the Board of
Investment in Thailand. It is one of the agencies under MITI. Although
it reports to MITI, it enjoys relative policy autonomy. As Malaysia's
industrialization deepens, wages rise and labor shortages have becomea problem, MIDA recently acquired a new mandate to encourage“cross-border investments” (outward FDI) by Malaysian companies.
Since March 2004, it also promotes services (except finance andutilities, which belongs to other agencies). MIDA wants labor-intensive
industries such as garment to leave Malaysia and become global.
Instead, Malaysia wishes to attract targeted high-tech FDI.
Incentives include pioneer status, investment tax allowance, andreinvestment allowance. Regionally, two levels of incentives are given,
the one for the Kuala Lumpur, Johor Baru and Penang areas and theother for the rest of the country. In addition, MIDA can offer"pre-packaged incentives" (customized special deals) to attract
targeted FDI firms individually. MIDA approves all FDI projects at thefederal level and provides various post-investment services. If any
problem arises between a company and a local authority, MIDA solves
it for them. Tax incentives are centrally administered by MIDA, but
thirteen states (local governments) can offer other incentives related toland and water, such as better conditions for lease, rent and location.
Incentives are given to domestic and FDI companies without
discrimination. After the Asian crisis, Malaysia now accepts 100%
foreign-owned projects regardless of how much the company exports.
MIDA feels that it works very closely and effectively with concernedbodies such as the Ministry of Finance (MOF), the Department oftatistics, other agencies under MITI, and foreign chambers of commerce.
Every Thursday, MIDA holds meetings to approve projects and decide
incentives. A representative from MOF sits in these meetings and canapprove proposed tax incentives on the spot. If there is any doubt, theproposal is reported to the higher level of MOF and the issue is resolvedin the following week. Such quick decision making among related
economic ministries is unimaginable in Vietnam at present.
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7. SME policy
The Small and Medium Industry Development Corporation (SMIDEC)
is another agency under MITI. There are forty agencies in charge of
SME promotion in Malaysia. Eighteen ministries are also involved.
SMIDEC plays the leading role among them.
In Malaysia, the number of manufacturing SMEs and their production
share have increased over the years. In 2004, they accounted for about
30% of output, 25% of value-added, and 32% of employment in the
manufacturing sector. However, all of this growth cannot be attributed
to policy measures, since private sector dynamism and external
circumstances should have certainly influenced the result as well.
A number of grants, soft loans and incentives, such as higher income
tax threshold, pioneer status with full tax exemption for five years, andinvestment tax allowance, are offered to manufacturing SMEs with atleast 60% Malaysian equity23, shareholders' funds not exceeding
RM80,000, and value-added of at least 15% or contribution to ruraldevelopment. Preferences are given for taking specified actions underproper documents (“concept papers”) for strengthening industrial
linkage, logistics services, overseas marketing, business planning,product and process improvement, obtaining quality certification, etc.
The list of eligible activities is long. Proposed actions are monitored
after 3, 6 and 12 months and benefits can be withdrawn if they are not
implemented. It is clear that Malaysia supports SMEs mainly forachieving excellence, not just for the social protection of small firms.
Currently, policy is evolving toward supporting SMEs in services in
addition to manufacturing.
The mission asked if application procedures for grants and incentives
were not too complex. SMIDEC admitted that sometimes publicawareness of their policies was low and applications for incentives

23

SMIDEC clarified that all Malaysian SMEs regardless of ethnicity were eligible forsupport. However, another source reported to the mission that only indigenous Malay SMEs
were promoted. We cannot explain the cause of this discrepancy. It may come from the gap
between stated policy and actual result.

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Chapter 4: Malaysia

were few. In such cases, it reviews procedure and regulation to see
whether the problem is on the SMIDEC side.

8. The automobile industry
Proton, established in 1983 and started operation in 1985, is Malaysia's
national car company. It has served as a key instrument for
implementing heavy industrialization and IMPs. Starting from the CKD
production of Mitsubishi Lancer, it subsequently internalized
capability in styling and design, platforms, engines, logistics,
marketing, etc. It also acquired cooperation with Lotus, a British car
maker. Proton is expanding from its original three factories to Proton
City in Tanjung Malim with more automation. It employs 10,000
people directly and has created an estimated 100,000 jobs through thevalue chain.
The domestic automobile market in Malaysia was about 519,000 units
sold in 2005, of which 72.8% was passenger cars and 27.2% wascommercial vehicles. In the passenger car segment, Proton holds the
top share of 41.5% (Jan.-Oct. 2005), followed by another local
company, Perodua24, with the share of 33.1%. The rest is supplied byforeign-brand manufacturers. Proton procures about 5,000 parts
locally from 286 suppliers, of which SMEs account for 55%. 20
vendors have the capability to design parts.
Given its large domestic market share, the quality of Proton seems
acceptable to Malaysian consumers, at least as popular vehicles. But
the mission also heard negative comments about its quality. The
greatest problems for Proton are small domestic market size and thelack of brand recognition abroad, which together limit its production
scale and raise its cost. Malaysia is now drafting a new national
automobile policy, to be completed in a few months. While it has come24

Perodua was also established by the government in 1990s with Daihatsu as a partner.
Unlike Proton, it undertakes assembly without acquiring design capability. Initially, there wasa market division between Proton (over 1,000cc) and Perodua (below 1,000cc). But thisdivision is now broken and the two companies have become competitors in the domestic
market.

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a long way to accumulate domestic capability, the current level is notenough to compete squarely with big international names under
accelerating global competition and industrial reorganization. For
survival, Proton desperately needs strategic alliance with one of thelarge foreign producers. Under such alliance, products should be retargeted to specific parts and selected car models for particularmarkets, and to become a crucial link in the global production network.
However, as the recent breakup with VW shows, it is extremely
difficult to reconcile national aspiration with the prospect of foreign
dominance in management.
Malaysia developed the automobile industry by internalizing
capability quickly with strong official support. But it has hit a thickwall due to limited scale and severe international competition. On theother hand, Thailand created a relatively free environment for FDI car
makers to achieve production size, quality, and even exports. Its
problem, however, is the slow pace of domestic capacity building andthe continued dominance of foreign design and technology25. Bothpaths are fraught with difficulties, but the key question is which path ismore likely, under appropriate policy, to establish a competitive
automobile industry in the long run. The fact that discriminatory
measures are no longer permitted under WTO and FTAs also must be
taken into account when Vietnam formulates its automobile industry
policy.

25

In this respect, Malaysia's E&E industry is closer to the Thai automotive industry thanProton.

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Chapter 5 Japan
Japan is a very important trade, investment and aid partner for Vietnam
as well as the leading nation in East Asia's dynamic manufacturing
network. The mission fully recognized, even before departure, thatJapan's past and current experiences could not be applied directly toVietnam because of different development stages and socio-economic
circumstances. In this sense, Thailand and Malaysia offer more
directly relevant information for Vietnam than Japan. However, themission believed that valuable lessons could still be had from Japan if
proper modifications were made. The mission succeeded greatly inobtaining such important insights.

1. METI's role
The Ministry of International Trade and Industry (MITI) is considredto have contributed to Japan's rapid industrialization in the postwar
period from the mid 1950s to the early 1970s, although the exact extent
and scope of this contribution is still debated. Most economists agree
that, while private dynamism was central, MITI also played an
important assisting role. On the other hand, the view that the Japanese
economy was orchestrated by a strong government dictating
businesses what to do, a view sometimes expressed by foreignobservers, is not supported. As time passed and the Japanese economy
achieved high industrialization and maturity, the role of MITI also
diversified into environment, energy saving, safety standards, tradenegotiation, intellectual property rights, regional cooperation, and soforth. The overall influence of MITI on Japanese industries also
declined as large private firms became competitive and globalized. In
2001, the government reorganized MITI into the Ministry of Economy,
Trade and Industry (METI)26.

26

We use the term MITI in discussing the past and the term METI for more recent situations.
However, the basic policy orientation of this ministry did not change by the name change in
2001. For this reason, it is acceptable to use the two terms interchangeably.

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Even in the high growth period from the mid 1950s to the early 1970s,
MITI's main role was to coordinate and support private activities rather
than dictating them. For declining industries, MITI intervened morestrongly in order to downsize and restructure them. MITI also
supported R&D in next-generation technology, but not always withsuccess. In the case of Japan's highly competitive industries such as
consumer electronics, cameras, watches, automobiles and motorcycles,
MITI's role was small. Private firms were the driving force of theseindustries. MITI sometimes tried to reorganize their industrial structure
but such efforts often failed to materialize or were rejected by theprivate sector For example, in the early 1960s, Japanese automobile
firms resisted MITI's intension to merge them into a few large firms tocompete with Americans. It is important to have a balanced view of therole of MITI (METI) in the history of Japanese industrialization. Itshould be neither overestimated nor underestimated.
In the automobile and IT industries (the two METI divisions we met),
the role of the government was relatively modest. In the case of
automobiles, METI has had no major role in deciding output,
investment, product design or global strategy of Japanese MNCs. Thishas been true not only today but in the past as well. METI's concern has
been various surrounding issues of the industry including air pollution,
fuel efficiency, trade negotiations and improving business environment
in the East Asian region (sometimes using ODA). These are the areasthat cannot be handled by individual companies due to externality or
the need for diplomatic leverage. Although Japan had serious air andnoise pollution, traffic accidents and congestion due to heavy
automotive use in the past, it never imposed any numerical restriction
on automobile production or registration. The METI officials we met
stated clearly that such restriction would violate the basic principle offree enterprise. It said that road safety and congestion was a traffic
control problem of the government, not a problem of private companies
that produce automobiles.
In the case of IT, the METI's role was somewhat greater than in the caseof automobiles in creating a vision and setting and revising targets.
This reflects the fact that IT is a fast evolving industry requiring hugeinvestment and constant adjustments in law and regulation in62

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Chapter 5: Japan

comparison with the automobile which is a relatively mature industry.
But it should also be noted that METI's policy touches only part ofJapan's entire IT industry, which accounts for over 8% of GDP27.
METI's current policy in this area is the e-Japan Strategy initiated in
2001. This strategy aimed to make Japan a top IT nation by 2005.
However, the target for IT infrastructure (fastest and lowest-costbroadband access in the world), which was one of the four original
targets28, was already achieved in 2003. Subsequently, the mainconcern shifted to the active use of IT by the general population. While
METI is relatively more influential in IT than in automobiles, thegovernment still remains a follower of industrial trends and opinion
rather than an enforcer of a strategy in a top-down manner. METI
continually listens to the views of the industry and experts informulating and revising e-Japan Strategy, as we will see below.
Clearly, the government's supplementary role in industrializationreflects the very strong dynamism and competitiveness of Japanesemanufacturing enterprises. MITI had to carefully listen to and workwith the private sector and implemented policies that were reallydesired by the industry. In rare cases where MITI tried to intervene in
the strategy and organization of private enterprises against their will,policy was not effective.

27

Japan's IT industry is divided into (i) contents and platform (cable TV, mobile phoneservice, broadcasting, etc); (ii) hardware (computers, mobile phones, audio-visual equipment,
consumer electronics, etc); and (iii) information service (system maintenance, software
production and sales, information processing, etc). The value of these segments amounted to
19 trillion yen, 9 trillion yen and 14 trillion yen respectively in 2003 with the total of 42
trillion yen (this may contain some double-counting if purchasers are not final consumers).
Japan's GDP in 2003 was 502 trillion yen.
28
The other three original targets were e-business, e-government and human resource
development (IT training)-see Table 1 below.

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2. Channels with the private sector
To play a role appreciated by businesses, MITI needed effective
communication channels with them. In fact, MITI's strong andmulti-faceted linkages with the private sector in the past were a favorite
research topic of foreign scholars such as Chalmers Johnson, Daniel
Okimoto, the World Bank, and Campos and Root29. At present, METI
still maintains many communication channels inherited from the MITI
days although the private sector is now relatively more independent
from METI compared with the past.
Deliberation councils still play an important role in linking
government, industry and experts and in generating consensus andsolving problems among them. Special committees and study groups
also play a similar role. Whatever the name may be, the mechanism forlistening to the industry's needs and opinions before making a policy iswell established in Japan. These councils, committees, and study
groups meet as frequently as necessary and produce reports to identify
new issues and map out future directions.
In addition to councils, committees, and study groups set up by thegovernment, industrial associations such as the Japan Automobile
Manufacturers Association (JAMA) and the Japan Electronics andInformation Technology Industries Association (JEITA) provide
permanent bridges between the government and businesses. METI
usually works with industrial associations to gather information andformulate policies. METI also contacts individual companies bytelephone, email and informal meetings as needed. Before going to an
FTA negotiation, for example, METI approaches businesses through an
industrial association and individual contacts to determine Japan's
negotiating position. In the case of introducing a new law, the draft isroutinely discussed in an official open committee attended by29

See Chalmers Johnson, MITI and the Japanese Miracle: The Growth of Industrial Policy,
1925-1975, Stanford University Press, 1982; Daniel I. Okimoto, Between MITI and theMarket, Stanford University Press, 1989; World Bank, The East Asian Miracle: Economic
Growth and Public Policy, Oxford University Press, 1993; and Ed Campos and Hilton L. Root,
The Key to the Asian Miracle: Making Shared Growth Credible, Brookings, 1996.

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Chapter 5: Japan

concerned businesses and experts. The draft law also receives publiccomments for at least one month.
Japanese enterprises are required by law to report basic data such as
production, sales and exports to the government every month.
However, data collected by industrial associations are usually fasterthan official data. When METI needs special or sensitive data fromenterprises, it must explain the reason. Enterprises cooperate only
when they agree with the purpose of such data collection.

3. Quick implementation and flexible revision
METI's industrial strategy is frequently reviewed and adjusted. In thecase of the IT industry, strategies are revised every one to three years
depending on the targeted product or service. Let us take e-Japan
Strategy mentioned above as an example.
Table 5-1 shows the evolution of this strategy from January 2001
(establishment) to September 2004. Within this 45-month period, key
targets were revised annually and new goals were introduced
constantly. Two new bodies were created to revise the strategy. In lightof early achievement of the initial targets, the completely revised
e-Japan Strategy II was formulated in July 2003. Although IT is an area
in which speed is essential, it must be admitted that METI's policy
formulation and execution is extremely fast and flexible. Moreover,agreed actions are immediately put into practice without delay. This is
in sharp contrast to Vietnam where the process of drafting andapproving industrial strategies and master plans normally takes years,
and implementation is often delayed while operational rules andregulations are being prepared. In the fast-changing IT industry,
five-year or ten-year targets are not meaningful since it is hard to
predict the industry's direction beyond immediate future.
The VDF-MOI mission has found in all of the countries it visited,
namely hailand, Malaysia and Japan, that effective industrial policy
formulation requires constructive and continuous contacts withbusinesses and a mechanism to frequently review and flexibly adjust
the policy in implementation. Without these, policy becomes too slow
and out of synch with the requirements of the industry.
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Table 5-1. Evolution of Japan's IT Policy in Recent Years

Source: METI Commerce and Information Policy Bureau

4. Numerical targets
One of the questions raised by the VDF-MOI joint research is how
Vietnam should use numerical targets in industrial strategy
formulation in the future. It is clear that setting rigid numerical targets
for all industries and products and requiring them to be met by anymeans is no longer appropriate in an economy under market-

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Chapter 5: Japan

orientation and global integration. But this does not mean that all
numerical targets must be abolished. Thailand uses numerical targets
for the total output and exports of automobiles and motorcycles, andJapan currently uses numerical targets for the household use ofbroadband internet and the promotion of e-government. Whichnumerical targets are appropriate and which ones are irrelevant andeven harmful?
In reality, Vietnam's policy making is shifting gradually away fromrigid targets to softer guidelines and recommendations. However,quantitative mentality is deeply entrenched from the days of economicplanning and difficult to overcome immediately.

Table 5-2. Three Characteristics of Numerical Real-sector Targets

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For the rethinking of numerical targets, it is useful to classify them into
different groups. Table 5-2 shows the hardness of targets, the level ofaggregation and the periodicity of revision as three key characteristics ofreal-sector numerical targets. This framework allows us to selectively
adopt numerical targets rather than accepting or denying them in totality.
Under economic planning, hard numerical targets commanded alllevels of aggregation from macro to product level, with five-year plans
and annual budgets as key planning cycles. Under market-orientationand international integration, however, legally binding targets are nolonger feasible or desirable. Numerical targets should be much less in
number and remaining ones should be of the other three types(indicative targets, business plans, or forecasts).
Long-and medium-term targets on GDP growth, overall export
performance or industrial structure may still be adopted, but theyshould be indicative without legal obligation. At the sectoral andindustry levels, the appropriate choice of targets depends on the natureof each sector or industry. For material industries supplying mainly
domestic markets such as steel, cement and power, numerical targets
based on realistic demand forecast scenarios are still useful. But private
enterprises, not the public sector, should gradually become the major
supplier, and policy should shift from direct intervention like price andinvestment control to indirect coordination of the industry's interest
such as drafting reports and master plans, and strengthening humanresources, supporting industries, marketing, procurement, and so on.
For processing- or assembly-type export-oriented industries such as
electronics, motorcycles, automobiles, garment, footwear and foodprocessing, collective numerical targets are less meaningful and should
be indicative at best. The effort of individual producers and global
market competition should determine quantitative performance, andthe main goal of enterprise managers should be innovation,competitiveness and strategic positioning rather than achieving
predetermined numerical targets regardless of demand. Furthermore,
for dynamically evolving industries like IT, software and consumer
electronics where new products and markets merge constantly,
quantitative forecasts beyond a few years are largely meaningless.

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5. Vietnam in global and regional competition
Japanese MNCs are striving to expand their business operation inhighly dynamic and competitive global markets. Whether they invest in
Vietnam is not a bilateral consideration between Vietnam and Japan but
one move among many to take a strategic position in the context ofglobal innovation, production and marketing. While improving
Vietnam's business conditions is important, this effort must always be
made in full understanding of Vietnam's position in the global andregional business environment. Even if Vietnam improves its investment
climate, that will not necessarily accelerate FDI inflows if the speed of
improvement is slower than in other host countries or if improvements
are made in the areas that do not interest foreign businesses.
The importance of evaluating Vietnam in the context of global and regional
business strategy was clearly shown in the following three meetings.
First, the Japan Bank for International Cooperation (JBIC) explained
the results of the annual survey of Japanese manufacturing MNCs to
the mission. According the latest surveys in 2003 and 2004, Vietnam
was the fourth most popular FDI destination for Japanese MNCs after
China, Thailand, and the US. But unlike China, Thailand, and the US,
Japanese MNCs had few concrete plans to invest in Vietnam althoughgeneral interest was high. This was partly because Vietnam was a
relatively new FDI host country and it would take some time forJapanese companies to gather information and draft business plans.
Japanese MNCs lauded low-cost labor, market potential, and humanresources as three attractive points of Vietnam, while the weaknesses
in the legal and policy system and insufficient infrastructure were themain drawbacks in comparison with other FDI destinations.
Second, Mr. Susumu Sanbonmatsu of the Research Institute of
Economy, Trade and Industry (RIETI) under METI discussed thestrategic dynamics of Japanese MNCs. In his research, key strategic
ingredients are markets, product line, and value chain positioning. To
introduce new products for each major market continuously, MNCs
must always plan and invest ahead (global innovation chain).
Moreover, for high-quality, low-cost, and speedy production, MNCs
must allocate different functions and processes to various countries
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correctly (global supply chain). In all this, management leadership andcorporate culture play very important roles. The essential point here isthat MNCs come to Vietnam if that improves their performance inglobal innovation chain or global supply chain. The government must
know what Vietnam can offer to attract them when it launches an FDI
marketing campaign.
Third, Honda Motor Company explained its business situations andstrategy to expand Asian production30. Recently Honda received alicense to produce cars in Vietnam, for which the company was
grateful. Honda hopes to build good relations with MOI in particular,
and with the Vietnamese government in general, to realize Vietnam's
potential with rising income and highly skilled labor. For motorbikes,
India, China, Thailand, Indonesia, Philippines, and Vietnam are the key
production sites of Honda. For cars, China and Thailand areparticularly important in East Asia. When car production starts in
Vietnam, Honda plans to assign Vietnam to produce certain parts for
global export. Honda already exports automatic transmission fromIndonesia to Asia, EU and US, and its plant in the Philippines also
exports manual transmission to global markets.

6. Partnership based on business architecture
The mission also exchanged views with Prof. Takahiro Fujimoto ofTokyo University at his project office. He is the leading Japanese
authority in business architecture theory and his current researchdocuments the integration-based manufacturing system which is at theheart of Japan's competitiveness31. For this purpose, sixteen Japanese
MNCs such as Toyota, Canon, Honda, Matsushita, and Sony cooperatewith this project.
30

Our discussion contained many concrete actions that Honda planned to undertake in thenear future whose details cannot be reported here.
31
Business architecture is divided into two main types: integral (creating original parts foreach product) and modular (combining common parts available in the market). Japan's
competitive firms often exhibit integral architecture while Chinese firms usually havemodular architecture. However, not all Japanese firms are competitive or integration-based.
According to Prof. Fujimoto, about half of Japanese firms are globally oriented and only
10-20% have integration-based manufacturing.

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According to Prof. Fujimoto's theory, comparative advantage iscreated when the organizational capability of an enterprise or acountry is matched properly with the architectural property of its
product (integral or modular). Production partners should also be
selected appropriately from the viewpoint of business architecture.
Japan is an industrial country with integral capability while the US is
an industrial country with modular capability. The US and China areappropriate production partners since they are both modular. Japan and
ASEAN countries would also become good partners if ASEAN
improves integration-based manufacturing capability. On the contrary,
if ASEAN pursues modularity-based production (copy production withlow quality and low price under excess competition), it will lose out toChina since China is much bigger and better at modular manufacturing
than ASEAN (see Figure 1-3 in chapter 1 of this book).
Vietnam must shift from modularity-based businesses tointegration-based business in order to avoid direct confrontation with
China and to build a more productive relationship with Japan. Prof.
Fujimoto emphasized that Vietnam should learn the skills suitable for
integration-based manufacturing. The government and donors(including Japan) should also support this effort in the private sector.
More specifically, local capability in product design and engineeringmust be raised in a way directly linked to production processes. Human
resource development for the purpose of high-quality manufacturing isparticularly important. In fact, these are exactly the targets thatJapanese firms are trying to achieve and what the Japanese governmenthas been helping with its technical assistance programs in ASEAN.
However, Prof. Fujimoto's theory puts these ongoing efforts in a newtheoretical perspective32.

32

Ohno previously argued that Vietnam should break through the “glass ceiling” ofindustrialization by not only agglomerating assembly and parts industries (quantitative
expansion) but also enhancing technical absorption (qualitative improvement) in the future.
Prof. Fujimoto's advice is basically the same as this but phrased in a more analytical language.
See chapter 1 of this book, and also chapter 1 of VDF's Improving Industrial Policy
Formulation, edited by Kenichi Ohno and Nguyen Van Thuong, and published by the
Publishing House of Political Theory, 2005.

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The mission raised three questions related to this view. First, canmodularity-based local firms (such as Vietnam's local motorcycle
assemblers) survive WTO and FTAs and become the basis of further
development or will they be eliminated? Second, in light of the findingthat industries in developing countries go through three stages: (i) therise of a pioneer to start a new business; (ii) expansion of copy
production with low quality and low price; and (iii) emergence of an
innovator to raise quality and competitiveness33, does the transition
from quantity to quality (from (ii) to (iii)) require FDI or can it be doneby domestic effort only? Third, architectural evolution is private
sector-driven in Japan, but does it perhaps require policy intervention
in developing countries?
Whether the government and ODA can play useful roles in speeding up
the upgrading process of industries was also discussed. While policy
support is theoretically desirable, actual policies based on insufficient
information tend to assist wrong producers (weak or politicallyconnected producers), leading to a waste of public money.
Unproductive copycats who will disappear soon and innovative
imitators who will contribute to industrialization must be distinguished
before assisting local producers. But such a distinction may not always
be possible.
Application of business architecture theory to industrial dynamics indeveloping countries is a new and evolving field in the Japanese
academic circle, and answers to the questions raised above cannot begiven immediately. But they may provide useful insights to Vietnam's
industrialization in the near future when these ideas are betterorganized and expressed.

33

Tetsushi Sonobe and Keijiro Otsuka, Roots and Strategies of Industrial Development:
Lessons from the East Asian Experience, Chisen Shokan, 2004 (in Japanese).

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1. JETRO Bangkok
Venue: JETRO Bangkok Office
Time: 9am, February 18, 2005
JETRO participants:
Mr. Atsuo Kuroda, President of JETRO Bangkok
Mr. Kunihiko Shinoda, Representative of JODC
Mr. Takashi Nakano, Managing Director of JETRO Ho Chi Minh
City, Vietnam
Presentations:· Toward the strengthening economic ties between Thailand andJapan, JETRO Bangkok· West-East Corridor Comprehensive Industrial Development
Program, 2004-2006, METI
Received:· “The rise of China: How should Japan respond?” by A.
Kuroda, Japan Echo April 2002, photocopy· “Asian comeback: to earn, think Thailand and Vietnam not
China”, Nikkei Business, Apr. 19, 2004, photocopy, English
and Japanese· “White Paper on International Economy and Trade 2004, key
points”, METI, June 2004, photocopy
Highlights:
The Thai car industry is booming because foreign producers favorablyreassessed Thailand's potential after the Asian crisis and tradeliberalization. Their strategy shifted from import-substitution to global
export.
With a long history of FDI absorption and industrialization, Thailand
has created a relatively thick layer of supporting industries, especially73

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for supplying auto parts. However, Thailand now faces the challenge of
emerging China which has advantages over Thailand in production
cost, market potential, etc. To cope with this, Thailand is focusing on
high-value and niche industries such as automobile and auto parts, foodprocessing, tourism, fashion, and high value-added services.
Human resource may become a problem in developing Thai industries
in the coming years. Thailand still lacks high-skilled labor force. Local
capability in basic industries such as steel, mold and die casting is still
at a low level.
For further development, Thailand should promote human resources,
encourage hard infrastructure such as logistics and a power supply
network across national boundaries, and improve soft infrastructuresuch as tax implementation, custom procedures and intellectual
property protection.
Tariffs are still high for finished cars. Services are still protected.

2. Electrical and Electronics Institute (EEI)
Venue: EEI, Bangkok
Time: 2pm, February 28, 2005
EEI participants:
Mr. Charuek Hengrasmee, President
Mr. Somboon Hotrakool, Director of Administration
Mr. Chirapat Popuang, Director of Information and Technical
Service Department
Presentation:· Electronics and Electrical Industry in Thailand
Received:· EEI brochure and company directory· Some data on electronics and electrical industry (photocopy)
About EEI:The Electrical and Electronics Institute, a non-profit agency under
MOI, was established in July 1998 to promote product testing,74

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technological and product development, R&D, and training. The
functions of EEI include the following:····

Encourage and support enhancement of value-added and localof parts and products
Develop and maintain local electrical and electronics productstandards consistent with international standards
Continually encourage the export of electrical and electronic
products
Provide a central function in the collection, analysis, research anddevelopment of electrical and electronics data related to production,market, international trade agreement, etc.

Highlights:
The electrical and electronics industry has been developing in Thailand
for more than 40 years beginning with the import substitution strategyof the 1970s. It is one of the most important sectors of Thailand interms of export contribution, with the average annual growth of morethan 20% in the past twenty years. In 2004, the export value was$33.07 billion, an increase of 20.6% over 2003 (34% of total export
and 18.9% of GDP).
Electrical and electronic imports from China and Korea are on the rise
and, as a result, Thai industries' domestic market share is decreasing.
Thai SMEs are facing tougher competition and unemployment isfeared. The industry needs reform in the areas of (i) telecommunication
products; (ii) computer hardware; (iii) electronics components; (iv)electrical appliances; and (v) software products.
The industry lacks skilled workforce in both quantity and quality. It
also lacks linkage among upstream (wafer production, material for
PCB production, etc), midstream (parts and components such as IC,
PCB, and capacitor) and downstream (electrical appliances andelectronics products such as air conditioner, television and computer).
The industry is weak in technology, R&D and marketing. In addition,
the industry is now facing a threat from very cheap Chinese electricaland electronics products.

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Main tasks of EEI are as follows:
·

·

·
·
·
·

Policy support for electrical and electronics industry (analyze thesituation of Thai electrical and electronics industry; recommend
policy measures; coordinate and solve problems between thegovernment and the private sector).
Implement technical standards, factory quality inspection and testing
center operation (a testing laboratory, testing service, technicalstandards consultation service). All electronics products sold in
Thailand, whether domestically produced or imported, must passquality tests.
Research related to industrial promotion (conduct and coordinate
projects by local or overseas researchers, etc).
Industrial clustering service which supports production linkage
and part procurement.
Information and technical services center which collects,
distributes and analyzes national and international information.
Special projects such as supporting industrial clusters,“technology foresight study”, a study on environmental impacts,
and recommendation of measures to cope with the EU WEEE
and RoHS directives.

3. Department of Industrial Promotion (DIP),
Ministry of Industry
Venue: DIP, Bangkok
Time: 9am, March 1, 2005
DIP participants:
Mr. Prapat Vanapitaksa, Deputy Director General
Mr. Saneh Niyomthai, Director, Bureau of Supporting Industries
evelopment
Ms. Chudatip Ritruechai, Industrial Technical Officer
Presentation:· Investment opportunities in Thailand
Highlights:
MOI's internal structure was explained. DIP promotes SMEs and76

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community-based industries. DIP identifies main constraints,
opportunities and concerns for the SME sector and supports thegovernment, non-government organizations and the private sector in
their efforts to promote SMEs. It has technical training centers fornationwide SME promotion. It also supports the formation of a service
provider network. DIP endeavors to be a guide for both old and newentrepreneurs in turning ideas to practical applications.
In automobile, spare parts are targeted. At present, Thailand exports
little and imports an increasingly large amount of parts. To correct thissituation, the five-year plan contains a mold-making strategy.
In electronics, most Thai firms perform passive subcontracting. The
government hopes to improve their capability to conduct R&D andcreate genuinely Thai products. The government assists with export
and marketing, supply chain, supply-demand matching, “train-factory
system” (large foreign firms teach small local firms), networking andclustering, foreign tours, tax preferences, etc.
DIP has the following ways to realize these goals.
···

Work with private firms to figure out what kind of industrial
support is needed.
Through participating in government committees, take part in the
joint policy making process. Implementation of master plans isevaluated frequently and measures are proposed continually.
Provide SME training programs with the aid of the German
Technology Institute as well as Japanese companies; establish
testing centers and centers for R&D and technology transfer to
SME.

DIP's list of targeted industries includes (i) agriculture (rice, rubber,etc); (ii) automotive industry; (iii) fashion (garment, textile, jewelry,etc); (iv) healthcare, spa, etc.; and (v) tourism.

4. National Economic and Social Development Board(NESDB)
Venue: NESDP, Bankok

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Time: 2pm, March 1, 2005
NESDP Participants
Mr. Thanin Pa Em, Director, Competitiveness Department
Presentation:· Thailand CompetitivenessReceived:· Ninth National Economic and Social Development Plan
2002-2006 (hardcopy)· Eighth National Economic and Social Development Plan
1997-2001 (hardcopy)
Highlights
Mr. Thanin delivered his presentation on the competitiveness ofThailand. Industry positioning and mapping were also explained.
Discussion focused on competitiveness analysis as well as industrial
policy to sustain the competitiveness of Thai industries in the context
of globalization.
···

NESDP uses the McKinsey competitive GE methodology to build
the Thai Competitiveness Matrix (TCM). NESDP then identifies
the relative position of each industry. Using TCM, the main
constraints, opportunities and concerns for each industry or
sector are identified and ways to formulate and implement
policy are figured out.
Thai industries can be classified into six groups: new wave,
opportunity, star, trouble, question, and falling star. The criteria
for classification are current size and growth.
By using TCM, the government can pinpoint each sub-sector orindustry. Then, in-depth sector analysis can follow.

5. Thammasat University
Venue: Faculty of Economics, Thammasat University, Bangkok
Time: 9am, March 3, 2005
Thammasat participants:
Prof. Somsak Tambunlerchai78

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Prof. Thamavit Terdudomtham
Dr. Kriengkrai Techakanont
Received:· “Historical development of supporting industries: a perspectivefrom Thailand” by Kriengkrai Techakanont and Thamavit
Terdudomtham, Obirin University, March 2004, photocopy
Highlights:
The Vietnamese delegation asked about the implementation of
localization policy in the past as well as the experience of Thailand indeveloping supporting industries through policy measures.
·

·

·

·

In the past, the Thai government implemented an aggressive
localization policy based on the point system. Each part had
weighted points and certain levels of total points (out of 100)
were targeted for passenger cars and trucks. Producers wererequired to reach these levels or faced much higher import tariffs
on parts. Although weights were often negotiated between
companies and the government, it can be said that thispolicy promoted supporting industries especially in metal,
rubber, and plastic parts. Relocation of Japanese firms toThailand was further stimulated by the yen appreciation after the
Plaza Agreement of 1985.
If localization is pushed too hard and too ambitiously, it would
create distortion and inefficiency. For example, firms would add
an unneeded minor work on an imported engine to make it a“local” product. Or they will bring foreign parts makers quickly
instead of fostering local partners over time. In Thailand,
negotiation and bargaining between producers and thegovernment resulted in reasonable localization targets, so all
producers met localization requirements without exception.
Thailand removed localization requirement in 2000 and shifted toa more liberal policy framework because of WTO. The Thaigovernment helped local parts makers to reduce cost and acquire
technology. It revised the import tariff structure on raw materials
to lower their production cost.
Unlike Malaysia, Thailand has no national car strategy. As a

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··result, all investors are treated equally. This has been a very
important factor in attracting assemblers and parts makers to set
up operations in Thailand.
However, local capability and technology are still at low levels.
Dependency on foreign technology and management remains
high even after 40 years of industrial development. The
government did not succeed in upgrading the quality of Thai
supporting industries. For this, improving local capability andinducing foreign firms to procure locally must be combined. The
Thai government failed in this. The government is supporting
SMEs and human resource development, but they are not very
effective. It should do much better in these areas.
The automotive master plan is only a guideline with broad
directions. Actual implementation is an ongoing and cooperative
process among all producers and government bodies concerned.

6. Office of Industrial Economics (OIE), Ministry ofIndustry
Venue: OIE, Bangkok
Time: 2pm, March 2, 2005
OIE participants:
Mr. Nat Chulkaratana, Director, Dept. of Engineering Industries
Ms. Chutaporn Lambasara, Director General (at the outset only)
Presentation:· Automotive Industry
Received:· OIE brochure
Highlights:· Thailand is one of the largest automotive countries in Asia.
Thailand focuses on automotive rather than electronics andelectrical industry. To become a Detroit of Asia is our goal. But
this does not mean we will be like Japan or Korea, which is too
difficult. Compared with automobiles, we do not thinkelectronics has comparative advantage against China in the
future.
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·

·

·

·

Thailand is promoting high value-added products throughadvanced technology, strengthening R&D and encouraging
product design and innovation. Another goal is importsubstitution; we import too many things that can be produced
locally, for example, farm machines. We are also strengthening
supporting industries, particularly SMEs. The main promotion
tool is tax and tariff policy. The Thai government does not care
the nationalities of companies operating in Thailand any more. In
the past, we did. MOI will soon become the Ministry of Industry
and Entrepreneurs. (The mission asked if free trade initiatives
and import substitution strategy conflicted, but Mr. Nat did notthink so.)In the last four years under the Thaksin government, federal
committees on steel, auto, electronics, etc. were set up. As aresult, policy formulation and private sector participation have
improved greatly. We now have a very active top-downgovernment whose decision making is faster than private
decisions. The prime minister orders ministries to study which
products should be strengthened. Value-chain and supply-chain
analyses are used for this purpose.
Every two weeks, the private sector (by industry) meets the prime
minister. If there is a complaint, Mr. Thaksin orders relevant
ministries to look into the matter and correct the situation. Thailand
is being run like a private company. The government is streamlining
the administration by reducing personnel and raising the salary by
30%. Under these circumstances, the importance of NESDB and thefive-year plan may be educed.
Corruption in Thailand is very limited. Political lobbyists
naturally exist, but otherwise policy making today is relatively
clean and open.
After the meeting, the mission wondered if top-down
liberalization policy with broad supporting measures was enoughto strengthen the Thai industrial base further. After intense
discussion, no consensus was reached among mission members.

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7. Board of Investment (BOI)
Venue: BOI, Bangkok
Time: 9am, March 3, 2005
BOI participants:
Mr. Thamrong Mahajchariyawong, Deputy Secretary General
Mr. Sakchai Luangsathikul, Senior Investment Promotion Office
Mr. Secksan Ruawohann, Director Investment Promotion
Division 3
Presentation:· Investment opportunities in Thailand
Received:· Powerpoint file of above presentation· “Thailand of investment. Double your expectations” (BOI
information package)
About BOI:
BOI is a centralized organization to implement the Thai government's
drive to attract FDI and provide incentives to stimulate investment.
Previously, BOI was under the Office of Government and chaired by
the prime minister. With the recent administrative reform, it was placed
under MOI.
Highlights:
At first, slides containing economic data, Thailand's attraction, BOI's
functions, FDI procedure, government policies, a list of incentives,international cost comparison, etc. were shown. The presentation was
clear, concise and up-to-date. Discussion followed.
··

BOI's list of targeted industries is as follows: (i) agro-products;(ii) fashion; (iii) automotive; (iv) electronics and ICT; (v)long-stay tourism; and (vi) energy and renewable energy (thiswas added last year). Each ministry and agency has slightly
different targeted industries because of their policy interest andresponsibility. But most targeted industries overlap.
BOI promotes projects that: (i) strengthen industrial andtechnological capability; (ii) make use of domestic resources; (iii)82

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·

·

·

develop basic and supporting industries; (iv) contribute to rural
regions outside Bangkok; (v) develop infrastructure; and (vi) protects
environment.
The Thaksin government gives top-down orders. Its policy is toderegulate industries and give them freedom to respond tomarket forces, and to provide a framework to facilitatesustainable growth. We have a liberal and transparent FDI regime
where all activities are open to foreign firms without ownershipor localization restrictions, except when there is anenvironmental concern. We are taking a large number of
initiatives to further liberalize the FDI regime. We welcome allfirms, not just big ones. Our incentive scheme, preferred projects
and approval procedure are explained clearly in the brochure andwebsite. The investment application form can be downloaded
from the website.
Regarding the current government, policy is formulated in thefollowing steps. First, the government states broad strategies tothe parliament. Next, it prepares Vision 2010/2020, which isfollowed by the four-year strategy. Then, each ministry prepares
annual action plans. The four-year strategy (which includes
concrete fiscal arrangement) is different from the five-year plan
(which remains indicative and concerned with social aspects).
The five-year plan is still needed for social concern andensuring consistency among policies. We now have betterinter-ministerial coordination. Previously, each ministry worked
by itself and did not talk with others. They still do not talk to eachother but Mr. Thaksin's vision integrates them at the top. But at
the operational level, we are still in the process of learning. We
need to sort out which concrete policy belongs to which ministry.
Our FDI target is 270 billion baht in 2005, but we may exceed
this and achieve 300 billion baht. Before, we targeted “netapplications” (submitted less returned documents) but we now
focus on “actual certificates”. The latter requires more
documents and reflects investors' seriousness more accurately.
Our maximum approval time is 60 working days for small
projects (less than 500 million baht) and 90 working days forlarger projects. We are actually faster than this, and trying toshorten the maximum periods further.
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·

·

·

Our FDI policy is changing every five years but always forbetter. We have centralized general incentives and promotion.
We do not have case-by-case treatment. Unlike Vietnam, all FDI
applications are processed by BOI. Local governments have noauthority to approve them regardless of investment size. They
are not permitted to offer additional incentives. If local
governments are given free hand in offering incentives, there will
be too much competition and too generous packages. But if
provincial leaders have good visions, they can use national
promotion measures to attract FDI.
Technical transfer measures are tricky because investors become
angry if you regulate them too much. We implement only broadmeasures to encourage technical absorption. Localization is nolonger forced. Technical barriers were also abolished. We justopen up and let the market decide.
The greatest attractiveness of Thailand is its welcoming attitude
toward FDI. “Red carpet treatment” for investors should always
be maintained in the future.

8. Thailand Development Research Institute (TDRI)
Venue: TDRI, Bangkok
Time: 2pm, March 3, 2005
TDRI participant:Somkiat Tangkitvanich, PhD, Research Director
Received:· TDRI brochure and publication list
Highlights:· It is obvious that the Thaksin government has clear visions forindustrial policy, but visions and implementation are twodifferent matters. This is the most interventionist government in
the history of Thailand. They are trying to promote certain
industries by creating industry-specific institutes. It is not certain
whether they are effective. Subsidized institutes are often
inefficient and may crowd out private activities. The current
government is a PR (public relation) government, with very good84

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publicity and popular support, but action is more difficult than PR.
Sometimes, policies tend to favor some special interest groups.
Corruption is serious and intensifying under the current
government. As a result, the government sometimes launches
conflicting programs. But it is not effective to promote a large
number of industries with limited resources.
Tariff reform is slow, but this has been true for a long time. The
service sector is still highly protected. Telecommunication andbanking remain closed to foreign investors.
I do not know about new government committees for individual
industries, but if they are promoting private-public dialogue, it is agood thing.

9. Thailand Automotive Institute (TAI)
Venue: TAI Bangkok office, Bureau of Supporting Industries, Bangkok
Time: 9am, March 4, 2005
TAI Participant: Mr. Vallop Tiasiri, President
Received:· Master plan for Thai automotive industry 2002-2006 (Thaioriginal hardcopy)· Master plan executive summary (English and Thai hardcopy)
About TAI:TAI was established in 1999 as an autonomous non-profit organization.
It has 70 staffs of which 30 are engineers. It is financed by both thegovernment and the private sector in order to develop the automotive
industry (automobiles, motorcycles and their parts) and strengthen thecompetitiveness of Thai products. TAI cooperates with researchers
from ten universities in Thailand, MOI, the Ministry of Commerce,
MOF, and the Ministry of Science and Technology. TAI provides
research and information services and manages a website for
automotive part makers (www.aseanautoparts.info) which is updated
by producers. This is an APEC supported website.
Highlights:· TAI has three main activities: (i) policy study and advice; (ii)85

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·

·

·

supporting the clustering of auto parts; and (iii) export
promotion. “Cluster” is not just networking but working
together. We are trying to change the mindset of local producers
and induce them to cooperate. Cluster members can be local, JV
or 100% foreign. Toyota and Denso are asked to help SMEs.
Our training center is open for any firm (but we teach in Thai).
Thai workers are good at skills but without knowledge. We havetrained 40,000 workers from 525 firms. But we need to upgrade
the evaluation system after the training. Thai workers are afraidof competence exams. We also operate testing centers. Testing
equipment is too expensive for individual SMEs so we offer thisservice for all.
The automotive master plan is drafted by TAI (hardcopy
received). The current one (2002-2006) has the following
chapters: (i) global situation; (ii) Thai situation; (iii) SWOT
analysis; (iv) strategy and targets for the next five years; (v)action plans. The targets for 2006 (1 million cars, 40% exported;
2 million motorcycles, 20% exported; parts export of 200 billion
baht; 60% localization) are likely to be achieved within this year.
Our forecast for 2005 is 1.1 million cars (420,000 exported) and3 million motorcycles (800,000 exported), and parts export worth
220 billion baht. The contents of action plans are decided byproducers. TAI only coordinates and summarizes them.
It normally takes about one year to complete a master plan. It istruly a joint product between private firms and MOI, with TAI
assistance. The drafting is done by TAI. The master plan issubmitted to MOI who is its official author. MOI then sends it to
the government and eventually to the prime minister. Besides thisofficial channel, TAI also sends the draft to the private sector andlets it directly present to the prime minister. The prime minister
will hear the same master plan from both sides, but
presentation by the private sector is more convincing. In
Thailand, there is no official approval of the master plan. It is
implemented as a consensus of all parties. The important thing isthat this plan be included in the national five-year plan which
secures its funding. We are now trying to draft a new master plan.
The methodology will be the same but we will have new targets.
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The agreed master plan contains broad numerical targets aslisted above. As long as these targets and ideas behind them are
valid, there is no need to revise them. Indeed, the current masterplan has not been revised. In implementation, remaining
questions are “details” (concrete projects) and “how much”(budgeting) which are decided and adjusted continuously.
Technical assistance through ODA or foreign firms is often
mobilized. Here too, private-government communication is very
close. There is no need for confrontation. I meet with producers
at least twice a month formally. Besides that, I have many
informal meetings with them. We are a small institute but weparticipate actively in many steering committees.
Private companies will not transfer technology until it isprofitable for them and the receiving side of technology is ready.
We have no nationality preference. Any investor from any
country is warmly welcome. While foreign companies are strong
here, Thailand is not dominated by them. The government makes
a fair and balanced compromise between national goals andforeign companies' demands.

10. DENSO
Venue: Head Office of Denso Thailand Company, Samutprakarn
Time: 9:30am, March 4, 2005
Denso participants:
Mr. Montree Musitmanee, General Manager of Engineering
SectionMr. Thavorn Chalassathien, Director, Administration & Denso
Training Academy Others
Presentation:· Investment opportunities in Thailand
Received:· Denso information package
About Denso:
Denso Thailand was established in 1972 with a capital of 200 million
baht. It has a workforce of 3,163, of which 28 are Japanese. It produces87

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cooling systems, electrical products, starters, radiators, magnets, wiper
motors, alternators and spark plugs, for automobiles and motorcycles.
Its main customers are Toyota (50%), Isuzu, Honda, Mitsubishi, andHino. It also exchanges parts among other Denso factories in Asia.
Highlights:
The Vietnamese mission asked about investment environment, the roleof government in formulating policy, capability of Thai supporting
industries and the strategy of Denso in the future if a new governmentchanges industrial policy.
· Denso highly appreciates the investment environment ofThailand with thick supporting industries and appropriate policy
and incentives. In fact, few foreign companies complain about
Thai industrial policy and investment environment. Most
investors are hoping to have long-term commitment in Thailand,
especially in the automotive industry, because of predictableindustrial policy and a strong network of supporting industries.
While industrial policy is revised and adjusted frequently, theprivate sector is happy because it can get involved in drafting,
implementing and revising industrial policy. The Thaigovernment is now focusing on improving human resources by
establishing technical training centers.
· Denso's high quality is the reason why major customers come topurchase our parts. Since our reputation is well established, we
have only a small budget for marketing and public relation. Denso
believes that the Thai government will not change its policy of
promoting the automobile industry. Therefore, Denso keeps
investing in Thailand in the coming years.
· Denso uses the "keiretsu" system in doing business in Thailand.
We work only with long-term Japanese partners. Human
resources in Thailand are quite weak. There is a shortage ofhighly skilled workers and technicians but the situation is
improving gradually.

11. Thai Summit Group (TSG)
Venue : HeadSamuthprakarn

Office of Thai Summit Auto Parts Industry,

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Time: 2:30pm, March 4, 2005
TSG participants:
Mr. Cheevit Limsiri, Chief Engineer, R&D Unit
Mr. Panikai Aroonchitt, Laision & Projects Manager, Executive
Vice President's Office
Mr.Chatkaew Hart Rawung, Manager, Automotive Parts
Department
Received:· TSG information package
About TSG:
Established in 1977, this local company group now has five overseas
plants in India, Indonesia and Malaysia, and one branch office in
Yokohama. The workforce is approximately 13,000 and its main
products are automobile and motorcycle parts, and electrical parts forhome appliances and agricultural machine. Its main customers include
Toyota, Mazda, Honda, Yamaha, Samsung and Tiger. It recently
established an R&D Department with 41 employees to undertake parts
design. The group has four training rooms for its employees. The groupalso has 22 joint venture units with Japanese companies.
Highlights:
There was a factory tour at first. TSG factories here had a large
number of stamping, welding, metal-working and other machines,
most of which were made in China. A large structure housed a
motorcycle parts factory and an auto parts factory with a warehouse inbetween. Most products were metal and plastic. There was also ashowroom.
· TSG is one of the three biggest local (Thai) suppliers of auto andmotorcycle parts in Thailand. TSG follows TSCIC principle(Teamwork, Social responsibility, Continuous improvement,
Initiatives and leadership, Commitment).
· TSG established the R&D Department three years ago and isinternalizing parts design capability. It has designed a golf cart.
Currently, TSG is trying to design a three-wheeled car for the
Asian market. Technical training programs supported by
Japanese experts are organized frequently. TSG also sends staff to89

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···Japan to absorb technology and skills from Japanese companies
but it is still a difficult task.
TSG is quite confident with its competitiveness against otherdomestic companies. Their main competitors are foreign and FDI
firms. Raw materials are mostly imported from Japan since Thairaw materials are low quality.
To improve the ability of managers, a job rotation program for allprospective managers is implemented.
There is no complaint about tax and tariff policy of the Thaksin
government. In addition, TSG joins the Thai Chamber ofCommerce to raise a voice on government industrial policy.

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1. JETRO Kuala Lumpur
Venue: JETRO Kuala Lumpur
Time: 9:30 am, January 9, 2006
JETRO Kuala Lumpur participants:
Mr. Tsuneo Tanaka, Managing Director
Ms. Ayako Hashimoto, Director
Presentations:
Overview of Malaysia Economic Development (verbal)
Malaysian Economy, JETRO Kuala Lumpur (slides)
Highlights:
Malaysia, generally regarded as one of the most successful nonwestern countries, has achieved a relatively smooth modern economic
growth over the last century. Malaysia has experienced rapid
industrialization in the past thirty years, transforming itself from an
economy dependent on mineral and agricultural products into one
dominated by manufacturing and services. The electronics andelectrical (E&E) industry is the largest sector, followed bychemicals and chemical products, and scientific and measuring
equipment. The country is now categorized as an “upper middleincome country” by the World Bank, with a per capita income of about$4,800 in 2004. It is the third richest country in ASEAN after
Singapore and Brunei. Over the last three decades, Malaysia's
economic policy has undergone three stages:
1957-1969: rural development and import substitution. During thisperiod, the Malaysian government directed resources for the benefit ofrural Malay communities, such as village schools, rural roads, clinics
and irrigation projects. In addition, the government was keen to reduce
dependence on commodity exports, which put the country at the mercyof fluctuating international prices. Several agencies were set up to
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their income. The government also provided a range of incentives andlow-interest loans to help Malays start businesses. Since official
procurement favored Malay companies, many Chinese-owned
businesses were obliged to "Malayanize" their management. All thistended to reduce the gap between the Chinese and Malay standards ofliving, although some argue that this would have happened anyway as
a result of Malaysia's general prosperity under increased international
trade.
1970-1990: industrialization and the New Economic Policy. The
formulation of the New Economic Policy (NEP) in 1970 was a
response to the deadly riots in 1969 against the economically dominantethnic Chinese. The government's commitment to the free market was
now hedged by its Bumiputra policies aimed at providing “constructive
protection” of Islamic Malays against domestic economic competition
from other ethnic groups and foreign investors. NEP was intended toreduce poverty and the economic gap among ethnic groups, but it also
created a Malay rentier class which relied on political patronage.
NEP tried to restructure the Malaysian economy over the two decades,from 1970 to 1990, with the following aims:
·

·

·
·

Redistribution of corporate equity so that the Bumiputra's share
would rise and the dominance of the Chinese Malays would
decline. With respect to employment, the Bumiputra's share ineach sector was aimed to rise to reflect more accurately theethnic distribution of the population.
Preservation of national unity through the amendment of theConstitution to forbid discussion, even in Parliament, of certain“sensitive issues”, including the special position of the Malays
and Borneo's ethnic groups. The amendment also required all
government bodies to use Bahasa Malaysia as the principal
official language. Many non-Malays resented this approach.
Improvement of economic conditions of the Malays.
Eradication of poverty irrespective of race. The government
implemented a large number of programs for rural development
during this period.

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1990s and the new millennium: the National Development Policy.
NDP, initiated in 1991, re-focused on wealth creation and deemphasized Malay preferences. This did much to ameliorate racial
tension. At the same time, the government announced “Vision 2020”,
a goal aimed at making Malaysia a fully developed nation with a highstandard of living by 2020. Malaysia suffered from the regional
economic crisis in 1997-98. While growth was sharply negative in
1998, Malaysia was able to take measures which put its economy backon track.
In the view of JETRO Kuala Lumpur, the success of Malaysia is basedon political stability and peaceful power transition, rich natural
resources such as wood, rubber and oil, charismatic leadershipespecially of Dr. Mahathir, and policy transparency. The businessenvironment in Malaysia is better than many other neighboring
countries. Corruption is also modest. However, with the emergence ofChina, Malaysia is now facing reduced FDI inflows as MNCs shift
their production to China where labor is much cheaper. Unlike the past,large FDI projects are unlikely to come to Malaysia in the future. But
there is still room to attract FDI in telecommunication, ICT, chemicals,
bio-technology, and other high-tech areas. Malaysia should be able tosustain an average growth rate of 4-5% per year.
The protection of automobiles will be phased out within the AFTA
framework in the next few years. The government seems to haveabandoned the idea of total protection of Proton. This national car
company still enjoys a large domestic market share but faces fierce
competition from big foreign names. In promoting industrial
development, SMIDEC plays an important role in fostering SMEs,
especially Malay SMEs. In addition, the SME Act was launched in2005 to accelerate SME development.

2. Malaysian Industrial Development Authority (MIDA)
Venue: MIDA, Kuala Lumpur
Time: 2 pm, January 9, 200693

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MIDA participants:
Mr. Arham Abdul Rahman, Deputy Director, Domestic Investment
Promotion Division
Mr. Roswaidin Mohd Zain, Assistant Director, Domestic Investment
Promotion Division
Presentation:
MIDA's functions in the promotion of the manufacturing and services
sectors
Received:
MIDA brochure, and information about industrial promotion in
Malaysia
About MIDA:
Established in 1967 under the Act of Parliament, MIDA is theprincipal agency for promoting and coordinating industrial
development. It is the first point of contact for investors who intend to
set up manufacturing and manufacturing related services operation in
Malaysia.
Headquartered in Kuala Lumpur, MIDA has a network of 16 overseas
offices covering North America, Europe and Asia-Pacific, to service
potential overseas investors. Within Malaysia, MIDA has 10 branch
offices to assist investors in the implementation of their projects. The
major functions of MIDA are:
·
·
·
·

·

To promote foreign and local investments in the manufacturingand manufacturing related services sectors.
To undertake planning for industrial development.
To recommend policies and strategies to the Ministry ofInternational Trade and Industry (MITI).
To evaluate applications for manufacturing licenses andexpatriate posts; tax incentives for manufacturing activities,
tourism, R&D, training institutions and software development;
and duty exemption on materials, components and machinery.
To assist companies in the implementation and operation of theirprojects, and offer assistance through direct consultation andcooperation with relevant authorities at both the federal and statelevels.
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Highlights:
MIDA is one of the five agencies under MITI and plays a role similar
to the Board of Investment in Thailand. MIDA's scope of authority,
namely promoting manufacturing investment and approving projects,
is clear and there is no overlapping with the mandates of otheragencies. Senior representatives from related agencies are stationed at
the MIDA headquarters in Kuala Lumpur to advise investors on
policies and procedures. They are from the Ministry of Finance,
Ministry of Human Resources, Immigration Department, Royal
Customs Malaysia, Department of Environment, Department ofOccupational Safety and Health, Tenaga Nasional Berhad, and Telekom
Malaysia Berhad. MIDA conducts weekly meetings to approve projects
with the attendance of these representatives. MIDA also organizes
monthly meetings with chambers of commerce and businesses toexchange information. In addition, MIDA assigns about twelve officers
to follow up approved projects in all states.
As Malaysia now faces a shortage of labor, it wishes to switch fromlabor-intensive operation to high-tech industries. To attract such FDI,
special incentives and customized packages are given to targetedindividual foreign firms through negotiation on a case-by-case basis.
Tax incentives are provided only by the federal government, but local
authorities can offer other incentives in the form of favorable land andwater conditions.
From the viewpoint of MIDA, key success factors in FDI attraction to
Malaysia are political stability, the business-oriented government
where policies are formulated openly by private initiative, and good
infrastructure including an excellent highway network and modern
airports and seaports.
While Malaysia continues to promote FDI, it also encourages
domestic investments to ensure that Malaysian entrepreneurs actively
participate in industrial development. Policies and measures have been
put into place to sustain Malaysia's competitiveness and maintain the
country as an attractive location for investors. These include:·

Liberalization of investment policy. Foreigners are now allowed95

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·

·

·
·

to hold up to 100% equity in manufacturing projects andmanufacturing related service activities.
Enhancement of the administrative system. The approval processof manufacturing licenses has been streamlined over the years byremoving unnecessary and cumbersome procedures andregulations.
FDI promotion into high value-added sectors. High-tech andknowledge-intensive projects in the manufacturing sector, suchas ICT, bio-technology, optics, photonics, nano-technology,
medical devices, and advanced materials are encouraged.
Promotion of the services sector.
Provision of focused and competitive incentives.

3. Economic Planning Unit, Prime Minister's
Department
Venue: Industry and Economic Services Section, Economic Planning
Unit, Putrajaya
Time: 9:30 am, January 11, 2006
EPU participants:
Ms. Layla Wathiqah Judin, Principal Assistant Director, Industry
and Economic Services Section
Mr. Nirwan Noh, Principal Assistant Director, Industry andEconomic Services Section
Mr. Asdirhyme Abdul Rasib, Principal Assistant Director,
Industry and Economic Services Section
Presentation:
Industrial Policy: Malaysia's Experience
About EPU:
The Economic Planning Unit, in the Prime Minister's Department, isthe central planning agency responsible for formulating policies andstrategies for economic development with the overriding objective ofachieving national unity. The planning cluster is composed of EPU andother central agencies, while the implementation cluster involves the
Implementation Coordination Unit and the relevant staff agencies.
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the one hand and line ministries and agencies on the other, as shown inthe diagram below. This top-down and bottom-up process ensures thatpolicies and strategies are mutually consistent and that development
concerns at sub-regional levels are fully integrated into overallnational development thrusts.

Source: EPU's website.

Highlights:
Key policy documents include Vision 2020 (1991-2020), which sets
the main objective in the long run, Outline Perspective Plans (OPPs),
five-year plans (currently the 9th Malaysia Plan is under preparation),and annual budgets. Malaysia Plans are produced by EPU while
Industrial Master Plans are compiled by MITI.
OPP covers overall growth of the economy and includes indicatorssuch as GDP, inter-sectoral linkages, sectoral contributions,employment projections, redistribution of economic gains, and social
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development. Five year plans are investment plans for realizing theobjectives of OPP. Annual Operating Plans are actual physical andfinancial plans for implementing the five-year lans.
IMP2 (1996-2005) focused on cluster-based industrial development
and manufacturing plus plus orientation. The latter was intended tomove Malaysia along the value chain horizontally towards higher value
activities as well as shift the whole value chain curve upwards throughproductivity-driven growth. Industries to be developed under thisapproach included electrical and electronics, textile andapparel, chemicals, resource-based industries, agro-based and foodproduct industries, materials and advanced materials, transportation,and machinery and equipment.
IMP3 (2006-2020) will focus on services and establishing linkage
among clusters. Although IMP2 has not been reviewed, IMP3 will be
reviewed every five years. The Malaysian government places emphasis
on project monitoring to ensure that policy implementation is intandem with the objectives as well as strategies set by the National
Development Policy and the five-year plan. This enables thegovernment to identify and remedy any failure or delay in theimplementation of any program or project, thus saving costs.
For IMP2, a researcher at the Malaysian Institute of Economic
Research (MIER) produced initial ideas. No such analytical input wasmade for IMP3.
The mission asked if IMP2 lacked selectivity since the eight listed
clusters covered virtually all key industries of Malaysia. It noted thatspreading public resources thinly across many industries wasconsidered a problem in Vietnam. EPU replied that, since the clusters
were private sector-driven, large public investment was not needed andbroad orientation posed no budget problem.
EPU emphasized that there was no shortcut to progress anddevelopment. The mission asked to clarify this statement sinceVietnam often sought shortcuts in industrialization. EPU explained
that, in multi-racial society, policy must be devised with care, andlaissez-faire growth without social concern was unacceptable.
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Regarding Vision 2020, there are nine stated challenges such as
national unity, mature democratic society, ethical society, andprosperous society. Vision 2020 includes only qualitative statements
without numerical targets. To achieve this Vision, policy documents
mentioned above map out concrete targets and make necessary
adjustments during the implementation period.

4. Ministry of International Trade and Industry (MITI)
Venue: MITI, Kuala Lumpur
Time: 2 pm, January 11, 2006MITI participants:
Mr. Wan Zakaria Wan Ibrahim, Principal Assistant Director, Strategic
Planning Division
Mr. Davidson Dee Ladi, Assistant Director, Strategic Planning Division
Highlights:
Malaysia implemented IMP1 (1986-1995) to lay the foundation of the
manufacturing sector. IMP2 (1996-2005) aimed to develop clusterbased industrial development and manufacturing plus plus orientation.
Its investment target was surpassed. IMP3 (2006-2020), currently
being prepared, will continue to make Malaysia more competitive in
the global market and transform it into a fully advanced country. While
IMP3 will boost existing industrial clusters, new elements such asservices, selected subsectors, networking, and cross-borderinvestments will be added. Efforts will be made to accelerate a shift
toward higher-end activities and products, and to strengthen linkages
among clusters and with the global economy. The draft of IMP3 isalmost finished, but it is waiting for the finalization of the latest data.
The drafting process of IMP3 was explained. Overall policy orientation
was decided by the Industrial Planning Committee (IPC) chaired by the
Minister of MITI. There was no single person or report that decided thepolicy direction as it was a result of evolving ideas through many
meetings. After this, the Steering Committee (SC) was organized todraft the plan. It in turn called for Technical Resource Groups (TRGs)
to prepare assigned chapters. Under the broad directive, the way todraft each chapter was largely left to each TRG. Usually a writer was99

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appointed, who might be an official, an academic or a business person.
First drafts were submitted to the MITI secretariat and reviewed bybusinesses and MITI officials. No foreign experts were mobilized at
the IPC or SC level.
The time sequence of drafting was explained in detail. Private sector
involvement was intense through participation in TRGs, firstbrainstorming, etc. The whole process was rather complicated but it
was properly carried out thanks to frequent contacts among concerned
ministries and agencies as well as with the private sector. Anyinter-ministerial conflicts could be resolved during TRG sessions.
IMP3 only sets out broad measures such as tax incentives. Details will
be decided later by MIDA or any other relevant organizations.
Ten TRGs were organized, including macro-framework, external trade,investments, development of SMEs, human resource development, ICT
and enabling technologies, marketing/branding, logistics, sectoraldevelopment, and services. These TRGs correspond to proposed
chapters.
The mission noted that IMP2 was a bold and unique document
strongly guided by academic concepts such as value chain andindustrial clusters. MITI officials thought that IMP2 was implemented
satisfactorily. Investment achieved its objective and exports also
increased.
The Vietnamese side also felt that projecting 15 years would be
difficult in a fast-changing world and for dynamic industries like E&E.
MITI replied that IMPs and other plans were instruments to realize the2020 Vision. They were rolling plans and IMP3 would be reviewed
every five years. Concrete implementation and monitoring mechanisms
for IMP3 are still under consideration. No details will be in IMPs as
actual implementation is at the level of relevant committees, ministries
and agencies.

5. Small and Medium Industries Development
Corporation (SMIDEC)
Venue: SMIDEC, Selangor Darul Ehsan
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Time: 9:30 am, January 12, 2006
SMIDEC participants:
Ms. Norsalehah Nasir, Director, Strategic Planning Division
Ms. Saraya Kulop Abdul Rahman, Senior Manager, Strategic Planning
Division
Two other ladies
Presentation: Presentation on SMIDEC
About SMIDEC:SMIDEC was established in 1996 in recognition of the need for a
specialized agency to promote small and medium enterprises.
SMIDEC's functions are:
·
·
·
·
·

To formulate policy and implement programs for the developmentof SMEs
To provide technical and advisory support services incollaboration with other related agencies for SME development
To forge industrial linkage between SMEs and large companies or
MNCs
To implement, coordinate and monitor financial assistance schemes
for SMEs
To collaborate with other local and international SME-related
agencies

Highlights:
As of 2003, the total number of manufacturing SMEs in Malaysia was
18,271. SMEs play an increasingly important role in job creation andeconomic growth of Malaysia. SMIDEC is a facilitator of SME
development with a budget for grants and soft loans of about RM700
million ($190 million). SMIDEC helps Malaysian companies to be
globally competitive.
To be eligible for SMIDEC's financial assistance, companies must haveat least 60% Malaysian equity in the manufacturing and manufacturing
related services and agro-based industries, with an annual turnover notexceeding RM25 million or fulltime employees not exceeding 150. For
companies in the services and information and communication
technology sectors, qualification requires an annual turnover notexceeding RM5 million or fulltime employees not exceeding 50.
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Grants may be provided to assist SMEs in business planning anddevelopment, product and process improvement, productivity andquality improvement, and certification; market development;
development and promotion of halal products (food prepared according
to the Islamic principle); and enhancing product packaging, design andlabeling capabilities. Soft loans are provided for factory relocation, ICT
adoption, etc. Grant application is processed within 14 working days
and disbursement within 20 working days.
Regarding the Industrial Linkage Program (ILP), SMIDEC maintains a
database of about 18,000 companies and has organized annual
match-making events participated by more than 250 local suppliers and
MNCs. ILP is also enhanced by SMIDEC's existing support programs
such as grants, soft loans and development programs. SMEs that
propose to manufacture promoted products or conduct promoted
activities in ILP are eligible for pioneer status with 100% exemption on
statutory income tax for five years, or 60% investment tax allowanceon qualifying capital expenditure incurred within five years with 100%
exemption on statutory income tax. For MNCs or large companies thatparticipate in ILP, expenditure incurred in the training of employees,
product development, and testing and factory auditing to ensure thequality of vendors' products, can be deducted in computing income tax.
In addition, there is the National SME Development Council chaired by
the Prime Minister and attended by the ministers and heads of 18 keyorganizations involved in SME development. This council coordinates
SME development programs. SMIDEC is an active member and acoordinating agency of this council.
SMIDEC has contributed to IMP3 by drafting the chapter on SME
development. For this purpose, it has organized a series of meetings
with other ministries and organizations to gather inputs to chart future
direction and strategies. The National SME Development Council hired
experts, and selected one of them as the editor for the entire chapter.
SMIDEC staff worked very hard to draft the SME chapter. In theprocess, some difficulties were encountered due to time constraint andthe quality of SME statistics.

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6. Proton
Venue: Proton Holdings Berhad, Selangor Darul Ehsan
Time: 2 pm, January 12, 2006
Proton participant: Mr. Haris Fadzilah Hassan, Head, Corporate
Planning Division
Presentation: Overview on the manufacturing sector, the automobile
industry, and Proton
About Proton:
The national car project, Perusahaan Automobil Nasional (Proton), wasincorporated in 1983 and plant operation started in 1985. Initially, its
shareholders were Khazanah Nasional (38.32%), Employees Provident
Fund (12.04%), Petronas (7.85%), and other local and foreign investors(41.79%). Production began with the Proton Saga model. Propelled by
the idea of creating a Malaysian car by the Former Prime Minister
Dr. Mahathir, this project was conceived to create an automotive
industry in increasingly high levels of technology and internal
intellectual property. It enjoys preferential tax and duty rates, operates
integrated production facilities, promotes industrial linkage, andcarries a national brand.
Highlights:
Mr. Haris presented slides containing the steps in Malaysia's
industrialization, its automobile industry, Proton as a national car
project, and its successes and current situation. The presentation was
clear, concise and up-to-date.
According to Mr. Haris, it may be difficult to objectively evaluate thedegree of success of the Proton National Car Project, but it can surely
be said that Malaysia took a different approach to the automotive
industry from the neighboring countries. Internal development oftechnology and engineering know-how was not high priority in other
ASEAN countries. In contrast, Malaysia's Second Industrial Master
Plan (IMP2), 1996-2005, targeted the automobile industry as a vital
sector. The government wanted it to adopt global orientation, enhance103

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capacity, add value, create brand-name recognition, and improve
human resources and management.
The national car project has boosted the development of part andcomponent production through vendor support programs. Introductionof the modular system encouraged production of sub-components.
Currently, there are 4,865 parts and components produced locally, and286 suppliers in Malaysia producing parts and components for Proton.
Many key engine parts are locally produced in Malaysia while other
ASEAN countries have only focused on basic casting, machining,
stamping, and final assembly. All design and engineering, embodying
core technology, are done outside ASEAN except in Malaysia where
Proton internalizes a full range of R&D capability and facilities.
Malaysia is proud to be one of the eleven countries in the world thatcan design and manufacture a vehicle from ground up. The Proton
Group in cooperation with Lotus, a British car maker, has increased its
engineering capabilities. Jobs directly created by Proton rose from5,400 in 1996 to 10,000 currently, of which 20 % are non-Malaysians.
In addition, Proton has created more than 100,000 jobs through thevalue chain and fostered many entrepreneurs and SMEs in Malaysia.
However, Proton is now facing a big challenge under tradeliberalization and globalization. Proton's disadvantages come partly
from the lack of scale economy and partly from the lack ofinternational brand recognition. Domestic sales in 2004 were about
500,000 units in 2004 and are expected to reach 519,000 units in 2005.
However, rising income and external opening are strengthening thesales of foreign-brand cars, especially those of Japan and Korea.
After more than 20 years of development, the Malaysian national
automobile industry is not yet internationally competitive. Proton isdifficult to survive without building a strategic alliance with a strong
brand-name foreign car maker. Proton now should find such a partnerand re-focus its products on niche markets in ASEAN and otherregional markets.
After the meeting, the mission visited the factory which was adjacentto the office building.

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7. Malaysian Institute of Economic Research (MIER)
Venue: MIER, Kuala Lumpur
Time: 9:30 am, January 13, 2006
MIER participants:
Mr. Kevin Chew, Research Fellow (macro area)
Mr. Shankaran Nambiar, Research Fellow (policy area)
About MIER:
The Malaysian Institute of Economic Research, a thinktank establishedby the government in 1985, is a non-profit organization that works withthe government. It both supports and criticizes the government. Thereare 20 staff, of which 8 are researchers. MIER is organized into fourareas: macro, "special" (trade), industry, and policy. The last covers
various topics related to growth, such as competition, poverty,
agriculture and industries. Annual budget proposals are also drafted by
MIER.
Highlights:
In the process of preparing IMP3, MIER is in charge of the TRG on themacro framework. Some difficulties were encountered in drafting thechapter. The terms of reference for their work were revised after thework was begun. There was also some difficulty in collecting data. The
drafting team considered the "within group" inequality (income gaps
within Bumiputra) to be an important issue, but this could not beanalyzed without relevant data.
Previously, when IMP2 was drafted, MIER prepared background
papers before the government started drafting. But IMP3 is being
prepared differently, with outside groups writing chapters without
much instruction from the center. This may carry the risk of losing
focus and clarity of the message. MITI could have exercised more
control over the scope of issues. In addition, IMP3's longer time
perspective of 15 years may cause difficulties since long-term
projection is generally difficult. To achieve the 2020 goal, Malaysia
needs to sustain 7% growth but this looks infeasible due to China's
emergence, possible regional crises, and natural slowdown due toeconomic maturity.
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While the mid-term reviews of five-year plans are done, there is no
systematic review of IMP2. Its growth target was not met, but this wasclearly due to external causes (Asian crisis). Industrial clusters did notseem to have formed as expected. The concept of industrial clusters
was sound, but policy implementation was weak. IMP2 also targetedindustries in which Malaysia had no comparative advantage such asadvanced materials or automobiles.
The central problem of Malaysia is inability to level up internal value.
Malaysia should open up more decisively, and avoid changing policies
frequently. The procedure for receiving SME credit is still
cumbersome. Malaysia has so far been lucky with ample natural
resources, but the way ahead is not so easy.
The lack of value creation comes from weaknesses in the education
system. Bumiputra orientation has created quantity-orientation, which
lowered quality. Important educational resources are now fleeing toSingapore. Malaysia looks better from outside, but viewed from inside,
inefficiency, corruption, and non-transparency in government
procurement exist. But the scope of official discretion is narrowing
under globalization.

8. KPMG Business Advisory Sdn Bhd
Venue: Wisma KPMG, Kuala Lumpur
Time: 2:30 pm, January 13, 2006
KPMG participants:
Mr. Y. K. Chin, Partner
Mr. Mohd Arif Ibrahim, Director, Advisory, Risk Advisory and Internal
Audit Services
Ms. Nik Fadzrina Nik Hussain, Senior Associate, Advisory
Presentation: Industrial Development in Malaysia (slides)
About KPMG:
KPMG is one of the world's leading providers of audit, tax andadvisory services.

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Highlights:
Mr. Chin is a co-writer of the chapter on marketing and branding in
IMP3. He explained the evolution and achievements of IMP1 to IMP3
as requested in advance by the mission. Slides were very clear andinformative.
The Malaysian manufacturing sector took off in the early 1970s whensemi-conductor giants such as Motorola and National Semiconductor
came to Penang to start labor-intensive component production withcheap labor. The Industrial Coordination Act played an important role
during this period.
Subsequently, IMP1 (1986-95) promoted resource-based industries. Its
main objectives were (i) manufacturing acceleration; (ii) processing ofdomestic natural resources; and (iii) indigenous technology. Its targets
were over-achieved.
IMP2 (1996-2005) highlighted manufacturing plus plus and clusterbased industrial development. However, as FDI inflow surged,
complacency was created and internal capability was not generated.
Meanwhile, Malaysia became the world's largest exporter of air
conditioners, color TVs, and semi-conductors. Growth record underIMP2 was lower than targeted. Mr. Chin thought that IMP2's cluster
strategy attained “very limited success”. He believed that the
shortcomings of IMP2 would be corrected in IMP3.
The drafting mechanism of IMP2 and IMP3 were explained. IMP2 wasnever revised, and while its growth target was reviewed, the situationsof clusters and manufacturing plus plus have not been reviewed.
A business CEO chairs, and MATRADE provides secretariat functions,at the TRG on marketing and branding, in which Mr. Chin participates
as a joint writer. TRG meetings were held every 2-3 weeks. There wereabout 20 members but not all of them always attended. Main problems
in drafting were analytical, and involved (i) understanding of thecomparative advantages of neighboring countries; and (ii)measurement of brand values. For the first, TRG requested MATRADE
to provide funds for a study, which was granted. For the second, thereis data by Interbrand, a private company, but its measurement is
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excessively US-focused. His chapter will not include any numericaltargets. So far, he has not received any financial compensation for histask, but the government says he will.
According to Mr. Chin, Malaysia should find its unique comparativeadvantage rather than compete directly with the two giants, namely
China and India. Malaysia must be complementary to them.
Furthermore, Malaysia should become a hub among China, India andIndonesia, since it incorporates their ethnicities in one and practices
mild Islam.

9. Penang Skills Development Centre (PSDC)
Venue: PSDC Penang
Time: 9:30 am, January 13, 2006
PSDC participant:
Dr. Ng Chern Hsoon, General Manager, Education and SME
Development
Received: PSDC brochure
About PSDC:The Penang Skills Development Centre is a unique joint effort ofgovernment, academia and industry. Although it was established by thestate (local) government through the Penang Development Corporation
and aided by academia, management and administration are left to theindustry's discretion. PSDC accepts members from the manufacturingindustry. Its tremendous success since 1989 has largely been due to thevitality of its corporate members who rank among the world's mostadmired corporations. PSDC operates as a non-profit society and has acurrent membership of 113 companies employing more than 100,000
workers. The functions of PSDC are:
· To provide cost effective training and educational programs for current
and future workorce.
· To forge strategic partnership with local and foreign universities,
training institutions and organizations to provide relevant
programs and training interventions to enhance workforce
competitiveness.
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(2) Malaysia· To support the Human Resource Development (HRD) initiatives ofboth the federal and state government.
· To promote the development of local SMEs to be global suppliers andservice providers.
· To share PSDC's intellectual property, competencies and expertisebeyond Penang and Malaysia.
· To develop PSDC's own training programs and courses.
· To generate sufficient income to sustain PSDC operation andsupport Malaysia's human capacity building process.
Highlights:
According to Dr. Ng Chern Hsoon, the main success factors of PSDC
were three.
First, a pro-business government with strong initiative to work with theindustry in human resource development. The Malaysian government
set up the HRD Fund, which collects mandatory contribution of 1% of
the payroll from manufacturing enterprises employing 50 or more
employees. The contributing company can reclaim up to a certain
percentage of their contribution for training purposes. Since 1989, theindustry's support in providing courses, equipment, and cash grants has
totaled more than RM7 million. The federal government has invested
more than RM17 million while the Penang state government hascontributed RM5.8 million.
Since PSDC's inception, close cooperation between the state andfederal government, industry, and academia has enabled PSDC toachieve the following milestones:····

Support from the industry in providing inputs on training,
together with commitments by the state and federal government
and academia.
Recognition by the state government as the vehicle to realize
human resource development for the industry.
Acknowledgment by the federal government, notably the Former
Prime Minister Dr. Mahathir, that PSDC is a good example of
Malaysia Incorporated at work.
Donations of equipment, training programs and funds byequipment suppliers, private training institutions and MNCs.
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·“Anugerah Menteri Sumber Manusia 2000: Training Provide
Category”, an award accorded by the Ministry of Human
Resource in acknowledgement of PSDC's contribution to thedevelopment of workforce.
Second, a culture of cooperation among its industry members. PSDC ismanaged by the Management Council comprising of 11 elected and 4
appointed office bearers and 7 ex-officio members. The office bearers
are usually CEOs or very senior persons of founding or full-member
companies. There is also a representative each from Penang state
government, Penang Development Corporation (PDC), Universiti Sains
Malaysia (USM), Sirim Berhad (formerly known as the Standards andIndustrial Research Institute of Malaysia), Penang Regional
Development Authority (PERDA), Ministry of Entrepreneur
Development (KPU), and Small and Medium Industries Development
Corporation (SMIDEC). These representatives are permanent membersof the Management Council, acting in an advisory capacity to theManagement Council in all matters related to government policies.
To link local companies with MNCs, PSDC often organizes tea-talks tobring the CEOs of MNCs and local suppliers to share ideas andexchange views. This helps local companies to join the supplier
networks of MNCs. PSDC also maintains a database of skilled workers
trained at PSDC. Job fairs are held annually to help students find jobs.
Third, a core of highly competent executives willing to contribute theirtime and knowledge selflessly to HRD. Initially, PSDC was establishedwhen the CEOs of Motorola, Intel and Hewlett-Packard formed a
Steering Committee to set up a skills center. Manufacturing fraternity in
Penang really cares about PSDC as its baby and nurtures it with further
contributions in facilities, equipment, software and teach-ware. Penang
Development Corporation (PDC), as a big brother to the industries, also
plays its part to the extent of loaning its staff to PSDC. Investors and
MNCs strongly believe in the consistency of Malaysian policies with thehistory of stability over the three decades. That is why they have been
willing to invest in the technical training of their labor forces.
Regarding future development, PSDC is looking for a strategic
partnership with technical colleges in advanced countries. This would

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enable PSDC to offer higher degrees and diplomas and furher boost its
position among other emerging training centers in Malaysia andneighbor countries.

10. Malaysia Industrial Development Authority(MIDA) in Penang
Venue: MIDA Penang
Time: 3 pm, January 13, 2006
MIDA Penang Participant:
Mr. Mohd Zukepli Bin Hj.Embong, Director, MIDA Penang
Highlights:
The Director explained the role of MIDA Penang. It is a regional officein charge of the promotion and coordination of industrial development
in Penang. The office has four staff including one director, one
secretary and two officers. It keeps the local government updated on
the policies and incentives of MIDA, and helps the local government tofollow up on the implementation of approved projects. It is the firstcontact point for investors who intend to set up projects in
manufacturing and related services in Penang. It also provides
consultation services to potential investors interested in Penang.
Regarding the advantages of Penang for FDI investment in comparison
with other locations in Malaysia, the Director said that Penang was avery good location for investors since it boasted good infrastructuresuch as large ports, airport and highways. In addition, Penang was thestate where the first economic zone in Malaysia was set up in 1971 to
attract FDI. The former chief governor traveled to the US and Europe
to invite big MNCs to Penang. While each state government has its
own investment promotion program, there is no conflict among them incompeting for FDI.
As for the past record and future prospects of Malaysia's economic
competitiveness, the Director commented that Malaysia was not successful
in creating large companies with globally-marketed high-quality products
like South Korea. Malaysia is still behind other countries in terms ofcapability building, especially in high-tech industries.
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(3) Japan
1. VDF Tokyo special workshop
Location: GRIPS, Tokyo
Time: 9:30-11:30am, May 30, 2005
Presenters:
Mr. Le Van Duoc (Director, Department of Planning, MOI)
Dr. Cao Xuan Thanh (Deputy Director, Department of Planning,
MOI)
Participants:
Kenichi Ohno (GRIPS/VDF), Yoshiaki Ueda (Univ. of Marketing &Distribution Sciences), Nozomu Kawabata (Tohoku Univ.), Tadashi
Kikuchi (Keio Univ.), Yuji Sasaoka (GRIPS), Shuji Isone (Japan
Carbon Finance), Fan Xiaoju (Waseda Univ.) Nguyen Thi Xuan Thuy
(GRIPS/MOI), Azko Hayashida (GRIPS)
Distributed:· “Workshop on Vietnam's Industrial Strategy, Planning and Policy
Formulation by MOI Officials at GRIPS” (handout)· MOI of Vietnam, “Vietnam Industry towards the year 2020”(powerpoint)
Highlights:
Mr. Duoc explained the general purpose of this mission and what hewanted to learn from Japan. Using slides, Dr. Thanh presented theachievements and structural transformation of Vietnam's industrial
sector. The strategic vision, goal and implementation direction toward2020 were also explained. Free discussion followed.
One participant asked about specific leading industries of Vietnam.
MOI explained that there were three groups of industries: (i) industries
that are already competitive and can lead the economy in the next five
years or so (garment, footwear, food processing, etc); (ii) basic

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industries (power, oil, industrial materials, etc); and (iii) leadingindustries (electronics, electrical, etc).
Another participant raised the issue of the recent power shortages inNorthern Vietnam. If this situation continued, it would send a very
negative signal to potential investors. MOI explained that power
generation required huge investment and the government was trying todiversify financial sources for its development. According to the power
sector roadmap, the public sector would be responsible fortransmission only and other functions would be privatized in the future.
Ohno raised four issues on numerical targeting. First, what should be
the scope of numerical targets (detailed targets for each sector andproduct, or only overall growth and exports)? Second, what should bedone when targets were missed? According to Ohno, missed targets
should be studied for future policy improvements rather than be met byany means. There should also be a layered structure of targets from a
few key macro targets to industry-specific indicators and productspecific forecasts, each of which should be treated differently. Third,
there seemed to be some classification problems (for example, crude
oil or mining should not be included in the “industrial sector”). Fourth,would Vietnam really need the five-year plan after 2010?
The MOI side asked whether the number of numerical targets should
depend on the stage of development. MOI also noted that, in the past,targets were treated as legal orders to SOEs but Vietnam was now
moving towards softer recommendation. The five-year plan was also
shifting towards orientation rather than strict targets. It was also argued
that, for some material industries like steel and power, numericaldemand forecasts and supply targets were still useful. One participant
noted that capitalist states used only macroeconomic (fiscal andmonetary) policies to influence industries indirectly. Others
emphasized the difference between top-down targets and bottom-up
targets, and the possibility of other targets like productivity.
The progress of SOE reform was also discussed. Vietnam wascurrently testing to convert some “decree 90” corporations into joint
stock companies. If this proved successful, more “decree 90”
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(3) Japanthe future. MOI was also trying to transform EVN, PetroVN and
Vinatex into “groups” (tap doan) of companies.
Other issues included (i) how much environmental concern wasincorporated in industrial strategy; (ii) how to cope with international
price fluctuation; and (iii) comparison with Chinese SOE reform.
After the workshop, the MOI delegation met GRIPS President Toru
Yoshimura.

2. Technical Cooperation Bureau of METI
Location: Ministry of Economy, Trade and Industry, Tokyo
Time: 16:30-18:00, May 30, 2005
METI participants:
Mr. Hisanori Nei (Director, Technical Cooperation Division)
Mr. Tetsuo Ito (Assistant Director, TCD)
Mr. Toshihiro Kodama (RIETI Senior Fellow)
Mr. Mitsuhiro Yokota (Director for ASEAN Affairs)
Mission members: Duoc, Thanh, Ohno, Thuy
Received:· TCD/METI, “Japan's Technical Cooperation Towards ASEAN, May
2005” (slide printout).
· Toshihiro Kodama, “Role of Government (Industrial Policy)” ,excerpts from JCIP, Made in Japan, MIT Press, 1997.
· “Recent Developments under AMEICC”, handout, March 2005.
Highlights:
Mr. Nei first explained about trade and FDI linkage within East Asia
and METI's economic cooperation in the region. Mr. Yokota briefly
explained about the AEM-METI Economic and Industrial Cooperation
Committee (AMEICC).
According to Mr. Nei, after the negative impact of the Asian crisis was
overcome, economic ties between Japan and East Asian developing
countries strengthened. Japanese firms were again shifting production
bases to East Asia, including some high-tech processes. Remaining
concerns included legal frameworks, protection of intellectual
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properties, customs procedure, FDI policy, human resource
development, environment, waste management, and so on.
Liberalization, facilitation and the sustainability of economic growth
were three main concerns. METI's current policy orientation consistedof economic partnership agreements (EPAs, more commonly known asFTAs) and institutional improvements. The Japan-Vietnam Joint
Initiative was one of such efforts.
The MOI team wished to see the 1998 trade flow data in the handout
updated to a more recent year. It also wanted to know which products
would be featured in the (current) second FDI wave from Japan toVietnam.
Mr. Kodama discussed Japan's high growth era based on his paper.
During the postwar period, Japan's main focus shifted as follows: (i)reconstruction (1945-52); (ii) regaining balance-of-payments
autonomy (1952-60); (iii) shifting to an open system (1960-70); (iv)
adjustment to the oil crises (1970s-early 80s); (v) international
cooperation (late 1980s-); and (vi) revitalizing the Japanese economy(1990s-). He emphasized that, during the high growth era, thegovernment used policy loans and tax measures to build infrastructure
and assist the downsizing of declining industries. According to him, theview that Japan targeted specific industries was wrong. Policies such as
tax incentives for R&D and machinery investment were general andavailable to all industries. Although selective interventions wereattempted around 1960, they were rejected by the parliament or thebusiness community. The visions presented by the government were
not mandatory but only indicative. They helped to share future visions
between the government and businesses.
The MOI mission remarked that building the government-business
relationship was important, but reality was that all industries lobbied
for government funds or tax cuts, which posed a headache for policy
makers. Mr. Kodama noted that Japan did not offer favorable treatment
to specific industries; any enterprise which satisfied certain criteria, in
any industry, could receive support. More discussion on sectorspecificity of industrial support ensued.

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3. Waseda University (Prof. Tran Van Tho)
Location: Prof. Tho's office, Waseda University, Tokyo
Time: 10:30-12:00, May 31, 2005
Waseda participant: Prof. Tran Van Tho (School of Social Sciences)
Mission members: Duoc, Thanh, Thuy.
Received:· “Phuong huong chien luoc cua Cong nghiep Viet Nam”(“strategical direction for Vietnam's industry”, Prof. Tho's article
released in The Saigon Times magazine on April 28, 2005, in
Vietnamese).
· “Kien nghi khan cap voi CP ve: chien luoc, chinh sach can thietde phat trien nganh dien, dien tu gia dung truoc thach thuc
AFTA" (Urgent proposal to the Vietnamese Government on thestrategy and policy to develop consumer electric and electronics
industry under the challenges from AFTA), Prof. Tho's Letter to
Mr. Tran Xuan Gia, Chairman of PM Board of Researchers, andMr Hoang Trung Hai, MOI Minister, on May 25, 2005, in
Vietnamese).
Highlights:
Prof. Tho discussed his activities as a member of the Prime Minister's
Research Board in Vietnam since 1993. He stressed on thedevelopment of supporting industries as a potential break-throughindustry for Vietnam in the context of globalization.
Prof. Tho explained his two recent papers listed above and a plan to
publish a book on Vietnam's economic and industrial development. He
expressed concern over import tariff policy on the parts and finishedproducts of consumer electronics.
MOI officials appreciated Prof. Tho's academic achievement andstressed that such studies were very useful for formulating strategies,
master plans and other policy documents for the sake of Vietnam's
industrial development up to the year 2020. More studies wereencouraged and closer cooperation with MOI was recommended. It

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was agreed that Prof. Tho should make a presentation on Vietnam's
industrial development strategy at MOI some time this summer.

4. Japan Bank for International Cooperation (JBIC)
Location: JBIC Head Office, Tokyo
Time: 14:30-16:30, May 31, 2005
JBIC participants:
Mr.Yasunori Onishi (Dep. Director General, Develop. Assist.
Dept. 2)
Mr. Takanori Satake (Senior Economist, JBIC Institute)
Mr. Shinji Kaburagi (Advisor, Corporate Finance Dept.)
Mr. Yoshifumi Omura (Dep. Director, Div.2, Develop. Assist.
Dept. 2)
Mission members: Duoc, Thanh, Ohno, Thuy
Received:· Takanori Satake, “Results of Survey of Overseas Business
Operations by Japanese Manufacturing Companies: Vietnam andother Asian countries” (handout prepared for this mission).
· JBIC Institute, “Survey Report on Overseas Business Operations
by Japanese Manufacturing Companies”, Summary, Nov. 2004.
· JBIC, “Development of Vietnam Industry Sector” (handout
prepared for this mission).
·
Shinji Kaburagi, “Essence to make the best of the comparable
competitiveness of the Vietnamese industry” (handout).
Highlights:
The JBIC side made three presentations on (i) the JBIC survey on
Japanese manufacturers with particular attention to Vietnam (datareceived-see above); (ii) JBIC's approach to assisting Vietnam's
industrial sector; and (iii) possibility of the ceramics industry.
Dr. Thanh asked if JBIC's manufacturers' survey differentiated northand south Vietnam since this distinction would be useful for policy
makers. He also wanted to know if more investors were willing to cometo Vietnam after mentioned weaknesses were corrected. JBIC
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(3) Japancountry since the questionnaire contained many questions andcountries, and respondents were in company headquarters. Dr. Thanhalso questioned why China, India and Vietnam were grouped
together, and the answer was that these were countries that Japanesebusinesses were particularly interested as new FDI destinations.
JBIC noted that, unlike China and Thailand, Vietnam and India
attracted much attention but reported few concrete investment plans.
This was probably due to a time element, since it would take some time
for investors to gather information and make plans for new hostcountries.
JBIC's assistance strategy for Vietnam was also discussed. Since SOEs
were inefficient and the private sector was still small, it was consideredessential that Vietnam absorb a large amount of FDI for
industrialization. But not many investors come to Vietnam due to thelack of supporting industries and intellectual property right protection.
Local firms should participate in the production network of FDI firms
for achieving efficiency and competitiveness. Master plans for key
industries, the Japan-Vietnam Joint Initiative, and JBIC's aid portfolio
were also discussed.
Mr. Kaburagi emphasized the importance of understanding the taste offoreign customers and marketing to foreign customers' needs. Using
the actual samples of ceramic bowls from Danang, he demonstrated
that Vietnam had high potential in this industry if proper businessorientation was in place.
Ohno noted that the proper use of numerical targets and the choice ofleading industries were key issues in Vietnam. While numerical targets
might not be suitable for highly developed economies, a country intransition might find them useful, if proper care was exercised. The
scope and role of such targets and how to choose leading industries
were the crucial question.

5. Honda Motor Co., Ltd.
Location: Honda Headquarters in Aoyama, Tokyo
Time: 10:00-12:00, June 1, 2005
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Honda participants:
Mr.Koji Nakazono (General Manager, Overseas Operation Officeno.2 - Asia & Oceania)
Mr. Hiroshi Nakagawa (Dep. Gen. Manager, Gov't & Industrial
Affairs Office)Mr. Shigeki Hayashi (Assistant Manager, Asean Motorcycle Dept,OOO no.2)
Mr. Cyril Aguadera (Coordinator, Asean Motorcycle Dept,OOO no.2), from Philippines
Mr. Issarapap Uchotananan (Coordinator, Asean Automobile Dept,OOO no.2), from Thailand
Mr. Junji Hida (Assistant Manager, Asean Motorcycle Dept.,
OOO no.2)
Asimo (Honda robot)
Mission members: Duoc, Thanh, Ohno, Hoang, Thuy
Received:· Presentation hardcopy (no title) by Asean Motorcycle Division,
Honda.
· Honda Corporate Profile.
· Honda Annual Report 2004.
Highlights:
The mission was greeted by large Japanese and Vietnamese flags andAsimo, Honda's human-type robot. A corporate video was shown, and
Mr. Aquadera presented Honda's automobile and motorbike strategies
using slides.
Mr. Nakazono welcomed the mission and thanked Vietnam for
granting Honda a license to start automobile production (dated March
2005). Mr. Nakazono said that Honda very much hoped to contribute toVietnam's industrialization and asked for further assistance of theVietnamese government. He hoped to exchange information andcontinue talks with the government. He also noted that Honda was the
only company that sponsored a large-scale TV campaign for traffic
safety in Vietnam.
As to the motorbike, Honda noted that the recent removal of quota
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(3) Japanlargest obstacle for expanding production. With rising output, Honda's
localization has already reached over 80%, and exports to thePhilippines and Laos began.
Other topics such as Honda's future business plans in Vietnam andother countries, as well as remaining issues, were extensively andconcretely discussed (not recorded here).

6. Japan External Trade Organization (JETRO)
Location: JETRO Headquarters, Tokyo
Time: 10:00-12:00, June 1, 2005
JETRO participants:
Mr.Ryo Ikebe (Chief Dep. Director, Trade and Economic
Cooperation Div.)
Mr. Koji Ida (Assistant Director, Asia & Oceania, Overseas
Research Dept.)
Mr. Satoshi Kitashima (Asian Cooperation Div., TECD)
Ms. Dao Uyen Phuong (Asian Cooperation Div., TECD)
Mission members: Duoc, Thanh, Ohno, Hoang, Thuy, Mori
· Koji Ida, “Vietnam's Investment-Related Environment forJapanese Companies”.
· Overseas Research Department, JETRO, “Japanese-Affiliated
Manufacturers in Asia: ASEAN and India (Survey 2004)”, March
2005.
Highlights:
Mr. Ida first presented the evaluation of FDI destinations (including
Vietnam) based on the JBIC survey (see the meeting record with JBIC
above). Discussion followed.
MOI wondered why the average size of FDI coming to Vietnam was
becoming smaller. As to the changeable policy environment, MOI said
that the government did not wish to change policies frequently but thiswas inevitable when external environment changed. MOI was
searching for appropriate industries to support (footwear, garment,
electronics, food processing, etc), and they hoped to receive global
market forecasts for key industries. However, JETRO did not have such
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forecasts. Ohno noted that evaluating the potentiality of industries
from global forecasts was difficult since Vietnam's performance would
not be in parallel with global market expansion.
Mr. Ikebe felt that by now Vietnam already had a fairly good FDI
environment. He thought that Vietnam's growth in the last ten years
was very impressive and its economy was full of dynamism. He wascertain that export processing would expand in the future. Mr. Ikebe
also said that enterprises in Vietnam should procure parts not only
domestically but also from China and ASEAN for building regional
business networks.
Mr. Kitashima remarked that Vietnam's supporting industries remained
very weak and could not compete globally unless they improved
technology and quality control. Measures to improve supporting
industries were discussed, including the vendor company database andreverse trade fairs by JETRO. Ms. Phuong is in charge of such fairs andanother fair will be held in Hanoi later this year.

7. Research Institute of Economy, Trade and Industry(RIETI)
Location: METI Annex, Tokyo
Time: 9:30-11:00, June 2, 2005
RIETI participant: Mr.Susumu Sanbonmatsu (senior researcher)
Mission members: Duoc, Thanh, Ohno, Hoang, Mori
Received:· A memo on the “Study plan on the global management andinnovation of Japanese enterprises” (Japanese).
· Susumu Sanbonmatsu, “Innovation and organizational andmanagement reform: the case of the electrical industries”, RIETI
Discussion Paper Series 05-J-003 (March 2005, Japanese).
Highlights:
Mr. Sanbonmatsu presented the general framework of his research.
Each MNC follows its own strategy while responding to changes inbusiness environment. Business style is defined by markets, productline, and value chain positioning. To realize the chosen business style,122

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(3) Japaneach MNC determines management style, design organization andoperational processes, and exercise organizational capabilities.
For dynamic competitiveness, two global chains-global innovation
chain and global supply chain-are particularly important. To introduce
new products continuously, MNCs must always plan and invest ahead
for each market. With Japanese MNCs, business architecture for initial
product development is often integral but later expansion is based on
modularization. Basic platforms may remain the same but additions are
made to serve markets in different countries. For efficient production,
MNCs must allocate different productive functions to various countries
properly for inventory reduction, labor cost reduction, quality, andspeed. Leadership and corporate culture (internal common value) areparticularly important. If an MNC has strong lead rship and corporate
culture for progressive innovation, it can rearrange management
resources, redesign organizational structure and power, and alter the
resource allocation principle.
MOI wanted to know what Vietnamese firms should do to participate
in these chains. Mr. Sanbonmatsu replied that strategies depended onwhether products were for export or domestic supply. Clustering isparticularly important, and policies for supporting industries and HRD
can promote its formation. When and how Vietnamese firms can enter
the global value chain depends on each sector. For automobiles, there
is already an extensive global production network spanned by MNCs
and the question is how to participate in it. For electronics, acquiringproper skills and technology is key. For software, human resources are
crucial. In all cases, an efficient electronic communication network
was necessary to join the global chain.

8. Automobile Division of METI
Location: METI, Tokyo
Time: 14:00-15:30, June 2, 2005
METI participants:
Mr. Makoto Watanabe (Director for Automobile Policy Planning)
Mr. Junichi Iwasaki (Assistant Director, Automobile Division)
Ms. Atsuko Yoshida (Technical Cooperation Division)
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Mr. Tetsuo Ito (Assistant Director, Technical Cooperation Division)
Mission members: Duoc, Thanh, Ohno, Hoang, Mori
Received:· METI profile brochure, 2004.
· Makoto Watanabe, “Current Status and Challenges of theJapanese Automobile Industry Policy”, prepared for this mission.
· JAMA, The Motor Industry of Japan 2005 (bilingual J & E).
· METI, Guide to the Research and Statistics Department, 2004.
Highlights:
Japan's automobile policy in the past and at present was explained. For
METI, “surrounding policies” on air pollution, fuel efficiency andtraffic safety were historically very important. For these, METI set
standards under close consultation with producers. The deliberation
council played a crucial role in private-public cooperation in the 1960s.
For air pollution, the emission control law was enacted in 1973 which
was tightened subsequently. Fuel efficiency was achieved bybenchmarking the most efficient producer (top-runner system). Diesel
regulation and clean fuel requirements were promoted with tax
benefits. More recently, the intelligent transport system and theelectronic toll collection (ETC) system have been promoted. Generally,
under increasing globalization, the role of METI has included (i) tradenegotiations and indicating clear trade liberalization schedules; (ii)coping with energy and environmental issues; and (iii) improving
business environment in the Asian region. The government has had no
major role in business strategy or promotion of the car industry sinceprivate enterprises decide them.
The mission asked whether policies were made by METI or otherministries. METI responded that it all depended on the issue. METI
was responsible for technology, safety standards and tradenegotiations. Traffic, environment and other issues were handled byother ministries. Inter-ministerial cooperation has been good. Draftedlaws were sent to the Cabinet and then to the Parliament for approvaland implementation.
Japan has had a long history of promoting supporting industries. The
law for rationalizing parts industry and the SME Agency provided
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many supporting measures. METI advised that upgrading skills ofworkers and enterprises was crucial for Vietnam.
The mission asked about controlling traffic congestion. METI repliedthat the number of cars was only a minor issue. For proper traffic
policy, the development strategy for roads and railways is crucial.
Infrastructure, traffic control system, urban planning and education are
all needed. Japan never restricted the registration of motor vehicles
since the freedom of business enterprise was so basic to Japanesepolicy making. Jakarta, Bangkok and Singapore restrict traffic enteringurban centers, but not the total number of cars. According to METI,
congestion is a traffic control problem, not a problem of the car
industry.
The mission also inquired about channels with the private sector.
Drafted laws are always discussed at an official open committee andalso receive public opinion for at least one month. For FTA
negotiations, METI communicates with the industry via telephone,email and informal meetings to summarize Japan's position before
going to the negotiation table. For data collection, there is a law that
requires monthly submission of basic data by enterprises. Such data
come automatically but with delay. The Japan Automobile
Manufacturers Association (JAMA) reports basic data much faster.
JAMA also plays a key role in linking government and businesses. If
METI needs specific or sensitive data, the reason must be explained. If
there is a good reason, businesses will cooperate. Otherwise, they
don't. METI usually works with JAMA but sometimes approaches
individual companies directly. The mission noted that, in Vietnam,
MOI did not contact individual enterprises for policy purposes.

9. Information & Communications Electronics
Division of METI
Location: METI, Tokyo
Time: 15:30-17:00, June 2, 2005
METI participants:
Mr. Kazuo Yokota (Deputy Director for International
Cooperaton, Information Policy Division)
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Mr. Toshihiko Tamura (Deputy Director, Information &Communications Electronics Division)
Ms. Atsuko Yoshida (Technical Cooperation Division)
Mr. Tetsuo Ito (Assistant Director, Technical Cooperation
Division)
Mission members: Duoc, Thanh, Ohno, Hoang, Mori
Received:· METI memo, “On information policy: past policy trends andfuture direction”, Nov. 2004 (Japanese).
· T. Kodama, H. Ueda, and T. Sunada, “Agenda for Industrial
Policy in East Asian Countries”, RIETI studies in international
trade and industry no.16, 1994.
Highlights:
The history of Japan's electronics industry promotion was explained. A
shift from heavy industry to the electronics industry was promoted, andlocally produced computers were encouraged in the 1960s-80s. Copingwith IT innovation, and trade talks on intellectual property rights andsemi-conductors were main issues in the late 80s to early 90s. From thelate 90s to 2000, e-business was promoted as internet became popular.
At present, the e-Japan strategy is METI's main concern. This strategy
was explained in detail.
The e-Japan strategy, formulated in 2001, aimed to make Japan afrontline IT nation by 2005. The government created the IT Strategy
Headquarters, IT Basic Law, and IT Strategy. It also supported thebuilding of IT infrastructure. One of the targets, creating fast internet(broadband) environment, was already achieved by 2003 in terms ofspeed and price. For this reason, the policy focus has shifted to theuser-side issues including provision of contents, platform, andinformation services.
METI's policy is conducted in continuous circles: the process ofevaluation, goal-setting and implementation is repeated to revise thestrategy. The typical policy cycle for electronics lasts 1 to 3 years
depending on the targeted product or service. Immediate targets andlonger-term goals are distinguished, but the important thing is thatpolicy cycles ensure quick and flexible response to changing situations
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(3) Japanand achievements. Goals, periods and criteria are constantly revised.
Numerical targets are sometimes used (for health services, forexample) but not very often.
The deliberation council on industrial structure concluded in its reportin April 2005 that Japan was strong in hardware but weak in IT
services. Moreover, it was pointed out that all Japanese manufacturers
produced similar IT products leading to excess competition andreduced prices and profits. By contrast, foreign companies such as
IBM, Intel and Samsung concentrate on core businesses and generatelarge profits. For METI, it is difficult to tell Japanese companies to
produce what and what not. But if private companies collectively
express desire to avoid overlapping in product lines, the government
can support their effort. This can be done through publishing official
reports, monitoring R&D, and deregulating the industry uponbusinesses' equest.
Japan's promotion measures are basically the same as in othercountries. METI uses tax reduction for introducing IT systems, tax
incentive for IT investment, subsidies for developing LSI circuits, andsubsidies for IT training of SMEs. Some of the IT training programs are
subsidized by prefectures (local governments). METI also supports
individuals who get IT licenses and qualifications.

10. Manufacturing Management Research Center(MMRC)
Location: MMRC Project Office, Tokyo
Time: 10:30-12:15, June 3, 2005
MMRC participants:
Prof. Takahiro Fujimoto (executive director)
Mr. Ge Dongsheng (researcher)
Mr. Hai (Tokyo University)
Mission members: Duoc, Thanh, Ohno, Hoang, Mori
Received:· MMRC profile (English and Japanese)· Takahiro Fujimoto, “A Twenty-first-Century Strategy for127

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··Japanese Manufacturing”, Japan Echo, Feb. 2004 (English).
Takahiro Fujimoto, The Monozukuri (manufacturing) Philosophyof Japan, Nihon Keizai Shimbunsha, 2004 (Japanese).
Takahiro Fujimoto, Architecture-based Analysis of Chinese
Manufacturing Industries, RIETI/Toyo Keizai Shimposha, 2005
(Japanese).

Highlights:
MMRC is the office of the 21st Century Center of Excellence (COE)
Project managed by the University of Tokyo and headed by Prof.
Takahiro Fujimoto, the leading authority on business architecture
theory34.
The purpose of this project is to document the integration-based
Japanese manufacturing system in detail. Integral business architectureis the source of strength of Japanese MNCs. Prof. Fujimoto's
hypothesis is that proper matching of product type and firms'
organizational capability generates competitiveness. Organizational
capability is country-specific. Japanese and Chinese business styles aredifferent, and trade between the two countries is therefore basicallycomplementary. This can be regarded as a new theory of comparativeadvantage based on business architecture.
The actual operation of integration-based manufacturing is often
unrecorded. This COE project attempts to put it into words. For thispurpose, sixteen Japanese MNCs including Toyota, Canon, Honda,
Matsushita, Sony, etc. form a consortium and monthly meet at thisoffice. Prof. Fujimoto gave some examples of architecture-based
analyses including (i) criticism of full-set mentality; (ii) Toyota
teaching a good company to become even better; (iii) Toyota-Dellcomparison; and (iv) invalidity of current industrial classification.

34

VDF is part of another 21st Century COE Project managed by GRIPS and headed by Prof.
Kenichi Ohno. This meeting exchanged information and views of two COE projects.

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(3) Japan

Ohno raised four issues related to business architecture dynamics indeveloping countries. First, whether modularity-based local firms cansurvive WTO and FTAs or they will be eliminated (example: Vietnam's
motorbike industry)? Second, Prof. Otsuka and Prof. Sonobe of GRIPS
identified a common 3-stage pattern of industrialization in developing
countries: (i) rise of an initiator; (ii) expansion of copy production withlow quality and low price; and (iii) emergence of an innovator to raise
quality and competitiveness. The key question is whether transition
from (ii) to (iii) requires FDI or it can be done locally. Third,
architectural evolution is private sector-driven in Japan, but it may
require policy intervention in developing countries. Fourth, can Japan's
integral businesses be combined effectively with production in ASEAN(including Vietnam)?
Prof. Fujimoto (as well as Profs. Otsuka and Sonobe) argued that ODA
should be used to help developing countries climb the three stages
noted above. However, Ohno cautioned that it was very difficult todistinguish unproductive copycats from innovative imitators. If ODA is
used to help unproductive copycats, it will fail. Prof. Fujimoto agreed
that this distinction was important. He added that the quality of
initiators and innovators was also critical. He thought that US-China(modular) and Japan-ASEAN (integral) were potentially suitableproduction partners. If Thailand and Vietnam acquire additional
capability required for integration-based manufacturing, they will
become Japan's good manufacturing partners. For this, key elements
are transfer of design and engineering capability from Japan to
ASEAN, promoting manufacturing-related HRD with ODA, andaccumulation of firm-specific knowledge by reducing job hopping.
Prof. Fujimoto is particularly interested in the motorbike industry andvisits China and India often. He also came to Vietnam and visitedThang Long Industrial Park. Toyota is inviting Prof. Fujimoto to lecture
in Vietnam (end 2005?). Ohno asked him to contact VDF before
coming to Vietnam to arrange additional activities. Prof. Fujimoto's
COE project will continue until 2007. He hopes to find anotherfunding after that.

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Industrial Policy Formulation ...

11. Development Bank of Japan (DBJ)
Location: DBJ, Tokyo
Time: 14:00-16:00, June 3, 2005
DBJ participants:
Mr. Masahisa Koyama (Director Gen., International &Cooperation Dept, DBJ)
Mr. Hirohiko Sekiya (Senior Executive, Japan Economic ResearchInstitute)
Mr. Kojiro Sakurai (Senior Economist, RICF, DBJ)
Mr. Takashi Sasano (Senior Economist, RICF, DBJ)
Mission members: Duoc, Thanh, Hoang, Mori
Received:· M. Koyama, “Japanese industrial policy and DBJ loans in the
postwar period”.
· H. Sekiya, “Industrial policy and policy-based finance in Japan”.
· K. Sakurai, “Theoretical explanation of industrial policies inpostwar Japan”.
· T. Sasano, “Industrial cluster policy”.
Highlights:
DBJ participants delivered their presentations in the order of received
materials above. Most of the information was on the past experiencesof Japan but some materials were about more recent periods.
Mr. Koyama's presentation made clear that Japan did have someperiod (1958-1962) of numerical targeting for development. Morespecifically, annual targets included: (i) export growth of 10.5%; (ii)growth in gross capital formation of 4%; (iii) growth in value-added of
10.5% for heavy and chemical industry and 5.3% for light industry;and (iv) growth in private consumption of 5.5%.
Mr. Sekiya discussed IT promotion loans as an example of a
successfully implemented industrial policy. In addition, two interesting
issues were raised: the practical processes of industrial policy in its
formulation and implementation, and key factors for successful
implementation of industrial policy under financial and SOE reforms.

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(3) JapanMr. Sakurai explained that the method of income elasticity of demand
was used to identify infant industries that should be supported by theJapanese government in the postwar period. It was interesting to knowthat the government did come up with a reason (though not accepted byall) to support some industries but not others in certain periods. In
addition, shingikai (deliberation council), a committee set up by arelevant ministry, provided a means to exchange information between
government and the private sector.
Mr. Sasano's presentation showed that Japan was now actively
incorporating the industrial cluster approach into its industrial policy.
Two recent industrial cluster policies in Japan, in 2001 and 2002, were
presented. The mission noted that the idea of industrial clusters was
also extensively used in the Malaysian Industrial Master Plan 2(1986-2005) drafted more than ten years ago.
Due to a time constraint, the DBJ participants and the mission did nothave enough time for discussion. Both sides agreed to keep contact via
email and other means.

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