Enhancing Enterprise Competitiveness and SME Linkages in Vietnam AmCham Supplier Day 2018 Brian Mtonya Thursday, October 4 th , , 2018 Senior Economist White Palace, 194 Hoang Van Thu, Phu Nhuan District, HCMC 1
Outline of Presentation • Context – Opportunities & Challenges • Scope and Framework of the SME Linkages Report • Focus of Analysis • Key Findings • Firm-Level Analysis What does the data say? • Key Market Failures in Linkages Programs • Examples of success with linkages in Vietnam • International experience on what works and what does not • What is WBG Doing on Enhancing Enterprise Competitiveness and SME Linkages 2
FRAGMENTATION OF PRODUCTION INTO GLOBAL VALUE CHAINS HAS CREATED OPPORTUNITIES AND CHALLENGES FOR VIETNAM Opportunities Risk of low value • Large scale foreign investment and export-led manufacturing driven added trap employment growth for predominantly assembly jobs • Short run opportunities for local supplier development program Weak backward linkages • Medium run opportunities to upgrade in the value chain by drawing on the vast resources available in the global supply-base Low management capabilities Challenges • Space for local firms has narrowed in manufacturing sectors because Weak backward major lead firms (Samsung, Ford, Toyota) in GVCs generally use the same linkages set of “global suppliers” everywhere • High value functions (innovation, design, post-production services) stay Risk of low value outside of Vietnam added trap • Vietnam becomes stuck in a “ low value added trap ”, failing to develop high value functions or innovation capabilities • Longer run risks as lower cost competitors draw foreign investment away from Vietnam 3
Emerging Opportunities : Services Services increasingly matter for manufacturing competitiveness and account for much of the value added in a product 4
In which FDI Sectors are the Opportunities for Domestic Suppliers? Vietnam FDI Inflows by sector Manufacturing FDI by subsector Total registered value, 2010-2016 Total registered value, 2010-2016 Health & EducFin Svcs Other Svcs Other Vehicles & Ag forest fish trans eqpt Mineral Transport products Machinery Mining Chemicals Power & Metals Utilities Hi Tech & Electronics Paper & Hospitality printing Manufacturing Furniture & wood products & Retail Food & 56% Rubber & 14% beverages plastics prods Real estate & Apparel, constructi textiles & on 16% leather Source: FIA prods 5
Where in Vietnam are the Opportunities for Suppliers? Total FDI projects by province Total FDI registered capital by province 1988-2016 1988-2016 Other Hung provinces Ho Chi Minh Yen 18% Other City 18% provinces Ho Chi Minh 30% Ba Ria Vung Tau City 29% Hai Duong Ba Ria Vung Da Nang Tau 9% Hai Phong Long An Hanoi 9% Quang Nam Bac Hanoi 17% Ninh Thanh Hoa Binh Binh Dong Nai Dong Nai Ha Duong Ninh Thuan Duong 8% 7% Tinh Bac 7% 12% Hai Ninh Source: FIA Phong 6
Domestic policies influence the impact of GVC participation and economic upgrading in countries National characteristics and absorptive capacity matter for the functioning of transmission channels of GVC participation to the domestic economy Source: WB, Taglioni and Winkler (2015) 7
SCOPE & FRAMEWORK OF ANALYSIS FDI Spillover Potential, Domestic Private 3 areas of analysis: Sector Capabilities and Business Environment Attracting FDI • Enterprise productivity and with vertical investment climate analysis spillovers potential • Factors influencing FDI-SME Linkages Promoting absorptive FDI-domestic capacity of firm linkages • Review of SME & Linkage private sector programs Business Environment – Polices and Institutions 8
I. KEY FINDINGS: FIRM-LEVEL ANALYSIS (1) Supply-side: domestic suppliers Demand-side: MNEs ‘Linked’ domestic firms (exporting indirectly at least of 1 Proportion of foreign-owned firms using domestic inputs is percent of their output) are smaller in Vietnam than peer quite low in Vietnam. countries (e.g., China and Malaysia). 12.5% 99.9% 97.2% 96.4% 8.7% 67.6% 5.1% 0.3% Vietnam 2015 China 2012 Malaysia 2015 Thailand 2016 Vietnam China 2012 Malaysia Thailand 2015 2015 2016 Source : World Bank, Enhancing Enterprise Competitiveness and SME Linkages Report 9
I. KEY FINDINGS: FIRM-LEVEL ANALYSIS (2) Product Innovation Product innovation rate by firm size and 80% ownership type 60% Small 12% 40% 20% Medium 40% 0% Product innovation (% firms) New to market (% innovating firms) Large 45% Vietnam Cambodia Lao PDR Malaysia Philippines Thailand Domestic 23% Characteristics of new products 100% Joint venture 70% 80% 60% Foreign 19% 40% 20% Source : World Bank, Enhancing Enterprise Competitiveness and SME Linkages Report 0% Completely new function Cheaper Higher quality Vietnam Cambodia Lao PDR Malaysia Philippines Thailand 10
I. KEY FINDINGS: FIRM-LEVEL ANALYSIS (3) Use of Quality Certification Skills Foreign-owned firm 50% 87% 76% Domestic firms 9% 45% 27% 18% 8% Linked firms 24% Skilled production workers Formal training Skills as constraint Non-linked firms 6% Linked firms Non-linked firms Source : World Bank, Enhancing Enterprise Competitiveness and SME Linkages Report 11
I. KEY FINDINGS: FIRM-LEVEL ANALYSIS (4) Proportion of firms finding it difficult to find Primary focus of formal training programs different types of skills Technical skills (other than IT) Technical skills (other than IT) Computer or general IT Computer or general IT Foreign language Foreign language Work ethic and commitment Work ethic and commitment Writing Writing Interpersonal and communication Interpersonal and communication Managerial and leadership Managerial and leadership 0% 20% 40% 60% 80% 100% 0% 20% 40% 60% 80% 100% Non-linked firms Linked firms Non-linked firms Linked firms 12 Source : World Bank, Enhancing Enterprise Competitiveness and SME Linkages Report
CONCEPTUAL FRAMEWORK: What market failures deter the development of FDI-SME linkages? Enhance MNE linkages to increase DVA, employment, Goal local firm productivity & market access Technology, skills, finance, standards VN supporting Investor industries (MNE) goods & services Policy Policy feedback Demand-side constraints: Supply-side constraints: • Lack of local suppliers • Technology & skills gaps Policy • Lack of competitive local suppliers • Lack of targeted financial and Policy feedback (quality, quantity and price) tech support for upgrading • Lack of information on domestic • Lack of information on MNE government suppliers & capacity sourcing strategies and • Distortive LCR policies or standards incentives Public sector constraints: • Insufficient policy alignment • Coordination failures • Lack of supporting services Source : World Bank, Enhancing Enterprise Competitiveness and SME Linkages Report 13
II. KEY FINDINGS: KEY MARKET FAILURES IN LINKAGE PROGRAMS • Lack of competitive local suppliers means that Lack of competitive local suppliers foreign firms will look elsewhere and link with More foreign-owned firms hold an internationally-recognized other firms which can provide consistent (in quality certification (e.g., ISO 9001) than linked or non-linked domestic firms. terms of quality, quantity, and price) and timely inputs needed to finalize production. Foreign-owned firm 50% • However, qualitative interviews with firms in Domestic firms 9% Vietnam suggest that there remains keen interest on the part of lead firms and first-tier suppliers in the automotive and electronic Linked firms 24% sectors , for example, to access globally- Non-linked firms 6% competitive local suppliers. Source : World Bank, Enhancing Enterprise Competitiveness and SME Linkages Report 14
KEY FINDINGS (3): KEY MARKET FAILURES IN LINKAGE PROGRAMS • Lack of access to finance Access to finance as top obstacle Has credit/loan or overdraft facility • Perceived as a top business obstacle by firms in 100 Vietnam (21.8% in Vietnam versus 11.5% in EAP) 90 80 70 • More Vietnamese firms complaining about access to 60 finance than firms from peer countries. (%) 50 40 • Vietnam rate lower than Malaysia and Thailand in 30 20 terms of firms with access to credit/loan or overdraft 10 facility. However, there is no large difference between 0 Linked Non-linked Linked Non-linked Linked Non-linked Linked Non-linked linked and non-linked domestic firms in Vietnam. • Sectoral focus: In the ICT sector , lack of access to reliable risk capital is an identified key constraint that Vietnam, China, 2012 Malaysia, Thailand, hinder start-up and scale-up. 2015 2015 2016 Source : World Bank, Enhancing Enterprise Competitiveness and SME Linkages Report 15
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