WB urges Vietnam to create more domestic value enhancing FDI links
WB urges Vietnam to create more domestic value enhancing FDI links
Vietnam faces a significant opportunity to upgrade its domestic value contribution in order to capture the benefits of foreign direct investment (FDI) inflows and global value chains, according to Ousmane Dione, the World Bank (WB) country director for Vietnam.
Addressing the Vietnam Economic Forum 2019 in Hanoi City on January 17, the WB director said Vietnam’s ratio of foreign trade to gross domestic product (GDP) exceeds 200%, making it one of the most open economies in the world. Trade-led development has contributed to its rapid growth, job creation and poverty reduction.
Dione said that links between FDI and domestic enterprises are weak. While Vietnam has become an export powerhouse, it is still focused on basic assembly rather than high value added activities.
Moreover, domestic value addition is low, especially for more sophisticated exports. International competition and the Fourth Industrial Revolution may erode Vietnam’s current value proposition.
He said that this requires a comprehensive policy package to strengthen the competitiveness of domestic enterprises: improving the business environment, granting access to finance, providing services, upgrading skills and introducing targeted and hands-on upgrade programs for enterprises.
Vietnam has a rising share of manufacturing exports, accounting for 80% of Vietnam’s gross exports, some US$190 billion in 2018, said Dione.
He added that Vietnam has become a manufacturing hub and major destination for FDI. As a share of GDP, the country has received more FDI than any other economy in ASEAN in the last decade, mostly in labor-intensive manufacturing.
The FDI-based manufacturing sector is a success story, but the performance of domestic firms has lagged, he stressed. Vietnam’s trade performance is driven by the FDI sector, accounting for 70% of the exports and achieving a significant surplus, while the domestic sector is still recording a trade deficit.
He pointed out that Vietnam’s manufacturing exports have a relatively high import content – in fact, it is higher than that of other ASEAN economies. Only half of the value of Vietnam’s gross exports is generated in Vietnam, and the rest are imported inputs.
Further, Vietnam’s value-added contribution is particularly low in the high-value manufacturing sector. In electronics, for example, domestic value is only some 40%, whereas the remainder is imported material.
He stated that expanding the country’s global value chain participation may lead to higher output and productivity, more added value and more jobs through links with both upstream and downstream sectors, technology spillovers and skill upgrades.
The WB official cited the World Economic Forum’s competitiveness report as saying that Vietnam faces a lack of qualified local suppliers.
He pointed out that linked firms are four times more likely to comply with established international managed processes as evidenced by quality certifications, such as ISO 9000. There is also evidence that skill shortages are more pronounced in linked firms, reflecting the need for more sophisticated skills to comply with the quality and technological requirements of global supply chains.
He also highlighted the core elements of a conducive policy framework: strategic FDI attraction, local enterprise capacity-building and connectivity development.
The notion of “increasing domestic added value on a competitive basis” is important as it highlights the need to invest in building up the competitiveness of local actors in the country to enter the supply chain, compared with taking the shorter and often not sustainable path, and imposes local content requirements and similar policies that tend to diminish productivity growth in the long run.
Since market failures impede these links, the Government has a supporting and strategic coordinating role to play, including ensuring policy coherence and alignment, he said.
According to Dione, international comparisons recommend a comprehensive policy focus to enhance competitiveness in terms of skills, institutions and infrastructure, together with the provision of targeted and hands-on upgrade programs.
These efforts also aim to boost the FDI footprint and increase domestic added value in the country, as well as increase FDI “stickiness.”
Foreign investors are brought in as key stakeholders in link interventions, providing guidance for program design and execution, and the necessary market pull.
He said support must go beyond matchmaking programs to address constraints faced by local businesses in connecting with foreign firms and to help local firms achieve “qualified supplier status.”
