Vietnam's Competitiveness Vietnam S Competitiveness: Professor Michael E. Porter Harvard Business School

Vietnam’s
Vietnam s Competitiveness
Professor Michael E. Porter

Harvard Business School
Ho Chi Minh, Vietnam

December 1, 2008
This p
presentation draws on ideas from Professor Porter’s books and articles,, in pparticular,, Competitive
p Strategy
gy ((The Free Press,, 1980);
); Competitive
p
Advantage (The Free Press, 1985); “What is Strategy?” (Harvard Business Review, Nov/Dec 1996); “Strategy and the Internet” (Harvard Business
Review, March 2001); and a forthcoming book. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or
by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Michael E. Porter. Additional information may
be found at the website of the Institute for Strategy and Competitiveness, www.isc.hbs.edu. Version: November 18, 2008, 3pm
20081201 – Vietnam CAON.ppt 1 Copyright 2008 © Professor Michael E. Porter

The Need For An Economic Strategy
• Vietnam has experienced an impressive growth over the last two

decades
• However, reforms so far are insufficient to move Vietnam to a middle

income economy
• The next several years will determine whether Vietnam will follow the
experience of Korea, or the Philippines
• Vietnam’s
Vi t ’ reform
f h
have b
been piecemeal
i l and
d reactive
ti
• Improving Vietnam’s standard of living will require a long term

economic strategy
– A set of interrelated policy changes, institutional structures, and

rigorous implementation mechanisms

Agenda
• Understanding Vietnam’s Economic Performance
• Assessing Vietnamese Competitiveness
• Identifying
Id tif i Action
A ti Priorities
P i iti
• Organizing for Competitiveness
• Creating an Economic Strategy

Prosperity Performance
Selected Countries
PPP-adjusted GDP
per Capita, 2007
$45,000
USA
Ireland
$40,000 Singapore Hong
g Kong
g
Switzerland
Netherlands Iceland
Canada Australia
$35,000 Austria Sweden
Germany UK Finland Taiwan
France Japan
$30,000
$ , Bahrain
Ital
Italy Spain Greece
New Zealand Slovenia

$25,000 Israel
Korea Czech Republic
Saudi Arabia
Portugal
$20 000
$20,000 Estonia
Hungary Slovakia
Lithuania Latvia
$15,000 Poland
Croatia Russia
Malaysia Argentina
Mexico Chile Romania
$10 000
$10,000 Brazil
Costa Rica
South Africa Turkey
Thailand
Colombia Vietnam China
$5,000 Egypt Indonesia Sri Lanka
Philippines Pakistan India
Nigeria Bangladesh Cambodia
$0
0% 2% 4% 6% 8% 10% 12%
Growth of Real GDP per Capita (PPP-adjusted), CAGR, 2003-2007
Source: EIU (2008), authors calculations
Labor Force Utilization
Participation Rates, Selected Countries
Labor Force
Participation Rate, 2007
65%
Singapore (6.16%)
China
60%
Iceland
Norway
Thailand Vietnam
55% Canada Hong Kong
Portugal Australia
J
Japan Sweden Russia
Germany Czech Rep. New Zealand Ireland
Latvia
USA UK Finland
50% South Korea
Brazil Slovakia Spain
Lithuania Taiwan
Indonesia
India Slovenia
45% F
France
Poland Bangladesh
Romania Chile
Austria
Italy Hungary
Colombia Mexico Argentina
40% Malaysia
Sri Lanka Philippines
Nicaragua
Morocco
35%
Bulgaria
Turkey
Pakistan
30%
-3% -2% -1% 0% 1% 2% 3% 4% 5% 6%
Change in Labor Force Participation Rate, 2003-2007
Source: Economist Intelligence Unit (2008)
Comparative Labor Productivity
GDP per employee
(PPP adjusted US$), Selected Countries
2007
USA
Hong Kong
Ireland
France
Norway Finland
UK Sweden
Australia
Canada Denmark Singapore
Italy Austria Japan Taiwan Estonia
Iceland
Germany Israel
Switzerland South Korea
Spain Greece
New Zealand Slovenia
Portugal Saudi Arabia Slovakia Latvia Venezuela

Chile
Poland Malaysia
Turkey Lith
Lithuania
i
Argentina Belarus
Czech Republic
Croatia Hungary Kazakhstan
Mexico Colombia
Syria Costa Rica Bulgaria Russia
Tunisia Thailand
Iran Peru Sri Lanka
Ecuador Egypt South Africa China
Yemen Brazil Indonesia Ukraine
Pakistan Philippines
Dominican Republic India
Nigeria
Cambodia
Cote d’Ivoire Senegal Bangladesh
Kenya Ghana Vietnam Ethiopia
Compound annual growth rate (CAGR) of real GDP per employee

(PPP-adjusted), 2003-2007
Source: authors calculation Groningen Growth and Development Centre (2008)

Decomposition of Vietnamese Growth
Contribution to
Annual GDP
growth (%)
10%
Capital Labor TFP
8%
6%
4%
2%
0%
-2%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Source: Ohno (2008)
Domestic Fixed Investment Rates
Gross Fixed Investment Selected Countries
as % of GDP (2007)
36%
China (40.4%) Latvia
India
34% Vietnam
32% Estonia
Croatia Spain
30% Kazakhstan
Korea Slovenia Sri Lanka Iceland
28%
Australia Slovakia
R
Romaniai
Thailand
Lithuania
26% Colombia
Singapore Greece Indonesia
Ireland Venezuela
24% Czech Republic Tunisia
Japan Argentina
New Zealand Ukraine Denmark
Canada Poland
22% Portugal Malaysia Italy Mexico Cambodia Egypt Pakistan
Hungary Austria France Russi Turkey
20% Hong Kong Chile Finland aKenya South Africa
Netherlands Norway
Saudi Arabia Sweden
18% Germany UK Brazil
Dominican Republic
16%
USA
Philippines
14%
-4% -2% 0% 2% 4% 6% 8% 10% 12%
Change in Gross Fixed Investment (as % of GDP), 2003 - 2007

Note: Includes inbound FDI
Source: EIU, 2008
Inbound Foreign Investment Performance
Stocks and Flows, Selected Countries
Inward FDI Stocks as % of
GDP Average 2003 - 2007
GDP,
80% Netherlands Estonia

Singapore
(160.1%, 64.7%)
70%
Vietnam Hungary Chile

60%
Switzerland
New Zealand Sweden
Slovakia
Czech Republic
50%
Denmark
Portugal Cambodia
40% UK
Spain Thailan Philippines
Australi Canad d Latvia
a
South Africa a Poland Iceland (46.7%)
Finland Lithuania France Israel
30% Colombia
Laos Mexico
Norway Austria
Slovenia Brazil Russia
20% y
Germany Turkey
Greece Italy Malaysia
South Korea USA Saudi
China
10% Indonesia Pakista Arabia
n
Indi
Japan a
0%
-5% 0% 5% 10% 15% 20% 25% 30% 35% 40%
FDI Inflows as % of Gross Fixed Capital Formation, Average 2003 - 2007
Source: UNCTAD, World Investment Report (2007)
Export Performance
Exports as Share of
GDP (in %, 2007)
Selected Countries
100%
Malaysia (116.4%)
90% Slovakia
Belgium Hungary
Czech Republic
Ireland
80%
Thailand Estonia
Netherlands Vietnam
70% Slovenia Slovenia
Cambodia
60% Bulgaria
Austria
S di Arabia
Saudi A bi Lithuania
Switzerland
50% Kazakhstan Croatia Philippines
Tunisia South Korea
Latvia Finland Germany
Norway Chile
Ukraine Poland China
40% South Africa Egypt
Canada Russia Indonesia
Sri Lanka France Portugal
30% Venezuela Mexico
New Zealand Italy
Dominican Republic Argentina UK
Turkey Colombi
20% India Bangladesh
Australia Spain a
Pakistan Brazil Japan
USA
10%
0%
-15% -10% -5% 0% 5% 10% 15% 20% 25% 30%
Ch
Change off Exports
E t as Share
Sh off GDP,
GDP 2003 tto 2007
• Imports as a share of GDP are equally high

Source: EIU (2008), authors’ analysis
Vietnam’s Exports By Type of Industry
World Export Market
Share ((current USD))
Processed Goods
0.8% Semi-processed Goods
Unprocessed Goods
0 7%
0.7% Services
TOTAL
0.6%
0.5%
0.4%
0.3%
0 2%
0.2%
0.1%
0.0%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Source: UNComTrade, WTO (2008)
Vietnam’s Cluster Export Portfolio
2000-2006
5%
Change In Vietnam’s Overall Footwear ((5.68%,, 1.91%))
Growth In World Export Share:
0.25%
Fishing and Fishing
Products
4%
06
arket share, 200
3%
world export ma
2% Appare
Vietnam’s w
Coal & Briquettes
Furnitur
1% T til
Textiles e
Plastics
Vietnam’s Average World
Tobacco Export Share: 0.31%
0%
-0.3% -0.1% 0% 0.1% 0.3% 0.5% 0.7% 0.9% 1.1% 1.3% 1.5%
Change in Vietnam’s world export market share, 2000 – 2006
Source: Prof. Michael E. Porter, International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, Harvard Exports of US$1.1 Billion
Business School; Richard Bryden, Project Director. Underlying data drawn from the UN Commodity Trade Statistics Database and the =
20081201 – Vietnam CAON.ppt
IMF BOP statistics. 12 Copyright 2008 © Professor Michael E. Porter
Agenda
• Identifying
Id tif i Action
A ti Priorities
P i iti

What is Competitiveness?
• Competitiveness depends on the productivity with which a nation uses

its human, capital, and natural resources.
– P
Productivity
d ti it sets t the
th sustainable
t i bl standard
t d d off living
li i (
(wages, returns
t on
capital, returns on natural resources)
– It is not what industries a nation competes in that matters for prosperity, but
how productively it competes in those industries
– Productivity in a national economy arises from a combination of domestic
and foreign firms
– Th
The productivity
d ti it off “local”
“l l” or domestic
d ti industries
i d t i is
i ffundamental
d t l tto
competitiveness, not just that of export industries
• Nations compete to offer the most productive environment for business

• The p
public and p
private sectors p
play
y different but interrelated roles in
creating a productive economy

Determinants of Competitiveness
Microeconomic Competitiveness
p
Quality of the Sophistication

National State of Cluster of Company
Business Development Operations and
Environment Strategy
Macroeconomic Competitiveness
Social
Infrastructure Macroeconomic
and Political Policies
Institutions
Natural Endowments
• Macroeconomic competitiveness creates the potential for high productivity, but is

not sufficient
• Productivity ultimately depends on improving the microeconomic capability of
the economy and the sophistication of local competition
Wage Level Comparison
Monthly Minimum Wage Selected Countries
USD, log scale, 2008
$3,000
Denmark
Ireland
United Kingdom Germany Sweden
Italy Japan / Belgium / France
AustriaNetherlands
Spain New
N Z
Zealand
l d
$1,000 Greece Australia
Slovenia Taiwan
Portugal Cyprus Singapore
Korea
Poland Slovakia Czech Republic
p
$500 Hungary
Estonia
Lithuania
Romania Latvia
Malaysia
$100 Bulgaria Th il d
Thailand
China
Philippines Indonesia
$50
Cambodia
Vietnam
$0
Global Competitiveness Index Score, 2008
Source: Global Competitiveness Report, 2008; EuroStat, 2008; Philippines Department of Labor and Employment,
20081201 – Vietnam CAON.ppt 2008 16 Copyright 2008 © Professor Michael E. Porter
Rate of Competitiveness Improvement
Low Income Countries, 2002 - 2007
BCI Value, 2007
High
India
Indonesia
Sri Lanka
El Salvador Vietnam
Pakistan
Tanzania Nigeria Gambia Honduras
Uganda Mali
Madagascar
M d
Zambia Zimbabwe Nicaragua
Ethiopia
Mozambique Bangladesh
Paraguay Bolivia
Low
Chad
Below average Average Above average
Dynamism Score, 2002 - 2007

Source: Global Competitiveness Report 2007
Social Infrastructure and Macroeconomic

Political Institutions Policies
• Basic human capacity • Fiscal policy

– Basic education – Government surplus/deficit
– Health system – Government debt
– Savings / Investment rates
• Political institutions • Monetary policy

– Political freedom – Inflation
– Voice and accountability – Interest rate spread
– Political stability
– Centralization of economic policymaking
– Government effectiveness
• Rule of law
– Judicial independence
– Efficiency of legal framework
– Civil rights
– Business costs of corruption
– Reliability of police
– Prevalence and costs of crime

Vietnam’s Position
Social Infrastructure and Macroeconomic

Political Institutions Policies
Basic health and education Fiscal policy

+ Solid provision of basic services + Government budget and debt at acceptable
– Increasing concerns about the quality of these levels
public services – Government budget still reliant on foreign aid
Political institutions Monetary Policy

+ High levels of political stability – High levels of inflation
+ Increasing decentralization of economic
policy responsibilities
– Little effective policy dialogue
– Corruption remains a significant challenge
Rule of law
+ Quality of laws tends to be good
– Effectiveness of implementation
p remains
weak

Governance Indicators
Selected Countries
Best
country in
the world Voice and Accountability
Political Stability
Government Effectiveness
Regulatory Quality
Rule of Law
Control of Corruption
Index of
Governance
Q lit
Quality,
2007
Worst
country in
the world
an
ia
nd
h
a
ia
ia
sia
m
n
ka
n
il
os
e
a
s
az
es
re
ta
n
pa
ne
or
di
d
es
s
na
la
iw
an
hi
La
ay
In
us
bo
Ko
kis
Br
ap
ad
pi
Ja
ai
on
et
Ta
iL
R
al
ilip
am
Th
Pa
ng
l
Vi
h
ng
M
Sr
In
ut
Ph
Si
Ba
So
Note: Sorted left to right by decreasing average value across all indicators. The ‘zero’ horizontal line corresponds to the median country’s average value across all
indicators.
Source: World Bank (2008)
Corruption Perception Index, 2007
1 Finland New Zealand
Deteriorating Iceland Sweden
Switzerland
Improving
Low Canada Norway
corruption UK
Hong Kong Austria Germany
Ireland Japan
United States France
C
Chile Spain Uruguay
Portugal Estonia Slovenia
Israel Taiwan
Hungary Czech Republic
Italy Malaysia South Korea
South Africa
Lithuania Slovakia Latvia
Rank in Jordan
Global Greece
Tunisia Poland
Corruption Croatia Turkey
Index, Colombia Romania
2007 Peru Brazil Mexico China India
Senegal
Panama
P Thailand T
Tanzania
i
Argentina
Egypt
Uganda
Ukraine
Vietnam
Philippines
Pakistan
High Cote d’Ivoire
d Ivoire Russia Indonesia
corruption Zimbabwe Nigeria
Venezuela Bangladesh
91
-20 -15 -10 -5 0 5 10 15 20
Change in Rank
Rank, Global Corruption Report,
Report 2007 versus 2001
Note: Ranks only countries available in both years (91 countries total)
Source: Global Corruption Report, 2007
Microeconomic Competitiveness: Quality of the
Business Environment
Context for
Firm
Strategy
and Rivalry
z Local rules and incentives that

encourage investment and
productivity
Factor – e.g. incentives for capital
investments, intellectual property Demand
(Input)
protection Conditions
Conditions
z Vigorous local competition
z Access to high quality – Openness to foreign and local z Sophistication of local
competition
business inputs customers and needs
– Human resources – e.g.,
e g strict quality
quality, safety
safety,
– Capital availability Related and and environmental
– Physical infrastructure Supporting standards
– Administrative infrastructure Industries
(e.g. registration, permitting)
– Information and transparency z Availability of suppliers and
– Scientific and technological supporting industries
infrastructure
• Many things matter for competitiveness

• Successful economic development is a process of successive upgrading, in which the business
environment improves to enable increasingly sophisticated ways of competing
Vietnamese Business Environment
Vietnam’s Relative Position 2008
Competitive Advantages Competitive Disadvantages
• Communications infrastructure • Government intervention (rank 119)
(rank 72) – E.g., SOE market dominance
– E.g., quality of the telephone
infrastructure
• Local competition (rank 75) • Trade barriers (rank 113)
– E.g., intensity of local – E.g., level of import tariffs
competition
Note: Rank versus 130 countries; overall, Vietnam ranks 102nd in 2008 PPP adjusted GDP per capita and 76th in New Global Competitiveness
Source: Institute for Strategy and Competitiveness, Harvard University (2008)
Openness to Trade
Rank (157
countries) Selected Countries, 2008
160
140
Vietnam
120
100
80
60
40
20
0
New Zealand
Germany
Hong Kong
Japan
Sri Lanka
Indonesia
India
nited States
Vietnam
Singapore
Taiwan
China
South Korea
Cambodia
Russia
Brazil
Philippines
Laos
Malaysia
Pakistan
Thailand
Un
S
N
• Vietnam’s lack of openness will retard further competitiveness upgrading

Source: Index of Economic Freedom (2008), Heritage Foundation
Vietnamese Business Environment
Vietnam’s Relative Position 2008
Competitive Advantages Competitive Disadvantages
• Communications infrastructure • Government intervention (rank 119)
(rank 72) – E.g., SOE market dominance
– E.g., quality of the telephone
infrastructure
• Local competition (rank 75) • Trade barriers (rank 113)
– E.g., intensity of local – E.g., level of import tariffs
competition
• Energy infrastructure (rank 109)
– E.g., quality of electricity supply
• Access to finance (rank 109)

– E.g., financial market sophistication
• Innovation infrastructure (rank 99)

– E.g.,
g , patents
pa e s per
pe capita
cap a
• Logistical infrastructure (rank 96)

– E.g., quality of roads
Note: Rank versus 130 countries; overall, Vietnam ranks 102nd in 2008 PPP adjusted GDP per capita and 76th in New Global Competitiveness
Source: Institute for Strategy and Competitiveness, Harvard University (2008)
Cost of Doing Business
Ranking, 2008
(of 181 countries)
Vietnam, 2008
Favorable Unfavorable
Median Ranking,
East Asia and Pacific
Vietnam’s per capita GDP rank: 70th
• Especially in land ownership in rural areas significant problems remain

Source: World Bank Report, Doing Business (2008)
State-Owned Enterprises (SOEs) in Vietnam
• SOEs continue to play a dominant role in the Vietnamese economy,

despite the commitment to privatization
• Government oversight of these companies and their spending is
limited and largely reactive
• The costs of slow progress on privatization are high for Vietnam’s
competitiveness
– Retards entry of new private companies
– Creates risks of corruption
– Can exacerbate economic volatility through excessive investment
financed through soft credit
• An effective privatization program strategy for Vietnam must shift
economic i structure,
t t nott just
j t change
h ownership
hi
– Privatization must go hand-in-hand with market opening and policies to
curtail anti-competitive practices
– Owners are needed that contribute new capital and skills
– Minority stakes can distribute ownership more widely

State of Cluster Development
Tourism Cluster in Cairns, Australia
Public
P bli RRelations
l i & Locall retail,
L t il
Market Research Travel agents Tour operators health care, and
Services other services
Food Local
Suppliers Attractions and Transportation
Restaurants Activities
e.g.,
e g theme parks,
parks
casinos, sports
Property Souvenirs,
Services Duty Free
Airlines,
Hotels Banks,
Maintenance Cruise Ships
Foreign
Services
Exchange
Government agencies Educational Institutions Industry Groups

e.g. Australian
A t li T Tourism
i C
Commission,
i i e.g. James
J C
CookkUUniversity,
i it e.g. Queensland
Q l dTTourism
i
Great Barrier Reef Authority Cairns College of TAFE Industry Council
Sources: HBS student team research (2003) - Peter Tynan, Chai McConnell, Alexandra West, Jean Hayden
Vietnam’s Cluster Export Portfolio
2000-2006
5%
Change In Vietnam’s Overall Footwear ((5.68%,, 1.91%))
Growth In World Export Share:
0.25%
Fishing and Fishing
Products
4%
06
arket share, 200
3%
world export ma
2% Appare
Vietnam’s w
Coal & Briquettes
Furnitur
1% T til
Textiles e
Plastics
Vietnam’s Average World
Tobacco Export Share: 0.31%
0%
-0.3% -0.1% 0% 0.1% 0.3% 0.5% 0.7% 0.9% 1.1% 1.3% 1.5%
Vietnam’s Cluster Export Portfolio cont’d
2000-2006
1.0%
Change
g In Vietnam’s Overall
Growth in World Export Share:
0.25%
0.8%
06
Agricultural Products
arket share, 200
Leather and Related Products
Oil & Gas

0.6%
world export ma
Building Fixtures and Equipment
Textiles
0 4%
0.4%
Vietnam’s w
Sporting, Recreational
and Children's Goods Vietnam’s Average
Construction Materials
World Export
Total Communications Equipment Share: 0.31%
Services Processed Foods
Publishing
g and Printing
g Lighting and Electrical Equipment
0 2%
0.2% Chemical Products Motor Driven
Medical Devices
Forest Products
Products
Information Power and Power Generation Equipment
Entertainment
Technology Prefabricated Enclosures and Structures
Jewelry, Precious Metals and Metal Mining and Manufacturing
Analytical Instruments
Collectibles Production Technology
Biopharmaceuticals Automotive
0.0%
-0.10% -0.05% 0.00% 0.05% 0.10% 0.15% 0.20% 0.25% 0.30%
Not reported Share of World Exports by Cluster
< 0.07%
Vietnam, 2000
0.07 – 0.15%
Fishing &
0.16 – 0.31% Textiles
Fishing Entertainment
Hospitality Prefabricated
0.31 – 0.62% Products Enclosures
& Tourism
Agricultural
0.62- 1.24% Products
Transportation Furniture
> 1.24% Building
& Logistics
Distribution Aerospace Fixtures, Construction
Services
Information Vehicles & Equipment & Materials
Defense
Tech. Lightning &Services Processed
Jewelry & Heavyy
Business Construction Food
Services Analytical Electrical
Precious Services
Education & Instruments Equipment Forest
Metals Knowledge Power
Medical
Creation Communi- Generation Products
Financial Devices
Services cations
Publishing
& Printing Biopharma- Equipment Heavy
Machinery
ceuticals Motor Driven Production
Chemical Products Technology
Apparel
Products Tobacco
Leather & Oil & Automotive
Related Gas Aerospace Metal
Plastics Engines Manufacturing
Products
Footwear Marine
Sporting
& Recreation Equipment
Goods
Note: Clusters with overlapping borders have at least 20% overlap (by number of industries) in both
directions.
Not reported Share of World Exports by Cluster
< 0.07%
Vietnam, 2006
0.07 – 0.15%
Fishing &
0.16 – 0.31% Textiles
Fishing Entertainment
Hospitality Prefabricated
0.31 – 0.62% Products Enclosures
& Tourism
Agricultural
0.62- 1.24% Products
Transportation Furniture
> 1.24% Building
& Logistics
Distribution Aerospace Fixtures, Construction
Services
Information Vehicles & Equipment & Materials
Defense
Tech. Lightning &Services Processed
Jewelry & Heavyy
Business Construction Food
Services Analytical Electrical
Precious Services
Education & Instruments Equipment Forest
Metals Knowledge Power
Medical
Creation Communi- Generation Products
Financial Devices
Services cations
Publishing
& Printing Biopharma- Equipment Heavy
Machinery
ceuticals Motor Driven Production
Chemical Products Technology
Apparel
Products Tobacco
Leather & Oil & Automotive
Related Gas Aerospace Metal
Plastics Engines Manufacturing
Products
Footwear Marine
Sporting
& Recreation Equipment
Goods
Note: Clusters with overlapping borders have at least 20% overlap (by number of industries) in both
directions.
Geographic Levels and Competitiveness
World Economy WTO
Broad Economic Areas Asia
• The business environment at a given

Groups off
G location is the cumulative outcome of
Southeast Asia policy at all geographic levels
Neighboring Nations
• Many competitiveness drivers occur
at the regional and local level
Nations Vietnam • The allocation of competitiveness
responsibilities across geographic
levels is a crucial policy challenge
States, Provinces Vietnamese provinces
Metropolitan and Rural Areas Ho Chi Minh City

Specialization of Regional Economies
Selected U.S. Geographic Areas
Denver, CO
Denver Chicago
Leather and Sporting Goods Communications Equipment
Oil and Gas Processed Food Boston
Aerospace Vehicles and Defense Heavy Machinery Analytical Instruments
Seattle-Bellevue-
Education and Knowledge Creation
Everett, WA
Communications Equipment
Aerospace Vehicles and Wichita, KS Pittsburgh, PA
Defense Aerospace Vehicles and Construction Materials
Fishing and Fishing Defense Metal Manufacturing
Products Heavy Machinery Education and Knowledge
Analytical Instruments Oil and Gas Creation
San Francisco-
Oakland-San Jose
Bay Area
Communications
Equipment
Agricultural
Raleigh-Durham,
R l i hD h NC
Products
Communications Equipment
Information
Information Technology
Technology
Education and
Knowledge Creation
Los Angeles Area

Apparel Atlanta, GA
Building Fixtures, San Diego Construction Materials
Equipment and Leather and Sporting Goods Transportation and Logistics
Services Power Generation Houston Business Services
Entertainment Education and Knowledge Oil and Gas Products and Services
Creation Chemical Products
Heavy Construction Services
Note: Clusters listed are the three highest ranking clusters in terms of share of national employment.
Source: Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School, 11/2006.
Vietnam Provincial Competitiveness Index, 2006
Excellent
High Performing
Mid-high
Average
Mid-low
Low Performing
Source: Vietnam Provincial Competitiveness Index 2006 (USAID)

The Neighborhood
Southeast Asia
• Vietnam has a central position between ASEAN and China

Economic Coordination Among Neighbors
Enhancing Productivity
Factor Context for Related and Regional

Demand Macroeconomic
(Input) Strategy Supporting Strategy &
Conditions Competitiveness
Conditions and Rivalry Industries Governance
• Improving regional • Eliminating • Harmonizing • Facilitating cross- • Coordinating • Creating a

transportation trade and environmental border cluster programs to regional marketing
infrastructure investment standards upgrading, e.g. improve public program
barriers within safety
• Creating
g an efficient • Harmonizingg – Tourism • Sharing
g best
the region
energy network product safety • Coordinating practices in
– Agribusiness
• Simplifying and standards macro-economic government
• Enhancing regional
harmonizing – Transport & policies operations
communications • Establishing
cross-border Logistics
and connectivity reciprocal • Creating regional
regulations and
consumer – Business institutions
• Li
Linking
ki financial
fi i l paperworkk
protection laws services – Dispute
markets resolution
• Coordinating
• Opening mechanisms
• Opening the anti-
government – Regional
movement of monopoly and
procurement development
students for higher fair
within the region bank
education competition
policies • Developing a
• Harmonizing
administrative regional
requirements for negotiating
businesses position with
i t
international
ti l
organizations

Agenda
• Identifying
Id tif i Action
A ti Priorities
P i iti

Stages of National Competitive Development
Shifting Policy Imperatives
Factor-Driven
Factor- Investment-
Investment- Innovation-
Innovation-
Economy Driven Economy Driven Economy
Low Cost Inputs Productivity Unique Value

• Macro, political, and legal • Increasing local competition • Advanced skills
stability • Market openness
p • Scientific and technological
g
• Efficient basic • Advanced infrastructure institutions
infrastructure • Incentives and rules • Incentives and rules
• Lowering regulatory costs encouraging productivity encouraging innovation
of doing business • Cluster
Cl t fformation
ti and d • Cluster upgrading
activation
Source: Porter, Michael E., The Competitive Advantage of Nations, Macmillan Press, 1990
Competitiveness Action Agenda: Key Priorities
Continue Existing Efforts Fundamental Reform
• Reduce corruption • Human resource

development at all levels
• Improve infrastructure • Reform of SOEs
• Deepen
p financial market • Cluster development
p
reforms
• Impose regulatory
attractiveness

Reducing Corruption
• The government has repeatedly committed itself towards reducing

corruption; and some action has been taken
• Evidence reveals little progress
p g
• Vietnam needs to target corruption as a crucial barrier for growth and

design an integrated strategy to tackle its occurrence
Action
A ti priorities
i iti
• Reduce the potential for corruption through simplified regulations, use
of modern information technology, and improved SOE governance/
privatization
i ti ti
• Set clear guidelines and reporting requirements for management of
SOEs
• Demonstrate a commitment for transparency, including support for a
strong press
Improving Infrastructure
• Significant infrastructure investments have been made in recent

years
• Evidence on their impact
p is mixed as best. There is significant
g
duplication of efforts and companies complain about serious
bottlenecks
• Vietnam needs to better target infrastructure investments to meet

the needs of its growing economy
Action priorities
• Establish a national fund for key infrastructure projects to be
implemented under the supervision of the Prime Minister’s
Minister s office
• Utilize matching funds incentives to improve effectiveness if
investments by provincial governments
• Create
C t a public-private
bli i t council il to
t advise
d i on spending
di priorities
i iti

Deepening Financial Markets
• Vietnam has made clear progress on opening up financial markets,

more recently also to foreign companies as part of the WTO agreement
• But the weakness of Vietnam’s financial markets even before the
global crisis, and the financing constraints faced by private
companies, indicate that serious challenges remain
• Vietnam needs to develop a modern regulatory and institutional

structure to enable an effective financial system
y
Action priorities
• Continue opening financial markets in line with WTO commitments
• Create an effective, independent financial regulator, using outside
help as needed
• Establish
E t bli h a development
d l t bank
b k to
t develop
d l fifinancing
i ttools
l ffor private
i t
SMEs
Regulatory Reform
• Regulatory reform has been on the Vietnamese policy agenda for

some time, especially over the last five years
• Despite some progress, the overall regulatory burden on businesses
and citizens remains high with no clear societal benefits
• Vietnam needs a fundamentally new approach to regulatory reform

and assessment of new regulations
Action priorities
• Aggressively pursue the work on regulatory reform initiated with
f i d
foreign donors
• Improve institutional capacity to evaluate and administer regulations,
not just the rules themselves
• Include an obligatory assessment of the administrative burden on
business in the process of introducing new laws and regulations
Human Resource Development
• Enrolment rates have increased significantly but quality is low and

Basic skills fail to meet company needs
• Vietnam needs to dramatically improve educational quality, through
education setting standards,
standards improving curricula,
curricula and involving the private
sector in governance
• Vietnam lacks a skills training system

Vocational • Companies have launched own training efforts to address skill
bottlenecks
training • Vietnam needs a clear program for cluster-based workforce
development
• The number of universities has increased but quality is low and skills
do not match company needs
Higher • Higher university education standards must be set and enforced,
education drawing on international experts
• Vietnam needs to develop a plan and enabling institutions for
assimilation
i il ti off global
l b l technology
t h l

Restructuring of State Owned Enterprises
• The government has an explicit policy to promote private enterprise but there is
deep-seated ambivalence towards privatization
• Without a thorough reform of the SOE sector, there is little hope for Vietnam to
reach the next level of economic development
• Create independent boards of directors
SOE • Implement transparent financial reporting
governance • Define clear financial objectives
– Set corporate charters
• Remove existing trade, investment, and artificial entry barriers

Competition in
protecting SOEs
markets with • Establish strong, independent regulatory bodies
SOEs • Support start-ups and spin-offs from SOEs
• Create clear legal conditions for privatization

Privatization • Define explicit objectives for privatization process
• Create a dedicated structure for implementing privatization
• The creation of SOE groups is not a solution and can exacerbate problems if
no other reforms are being implemented
Cluster Development in Vietnam
• Vietnam’s clusters
cl sters ccurrently
rrentl tend to be narrowly
narro l foc
focused
sed on
individual products
• There is limited collaboration among companies, suppliers and other

institutions
– Some clusters, like coffee, have the potential to significantly increase their
performance
f if they
th adopt
d t a collaboration
ll b ti approach h
• Cluster-based development thinking is crucial in improving the delivery

off other
th economici policies
li i
– Workforce skill development around clusters
– FDI attraction/industrial zones around clusters
– Cluster-based regional development initiatives
– Quality and technology transfer organization for each cluster
• Policy should upgrade all existing and emerging clusters, not choose
among them
Clusters and Economic Policy
Science and Technology
Education and I
Investments
t t
Workforce Training (e.g., centers, university
departments,
Management Training technology transfer)
Standard setting and

FDI/Business Attraction quality initiatives
Clusters
Export Promotion Market Information
and Disclosure
Environmental
Industrial parks and Stewardship
free trade zones
Physical
Ph i l Natural Resource
Infrastructure Protection
• Clusters provide a framework for implementing public policy and

organizing public-private collaboration to enhance competitiveness
Clusters and Economic Diversification
Develop Related Clusters
Turn Niche Products Into Build Clusters Around

Deepen Existing Clusters
Clusters MNCs
Upgrade Existing Export

Products and Services

Upgrading Vietnamese Niche Positions, 2006
Industry
Change in
Cluster World Share of Export Value (in
Cluster Subcluster Industry Share (1997-
Export
p Share World $thousands))
$
2006)
Exports
Rubber Natural rubber, balata and similar natural gums 7.82% 3.40% $ 1,137,205
Plastic Waste Reclaimed unhardened rubber; waste 1.88% 1.87% $ 6,084
Plastics 0.490%
Plastic Products Plastic sacks, bags 1.55% 0.65% $ 150,234
Rubber Synthetic rubber 1.13% 1.13% $ 143,316
Sporting, Motorcycles and Bicycles
y y Parts of other motorcycles
y 1.42% 1.22% $ 60,962
,
Recreational and 0.361%
Children's Goods Motorcycles and Bicycles Bicycles and other cycles, non‐motorized 1.27% -1.56% $ 49,628
Communications Specialty Office Machines Parts for calculating, accounting machines 23.04% 23.04% $ 444,384
0.284%
Equipment Electrical and Electronic Components Insulted wire, cable and conductors 1.07% 0.72% $ 705,725
Specialty Foods and Ingredients Starches, inulin and gluten 7.93% 6.23% $ 148,445
Food Products Machineryy Distilling, rectifying plant
g y gp 2.64% 2.64% $ 19,449
Specialty Foods and Ingredients Vegetable saps, extracts 0.90% 0.50% $ 9,193
Processed Food 0.260%
Dairy and Related Products Milk, concentrated or sweetened 0.84% -0.22% $ 89,315
Specialty Foods and Ingredients Yeasts 0.81% 0.27% $ 7,962
Specialty Foods and Ingredients Homogenized food preparations 0.76% 0.59% $ 4,888
Glass Drawn, float, cast glass, worked 6.39% 6.37% $ 78,185
Lighting and
0.256% Electrical Parts Other inductors 3.20% 2.86% $ 137,477
Electrical Equipment
Electrical Equipment
Electrical Parts Other electric transformers 1.17% 0.68% $ 63,386
Motor Driven Motors and Generators Electric motors<=37.5w 1.88% 1.15% $ 150,425
0.156%
Products Appliances Sewing machines and parts 1.21% 0.26% $ 45,749
Entertainment and Audio Equipment Loudspeakers, unmounted 1.41% 1.40% $ 39,964
Reproduction 0.125%
Equipment Audio Equipment Electric sound amplifiers 1.07% 1.07% $ 8,745
Information Peripherals Input or output units 1.01% 1.01% $ 653,740
0.121%
Technology Electronic Components and Assemblies Printed circuits 0.36% -0.43% $ 85,738
Electronic Components TV picture tubes, CRTs 1.26% 1.23% $ 53,690
Analytical
0.047% Electronic Components Other electronic valves, tubes 0.35% -0.50% $ 12,186
Instruments
Process Instruments Gas meters 0.34% 0.34% $ 1,415
Fabricated Plate Work
Fabricated Plate Work Steam generating boilers, super‐heated
Steam generating boilers, super heated water boilers; a
water boilers; a 1.35%
35% 1.35%
35% $ 53,010
53,0 0
P d i
Production
0.046% Process Equipment Components Articulated link chain and parts 0.45% 0.31% $ 7,292
Technology
Machine Tools and Accessories Cutting blades for machines 0.42% 0.38% $ 7,501
Source: Prof. Michael E. Porter, International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, Harvard Business
School; Richard Bryden, Project Director. Underlying data drawn from the UN Commodity Trade Statistics Database.
Agenda
• Identifying
Id tif i Action
A ti Priorities
P i iti

The Process of Economic Development
Shifting
g Roles and Responsibilities
p
Old Model New Model
• Government drives economic • Economic development is a

development through policy collaborative process involving
decisions and incentives government at multiple levels,
companies, teaching and
research institutions
institutions, and
institutions for collaboration
• Competitiveness must become a bottoms-up process in which many individuals,

companies, and institutions take responsibility
• Every community and cluster can take steps to enhance competitiveness

Government and the Process of Economic Development
• Competitiveness is affected by a myriad of government entities

– Multiple agencies and departments (e.g. finance, trade, education, science
and technology,
gy, commerce,, regional
g p
policy,
y, energy,
gy, agriculture)
g )
– Multiple levels of government (nations, states, cities, etc.)
– Intergovernmental relations with neighboring countries affect
competitiveness
• Competitiveness is rarely the sole agenda of any government agency
• Coordinating structures are needed that brings together the ministries

and departments necessary to formulate and implement an economic
strategy
• Explicit mechanisms are needed to engage the private sector in dialog
about policy priorities and implementation progress

Organizing for Competitiveness in Vietnam
Recommendations
• Create effective, independent regulatory organizations
• Improve economic policy at the provincial level
• Improve mechanisms for public-private discussion and collaboration
• Enhance strategic planning and program management capacity in

the central and provincial governments
• Develop a national economic strategy process to guide priorities in

i
improving
i ththe b
business
i environment
i t

Regional Development in Vietnam
• Vietnam’s provinces are developing at different rates; prosperity levels

between the richest and poorest regions differs greatly
• Political p
power and responsibility
p y for economic development
p has been
decentralized to the provinces, who apply to the national government for funds
• Provinces have adopted unfocused growth strategies with much duplication
p
and little specialization across p
provinces
• Provinces have insufficient technical capacity for policy design and
implementation
• Each
ac pprovince
o ce sshould
ou d be ccharged
a ged with
t de
developing
e op g aan eco
economic
o cp plan
a based o
on
its unique strengths and potential
• Each province should be expected to publicly report on implementation

Competitiveness Institutions
• Economic strategy unit in the Prime Minister’s office

– Regularly updating on progress
– Lead a formal planning and program management process involving all
agencies
• Public-private competitiveness council
• Vietnam Competitiveness Institute

– To conduct analyses, benchmark vs. other countries, and train
government leaders
– Joint national and provincial
• Enhanced role of business associations

Agenda
• Identifying
Id tif i Action
A ti Priorities
P i iti
• Integrating
g g Corporate
p Social Responsibility
p y

Defining an Economic Strategy
National Value Proposition
• What is the unique competitive position of the nation or

region given its location, legacy, and existing and potential
strengths?
– What roles with neighbors, the region, and the broader world?
– What unique
q value as a business location?
– For what types of activities and clusters?
Achieving and Maintaining Parity

Developing Unique Strengths
with Peers
• What elements of context and the • What weaknesses must be addressed to

business environment are crucial achieve parity with peer countries?
priorities?
• What existing and emerging clusters
should be developed first?
• Priorities and sequencing are a necessity in economic development

The Need for an Economic Strategy
• Th
The Vietnamese
Vi t governmentt follows
f ll llargely
l an evolutionary
l ti and
d
reactive approach in response to crises and specific problems
• Foreign aid inflows are fragmented and driven by donor-priorities
• This approach has been successful in achieving success in factor-
based economic development, but will be insufficient to move to a
new stage
• Government needs leads in a broad-based discussion on a new

economic strategy that sets priorities for improvements in the
business environment and institutions
– Internally, the government needs to increase its technical capacity to
support such a strategic dialogue, for example through a strategy unit in
the Prime Minister’s office

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Vietnam’s

Professor Michael E. Porter

Ho Chi Minh, Vietnam

20081201 – Vietnam CAON.ppt 1 Copyright 2008 © Professor Michael E. Porter

• Vietnam has experienced an impressive growth over the last two

• However, reforms so far are insufficient to move Vietnam to a middle

• Improving Vietnam’s standard of living will require a long term

– A set of interrelated policy changes, institutional structures, and

20081201 – Vietnam CAON.ppt 2 Copyright 2008 © Professor Michael E. Porter

• Understanding Vietnam’s Economic Performance

• Assessing Vietnamese Competitiveness

• Organizing for Competitiveness

• Creating an Economic Strategy

20081201 – Vietnam CAON.ppt 3 Copyright 2008 © Professor Michael E. Porter

New Zealand Slovenia

Portugal Saudi Arabia Slovakia Latvia Venezuela

Compound annual growth rate (CAGR) of real GDP per employee

Source: authors calculation Groningen Growth and Development Centre (2008)

Change in Gross Fixed Investment (as % of GDP), 2003 - 2007

80% Netherlands Estonia

Vietnam Hungary Chile

• Imports as a share of GDP are equally high

Coal & Briquettes

• Understanding Vietnam’s Economic Performance

• Assessing Vietnamese Competitiveness

• Organizing for Competitiveness

• Creating an Economic Strategy

20081201 – Vietnam CAON.ppt 13 Copyright 2008 © Professor Michael E. Porter

• Competitiveness depends on the productivity with which a nation uses

• Nations compete to offer the most productive environment for business

20081201 – Vietnam CAON.ppt 14 Copyright 2008 © Professor Michael E. Porter

Quality of the Sophistication

• Macroeconomic competitiveness creates the potential for high productivity, but is

Global Competitiveness Index Score, 2008

Dynamism Score, 2002 - 2007

Social Infrastructure and Macroeconomic

• Basic human capacity • Fiscal policy

• Political institutions • Monetary policy

20081201 – Vietnam CAON.ppt 18 Copyright 2008 © Professor Michael E. Porter

Social Infrastructure and Macroeconomic

Basic health and education Fiscal policy

Political institutions Monetary Policy

20081201 – Vietnam CAON.ppt 19 Copyright 2008 © Professor Michael E. Porter

z Local rules and incentives that

• Many things matter for competitiveness

• Vietnam’s lack of openness will retard further competitiveness upgrading

• Access to finance (rank 109)

• Innovation infrastructure (rank 99)

• Logistical infrastructure (rank 96)

Vietnam’s per capita GDP rank: 70th

• Especially in land ownership in rural areas significant problems remain

• SOEs continue to play a dominant role in the Vietnamese economy,

20081201 – Vietnam CAON.ppt 27 Copyright 2008 © Professor Michael E. Porter

Government agencies Educational Institutions Industry Groups

Coal & Briquettes

Leather and Related Products

Oil & Gas

Building Fixtures and Equipment

World Economy WTO

Broad Economic Areas Asia

• The business environment at a given

States, Provinces Vietnamese provinces