The 2010 Vietnam Competitiveness Report

Professor Michael E. Porter Harvard Business School Vietnam Competitiveness Report Launch Hanoi, Vietnam November 30, 2010

Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM

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Copyright 2010 @ Professor Michael E. Porter

The Vietnam Competitiveness Report
Objectives • Provide policy makers and external observers with a data-rich assessment of Vietnam’s competitiveness, using a comprehensive internationally-accepted methodology • Develop an integrated set of policy recommendations, supported by a transparent logic and data • Engage decision makers from different constituencies in a dialogue on the future of Vietnam’s competitiveness Partners

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The 2010 Vietnam Competitiveness Report

• Vietnam’s Economic Position and Development Model • Assessing Vietnam’s Competitiveness • A Competitiveness Strategy for Vietnam

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Copyright 2010 @ Professor Michael E. Porter

Porter .Vietnam’s Position in 2010 • Significant growth over the last two decades • Widespread reduction in poverty • Resilience in the face of the global economic crisis Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM 4 Copyright 2010 @ Professor Michael E.

Vietnam’s Long-Term Prosperity Growth 1975 . Porter .2009 GDP per Capita. PPP adjusted in 1990 US$ CAGR: +2.15% Source: Groningen Growth and Development Centre and The Conference Board (2010) Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM 5 Copyright 2010 @ Professor Michael E.00% CAGR: +6.47% CAGR: +5.

Vietnam’s Position in 2010 • Significant growth over the last two decades • Widespread reduction in poverty • Resilience in the face of the global economic crisis BUT • Still low level of prosperity and productivity • Growing concerns about the economic sustainability of Vietnam’s current development model Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM 6 Copyright 2010 @ Professor Michael E. Porter .

Porter . authors calculations Source: EIU (2010) 7 Copyright 2010 @ Professor Michael E. 2000 to 2009 Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM .Prosperity Performance PPP-adjusted GDP per Capita. CAGR. 2009 ($USD) Selected Countries. 1999 to 2009 Growth of Real GDP per Capita (PPP-adjusted).

Porter . 1990-$USD Source: Groningen Growth and Development Centre and The Conference Board (2010) Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM 8 Copyright 2010 @ Professor Michael E.Vietnam’s Labor Productivity PPP-adjusted GDP per Employee.

fuelled by Vietnam’s integration into the global economy. has been the key driver of Vietnam’s growth • Foreign investors have combined capital with Vietnamese labor and imported inputs to serve global markets.Vietnam’s Current Development Model • Structural change. increasingly also domestic demand Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM 9 Copyright 2010 @ Professor Michael E. Porter .

2000 .2008 Source: General Statistics Office. Porter . ACI calculations Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM 10 Copyright 2010 @ Professor Michael E. Vietnam.Structural Change and Vietnamese Growth Decomposing Vietnamese Labor Productivity Growth.

Porter .Drivers of Structural Change: Economic Openness Openness to Trade Openness to Investment Source: EIU (2010) Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM 11 Copyright 2010 @ Professor Michael E.

. Vietnam.The Growth of the FDI Sector Growth (2000 = 100) Profits (return on fixed capital) 450 400 Profits 30% 25% 350 300 250 200 150 100 50 0 0% # Firms Workers Fixed Capital 20% 15% 10% 5% 2000 Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM 2001 2002 2003 12 2004 2005 2006 2007 Copyright 2010 @ Professor Michael E. Porter Source: Data from General Statistics Office.

but have not raised prosperity levels beyond the low wages in manufacturing • There is little evidence of positive spill-overs from FDI to the rest of the Vietnamese economy in terms of improving productivity and technology • Vietnam’s attractiveness to investors is almost solely the result of the low prevailing wages • In a changing global market environment.Vietnam’s Current Development Model • Structural change. increasingly also domestic demand • Value added and productivity in Vietnam remains low . especially in manufacturing • FDI and exports create jobs. Porter . fuelled by Vietnam’s integration into the global economy. has been the key driver of Vietnam’s growth • Foreign investors have combined capital with Vietnamese labor and imported inputs to serve global markets. this is unlikely to be sufficient for sustained growth 13 Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM Copyright 2010 @ Professor Michael E.

47 800 600 400 200 0 ila /J ak ar ta a po re ok m an Ko re a an ay si en Vi et na M an Ja p an gk bo d C Copyright 2010 @ Professor Michael E.Relative Wages: Selected Countries Avg.146.15 $82.29 $48.95 $156.809.45 $336.19 $117.91 1800 1600 1400 1200 1000 $829. Porter $540.72 $47.04 $166. monthly wage (US$) 2000 $1.36 iw Si na Ta he n M al zh M et ro /B So ut ai la nd a/ S pp in es / hi n Source: Philippines Department of Labor and Employment (2010) Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM Ph i li 14 Th In d C on es ia am h ia .71 $1.

6% 0.3% 0.2% 0. Porter 2007 2008 20 . WTO (2010) 0.5% 0.7% TOTAL 0.4% 0.1% Source: UNComTrade.8% Semi-processed Goods Unprocessed Goods Services 0.Vietnam’s Exports By Type of Industry World Export Market Share (current USD) Processed Goods 0.0% Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM 1997 1998 1999 2000 2001 2002 15 2003 2004 2005 2006 Copyright 2010 @ Professor Michael E.

416% Change in Vietnam’s world export market share. Institute for Strategy and Competitiveness. Underlying data drawn from the UN Commodity Trade Statistics Database and the IMF BOP statistics. Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM 16 Exports of US $2 Billion = Copyright 2010 @ Professor Michael E. 1997 – 2009 Source: Prof.2009 Change In Vietnam’s average world export share: 0. Michael E. Harvard Business School. Porter . Porter.Vietnam’s Cluster Export Portfolio 1997 . Project Director. International Cluster Competitiveness Project.275% Vietnam’s world export market share. Richard Bryden. 2009 Vietnam’s average world export share: 0.

Share of World Exports by Cluster World Market Share 0.5% 5% . Equipment & Services Lightning & Electrical Equipment Power Generation Furniture Construction Materials Heavy Construction Services Forest Products Financial Services Analytical Education & Instruments Knowledge Medical Creation Devices Communications Publishing Equipment & Printing Biopharmaceuticals Chemical Products Oil & Gas Motor Driven Products Tobacco Heavy Machinery Production Technology Automotive Apparel Leather & Related Products Plastics Aerospace Mining & Metal Engines Manufacturing Footwear Sporting & Recreation Goods 17 Marine Equipment Note: Clusters with overlapping borders have at least 20% overlap (by number of industries) in both directions. Porter .5% .5% 1.5% .1. Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM Copyright 2010 @ Professor Michael E. Building Fixtures.10% Fishing & Fishing Products Entertainment Textiles Prefabricated Enclosures Vietnam. 2008 Hospitality & Tourism Processed Food Jewelry & Precious Metals Business Services Agricultural Products Transportation & Logistics Distribution Services Aerospace Vehicles & Information Defense Tech.

The External Environment in 2010 Opportunities • New opportunities as a means to serve new demand – Emergence of Asia – Increasing market of consumers with similar needs as in Vietnam • New opportunities as a supply base – Cost pressure on global companies – China + 1 strategy of MNCs Threats • Disruptions that could limit demand – Rising protectionism – Overheating in China. sluggish growth elsewhere – Climate change • Competition that could reduce Vietnams attractiveness – From other low-wage locations – From within the increasingly open ASEAN region Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM 18 Copyright 2010 @ Professor Michael E. Porter .

Vietnam’s Current Development Model Emerging Weaknesses • Low sophistication in the export sector coupled with strong domestic demand drive growing trade deficit Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM 19 Copyright 2010 @ Professor Michael E. Porter .

000 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Pr 20 Source: Data from General Statistics Office.000 -20.000 10. Porter . Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM 20 Copyright 2010 @ Professor Michael E.000 70.000 30.000 20.Vietnam’s Balance of Trade 1995 – 2008 US$M 80.000 40. Vietnam.000 60.000 50.000 0 -10.

Vietnam’s Current Development Model Emerging Weaknesses • Low sophistication in the export sector coupled with strong domestic demand drive growing trade deficit • Real appreciation of the Dong further contributes to the deficit Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM 21 Copyright 2010 @ Professor Michael E. Porter .

Porter .Vietnam’s Currency Valuation Index (2000 = 100) 160 CPI VN/CPI USA 150 140 Exchange Rate Index VN 130 120 110 100 90 80 2000 2001 Source: 2000-2008 data – WDI. 2009 data – EIU Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM 2002 2003 22 2004 2005 2006 2007 2008 2009 Copyright 2010 @ Professor Michael E.

Vietnam’s Current Development Model Emerging Weaknesses • Low sophistication in the export sector coupled with strong domestic demand drive growing trade deficit • Real appreciation of the Dong further contributes to the deficit • Significant capital inflows fuel domestic demand growth and inflation • Expansionary fiscal and monetary policies worsen inflation. Porter . rather than control it Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM 23 Copyright 2010 @ Professor Michael E.

2009 25% 20% 15% Vietnam 10% Indonesia Malaysia China Thailand 5% 0% -5% Source: EIU 2010 2000 2001 2002 2003 2004 24 2005 2006 2007 2008 2009 Copyright 2010 @ Professor Michael E.Rate of Inflation % change in CPI Selected Countries. 2000 . Porter Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM .

rather than control it • Falling ratio of GDP growth to investment increases the need for capital inflows to maintain the growth rate • Demand growth is outstripping the existing microeconomic capacity in terms of skills and infrastructure Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM 25 Copyright 2010 @ Professor Michael E.Vietnam’s Current Development Model Emerging Weaknesses • Low sophistication in the export sector coupled with strong domestic demand drive growing trade deficit • Real appreciation of the Dong further contributes to the deficit • Significant capital inflows fuel domestic demand growth and inflation • Expansionary fiscal and monetary policies worsen inflation. Porter .

and Pham Truong Hoang (2009) – data drawn from Japanese-Affiliated Manufacturers in Asia. Porter . Note: Surveys in 2003-2004 did not include questions about recruitment of general workers Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM 26 Copyright 2010 @ Professor Michael E.Ease of Worker Recruitment Percentage of Firms that report Difficulty in Recruiting Source: Junichi Mori . Nguyen Thi Xuan Thuy. JETRO.

rather than control it • Falling ratio of GDP growth to investment increases the need for capital inflows to maintain the growth rate • Demand growth is outstripping the existing microeconomic capacity in terms of skills and infrastructure • The gap between announced and implemented FDI is rising Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM 27 Copyright 2010 @ Professor Michael E. Porter .Vietnam’s Current Development Model Emerging Weaknesses • Low sophistication in the export sector coupled with strong domestic demand drive growing trade deficit • Real appreciation of the Dong further contributes to the deficit • Significant capital inflows fuel domestic demand growth and inflation • Expansionary fiscal and monetary policies worsen inflation.

000 50.Foreign Direct Investment in Vietnam US $M 1988 .000 60.000 40.Vietnam Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM 28 Copyright 2010 @ Professor Michael E. Porter .2008 Registered Actively Invested 70.000 20.000 0 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Source: General Statistics Office.000 10.000 30.

Porter .The 2010 Vietnam Competitiveness Report • Vietnam’s Economic Position and Development Model • Assessing Vietnam’s Competitiveness • A Competitiveness Strategy for Vietnam Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM 29 Copyright 2010 @ Professor Michael E.

Determinants of Competitiveness Microeconomic Competitiveness Quality of the National Business Environment State of Cluster Development Sophistication of Company Operations and Strategy Macroeconomic Competitiveness Social Infrastructure and Political Institutions Macroeconomic Policies 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 Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM 30 Copyright 2010 @ Professor Michael E. Porter .

Macroeconomic Competitiveness Social Infrastructure and Political Institutions Human development – – Basic education Health system • • • • Macroeconomic Policies Fiscal policy – – Government surplus/deficit Government debt • Political institutions – – – – – Political freedom Voice and accountability Political stability Government effectiveness Centralization of economic policymaking • Monetary policy – Inflation • Rule of law – – – – – Security Judicial independence Efficiency of legal framework Business costs of corruption Civil rights 31 Copyright 2010 @ Professor Michael E. Porter Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM .

capabilities.Determinants of Competitiveness Microeconomic Competitiveness Quality of the National Business Environment State of Cluster Development Sophistication of Company Operations and Strategy Macroeconomic Competitiveness Social Infrastructure and Political Institutions Macroeconomic Policies Sophistication of Company Operations and Strategy • The internal skills. and management practices needed for companies to attain the highest level of productivity and innovation possible Endowments Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM 32 Copyright 2010 @ Professor Michael E. Porter .

Determinants of Competitiveness Microeconomic Competitiveness Quality of the National Business Environment • The external business environment conditions that allow companies to reach high levels of productivity and innovation Quality of the National Business Environment State of Cluster Development Sophistication of Company Operations and Strategy Macroeconomic Competitiveness Social Infrastructure and Political Institutions Macroeconomic Policies Endowments Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM 33 Copyright 2010 @ Professor Michael E. Porter .

Quality of the National Business Environment Context for Context for Firm Firm Strategy Strategy and Rivalry and Rivalry • Local rules and incentives that encourage investment and productivity  Open and vigorous local competition Factor Factor (Input) (Input) Conditions Conditions • Access to high quality business inputs Demand Demand Conditions Conditions • Sophisticated and demanding local customers and needs Related and Related and Supporting Supporting Industries Industries • Availability of suppliers and supporting industries • Many things matter for competitiveness • Successful economic development is a process of successive upgrading. Porter . in which the business environment improves to enable increasingly sophisticated ways of competing Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM 34 Copyright 2010 @ Professor Michael E.

specialized assets. Porter . Social Infrastructure and Political Institutions Macroeconomic Policies Endowments Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM 35 Copyright 2010 @ Professor Michael E. and institutions in particular fields.Determinants of Competitiveness Microeconomic Competitiveness Quality of the National Business Environment State of Cluster Development Sophistication of Company Operations and Strategy Macroeconomic Competitiveness State of Cluster Development • A geographic concentration of firms.

Interiors. Brake. Electrical. Tire. Rubber. Interiors. Wheel. Suspension. Machining. Plastics. Stamping. Steering. Plastics. Electrical. Rubber. Trimming Parts (2ndd & 3rd tiers) Parts (2n & 3rd tiers) Globally Competitive Regionally Competitive Nationally Significant Nationally Insignificant Government Government Education and Education and Technical Technical Institutions Institutions 36 Associations Associations Copyright 2010 @ Professor Michael E. Function. Electronics and Electrical Systems Bodyworks. Bodyworks. Tire. Suspension. 2003 study Assemblers MotorMotorcycles cycles Passenger Passenger Cars Cars Pickup Pickup Trucks Trucks Distribution Distribution Finance Finance Testing Testing Engines.The Thai Automotive Cluster: The Activity Dimension Steel Steel Plastics Plastics Rubber&Tires Rubber&Tires Electronics Electronics Glass Glass Leather & Leather & Fabric Fabric Machinery Machinery Tools Tools Mold&Die Mold&Die Jig&Fixture Jig&Fixture Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM Source: Sasin-team analysis. Forging. Steering. Engines. Machining. Brake. Trimming Function. Casting. Forging. Porter . Drivetrains. Wheel. Casting. Drivetrains. Electronics and Electrical Systems Components and Module Makers Components and Module Makers (1stst tier) (1 tier) Specialized Specialized Consultants Consultants Services Services Stamping.

Clusters and Competitiveness • Clusters increase productivity and operational efficiency • Clusters stimulate and enable innovations • Clusters facilitate commercialization and new business formation • Clusters reflect the fundamental influence of linkages and spill-overs across firms and associated institutions in competition Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM 37 Copyright 2010 @ Professor Michael E. Porter .

. political. The Competitive Advantage of Nations. Porter . and legal stability • Improving human capital • Efficient basic infrastructure • Lowering regulatory costs of doing business • • • • Productivity Increasing local rivalry Market opening Advanced infrastructure Incentives and rules encouraging productivity • Cluster formation and activation Unique Value • Advanced skills • Scientific and technological institutions • Incentives and rules encouraging innovation • Cluster upgrading Source: Porter. Macmillan Press.Stages of National Competitive Development Shifting Policy Imperatives Factor-Driven Economy InvestmentDriven Economy InnovationDriven Economy Low Cost Inputs • Macro. Michael E. 1990 Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM 38 Copyright 2010 @ Professor Michael E.

Porter .Vietnam’s Competitiveness Profile Position Relative to Current Prosperity Country Competitiveness Macroeconomic Competitiveness Microeconomic Competitiveness Company Operations and Strategy Political Institutions Macroeconomic Policy National Business Environment Rule of Law Significant advantage Moderate advantage Neutral Moderate disadvantage Significant disadvantage Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM Human Development 39 Copyright 2010 @ Professor Michael E.

Porter . 2009 Corruption Perception Index. 2009 versus 2001 Note: Ranks only countries available in both years (91 countries total) Source: Global Corruption Report. Global Corruption Report. 2009 Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM 40 Copyright 2010 @ Professor Michael E.Rank in Global Corruption Index. 2009 Deteriorating Improving Low corruption High corruption Change in Rank.

but major reforms (e.g. low effectiveness of the significant ongoing further investments Solid communication infrastructure as a result of liberalization and competition Growing but still shallow financial system. Project 30) under way Poor innovation infrastructure      Related and Related and Supporting Supporting Industries Industries   Natural emergence of clusters.Vietnam’s National Business Environment Context for Context for Firm Firm Strategy Strategy and Rivalry and Rivalry   High level of openness to foreign investors WTO/ASEAN liberalization commitments but remaining important barriers Weak competition policy and enforcement Unequal competition among companies. serious shortage of skilled labor Modest performance on administrative infrastructure. highly volatile and speculative. sophistication of local customers Weak regulatory quality standards and enforcement   Basic physical infrastructure in place. Porter    Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM . yet improving. but focus on narrow activities with weak presence of local suppliers and service providers Shallow roots of FDI in the local economy Sector-oriented policies ineffective and not systematically focused on clusters 41 Copyright 2010 @ Professor Michael E. with SOEs receiving special treatment Competition focused on price. with limited access to credit for new private companies Education system is growing but provides largely insufficient quality. not quality Unclear separation of government role as a regulator from that as an owner Equitization of SOEs not oriented towards improving performance   Factor Factor (Input) (Input) Conditions Conditions    Demand Demand Conditions Conditions Sizeable and growing market Low.

4 0.Regulatory Quality: Selected Countries Composite Measure of Regulatory Quality 0. Global governance indicators. Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM 42 Copyright 2010 @ Professor Michael E. Porter .2 Malaysia 0.2 Vietnam -0.0 Thailand China -0. Values for 1997.6 0. 2009. 1999 and 2001 have been interpolated.4 -0.8 0.6 -0.8 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: World Bank Institute.

Sophistication of Vietnamese Companies • High levels of flexibility and responsiveness to market opportunities • Short-term. not quality • Low level of operational sophistication • Large SOEs operating as corporate groups with little synergy • Huge gap in operational effectiveness and productivity between Vietnamese SOEs. Vietnamese private companies. and foreign MNCs Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM 43 Copyright 2010 @ Professor Michael E. opportunistic company strategies • Compete primarily on cost. Porter .

focused on control • While the development model has been successful in the past. the signs of its fragility are increasing • Vietnam needs a strategy to develop a new development model.Vietnam’s Competitiveness in 2010: Summary • Vietnam’s key current competitive advantages are based on inherited endowments. Porter . distinctive advantages • Government efforts to meet the infrastructure and regulatory needs of a growing economy are hampered by a traditional governance system. especially its geographic location and demographic profile • Government has enabled these advantages to reveal itself through market opening and investments in basic infrastructure • It has not created new. build on distinctive competitive advantages that can sustain growth in a changing global market environment Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM 44 Copyright 2010 @ Professor Michael E.

The 2010 Vietnam Competitiveness Report • Vietnam’s Economic Position and Development Model • Assessing Vietnam’s Competitiveness • A Competitiveness Strategy for Vietnam Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM 45 Copyright 2010 @ Professor Michael E. Porter .

Towards a New Strategy: Three Guiding Principles A new orientation towards competitiveness • From a focus on macroeconomic drivers of structural change to upgrading macro. and transformed SOE’s A new role for government • From a government controlling a transition economy to a government creating competitive advantages in a market economy Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM 46 Copyright 2010 @ Professor Michael E. Porter .and microeconomic foundations of productivity A structural transformation in the role of the private sector • From a focus on SOEs and foreign MNCs to a market-driven combination of private firms. MNCs.

Porter .Vietnam’s Competitiveness Agenda Strategic Action Priorities Address emerging challenges Prepare the next stage of development Manage the growing macroeconomic imbalances Address emerging bottlenecks in key input factors Create the foundations for higher productivity Secure current growth Enable future growth Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM 47 Copyright 2010 @ Professor Michael E.

and the Central Bank – Set clear monetary policy goals • Financial market regulation – Enhance regulatory oversight of the financial system through the Central Bank • Coordination of overall macroeconomic policy over time – Strengthen mandate and operations of the Central Committee for Financial and Monetary Policies Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM 48 Copyright 2010 @ Professor Michael E.Manage Macroeconomic Imbalances Key Action Proposals • Transparency of fiscal position of the government and SOEs – Create central entity with mandate to report on fiscal position of all government entities and of SOEs and on the current state of the economy • Budget discipline – Establish regular monitoring/auditing of public spending – Strengthen quality and effectiveness of public debt management • Consistent and predictable monetary policy – Clarify roles of the National Assembly. Porter . the government.

workforce skills. Porter . current policies lack effectiveness.Address Microeconomic Bottlenecks Key Action Proposals • Microeconomic bottlenecks are emerging in physical infrastructure (transport. energy). and administrative capacity • The government has identified all of these areas as action priorities • However. despite sometimes significant financial commitments Outlines of a new approach • Identify and alleviate problems in specific regional clusters • Focus individual cluster efforts on most pressing bottleneck • Create cluster-based task-force with mandate and power to take action • Learn from individual problems about general issues and possible nationwide solutions Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM 49 Copyright 2010 @ Professor Michael E.

Possible Cluster Initiatives Electronics & engineering cluster in Hanoi and neighboring regions: Local supplier capacity Tourism cluster in the Central Region: Concept and related services Garment cluster in Ho Chi Minh Region: Workforce skills Logistics cluster in Ho Chi Minh City region: Infrastructure Agro-processing cluster in the Mekong Delta region: Value-added Activities Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM 50 Copyright 2010 @ Professor Michael E. Porter .

oversee and evaluate infrastructure development – Strengthen the system for managing public procurement – Provide viable market-based financing options for infrastructure investment – Address electricity shortages through a utility action package of investment. Porter .Create Foundations for Higher Productivity Key Action Proposals: Policies • Education and workforce skills – Develop a national workforce strategy with rigorous studies on the type of skills and competencies required for future growth – Reform the regulatory framework for the education sector – Promote vocational training – Set up a National Productivity Fund to support cluster-based initiatives in skill upgrading efforts • Physical infrastructure – Create a centralized planning mechanism to coordinate. market regulation and technological measures Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM 51 Copyright 2010 @ Professor Michael E.

Create Foundations for Higher Productivity Key Action Proposals: Policies (continued) • Governance of State-Owned Enterprises (SOEs) – Separate the role of the government as an owner from that as a regulator – Define and enforce modern governance standards for SOEs – Ensure competition and market discipline in the markets in which SOEs operate – Improve the equitization process and define policy for effective management of divestment proceedings • Attraction of Foreign Direct Investment (FDI) – Develop a new FDI attraction strategy for Vietnam – Strengthen the capacity of the Foreign Investment Agency (FIA) – Set up outreach initiatives with foreign MNCs to build the local supplier base and clusters around foreign investments Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM 52 Copyright 2010 @ Professor Michael E. Porter .

especially in areas linked to investment attraction. Porter . and SME/private sector-development. workforce skill development. industrial parks. – Conduct a national cluster mapping project to identify and assess clusters across the country – Encourage the launch of pilot cluster initiatives through the creation of a Vietnamese Cluster Initiative Fund Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM 53 Copyright 2010 @ Professor Michael E.Create Foundations for Higher Productivity Key Action Proposals: Policies (continued) • Cluster development – Re-organize existing policies around clusters.

The Role of Government in Cluster Initiatives

Government should

Government may

Government should not
• Pick favored clusters • Pick favored companies • Subsidize or distort competition • Define cluster action priorities

• Support all existing and emerging clusters • Participate • Enable data collection and dissemination at the cluster level • Be ready to implement recommendations

• Initiate/ Convene • Co-Finance

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Industrial Policy versus Cluster-Based Policy
Industrial Policy
• Target areas of perceived market demand or attractive technology • Intervene in competition (subsidies, protection, etc.) • Favor domestic companies • Require sustained financial commitment by the public sector • Centralize decisions at the national level • Has a high failure rate; short term impact but low sustainability

Cluster-Based Policy
• Leverage existing assets, history, and geographic location • All clusters are good • Enable competition to be more productive and sophisticated • Neutral on ownership • Require sustained participation by all actors • Encourage initiative at all geographic levels • Has rising impact over time; some quick successes are possible

Distort and impede competition
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Enhance and upgrade competition
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Organize Public Policy around Clusters
Business Attraction Education and Workforce Training Science and Technology Infrastructure (e.g., centers, university departments, technology transfer) Setting standards

Export Promotion

Clusters
Market Information and Disclosure

Specialized Physical Environmental Stewardship Infrastructure Natural Resource Protection

• Clusters provide a framework for organizing the implementation of many public policies and public investments directed at economic development
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Growth. and Diversification Grow activities in related clusters Grow activities in new industries within existing clusters Upgrade the quality of activities in existing clusters Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM 57 Copyright 2010 @ Professor Michael E.Clusters. Porter .

including hiring. Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM 58 Copyright 2010 @ Professor Michael E. promotion. starting with pilot agencies – Develop comprehensive civil service reform program with modernization of organizational structures and HR practices. etc. Porter . pay.Create Foundations for Higher Productivity Key Action Proposals: Architecture • Policy Process – Creation of a central Regulatory Impact Assessment (RIA) unit to review existing and a new laws and regulations – Establishment of an institutionalized review process for draft laws and regulations hat invites stakeholders to comment – Development of a medium-term budget planning process with rolling updates • Public Sector Capacity – Establishment of the Prime Minister’s Policy Unit – Launch anti-corruption campaign – Review of the current training system for public officials.

Porter .The Process of Economic Development Shifting Roles and Responsibilities Old Model Old Model •• Government drives economic Government drives economic development through policy development through policy decisions and incentives decisions and incentives New Model New Model •• Economic development is a Economic development is a collaborative process involving collaborative process involving government at multiple levels. and private research institutions. companies. companies. government at multiple levels. and private sector organizations sector organizations • Competitiveness is the result of both top-down and bottom-up processes in which many individuals. teaching and research institutions. and institutions take relevant decisions Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM 59 Copyright 2010 @ Professor Michael E. teaching and companies.

Create Foundations for Higher Productivity Key Action Proposals: Architecture (continued) • Regional government – Launch funding competition for development of regional economic development strategies – Develop a knowledge and skill infrastructure for regional development – Review the current structure of authority delegation between the central and regional governments Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM 60 Copyright 2010 @ Professor Michael E. Porter .

Porter .Policy Levels Influencing Competitiveness World Economy WTO Broad Economic Areas South-East Asia Groups of Neighboring Nations Greater Mekong Region • The business environment at a given location is the cumulative outcome of policy at all levels of geography • Microeconomic competitiveness raises the importance of lower levels of geography • The allocation of responsibilities across levels of geography is a crucial policy challenge Nations Vietnam States. Provinces Vietnamese provinces Metropolitan and Rural Areas Hanoi region Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM 61 Copyright 2010 @ Professor Michael E.

. and sufficient administrative capacity at local and regional level Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM 62 Copyright 2010 @ Professor Michael E. states. internal competition. Porter .g. provinces. metropolitan areas) • Many essential levers of competitiveness reside at the regional level • Region’s specialize in different sets of clusters • Cluster strength directly impacts regional performance • Each region requires its own distinctive competitiveness agenda • Improving competitiveness requires effective policy collaboration between regions and the national government • Decentralization is important to foster regional specialization.Regions and Competitiveness • Economic performance varies significantly across sub-national regions (e. and greater government accountability • Effective decentralization requires clarity on roles and responsibilities.

Implementation Model Creating a National Competitiveness Council National Competitiveness Council Coordinate Monitor Report Task Forces Agencies Action Action 63 Action Public Government Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM Copyright 2010 @ Professor Michael E. Porter .

the national control over policies allows for a more traditional addressed directly approach Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM 64 Copyright 2010 @ Professor Michael E.Implementation Model National Institutional Reforms National Policy Reforms • Upgrade quality of policy design through institutional reforms • Translate cluster experience into better national policies Regional Cluster Efforts • Develop local solutions in regional clusters • Bottom-up approach with gradually increasing scope is more likely to mobilize • For microeconomic upgrading. big-bang approach more likely to engage all relevant constituencies than traditional top-down efforts • Macroeconomic policies controlled at the national level. a bottom-up approach with gradually increasing scope is all relevant constituencies than traditional top-down. can and should be • For macroeconomic upgrading. Porter .

and the broader world? Developing Unique Strengths • What elements of the business environment can be unique strengths relative to peers/neighbors? • What existing and emerging clusters represent local strengths? Achieving and Maintaining Parity with Peers • What weaknesses must be addressed to remove key constraints and achieve parity with peer countries? • Priorities and sequencing are necessity in economic development Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM 65 Copyright 2010 @ Professor Michael E. legacy. the region. and potential strengths? – What unique value as a business location? – For what types of activities and clusters? – And what roles with neighbors.Creating a National Economic Strategy for Vietnam National Value Proposition • What is the distinctive competitive position of Vietnam given its location. existing strengths. Porter .

Porter .Role of a National Value Proposition • The value proposition should be an inspiration to the Vietnamese population • The value proposition is a signal to companies from abroad and at home about what assets and conditions can expect to find in Vietnam • The value proposition is a signal to policy makers in Vietnam of what type of improvements are most critical in order to make the value proposition a reality Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM 66 Copyright 2010 @ Professor Michael E.

apparel. US • Natural resources • Established positions in selected global markets (footwear.) • Strong clusters in areas like footwear. coffee. and seafood products • … Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM 67 Copyright 2010 @ Professor Michael E.Towards A Value Proposition for Vietnam What is Unique about Vietnam? • Location • Demographics • Legacy of influence from China. . coffee. Europe. apparel. automotive. and seafood products) • … What does Vietnam aim to offer? • Access to a growing market and region • Manufacturing base to compliment MNCs Chinese operations • Integration into/access to ASEANwide cluster networks (electronics. Porter ..

Porter .Vietnam’s Competitiveness Challenge: From Ambition to Action Provide access to existing comparative advantages Enable emergence of new competitive advantages Low labor costs Natural endowments Productivity Vietnam Competitiveness 20101130 – v8 Mon Nov 22 10AM 68 Copyright 2010 @ Professor Michael E.

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