Promoting Value Chain-based Business

 

This private sector contributed 22.9 percent of total social investment in 2000 and 37.6 percent in 2013. It creates 14.5 million jobs, accounting for 76.7 percent of total non-agricultural employment, she noted.

 

The report notes that the future prosperity of Vietnam's economy will largely depend on further-strengthened link to global value chains, maximised FDI flow spreading, and especially private sector development, particularly medium and large-sized enterprises.

 

The gradual opening up of the economy has allowed private sector to develop by engaging deeply into global value chains. The world is witnessing a period of unprecedented economic interdependence among countries with the rapid development of value chain-based business operations. For example, the manufacturing sector based on global value chains expanded from 37 percent to 48 percent of the total value of exports from 2005 to 2008 and this rate in Vietnam was from 52 percent to 72 percent. Most export growth has been driven by the choice of multinational corporations once they have identified Vietnam as a production base in Asia. FDI flows into Vietnam averages about US$8 billion a year. However, weak value chain and insufficient supporting industrial companies for the poor export sector have weakened the ripple effect of FDI on the domestic economy of Vietnam. In fact, while FDI firms have been assembling and manufacturing relatively upmarket products for international markets, most Vietnamese businesses are still looking on the local domestic or exporting low-valued goods. Vietnam imports up to 90 percent of raw materials for export production. The main contribution of Vietnam to global value chains is the supply of lowly-skilled labourers. The private sector, mainly constituted by SMEs, only involves in global production networks through their cooperation with multinational corporations and hardly exports directly.

 

That’s right. We have a wrong view that we must support small businesses for their development. This will bring about the sense of reliance. No company wants to grow up because they will be supported and prioritised if they are small. So, why should they have to grow up to give up windfalls? And, in a long period, Vietnam focused on increasing new business start-ups and made light of empowering internal strengths for existing ones to engage in global value chains. Currently, medium-sized companies account for only about 2 percent of businesses in operation while 95-96 percent are small and micro and small enterprises (with fewer than 10 employees). Because of small scale, they are disqualified for exporting products to foreign markets or participating in global production networks. The engagement of Vietnamese companies in value chains is lower than other economies of the similar scale of Vietnam in the Southeast region, 36 percent versus close to 60 percent in Thailand and Malaysia. SMEs generate nearly 77 percent of jobs and contribute 40 percent to GDP but only 20 percent to export value. Many of these companies are led by women who hardly contact big companies to join global value chains. Therefore we need to focus on supporting medium and large enterprises to leverage the entire private sector.

 

Value chain-based business has enabled Vietnam's economy to select better sectors like electronics, seafood and garment - textile for development instead of building the entire industry. For example, when Samsung Group invested in Thai Nguyen province, it has entailed a series of satellite companies to supply parts for this group. Earlier, Honda also had a similar model when it invested in Vinh Phuc province. Vietnamese SMEs can manufacture low-end products or high-end products.

 

To support SME development, Vietnam must build a fair business environment for all economic sectors, particularly in access to resources like land, credit and market. It also needs to promulgate the Law on SME. It should focus on the quality and scale of SMEs rather than the count of them. The law will be the basis for Vietnam to have SME support strategies and increase medium and large-sized enterprises to enhance labour productivity.

 

Other factors also need to be taken into account like speeding up the development of supporting industries, encouraging big companies to invest in infrastructure for SMEs, developing human resources, and choosing sectors of sharp competitive edges for prioritised development. Outperforming companies of medium scale or bigger will be chosen to be developed into national brands.