How Can Supporting Industries Participate More Deeply in Global Supply Chains?

10:02:19 AM | 8/12/2020

Vietnam is facing many opportunities to accommodate shifting foreign direct investment (FDI) inflows as well as to increase the sustainability of supply chains. However, the country has difficulty participating deeply in the processing and manufacturing industry and is lagging behind other countries in the region in this respect.

In the midst of the gloomy global economy, despite the distress of the pandemic, the macroeconomic indicators still show plenty of room for development. With 13 bilateral and multilateral free trade agreements in force, plus the recently signed Regional Comprehensive Economic Partnership (RCEP) and two other FTAs under negotiation, Vietnam is one of the most open economies in the world, creating great opportunities to develop new supply chains. In attracting investment, in the first ten months of 2020, Vietnam attracted US$23.48 billion worth of foreign direct investment (FDI) in the first ten months of 2020, equivalent to 80.6% of the same period in 2019. In which, the disbursed capital was estimated at US$15.8 billion, equaling 97.5% over the same period in 2019. Thus, compared to the same period in 2019, the first 10 months of 2020 witnessed decreases both in attracting capital and disbursing FDI. Despite the decline, this result is still better than the global reduction of 30% - 40% in 2020. This is a quite good initial result compared to the rest of the world, a lever for Vietnam to reverse the negative effects of Covid-19.

However, according to Mr. Nguyen Van, Vice Chairman of Hanoi Supporting Industries Business Association (HANSIBA), the current concern is that the level of Vietnam's participation in global and regional value chains is still limited, despite being one of the world's most open economies (according to the World Bank, Vietnam's openness is 1.5 times higher than Thailand and 5 times that of China). Vietnam's participation in global and regional value chains is still much lower than that of other ASEAN countries. According to World Bank data, in 2018, Vietnam only generated US$20.4 billion by participating in global and regional value chains, ranking 53rd out of 174 countries. This figure was less than a quarter of the Philippines with US$84.8 billion (ranked 34th).

Besides, Mr. Van said that the level of participation in complex and sophisticated stages of Vietnam was still low. According to the World Development Report (WDR) in 2020, the level of participation of Vietnam is currently at the level of "limited processing and manufacturing" and needs to move up in global value chains (GVC) to improve its productivity.

According to calculations, GVC currently accounts for 66% of commercial transactions, but the level of localization of Vietnam is still low, only 28% of the total trade turnover, nearly half that of China. Not only that, Vietnam focuses too much on a number of markets, products and businesses such as: four leading products (textiles, electronics, chemicals, metals) accounting for two thirds; four largest markets (China, Japan, Korea and the United States) accounting for 60%; the top four groups (Samsung, Foxconn, Intel, Panasonic) accounting for 70% of trade turnover in GVC. This means that 70% of Vietnam's export turnover comes from FDI enterprises. Meanwhile, the ability of domestic enterprises to participate in and connect to the GVC is limited.

In 2020, it is estimated that every 1% increase in participation in GVC will increase per capita income by more than 1% (twice the rate for traditional trade). Therefore, according to many economists, increasing Vietnam's participation in the GVC is an important factor to promote labor productivity growth and economic growth. In the medium and long term, Vietnam should have reforms based on close public-private coordination, and proactively attract investors seeking new production facilities outside China to diversify the global supply chains.

In addition, Mr. Van added that two important factors to prioritize were training high-quality workers and building connected infrastructure, which included focusing on development of infrastructure projects of specialized industrial parks and supporting industrial parks. The Government has approved the planning of industrial parks nationwide; promoted higher post-secondary education and training, and created a highly skilled and qualified workforce. It is especially important to focus on developing domestic supporting industry enterprises. At the same time, all levels of authorities need to coordinate to implement synchronously and drastically "Solutions to promote the development of supporting industries" as stated in Resolution 115/NQ-CP dated August, 2020 by the Prime Minister.

To promote the domestic supporting industry development, according to Mr. Van, it is necessary to reduce costs of loading and unloading goods, storing, transporting and improving administrative procedures. In addition, the business environment should continue to be improved in the direction of transparency, clarity, consistency, stability and predictability.

“This process requires close coordination and joint effort of stakeholders such as the role of the State, the Government, ministries and localities in identifying strategic priorities, creating policy frameworks, improving business investment environment; enhancing the role of groups and associations such as Vietnam Association of Supporting Industries (VASI) and Hanoi Supporting Industries Business Association (HANSIBA) in linking businesses. From there, SMEs, including the supporting industry community, can be proactive and ready to participate in global supply chains,” Mr. Van affirmed.

By Quynh Anh, Vietnam Business Forum