Opportunities of Global Value Chains

Today's rapidly changing world of economic integration has presented both opportunities and challenges to companies in three important new trends that affect product value chains.

New trends affecting product value chains

The rise of global value chains

Breaking down global production processes offers new opportunities for the integration of rich and poor economies, with potential benefits for each party. Global value chains powered by digital technology have benefited developing economies. The breakdown engages different countries in production processes, instead of just one which must do everything to make products for export. With value chains, a country can specialize in one or more activities in which it has comparative advantages. The separation of production starts in advanced economies to cope with competition and reduce logistics costs and then spreads globally as major developing economies are opening up. However, global value chains also need to engage participating enterprises to have outstanding economies of scale. This is also a major existing challenge to companies in countries where the fundraising environment is still inadequate.

Revolutionized business strategy

Focusing on high value-added segments in the supply chain segmentation (see image above) such as product research and development (A), product design (B), marketing (E - branding, pricing, selling, etc.) and after-sales service (F). Manufacturing (C) and assembly (D) have lower added value. Therefore, in the context that the product value chain has stretched and expanded globally during the integration process, multinational corporations tend to outsource C and D segments to other developing countries. This is also an opportunity for developing countries to attract investment and develop partners to improve manufacturing levels in short and medium-term strategies. However, in the long-term strategy, developing countries and businesses also need to develop and expand their participation in A, B, E and F segments to enhance their performance. In the near future, it is necessary to make a breakthrough in the E segment (pricing, selling, etc.) by developing their product and service brands because brands play an increasingly important role in high-tech products and in countries with developed financial markets.

Brand development opportunities

The global value chain and value-added segments have provided opportunities for companies in countries that are manufacturing and assembling bases to climb up to higher value chains like developing their own brands to enhance their reputation in investment cooperation and increase corporate value in domestic and international financial markets.

Around the world, economists agree that branding has an important economic function to create added value for products and direct aggregate demand.

Our country witnessed ups and downs in Vietnamese product branding construction and development. Pre-1975 consumer goods brands like Co Ba soap, La Dalat car, Truc Bach beer and Thorakao cosmetics were once the pride of Vietnamese people. With our country’s economic transformation nearly 50 years after national reunification, some brands are still popular today, some already disappeared and some seem to be moribund.

Currently, the business community consists of more than 800,000 companies (of which about 98% are small and medium-sized enterprises (SMEs), largely operated in the limited liability form.) Among them, foreign direct investment (FDI) companies and State-owned enterprises (SOEs) account for over 22,000 and nearly 900, respectively. Vietnamese firms have gradually built up their strong brands in manufacturing fields such as electronics, automobile, agriculture, footwear, and textile and garment in order to create added values for products, not only domestically but also globally. Even though SOEs play a key role in making products for society, they also seem to have "forgotten” developing their product brands in the global value chain because they run monopolistic business, State-sole ownership and have a term-based mindset (only caring about the safety for operation terms of their incumbent leaders). All of these lead to the waste of resources, reduce service quality for the people and weaken national competition. Developing and continuously reforming corporate structure institutions to create more added values for products and effectively serve the people is a very important element in completing the socialist-oriented market economy institution as well as contributing to effective economic integration.

Proposals to support businesses to enter global value chains

The resolution of the 13th National Party Congress requires "Focusing on perfecting the synchronous and modern market economic institutions on the basis of fully complying with market laws of the economy and intensive international economic integration.”

The following is the three proposals for carrying out Party guidelines and effectively developing social capital by reforming corporate structure institutions in the changing landscape of international trade.

First, about joint stock company: To support the market economy development with global product value chains, the role of various types of business structures and institutions is very important because only when company models are exploited to their maximum potential and operated appropriately, will they be able to work at their best performance and capacity. Given the fact that most Vietnamese companies are facing challenges arising from the economies of scale due to their limited access to capital, the joint stock company is a modern solution for running business, combined with the advantages of shared ownership and professional governance. A joint stock company empowers shareholders by pooling resources and limiting liabilities and transferable ownership. This reformed model has changed the business landscape and helped increased access to capital, scale expansion and transparent operation.

In fact, in Vietnam, the joint stock company needs to be focally developed because it carries many advantages in the market economy such as elasticity and quick adaptation to innovation. Especially, most Vietnamese companies are very limited by economic scale. Moreover, it is necessary to speed up the equitization of SOEs and commercial banks in order to utilize financial capital resources more effectively and have the necessary publicity and transparency for innovation and development.

Second, about brand building and protection: Companies need to study global value chains and the world's manufacturing bases besides Vietnam to gradually build up strategies to make products of their own brands to effectively exploit their product value chains, and enhance their reputation and competitiveness in the current context of globalization. Nevertheless, while using the outsourcing strategy, they should not go too far from their core competencies such as local market and technological know-how to avoid risks arising from supply chain changes. Moreover, it is also essential to take measures to protect trademarks (like registering intellectual property rights and trademarks) in the markets where they have a business presence.

Third, about the business environment: The Government needs to build an enabling business environment for companies, including joint stock companies. It necessarily studies and gradually builds a legal environment for the favorable development of joint stock companies. In the near term, it is important to improve related laws in terms of taxation and financial markets. Especially, the financial market needs to be developed synchronously and modernly for various types, institutions and structures of companies in order to increase the effectiveness of enormous social resources for growing financial resources, boosting cooperation and competition of the business community in the global value chain and effectively ensuring the country’s development and international economic cooperation. In that process, developing a digital technology ecosystem will play an important role in forming a favorable development environment for modern corporate structures to work effectively together with globalization processes.

Driven by the Government’s effective regulations of the financial market and the continuous innovation and reform of business institution structures of the business community, the Made in Vietnam brand will increasingly develop in the digital economic age to help sharpen national economic competitiveness.

Dr. Doan Duy Khuong

Source: Vietnam Business Forum