4-1-1 Lan Huong Nguyen

8/18/2019 4-1-1 Lan Huong Nguyen

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Role of the State in industrial upgrading in Vietnam

MA. Huong Lan Nguyen

Director of Department of Macroeconomic and Strategy Studies

Development Strategy Institute

Ministry of Planning and Investment

Abstract

As Vietnam is transitioning from a highly centralized planned to a market-oriented economy, it is widely recognized

that Vietnam has adopted the strategy of state-led development since its first days of the renovation process.

However, whether the idea of State-led development and national economic planning has worked well in attaining

sustainable economic growth and transforming the economy from an agrarian to an industrialized and successfully

integrated into the global economy remains a controversial issue. This paper analyzes industrial policy framework

and performance of the industrial sector past 10 years to show that the State-led mode has not yet succeeded in

industrial upgrading. Over 20 years of industrialization, Vietnam is still in the early stages of industrialization. The

practice of policy design and implementation revealed that lots of policy measures was either ineffective because of

desk plans or encourage rent-seeking activities or unable to create new comparative advantages. Poor quality of

policy formulation, weak link between plans and budget and less effective of implementation and inadequate

supervision are major reasons limited efficiency of the State’s intervention.


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1.

Introduction

For over two past decades, Vietnam has attained a relatively remarkable performance with the average GDP growth

rate of 7.4% per year during the period of 1991-2010. GDP per capital in dollar terms has increased 11 folds from 98

USD in 1990 to roughly 1200 USD in 2010 which already achieved the low middle income level.1 As Vietnam is a

transitioning economy from a highly centralized planned to a market-oriented ones, it is widely recognized that

Vietnam has adopted the strategy of state-led development since its first days of the Renovation process so-called

Doimoi. However, whether the idea of state-led development and national economic planning has worked well in

attaining sustainable economic growth and transforming the economy from an agrarian to an industrialized and

successfully integrated into the global economy remains a big question. The most striking negative aspect is that

unlike achievements gained during the first decade of reform process (from 1990-2000), the high economic growth

has not been propelled by industrial upgrading and productivity increase but associated with macroeconomic

instability recent ten years.

This paper highlights the main industrial policy framework the State adopted during 2001-2010 to foster economic

structural transformation and provides the overall assessment of current status of the industrial sector. It also

illuminates the extent to which the dominant role of the state-owned enterprises (SOEs) appears to constitute part of

the obstacles to upgrade the industrial sector as well as ensure sustainable economic growth. The crucial question is:

to what extent the role of the state in industrial upgrading in Vietnam?

The rest of the paper is organized as follows: Section 2 provides an overview of industrial policy framework up to

now. Section 3 presents current situation of the industrial sector in Vietnam. Section 4 evaluate role of the State in

industrial structure transformation and Final is conclusions.

2. Overview of industrial policy framework

Industrial development orientations in socio-economic development strategies

Since Doimoi, Vietnam has announced two socio-economic development strategies (SEDS) for the periods 1991-2000

and 2001-2010 in which industrial transformation is always one of the most important contents. The first strategy

entitled “Strategy for Socio-Economic Stabilization and Development” was designed to rescue the economy from a

serious crisis which had roots from adopting a highly centralized Soviet-style planned economy with major

characteristics of (i) state or collective ownership of production means; (ii) government administered supply of

physical input and output; (iii) lack of business autonomy, absence of factor markets, highly regulated goods and

services markets; and (iv) a bias toward heavy industry in investments. Since early 1980s, there was an agricultural

production crisis, no foreign investment and insufficient domestic financial resources for economic development and

job creation. Shortages of common goods and annual hyperinflation rate are chronic. As such, the first SEDS

transferred development orientation from heavy industries to light industries to meet domestic consumption and

1 IDA at work (2010), Vietnam: Laying the foundation for sustainable, inclusive growth, http://www.worldbank.org/ida

(8/3/2010): p .2


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export. Accordingly, industrial value added was planned to grow by 10-12% per year and a number of industrial

sectors were selected for development. In this regards, they are food processing and exportable manufacturing;

mining includes crude oil exploitation and several k inds of minerals; electricity installation; transportation, irrigationand communications.2

The second SEDS for the period 2001-2010 namely “Strategy for accelerating industrialization and modernization in

socialist orientation to basically become an industrialized country by 2020” set new basic principle which was to lay

the foundations for a modern-oriented industrialized country by 2020. Accordingly, by 2010, share of the industrial

sector reaches 40-41% of GDP, employments in the agriculture sector reduces to 50%, employment in the industrial

sector reaches 23-24%, annual growth in industrial value added reaches 10-10.5%, industrial exports account for 70-

75% of total exports, meets domestic demand in construction steel, potassium fertilizer and a part of nitrogen

fertilizer and 40% of machinery, localized ratio in vehicles, machines and equipments meets 60-70%. 3 In order to

achieve these targets, the strategy emphasized on (i) accelerate the development of industrial sectors owning

competitiveness advantage to dominate the domestic market and penetrate world market such as agricultural, forest

and aquatic product processing, garment, leather and footwear, electronics and informatics, certain mechanical

products and consumer goods etc. and (ii) selectively construct a few heavy industry establishments (petroleum,

metallurgy, machinery, basic chemicals, fertilizers, and construction materials, etc.

Development orientations in industrial strategies and master plans

On the basis of the SEDS, the Ministry of Industry and Trade (MOIT) has set up a system of lower-level strategies and

master plans to develop the industrial sector. There are 80 development strategies, master plans and plans for

industrial sub-sectors such as automobile, motorbike, garment and textile, chemistry, electricity, coal, informatics,

electronics, milk processing, vegetable oil drawn up during the period 1995-2010,4 except the development strategy

for the industrial sector as a whole.

A year after accession to the World Trade Organization (WTO), the Prime Minister approved “Development Strategy

and Protective Measures of Domestic Industrial Production in consistence with international commitments, WTO’s

regulations by 2020”. The overall goal is: “To bring the country out of underdevelopment status and basically become

modern-oriented industrialized country with regional leading position in a few manufacturing sectors by 2020”.

Priorities are given to three industrial sub-sectors: (i) export-oriented industries with high competitiveness including

garment and textiles; leather and footwear, agricultural, forest and aquatic product processing, electronics

production-assembly (ii) fundamental industrial sectors that SOEs hold dominant role: energy, metallurgy, chemical

industry (including fertilizer and petrochemical industries), mineral mining and processing, construction materials

and machinery industry (including the automobile industry); (iii) potential industrial sectors including electronic

2 Seventh Communist Party Congress (1990), Chien luoc on dinh va phat trien kinh te-xa hoi den nam 2000, (Strategy for Socio-

Economic Stabilization and Development till 2000), page 6-12. 3 Ninth Communist Party Congress (2001), Chien luoc phat trien kinh te-xa hoi 2001-2010, (Strategy for Socio-Economic

Development 2001-2010), page 6-14 4 Statistics provided by the Ministry of Industry and Trade at i ts website http://moit.gov.vn/c/portal/layout?p_l_id=PUB.1.118


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accessories, software and digital information, pharmaceutical and cosmetic, products from new technologies,

telecommunication and informatics devices.

At the end of 2008, the MOIT launched the “Development Strategy for Industrial Sectors Applied High Technology

by 2020”. High-tech industries selected to give development priority should have a spread effects and stimulate

moving up in the global value chain. As such, industrial sectors specified are electronics industry, informatics industry,

machinery industry, metallurgy, chemical industry, food processing and energy .

Realizing the necessity of supporting industries, the “Master Plan of Supporting Industry Development to 2010

vision towards 2020” was adopted by the MOIT in 2007. However, after two years from adoption, it was proved to be

outdated and is being reviewed by the MOIT while Draft of the Decree on “Supporting Industries Development” is

being released for consultation before Government approval. The Draft Decree proposes incentives for supporting

industries of garments and textiles, leather and footwear, electronics and informatics, machinery (including the automobile

industry).

Development of Policy Measures

The Government has adopted a wide range of measures across all policy areas to implement industrial development

orientations mentioned above. Of which, most prominent are credit policies, tax policies, and high-tech support

policies.

- Credit policies: Provide direct support through preferential loans supplied by the Vietnam Bank for Development

(products/sectors benefited are key machinery products, electronics, automobile and motorbike and supporting

industries for 5 sectors including machinery (including automobile assembly), electronics, garments and textiles and

leather and footwear).5

- Tax policies: provide forms of preferential tax policies including (i) Preferential tariff rate (for instance, ship

building, electronics, automobile, leather and footwear); (ii) Preferential enterprise income tax (say, shipbuilding,

electronics ); (iii) Preferential VAT rate (for example, garments and textiles, machinery)6

5 For example, Decision No.10/2009/QĐ-TTg in 01/16/2009 on Incentives for production of key machinery products, List of key

machinery products and List of investment projects on key machinery products in the period of 2009 – 2015; Point 4b, Article 1 ofthe Decision No. 186/2 002/QĐ-TTg on Approving machinery development strategy to 2010, vision toward 2020; Point II.1 ofCircular No. 87/2003/TT-BTC in 9/15/2003 issued by the Ministry of Finance to provide incentives for the company manufacturingpassenger cars with 25 seats or more; Point 2a, Article 2 of Decision No. 55/2001/QĐ-TTg in 4/23/2001 by the Prime Minister onthe approval of development strategy and some policy mechanisms supporting for the implementation of development strategy oftextile and garment industry in Vietnam to 2010; Section 4.1 of Decision No. 36/2007/QĐ-BCN on Master plan to developfootwear to 2010. 6 Circular No.104/2010/TT-BTC on 7/22/2010 on rate for preferential tariff on materials and components imported to producelifting equipments in the List of key machinery products; Point 3, Section b, Part 5 of Decision No.02 /2008/ QĐ-BCT on01/21/2008 on approval of master plan for development of production of agricultural machines in the period of 2006 – 2015, vision

toward 2020; Section 4, II, A of Circular No.120/2003/TT-BTC on 12/12/2003 providing in detail for the implementation of ValueAdded Tax; Point 4c, Article 1 of Decision No. 186/2002/QĐ-TTg on approval of development strategy of machinery industry to2010, vision toward 2020; Section 6a, Article 1 of Decision No. 177/2004/QĐ-TTg in 10/05/2004 on approval of master plan ofautomobile industry development to 2010, vision toward 2020; Decision No 58/2009/QĐ-TTg in 16/4/2009 on tax solutions toencourage invesment and consumption to prevent economic slowdown and resolve dificulties for enterprises and Section 1, Article


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- Science and technology (S&T) policies: Science and technology together with education is declared to be top priority

policies since the first SEDS.7 Favor policies measures have been addressed in important laws including Law on S&T

2000, Law on State Budget 2002, Law on Technology Transfer 2006, Law on High-Tech 2008. The Government hasplayed the most important role in financing for R&D programs and set aside scientific development funds and set up

national scientific and technology research centers. For example, Vietnam Academy of Science and Technology

(VAST) which comprises of 23 specialized institutes is put directly under the management of the Government.8 State

financed programs on S&T to create conducive conditions to technology transfer have been implemented. Recently,

the Ministry of Science and Technology has managed from 15-20 S&T programs aiming at linking S&T with

production. In addition, the MOIT is in charge of 4 techno-economic programs to attract companies’ investment.

Preferential tax and credit policies are also applied to encourage R&D activities.9

Policies on location of the industrial areas: Industrial zones (IZs) and export processing zones (EPZs) were established

and developed in close association with the Doimoi process at the late of 1980s. As such, the system of new-type IZs

and EPZs has replaced the old-type IZs that simply served as concentrated locations for state-owned industrial

enterprises and become locations where various industrial manufacturing and services enterprises from all economic

sectors come to operate. The “one-stop window” mechanism in Vietnam was first applied to IZs and EPZs. In each of

the IZs and EPZs, a Management Board is established to perform the functions of State governance over IZs and

EPZs and to serve as the contact point for communications with and information provision to investors. Most of

those management boards are authorized by the Ministry of Planning and Investment (MPI) to perform State

governance over investment activities (including file collection, licensing, and settlement of problems occurred to

enterprises’ investment activities) carried out by foreign investors. In addition, the Management Board is also

authorized to approve the import plan, grant certificates of origins (C/O) form D, work permits… along the lines of

“one-stop window and single contact” in IZ and EPZ management. Since 2006, given the adoption of a common

Investment Law to all economic sectors, either domestic or foreign, the trend of decentralization is being further

enhanced.10

A wide range of preferential policies have been adopted to attract investment into IZs and EPZs. In general, projects

located in IZs and EPZs can enjoy more preferences than similar projects located outside them. Investors in these IZs

1 of Circular No. 85/2009/TT-BTC on 4/28/2009 to guide the implement of Decision No. 58/2009/QĐ-TTg; Circular No.216/2009/TT-BTC on 11/12/2009

7 Seventh Communist Party Congress (1990), Chien luoc on dinh va phat trien kinh te-xa hoi den nam 2000 , (Strategy for Socio-EconomicStabilization and Development till 2000), page 23 8 Decree 62/2008/ND-CP on regulations of functions, missions and organization structure of Vietnam Academy of Science and

Technology signed by Prime Minister on 12 May 2008 9 For instance, income from R&D contracts is exempted from corporate tax. Besides, equipment, machinery, material used directlyfor R&D that cannot be produced in country are free from import duty and VAT and pilot products are exempted from corporatetax and VAT. Furthermore, newly created firms under high-tech or R&D projects can apply corporate tax of 10% during 15 years.Newly created firms under projects in high-tech parks and in R&D can be exempted from corporate tax for maximum of 4 years,reduction of 50% no more than 9 years. Products produced by technology of at first time application in Vietnam can be exemptedfrom corporate tax. Long and middle term credit for conducting S&T activities with preferential rates under the NationalFoundation for S&T and other funds. For further details, see Dang Duy Thinh (2009), “Strengthening the Incentives for R&DInvestment and Technology Transfer in Vietnam” presented at Interim Workshop on Knowledge Sharing Project , Korea DevelopmentInstitute, Seoul, November 2009 10 See more Nguyen Lan Huong (2008), “Some ideas on driver area development in economic structure change process in Vietnam”,

paper presented at the National Spatial Policy Seminar FY 2007 , 16 - 20 March 2008, Tokyo, Japan


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and EPZs will be given investment preferences regarding land lease, enterprise income tax, site clearing, social infrastructure

facilities and infrastructure outside the zone’ s fence etc.11

3. Current situation of the industrial transformation in Vietnam

3.1 Overall picture of structural transformation

Economic structure by sector continues to shift to industrial sector (including construction) which accounted for

41.6% of GDP in 2007 compared to 36.7% in 2000. Since 2008, the global economic crisis hit Vietnam’s economy, of

which the industrial sector was affected most seriously. In 2008, its growth rate decreased significantly and its

percentage in GDP decreased to 39.7%. Thanks to the Government’s demand stimulation package executed in 2009and the recovery of the world economy, the sector soon recovered its growth rate in 2009 and became the most

important contributor to GDP in 2010. The proportion in GDP of services sector almost unchanged over the last ten

years. Except in 2008, share in GDP of the agricultural sector gradually dropped from 23.2% in 2000 to 20.9% in 2009

and 20.3% in 2010.

Table 1: Share of GDP by sector, 2001-2010

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Agriculture 24.5 23.2 23.0 22.5 21.8 21.0 20.4 20.3 22.1 20.7 20.3

Industry and

Construction36.7 38.1 38.5 39.5 40.2 41.0 41.5 41.5 39.7 40.2 41.1

Services 38.7 38.6 38.5 38.0 38.0 38.0 38.1 38.2 38.2 39.1 38.6

Source: General Statistical Office, Statistical Yearbooks and Ministry of Planning and Investment (MPI) (2010a)

It is evident that the industrial and services sectors are driver engines of economic growth. The industrial sector

contributed 47.1% of GDP growth rate in 2010, a slight decrease from 51% in 2000. In the meantime, contribution of

the services sector to GDP growth rate has increased considerably from 33% in 2000 to 46% in 2010.

11 For more details, important legal documents are The Law on Enterprise Income Tax 2008, Chapter III; The Enterprise Law 2005,List of sectors and regions for special preferential investment and Decree 29/2008/NĐ-CP dated on 14 March 2008 onregulations on Industrial Zones, Export Processing Zones and Economic Zones.


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Figure 1: Share in GDP growth rate by sector (Percentage points)

Source: Calculated from Vietnam’s Statistical Yearbooks

There is also a positive shift in internal structure of the industrial sector by technology classification. The high-tech

industries accounted for 23.5% of total industrial production output and 19.5% of the industrial value added in 2007

compared to19.6% and 18.3%, respectively, in 2000.

Figure 2: Structural change of industrial sectors by technology classification, 1997-2007

Source: Ministry of Planning and Investment, 2010b.

Commodity export grew 20% per year in the period of 2001 – 2008, then decreased significantly in 2009 (-8.9%) due to

the global crisis and recovered remarkably in 2010 (19.1%). Export turnover per capita increased from 187 USD in

2000 to 736 USD in 2008. In export structure, the proportion of raw products decreased from 56% in 2000 to 44% in

2008.

Nevertheless, Vietnam’s export structure has not undergone rapid changes. Wealth is largely dependent on the

exportation of primary commodities and low-tech products. During 2005-2007, exports of mineral accounted for 24%

of export turnover, much higher than those of other countries in the region. (Figure 3) Share of primary products in


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export turnover fell down nearly 10% from 2000 to 2007; nevertheless, most of this reduction was transfer to the

increase in share of low-tech manufacture export while share of medium and high-tech manufacture export remain

very small (F. Nixson et al, 2009).

Figure 3: Export structure of Vietnam and some countries, 2005-2008

The United States Japan

Vietnam China

India Thailand


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Source: World Bank, 2009, Trade at-a-glance

Import structure by SITC categories shows the over-reliance on materials and equipments. Fuels, materials and

equipment accounted for 90% of total imports (Figure 4). Furthermore, 90% of trade deficit is with China.12 It is clear

that Vietnam has not mastered production of machinery, equipment and technology despite over 20 years of

industrialization. More noteworthy, the majority of machinery imported was not from advanced countries but from

China. To reduce cost, even about 10% of enterprises acquired second-hand machinery with technical value was less

than 50% and only 25% of enterprises are using completely automatic equipments and the remaining are using semi-

automatic production lines. 13 There is a serious concern that Vietnam is facing a wave of transferring outdated

machinery and obsolete technology, especially from China.

Figure 4: Import structure by commodity classification, 1995-2009

Source : Calculated from Statistical Yearbooks

12 Calculated from GSO’s Statistical Yearbooks 13 Han Ni, 2009, Năng lự c khoa học công nghệ của các doanh nghiệ p còn hạn chế - (Technology capacity of enterprises isstill low), http://www.nistpass.gov.vn/index.php?option=com_content&task=view&id=327&Itemid=30 (16/8/2010)


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3.2 Current status of the Industrial sector

Despite a positive trend of structure change by sector, its speed was much lower than that in the period of 1991-2000.

In the last 10 years of the 20th century, the percentage in GDP of agriculture sector declined 14.2 percentage points

(from 38.7% in 1990 to 24.5% in 2000). Meanwhile, in the first ten years of the 21st century, the proportion in GDP of

this sector has decreased 4.2 percentage points (from 24.5% in 2000 to 20.3% in 2010). Share in GDP of industrial

sector increased 14.1 percentage points between 1991 and 2000 but only 4.4 percentage points between 2001 and 2010.

During 2001-2010, official statistics shows that employments in the agricultural sector have dramatically dropped

from 74.8% in 1999 to 51.9% in 2009 or a decrease of 22.9 percentage points compared to just 7.9 percentage points of

last period. No country could change the labor structure as quickly as Vietnam did in the period of 2001-2010, even

NIEs in their industrialization periods. For example, from 1960 to 1970, the share of employees in agricultural sector

decreased by 16 percentage points (from 45% to 29%) in Taiwan. In Indonesia and Thailand, the proportion of labor

in agriculture only fell around 13 percentage points and 15 percentage points, from 80% and 60% in 1968 to 65% and

56% in 1988, respectively.14 However, labor productivity has risen 3.9%/per year in 2001-2009 period, much lower

than that of 1991-2000 period (5.5%).

Figure 5: Shift in labor structure by sector and national labor productivity, 1990-2009

Source: Calculated from Statistical Yearbooks, Units: %, million dongs

The world historical record reveals that in the initial stage of industriliazation, labor mobility from the agricultural

sector with lowest productivity to the industrial secor with not only much higher productivity but also higher growth

rate of productivity will raise national productivity significantly. However, this was appropriate in Vietnam only in

the first decade of “Doi Moi” process (1990 – 2000) while was not suitable with figures in the next decade (2001 –

2010). In 1990, the productivity of industrial sector was 5.1 times of that of agricultural sector, then increased to 7.4

times in 2000 but felt to 4.7 times in 2009. During 1991 – 2000, productivity growth rate of the agricultural sector was

2.9% per year while that of industrial sector and service sector were 6.9% and 1.2% per year, respectively. In the

14 Source: Calculated from WDI (WB) and database of ADB and ILO for Taiwan


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period of 2001 – 2009, the growth rate of agricultural sector was 3.5% per year, much higher than that of industrial

sector (0.76% per year) and service sector (2.1% per year). Thus, productivity in the agricultural sector was growing

fastest and the industrial sector, which is creating most new jobs, is showing a stagnant productivity recent ten years.In other words, Vietnam has suffered from “structural burden” (Baumol, 1967, 1985) which should be occurred in the

next stages of development when labor shifts from industrial sector to service sector.

Why has statistical data about labor productivity and labor employment represented “structural burden” as

mentioned by Baumol? There are three problems need to be considered to explain for this paradox:

- The reliability of statistic data on labor, employment.

- The problems of base year: the using of 1994 as the base year by the General Statistic Office (GSO) was too outdated

and could cause serious distortion effects when calculating GDP, productivity and growth rates by fixed price.Currently, countries in the region have switched to use 2005 as base year.

- The most important problem is the less development of the industrial sector which made its new jobs created low

quality.

Productivity growth rate has increased at very slow pace (0.6% annually during 2001 – 2005 and 1.3% annually

during 2005 – 2009) while the number of industrial employees rose significantly (9.2% annually during 2001 – 2005

and 7.2% annually during 2005 – 2009). This implies input-driven mode of growth and high dependence on unskilled

labor-intensive manufacturing. Only 26 over 112 sub-sectors, which mainly are agriculture, mining, unskilled labor-

intensive manufacturing and service sectors, each contributes more than 1% of GDP. Other 21 sub-sectors each

contributes from 0.5 to 1% of GDP, including automobiles, motorcycles, bicycles and accessories, other transport

vehicles, electrical equipment and textiles (MPI, 2010b)

Internal structure of the industrial sector almost unchanged over the last ten years. Contraction of mining and

quarrying sector was compensated by expansion of construction sector while share of the manufacturing sector was

constant.


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Figure 6: Composition of the industrial sector, 2000 – 2009 (value added, %)

Source: Calculated from Statistical Yearbooks

Since 2000, the mining sector has used roughly 5% of industrial labor force but produced over one – fifth added value

of the industrial sector.15 With rudimentary and outdated technology, over 20,000 mining enterprises are exhausting

all natural resources and imposing seriously environment damage. Thousands of hectares of coastal protection forest

in the Central of Vietnam and upstream forest in provinces such as Quang Nam, Lao Cai, Thai Nguyen, Bac Kan, Ha

Giang, etc have disappeared due to mining activities. In addition, many companies do not keep commitments to land

– refill after excavation for ore, in which gold exploitation in upstream area of Quang Nam province is a good

example. The discovered coal mines are getting to become exhausted and Vietnam is expected to import coal in 2012 .

Similar situation is forecasted to other natural resources such as petroleum, iron, copper, titanium, gold, wood, etc.

However, new plans of mining in deeper ground and remote area are being promoted such as bauxite in the Central

Highland and brown coal basin in the Red River Delta to resolve the threat of natural resources exhausted, which is

alarmed to cause ecological crisis by scientists.

Unskilled labor-intensive manufacturing and agro-industries are dominant players in the industry. Food and

beverage, and textile are two most important contributors to industrial gross output in the period of 1996 – 2009

(20.2% and 8.7%, respectively). More noteworthy, the proportion of added value over gross output (VA/GO) of all

manufacturing sub-sectors has experienced a rapid decrease. (Table 1 in Appendix).

Figure 7: Trends in VA/GO ratio of industrial sub-sectors, 1995-2009

15 GSO, Statistical Yearbooks


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Source: Calculated from Statistical Yearbooks

The picture of Vietnam’s industrial sector can be seen clearly by analyzing some main features of the five priority

industries including: mechanical industry, automobile, motorcycles, textile and garment, footwear as below:

Box 1: Overview of present state of 5 priority industrial sub-sectors

- Machinery industry ( excluding the automobile and motorbike industries) : Despite of being selected as one of priority sect

or for development since the first SEDS, the machinery industry has grown up slowly. It met 38% of domestic market

in 2009 compared to 8% in 1990. Its export value was negligible until 2006 when soared to 1.175 billion USD then 2.5

billion USD in 2008. Nevertheless, the rate of waste products remains high, about 30%; most manufactories produce i

n a closed process and lack of modern plants. Technology acquisition is simple and far behind from 2 to 3 technology

generations as compared with that of other countries in the region.

- Automobiles industry: By the end of 2009, there are 52 enterprises operating, of which 12 are FDI. Number of automo

bile produced has increased by 4.25 times from 2002-2009. Domestic firms have achieved certain successes in the pro

duction of truck, passenger cars and buses. Notably, these successes are mainly based on domestic private enterprises

such as Truong Hai Automobile and TMT Automobile with rapid increase in investment rate. However, as CBU imp

orted cars are levied at extremely high rate (170% - 200% on import prices), domestic producers have an incentive of c

harging high price for domestic assembled cars which make Vietnamese automobiles most expensive in the world. In

addition, FDI automobile companies have low localized ratio, for instance, just 7% in Vietnam Toyota Joint Venture

Company, much lower than requirement from the Government (at least 30%). Number of companies participating in p

roviding components for automobile factories in Vietnam is small, just 70 companies compare to 1000 companies in Thailand, 38

0 companies in Malaysia or 230 companies in Indonesia.16

- Electronics industry: By late of 2007, there were over 374 enterprises operating of which 100 are FDI firms including

16 Presented by Mr. Taizo Chigira, Project General Manager TMAP Div at the meeting with the Delegation of the Development

Strategy Institute, Toyota Head Office, Nagoya, 18 August, 2010


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many big brand names such as Sony, JVC, Toshiba, Sanyo, LG, Samsung, TCL, etc. The sector currently ranks the fift

h in terms of export turnovers (2.77 billion USD in 2009). Major shortcommings of the sector is the over reliance on fo

reigners and low value added as firms mainly import components for assembly and processing (80%). FDI firms accounted for 30% of enterprises, 90% of investment capital, over 90% of export turnovers and about 80% of domestic mar

ket share. Moreover, they are producing 100% of computer, 78% of communication equipment, 76.4% of medical equi

pment and 33% of other electronics equipment (Intitute of Trade Studies, 2009).

- Textile and garment industry: Textile and garment is one of the fastest growth sectors. It increased by 12% per

annum during 1996-2000 and 15.1% during 2001-2009. This is also the most important sector regarding to

employment creation using over 2 million workers or equivalent to 26.3% of total industrial employments. Vienam’s

textile export turnover ranked Top Ten in the world. In 2009, export turnover of garment and textile reached 9.1

billion USD and highly concentrated in US, EU and Japan markets (accounting for 55%, 20% and over 10% of total

export turnover, respectively).

The fundamental weakness of the sector is the over-reliance on imported raw materials and weakness in design and

distribution segments and low labor productivity. Also by not building a strong brand, most of Vietnamese

enterprises mainly export through the third countries and very few firms can directly export to major markets.

Consequently, the sector is developing mainly basing on taking advantage of cheap labor cost and created low value

added. According to Vietnam Textile and Garment Association, the percentage of added value is about 20 – 30% in

the previous years and about 48% in 2009. 17 Currently, there is about 30% of textile and garment value exported in

the FOB form involving in the high value added segments of design and R&D. However, the advantage of cheap

labor cost is decreasing as wages increase. It is evident that real income of employees has gone up rapidly since 2006.

In the period of 2002 – 2008, the nominal income of employees in the economy increased by 12.7% per year. During

the same period, consumer price index (CPI) increased by 12% per year, making real income of employees virtually

unchanged. However, in three years of 2006 – 2008, nominal income of laborer in the economy increased by 21.9%

per years, while CPI in the same period increased by 16.6% per year making real income of employees increased by

5.3% per year.

17 Minh Tam, 2009, Năm 2010, ngành dệt may đ ặt mục tiêu xuất khẩu 10,5 tỷ USD – (In 2010, the export target of textile and garment

industry is 10.5 billion USD), The Saigon Times, http://www.thesaigontimes.vn/Home/thoisu/sukien/27137, ( 10/9/2010) 18

Materials for footwear industry account for 80% of product value, in which the production of leather sector plays the mostimportant role. According to Vietnam Footwear Association, the need for leather sector in 2007 is approximately about 350 million

square feet while the leather firms of Vietnam and foreigners satisfied only 20% of the domestic demand on leather and 80% of that

have to be imported. Accessories manufacturing industry is more exacerbated. Vietnamese firms have produced only some limited

products such as labels, lace, shoelace… but “leave open” sophisticated accessories plated plastic products such as rings, dew falls,

courbary bead, other ornaments on shoes, especially women and kids shoes. (according to Vietnam Footwear Association, 2009,

T ổng quan về ngành da giày Việt Nam năm 2008 và triểu vọng năm 2009 – (Overview of Vietnam footwear industry in 2008 and prospectsin 2009), http://www.lefaso.org.vn/default.aspx?portalid=1&tabid=18&itemid=1542,(8/9/2010) and Hai Yen, 2010 , Ngành da giày:

Cân bằng xuất khẩu và tiêu thụ nội địa – (The footwear industry – The problem of balance between export and domestic), Info TV,http://www.baomoi.com/Info/Nganh-da-giay-Can-bang-giua-xuat-khau-va-tieu-thu-noi-dia/45/5552225.epi, ( 15/8/2010);

“Vietnam Electronics Enterprises - cooperate to exist” – Online Journal of Finance No.68 dated 15/02/200919 Vietnam Footwear Association, 2009, Ngành da giày Việt Nam vẫn đang ở trong tình trạng lấy công làm lãi –( Vietnam footwear

industry is still completely wrapped up in making profit merely from selling one’s labor power) , Editorila, http://www.xaluan.com/modules.php?name=News&file=article&sid=155601, (15/8/2010)


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- Footwear industry: Being a labor-intensive industry, the sector is employing about 9% of total employments the

whole economy. It is also one of the most important contributors to export performance with over 4 billion USD

worth in terms of export turnover. Furthermore, Vietnam ranks fourth in exporting footwear in the world.

However, footwear sector is also showing the same weakness like garment and textile sector which are the over-

reliance on imported raw materials which is accounting roughly 80% of its demand,18 and mainly implement of

assembling for export, thus, leading to low added value of the product. About 70% of domestic footwear enterprises

are purely assembling for foreigners. It is estimated that its added value is around 25%.19 Currently there are over 500

footwear enterprises but only less than 10 brand name such as Biti’s, Bita’s, Thuong Dinh, Vento, Sholega, etc.

Vietnamese brand name known in the world is even less. Only B iti’s has penetrated into market of over 40 countries

and Vento has its stores in China, Japan, India, Canada and North America and Vina Shoes – a state-owned

corporation - is finding the way to the U.S.

The less development of the industrial sector suggested low quality of new jobs created. For evidence, jobs are

mainly created by household units and SMEs or in low-tech manufacturing such as garments and textiles, leather and

footwear, electronic assembling with low income. For example, despite of the increase in opportunity of getting job,

most of new jobs created are simple, un-skilled and low wage. Specifically, the highest income in the electronics

industry is just from 1.2 to 1.5 million dongs (or 70-90 USD) per month, according to the Institute for Labor Science

and Social Affair (2009). After subtracting to the expenses such as housing rental, subsistence expense the saving

level of the labor is only from 200 to 400 thousand dongs (or 12 – 24 USD) per month.

Due to low quality of job creation, change in income has no tight relationship with shift in employment as

experienced in many other countries. The proportion of agriculture in GDP of Vietnam decreased sharply while GDP

per capita changed much less in comparison with that of other countries in the industrialization process. For example,

when agriculture accounted for 20% of GDP as in Vietnam nowadays, Korea reached GDP per capita of 4,000 USD in

comparison with 1,000 USD of Vietnam.20

3.3 Industrial Structure by Types of Ownership

Before and after launching Doimoi process, state-owned enterprises (SOEs) always hold dominant positions in key

sectors in the economy. That is areas which enjoy many preferential policies (protectionism, slow opening markets,

easy access to land, capital, markets, technologies, etc.). Of the 500 largest enterprises in Vietnam in 2009, all the top 5

enterprises were SOEs which their main business activities are in the industrial sector.21 In the industrial sector, SOEs

are biggest in terms of asset, 31 times more than that of private enterprises and is 2.5 times more than that of FDI

20 Source: World Bank, World Development Indicators 21 Five Groups include: Vietnam National Oil and Gas Group, Petroleum Electricity Corporation, Vietnam NationalCoal and Mineral Industries Group and Vietnam Posts and Telecommunications Group. The largest private companyin Vietnam is FPT which ranked 27th in VNR 500 in 2009.


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enterprises. SOEs also rank first in terms of fixed assets with 229 billion dong per enterprise compared to 5 billion

dong and 80.7 per private and FDI ones, respectively. Industrial SOE is also largest in terms of labor employed, on

average 677 employees per enterprise or 11.5 times and 1.5 times more than that of private enterprise and FDIenterprise, respectively22. Workers in SOEs generally have higher levels of qualification than in private enterprises

and FDI enterprises. In total 39.7 thousand scientific and technical staff of the industrial sector, SOEs accounted for

40%, while private enterprises account for 35% and the left is FDI sector. Data on credit access and land use right of

industrial SOEs are not available but it is noteworthy to emphasize that SOEs of any kind is accounting for 2.2% of

total enterprises but using nearly 1/3 of total credit of the economy and 1/3 of total investment implemented by the

state sector (Hahn and Nguyen et al, 2009)

However, performance of industrial SOEs is not commensurate with the great advantage that it holds. In terms of

contribution to industrial output value, FDI sector is contributing most, (44.4%), then the private sector (37.1%) and

SOEs contribute least (18.5% in 2008, down from 49.6% in 1996). FDI sector also has the most contribution to capital

formation in the industry (42%), followed by domestic private enterprises (39.6%), and finally the SOEs (18.6%). FDI

enterprises also dominate in export. It made up 53% of total exports in 2009 of which, export products are basically

manufacturing goods (electronics, textiles, footwear etc) while SOEs mainly export raw natural products (for instance,

oil, coal, and agricultural products). In terms of jobs creation in the industry, the private sector plays the most

important role, generating 44.1%, second is the area of FDI (38.2%) and the lowest is SOEs (17.7%).

Industrial FDI enterprises also perform well. Profit before tax per worker in FDI sector is roughly 2 times more than

that of SOEs and 6 times of private enterprises. Profit before tax per capital of FDI is a lso the highest, reaching 0.155,

is 3.3 to 3.5 times more than that of SOEs and private enterprises. Profit before tax over net revenue of the FDI sector

is 0.13, while this number of the SOEs and private enterprises is 0.06 and 0.04, respectively. According to National

Assembly Steering Committee (2009), from 2006 to 2008 there are 35/91 state corporations with profit margins above

15%; 18/91 corporations less than 5% and 3 corporations loss. 45.5% state corporations operate inefficiently (ROE

below 10%), some corporations had decreased in state-owned capital and even several corporations lost its capital

such as Waterway Construction Corporation (-464 billion dong), Vietnam Mulberry-silk Corporation (-9 .9 billion

dong). Among reported biggest SOEs, there are 47 holding groups and corporations invested in financial sector

worth 21,164 billion dong or 1.2 billion USD, of which the most typical example is Electricity of Vietnam (EVN),

VINASHIN (now in restructuring period due to bankruptcy).23 Overall performance of these all 47 corporations are

generally lower than that in their core business (less than 4.78% in 2008). Some corporations invested big amount of

money into the financial sector while lack of funding for investment in important projects assigned by the State, for

22 Except the case with special notes, all data in industrial structure by economic sector was calculated fromEnterprises Survey in 2008, conducted by the General Statistics Office. 23 VINASHIN was used to the second biggest enterprises in the list of VNR 500 (2009) before going bankruptcy in

June 2010 with its debt of 4 billion USD after only 3 years received huge investment from the State to develop shipbuilding as key sector.


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example EVN. 88 corporations were leased and assigned to use directly 365,818 hectares of land, but many of them

do not use all, or use for sub-lease or real estate business.24

Despite of the fact, above is just the “float part” of the performance of SOEs. It is clearly that the State is facing

difficulties in adopting effective solutions to manage more than 1,500 largest SOEs remaining after 20 years of

equitization/privatization. Only 168 SOEs were equitized by the end of 2009 compared to 900 SOEs in the approved

schedule for period 2007-2010. According to the Enterprise Reform Steering Committee, there are about 1,500 SOEs

which must be transferred to one member limited liability company to accommodate with the provisions in Article

166 Enterprise Law 2005, as they did not complete equitization before 01/07/2010. However, it is widely recognized

that this is simply “old wine in a new bottle”, seeing little change in organizational ethos. For example, to simply and

keep up with deadlines of complete conversion before 01/07/2010, SOEs did not evaluated their value at market

prices as well as work out programs to settle asset disposal, financial and organizational issues, labor as well as land

use right, etc once transformed into one member limited liability company. In some enterprises, there is a certain

change on the organizational structure of management, the Board of Directors (BoD) is replaced by Council members,

the title of Board of Director’ Chairman replaced as Chairman of Council member regulated in the Business Law 2005,

but in most of enterprises this title are always assigned for the CEO because of the fears of conflict between two most

important officials which would adversely affect the business25, Bui Xuan Hai (2010). In addition, the lesson from

VINASHIN both before and during the restructuring period, has suggested that it is fragile to hope that SOEs will

lead the economy toward prosperity.

The private sector remains weak regarding to its own industrial strength. Despite of the fast growth rate of newly

established private enterprises after the launch of Enterprise Law in 1999, most of them are small and medium ones.

Only 28,9% of enterprises in the list of VNR500 in 2009 are private ones while only 17 over 200 Vietnamese biggest

enterprises released by the UNDP are private ones. More importantly, most of these 17 business groups are former

SOEs which have just been privatized.

Specifically, the largest private enterprise in Vietnam's is Saigon Jewelry Joint Stock Company-SJC ranked only 16th

among 500 largest enterprises in Vietnam (VNR 500, 2010). Among top 10 largest private companies, three companies

are in trading gold, silver and gems and other three ones doing business in financial sector and one operating in

telecommunications and information technology sector (FPT) and one commercial company, and one company

focusing on heavy industry (Hoa Phat - iron and steel production) and one producing milk but the State remain hold

the dominant share (Vinamilk). Thus, in 10 biggest private companies in Vietnam only have one company with

revenue from operation of industrial production (Hoa Phat Group). FPT is yet known for information technology

companies in Vietnam, but revenue from distribution activities (mobile phones, software and other information

technology products) accounted for 70% of total revenue in 2008 (75% in 2007). Even Hoa Phat, the core business -

24 Executive National Assembly, 2009, Report on results of monitoring the implementation of policies on managing and usingstate capital and asset in SOEs from 2006 to 31/12/2008, unpublished report. 25 Bui Xuan Hai, 2010, “Công ty trách nhiệm hữu hạn: Bình cũ rượu mới” – ( Limited liability company - old wine in newbottle”), Law Newspaper, Hochiminh city 27/11/2010


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steel production only contributes 43.8% of total revenue and 45.1% after-tax profit in 2009 (Tan Viet Security, 2010).26

Business on real estate is expected to contribute 30% of profits in coming years with a series of projects have been

developed as two projects in Industrial Zone in Phonoi (Hung Yen) and Hoa Mac (Hanam); Project Office Building,commercial centre and apartment in 257 Giai Phong (Hanoi); Complex Project Mandarin Garden; contributing over

20% of capital along with ACB, Viettel, Vinaconex invested in projects Urban Dai Mo - Mo-scale more than 200

hectares in the southwest of Hanoi, the new urban projects A Pho Hung Yen.27 If looking at others well-known

private enterprise in Vietnam, most of them are running business on banking, securities, jewelry, construction, real

estate, exploitation and trading of mineral resources (wood, agricultural and forestry products), very few enterprises

are specializing in industrial production (VNR 500).

By contrast to few big private enterprises which have succeeded in exploiting holes in policy measures or relying on

political relationships, the vast majority of private enterprises are small and weak. Up to 80% of Vietnam’s private

enterprises are small-scale with capital less than 5 billion dong and 87% of them are employing less than 50

employees. A recent survey revealed that only 5.2% of these enterprises could access the export support policies,

while 23.1% said that difficult to access and 71.7% said that is not accessible. Only 13.2% small-scale enterprises

(SMEs) can cooperate with large enterprises, while 11.7% and 75.1% hardly cooperation cannot cooperate. 63% of

surveyed SMEs said that need assistance in business management training, 59.7% need training and support, 54%

need information technology support and only 11.8% required technical support.28

Foreign-invested sector (FDI) is increasingly important to Vietnam’s growth performance, especially in industrial and

trade performance. However, there are some concerns about quality and actual contribution of the FDI sector

regarding to improving internal strength of the economy which are:

FDI are highly concentrated by kinds of economic activity. FDI investment commitment is highest in the

manufacturing sector (about 49.7% of total FDI commitments), then the hotel-restaurant and the mining sectors

(account for 23.1% and 6.4%, respectively) while smallest in the agriculture, forestry and fisheries (2.5%).29 In the

manufacturing sector, FDI companies are mainly operating in low-tech and labor intensive sub-sectors with low

added value (such as textiles, footwear, groceries and farm products). It’s noteworthy to emphasize that FDI sector is

the dominant player in terms of export performance (53% of total exports and 70% of manufactured exports) but the

proportion of high-tech manufactures, in total, barely above 5%, while even medium-tech represents a small

proportion (F.Nixson et al, 2009). FDI registered capital in the service sector highly concentrated on real estate

26 Tan Viet Security, 2010, Báo cáo cập nhật – Tập đoàn Hòa Phát – ( Update Report-Hoa Phat Group), Page 2 27 V.Minh, 2010, HPG- Từ nay đến năm 2015 tăng tỷ trọng bất động sản trong cơ cấu lợi nhuận -(HPG- share of real estatein profit structure increase from now to 2015), http://www.baomoi.com/Info/HPG-Tu-nay-den-2015-tang-ty-trong-bat-dong-san-trong-co-cau-loi-nhuan/127/4058756.epi, (October, 2010) 28 Joonghae Suh, 2010, Overview Report on the growth of Vietnamese enterprises , presented at the Interim Workshop ofKnowledge Sharing Project, Korea Development Institute, Seoul, Korea, 11/201029 General Statistics Office, 2009 , Statistics year book 2008, Statistical Publishing, Hanoi and Spiresearch, 2009, The risingtide of Asian investment in Asia, www.spiresearch.com


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business (70%-80%) with extremely high disbursement rate (91%) compared to the average total disbursement over

total commitment of FDI (33% during 1988-2008).30

The cooperation between domestic enterprises and FDI enterprises remains weak. In the period 1988-2009,

up to 77.67 of FDI projects is 100% foreign capital, accounting for 62.6% of the total registered capital. Number of

projects in the form of joint ventures accounted for only 18.4% (30.9% of the total registered capital), the rest in other

forms of investment such as business cooperation, BOT, joint stock companies and capital management companies. It

is evident that the localization rate in the automobile industry is only 5-7%, and the less development of supporting

industries cause industrial local producers to import 70-80% of their inputs (DSI, 2010). Besides, FDI enterprises were

expected to promote technology transfer into Vietnam; however, researches of Nguyen et al (2006) and Nguyen and

Bui (2010) revealed that FDI did not fulfill this important task. According to Nguyen and Bui (2010), the contribution

of total factor productivity (TFP) of the FDI sector was -17.6, while that of the SOEs and private enterprises were 8.6

and 3.1, respectively in the period 2004-2009, which suggested that performance of FDI sector did not originate from

technology progress.

Although to be the most important contributor to export and industrial production, FDI enterprises

(excluding crude oil producers) contributed least to state budget, only from 9 - 10% in period 2005-2008. Contribution

of FDI sector to state budget even decreased by 11.2% in 2009 while that of the domestic private sector felt only 4.4%

and SOEs rose by 6.2% when the economy was adversely affected by the global crisis. One of main reasons is that

most of FDI enterprises have reported losses to avoid paying tax. For instance, according to Hochiminh City Taxation

Department (2009), nearly 60% of FDI enterprises reported a loss in 2009 while the proportion was 61.3% and 70 % in

2008 and 2007, respectively despite that Vietnam's economy was boom in 2007.31

Last but not least, FDI firms play negligible role in job creation. By the end of 2009, approximately 1.6 million

workers are working for FDI sector, accounting for only 3.4% of the workforce working in the economy.32 Of the total

number of FDI’s employees, approximately 65% is female with no training or only short-term training and mostly

working in such industries as textiles, leather, agro-forestry-fisheries processing companies under hard working

condition, high intense and suffering from many occupational diseases (DSI, 2010).

4. Overall Evaluation on Role of the State in Industrial Upgrading

In general, much of the success in industrial development to date has been the result of government decisions to

remove barriers to entrepreneurial efforts for both foreign direct investors and more recently for domestic private

investors (Nixxon et al, 2009). More recent 10 years; however, speed of reform is slower while vital obstacles to the

development of the industrial sector as well as of the whole economy, especially regarding to resource allocation and

30 Calculated from data of the Foreign Investment Agency, Ministry of Planning and Investment31 Tan Duc. 2010, “Thiệt hại vì chuyển giá”- ( Loss because of price transfer), Saigon Economic Times, issues 15-2010,page 11 32 General Statistics Office. 2010.


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level the playing field have not been resolved. Consequently, the effective of the State’s directions to industrial

upgrading has not reached its expectations.

Strategies and master plans are abundant in terms of quantity but poor in terms of quality. Goals and objectives often

are expressed in desired quantities (output, export growth, local supply ratios, investment projects, etc) rather than

creating the competitive capacity on the global market (cost, quality, delivery, rapid response, marketing etc).

Strategies remained to be developed on product orientation rather than process orientation, for instance, the Strategy

for Industries applying high technology by 2020 or the current Draft Decree on Supporting industries. A large

number of documents have been formulated for the mineral mining and processing sectors (white limestone

materials, industrial minerals (serpentine, barite, graphite, fluorite, bentonite, diatomic and talcum, the ore, rare earth

and uranium, tungsten and antimony etc) where the SOEs assume the predominant role (over 90% of gross output).

In addition, almost all strategies and master plans have been adopted without concrete action plans with resources

and detail timetable for monitoring and evaluating the implementation of the proposed objectives. In many cases,

policy measures to achieve targets are usually too general to implement while some are inappropriate or infeasible

due to lack of good analysis. Furthermore, poor and inconsistent industrial policies also resulted from

decentralization of policymaking and weak coordination among ministries leading to contradiction instead of being

integrated among different policy components. Last but not least, weak link between strategies or master plans and

state budget causes strategies become desk-plans. Currently, the Ministry of Planning and Investment is responsible

for allocating development investment expenditures while the Ministry of Finance is responsible for allocating

recurrent expenditures and collecting revenues. Vietnam has yet adopted Medium Term Expenditure Framework and in

general, did not set aside any specific funds for specific projects. Decisions of funding for so many state projects makes the

Government's priorities not funded commensurate with their importance.

Even when policy measures are developed well enough, there is still a large gap between policies designed and

implementation. For instance, Vietnam Development Bank (VDB) which former was Vietnam Development Fund

was established to supply preferential loans for targeted programs since 1999. 33 VDB mobilizes capital from issuing

Government bonds, borrowing from State Treasury, Social Security Fund etc. to provide credit for state-oriented

investment projects. The amount of credit from VDB is estimated to make up 15% of total public investment.

Except the ship building industry, other priority sectors seem to enjoy negligible preferential capital from VDB.

(Table 2). For example, since the adoption of the mechanical engineering development strategy to 2010, vision toward

2020 in 2002, only 8 over 19 projects and products registered by enterprises have been approved to satisfy selectionprinciples of the Key Mechanical Engineering Program34 which allows access to credit preferences. However, almost

all projects are in the negotiation period with VDB for loan approval. During 2006-2009, VDB has signed about 1,300

credit contracts with value of USD 3 billion35 and USD 1.5 billion worth of outstanding loans, of which the industrial

sector contributed 5.1% of projects, 28.5% of total contract value and 22.8% of total outstanding loans. By mid-2010,

33 Decree 50/1999/ND-CP 34 The program aims to develop eight types of machineries, including motive power engines, tractors, agricultural equipment,mechanical tools, construction engineering, ship engineering, automobile engineering and electrical equipment.35 Exchange rate: 1 USD = 19.500 VND


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VDB is managing more than 3,900 credit contracts with USD 7.7 billion worth of value and USD 3.7 billion worth of

outstanding loans.

Table 2: State Investment Credit in Vietnam Development Bank by mid-2010

Unit: billion USD

No Field/Sector No of Projects Value of Credit Contract

1 Electricity 164 2.3

2 Cement 30 0.8

3 Investment in agriculture and rural area 1,383 0.3

4 Ship building 82 0.5

5 Chemical industry 18 0.5

6 Social safety net 170 0.4

7 Dung Quat Oil Refinery 1 1

8 Son La hydropower plant 0.86

9 Others

Total 3900 7.7

Source: Calculated from VDB (2010), Report on preliminary evaluation on 3 years implementation of Decree

151/2006/ND-CP and Decree 106/2008/ND-CP.

Besides, 65% of state-owned sector’s investment flowed into 10 sub-sectors including land transport, water transport,

electricity, gas and water supplies, crude oil and gas exploitation etc. while 66.5% of private sector’s investment

concentrated on 10 sub-sectors including trade, construction, land and water transportation, telecommunication

services, coal exploitation, hotel etc. and 47.3% of FDI sector’s investment absorbed by 10 sub-sectors including crude

oil and gas exploitation, electricity, gas and water supplies, trade, real estate business etc.

Table 3: Top Ten Sectors Received Highest Investment

No State-owned Sector Non-state owned sector FDI

1Land transport Other services

Crude oil and natural gasexploitation

2 Water supply Trade Electricity and Gas

3 Water transport Civil construction Water supply

4 Electricity and Gas Land transport Leather products5 Other services Water transport Trade

6 Crude oil and natural gasexploitation

Telecommunication Services Real estate business

7State management, defence and

compulsory social securityCoal exploitation General purpose machines

8 Education and training Hotel Land transport

9 Civil construction Fishery Cement production

10 Health care and social subsidies Electricity and Gas


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Source: MPI (2010b)

In terms of effective rate of protection (ERP), tariff barriers on industrial sector declined most dramatically from 40%

in 2005 to 2.1% in 2009, even faster than the decrease in nominal rate of protection (NRP) which felt down from 19.5%

in 2005 to 3.5% in 2009. (Table 2 in Appendix)

5. Conclusions

Over 20 years of industrialization, Vietnam’s industrial sector has developed but still in the early stages of

industrialization. Despite of high speed of labor shift from the agricultural sector to the industrial and services sectors,

GDP structure by sector has undergone insignificant change for recent 10 years. Industrial performance is mainly

based on existing advantages namely natural resources and unskilled labor and the natural development of

capabilities and inflows of FDI. Acquisition of capacities of industrial enterprises remains low and their production

are mostly in the form of processing and assembly while highly depend on importing raw material and equipments.

As such, Vietnam is capturing low value added domestically and facing many difficulties in moving up global value

chains.

Weak performance of the industrial sector suggests the limited results of policy measures developed by the State to

achieved the goal of basically finishing the industrialization process by 2020. The practice of policy design and

implementation revealed that policy measures was either ineffective because of desk plans or encourage rent-seeking

activities or unable to create new comparative advantages. Poor quality of policy formulation, weak link between

plans and budget and less effective of implementation and inadequate supervision are major reasons limited

effectiveness of the State’s intervention. We all know that, even if adequate policies are in place, inadequate

institutional arrangement can create opportunities for self–interested rather than for motivations of long–run

investment in the future. If that is the case, no plan can come into effect though it is well designed.


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2000 2001 2003 2005 2006 2007

- Manufacture of tobacco products 0,41 0,41 0,40 0,36 0,36 0,32

- Textile 0,22 0,19 0,15 0,13 0,09 0,09

- Manufacture of apparel dressing 0,24 0,24 0,16 0,13 0,12 0,11

- Tanning and dressing of leather 0,22 0,20 0,18 0,13 0,13 0,13

- Wood processing and forest product 0,17 0,17 0,14 0,10 0,10 0,10

- Manufacture of pulp paper andpaperboard 0,17 0,15 0,11 0,09 0,09 0,08

- Publishing, printing and reproductionof recorded media 0,21 0,19 0,15 0,12 0,11 0,12

- Manufacture of coke and refined

petroleum 0,07 0,09 0,07 0,05 0,04 0,05- Manufacture of chemicals and chemicalproducts 0,17 0,18 0,13 0,09 0,08 0,07

- Manufacture of rubber and plasticproducts 0,17 0,14 0,11 0,09 0,08 0,07

- Manufacture of other non – metallicmineral products 0,39 0,35 0,29 0,27 0,24 0,24

- Manufacture of metal 0,15 0,12 0,08 0,06 0,05 0,04

- Manufacture of metal products 0,17 0,15 0,10 0,07 0,06 0,06

- Manufacture of machine andequipment 0,19 0,17 0,14 0,11 0,11 0,09

- Manufacture of office accounting and

computing machinery 0,08 0,02 0,02 0,01 0,01 0,01- Manufacture of electrical and electronicequipment 0,14 0,13 0,11 0,07 0,06 0,05

- Manufacture of radio, television andcommunicative equipment 0,17 0,17 0,12 0,10 0,10 0,08

- Manufacture of medical instrument 0,12 0,11 0,10 0,09 0,08 0,06

- Manufacture of motor vehicles 0,19 0,14 0,11 0,09 0,10 0,09

- Manufacture of other transport 0,12 0,08 0,08 0,05 0,06 0,05- Manufacture of furniture and otherproduct 0,18 0,16 0,11 0,07 0,06 0,06

Source: National Centre for Socio – Economic Information and Forecast, (2009), Nghien cuu tac dong cua mot

so nhan to phia cung, phia cau va nang suat den tang truong va chuyen dich co cau cac nganh cong nghiep che tac bang mo

hinh I-O, (Evaluate impacts of supply, demand and productivity factors on industrial growth and structural

transformation by applying I-O model), page 32.

Table 2: Effective and nominal rate of protection on industrial sub-sector in 2009

Sector ERP (%) NRP(%)

Fibers 8.623 3.73

Textile products 31.863 7.177

Costume -1.004 3.814

Leather, preliminary processed fur, suitcase, bags, saddle 1.109 1.923


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Shoes, sandal 17.364 9.588

Processed wood and by-wood products 0.971 1.152Paper and by-paper products 8.028 3.837

Products of printing activities 10.077 4.988Coke coal and other by-product cokes 0.638 1.044

Gasoline, lubricants -0.909 2.797

Other product extracting from oil gas -16.548 1.612

Basic organic chemicals -4.032 0.564

Fertilizer and nitrogen compound -0.946 1.007

Plastic and primary synthetic rubber -1.250 0.632

Other chemical products, man-made fibers 8.978 3.502

Medicine, chemical prophylaxis and pharmacy 8.478 4.882By-product rubber 2.669 2.364

By-product plastic -0.453 0.273

Glass and by-product glass 10.112 6.348

Cements 11.131 5.357

Other non-metallic mineral products 9.764 5.679Iron, steel, iron 2.345 2.319

Other metal products 1.041 1.944

Electronic device, computer and peripheral 15.377 1.22

Machinery & equipment used for broadcasting, television and information activities

8.575 4.152

Electrical household appliance 6.885 1.219

Other electronic products and optical products 2.048 1.885

Motor, electric generator, power transformers 4.847 3.646

Cell and battery -0.853 0.015

Electronic conductor -0.580 0.020

Electric light equipment 6.684 3.542

Consumer electronic equipment (refrigerator, dishwasher, washing mac

hine, dust allayer)

136.268 28.534

Other electric equipments 33.608 6.667

General-purpose machinery 6.027 3.730

Special-purpose machinery 0.774 1.993Cars (all kinds) 7.593 4.476

Car engines with tractor (except automotive) 39.760 11.991

Ships and boats 7.901 3.324Motor vehicles, motor bikes 86.224 25.540

Other transport means -9.629 1.049

Bed, cabinet, tables, chairs 27.641 13.338

Jewelry, false jewelry and related details; musical instrument; fit tools, sports, toys, games

3.608 2.927

Medical equipments, dental, Orthopedics and rehabilitation 0.417 0.701

Other processed industrial products, repair services and equipment and machinery maintenance

8.614 6.380

Electric transmission services -0.635 0.336

Sources: Bui Trinh (2010).

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4-1-1 Lan Huong Nguyen