National Competitiveness of Vietnam: Determinants, Emerging Key Issues and Recommendations S C H R I F T E N Z U R W I R T S C H A F T S T H E O R I E U N D W I R T S C H A F T S P O L I T I K Hien Phuc Nguyen Phuc Hien Nguyen - 978-3-631-75113-8 Downloaded from PubFactory at 01/11/2019 08:10:49AM via free access The author presents an empirical study on Vietnam’s national competitiveness by using mixed methods research (qualitative and quantitative) with a combination of hard and soft data. The result shows that production resources (human, infrastructure, capital and natural resources) have played the most important role in improving competitiveness, productivity and living standard in Vietnam in the last two decades. The author also analyzed and evaluated the competitiveness of the Vietnamese economy, and pointed out the remaining weaknesses of competitiveness compared to the selected regional countries such as shortage of production resources supply, a dominance of inefficient state-owned enterprises and its slow reform, and weak public institutions as well as inefficient government governance. These weaknesses have led Vietnam’s competitiveness, productivity and economic growth to remain low, especially compared to China. Finally, the author attempts to provide some recommendations enhancing the competitiveness, productivity, and citizens’ living standard in Vietnam in the long term. Hien Phuc Nguyen is a teaching assistant in Political Economy and Economic Theories at Hanoi National Economics University, where he graduated BA in business and MA in economics. He earned his PhD in economics from the University of Leipzig. He is the author of several articles and working papers on competitiveness and integration. S C H R I F T E N Z U R W I R T S C H A F T S T H E O R I E U N D W I R T S C H A F T S P O L I T I K Hien Phuc Nguyen National Competitiveness of Vietnam: Determinants, Emerging Key Issues and Recommendations Phuc Hien Nguyen - 978-3-631-75113-8 Downloaded from PubFactory at 01/11/2019 08:10:49AM via free access National Competitiveness of Vietnam: Determinants, Emerging Key Issues and Recommendations Phuc Hien Nguyen - 978-3-631-75113-8 Downloaded from PubFactory at 01/11/2019 08:10:49AM via free access SCHRIFTEN ZUR WIRTSCHAFTSTHEORIE UND WIRTSCHAFTSPOLITI K Herausgegeben von Klaus Beckmann, Michael Berlemann, Rolf Hasse, Jorn Kruse, Franco Reither, Wolf Schafer, Thomas Straubhaar und Klaus W. Zimmermann Band 39 ~ PETER LANG Frankfurt am Main· Berlin· Bern• Bruxelles• New York• Oxford. Wien Phuc Hien Nguyen - 978-3-631-75113-8 Downloaded from PubFactory at 01/11/2019 08:10:49AM via free access Hien Phuc Nguyen National Competitiveness of Vietnam: Determinants, Emerging Key Issues and Recommendations £ PETER LANG lnternationalerVerlag derWissenschaften Phuc Hien Nguyen - 978-3-631-75113-8 Downloaded from PubFactory at 01/11/2019 08:10:49AM via free access Open Access: The online version of this publication is published on www.peterlang.com and www.econstor.eu under the interna- tional Creative Commons License CC-BY 4.0. Learn more on how you can use and share this work: http://creativecommons. org/licenses/by/4.0. This book is available Open Access thanks to the kind support of ZBW – Leibniz-Informationszentrum Wirtschaft. 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Printed in Germany 1 2 3 4 5 7 www.peterlang.de Phuc Hien Nguyen - 978-3-631-75113-8 Downloaded from PubFactory at 01/11/2019 08:10:49AM via free access Acknowledgements In order to complete this thesis, I owe a great debt of gratitude to many people. First and foremost, I would like to express my deep gratitude to Prof. Dr. Rolf Hasse for his kindly care, generous help and encouragement. Without the great comments and valuable guidance of Professor Hasse I would have not been able to complete this research. I am greatly indebted to Dr. George Quaas for his kind help and significant com- ments, especially involving the empirical study section of the research. I would also like to express a special thank to Dr. Minh Khuong Vu (Harvard) for his great help and guidance. Although he has not been in Germany, we have had significant discussions via email which have helped me to complete the research. I would also like to thank Prof. Dr. G. Schnabl, Prof. Dr. U. Vollmer, and my col- leagues at both the Institute for Economic Policy and Institute for Theoretical Economics, whose constructive opinions and arguments in the PhD seminars helped me to develop my thesis. I am grateful to the Vietnamese Government and German Academic Exchange Service (DAAD) whose financial support made my research possible. I would like to thank all the business leaders, local and government officials, and academics, who spent their scarce time in answering my survey questionnaire. I am also grateful to my colleagues and friends in Vietnam for collecting data and conducting the survey. For correcting the draft, I am very thankful to Mrs Julie Sliva (America) and Ryan Young (Australia) who kindly and enthusiastically helped me to correct the dissertation. The result would have been limited if I hadn't had their help. On this occasion, I also would like to express my special thanks to Prof. Dr. F. Quaas, Mrs Martina Kussatz, Mr. M. Rauch, S. Preissler, and Mrs R. Kohlmann who have assisted and encouraged me in many ways to complete this research. Finally, I would like to thank my parents and parents in-law for their help in col- lecting data and continuous encouragement. I am also indebted to my older sister, who has been very caring and encouraging to me. Last but not least, I want to thank my young wife, Ha, for her patience and wholehearted support for me to overcome challenges during the time of the study course. 5 Phuc Hien Nguyen - 978-3-631-75113-8 Downloaded from PubFactory at 01/11/2019 08:10:49AM via free access Phuc Hien Nguyen - 978-3-631-75113-8 Downloaded from PubFactory at 01/11/2019 08:10:49AM via free access Table of Contents List of Abbreviations ............................................................................................. 11 List of Figures ........................................................................................................ 13 List of Tables and Boxes ....................................................................................... 15 Chapter 1: Introduction .................................................................................. 17 I. I Research Context and Problem ............................................................... 17 1.2 Research Objectives ................................................................................ 21 1.3 Research Questions and Hypotheses ...................................................... 2 I 1.4 Methodology ........................................................................................... 21 1.5 Structure of the Thesis ............................................................................ 22 Chapter 2: Theoretical Frameworks of National Competitiveness ............ 25 2.1 The Concept of Competitiveness ............................................................ 25 2.1.1 National Competitiveness ........................................................... 25 2.1.2 Motivations of Competition among Nations .............................. 31 2.1.3 Evolution of Competitiveness Concept ...................................... 32 2.2 Porter's Diamond Model ........................................................................ 33 2.2.1 Determinants in the Model ......................................................... 33 2.2.2 The Diamond Model as a System ............................................... 35 2.3 Stages of Competitive Development ...................................................... 37 2.3.1 Factor-Driven Development ....................................................... 38 2.3.2 Investment-Driven Development ................................................ 39 2.3.3 Innovation-Driven Development ............................................... .40 2.4 The "Golden" Rule of National Competitiveness .................................. .42 2.4. l Creating a Stable and Predictable Legislative Environment ...... 42 2.4.2 Working on Flexible and Resilient Economic Restructure ....... .42 2.4.3 Investing in Physical and Technological Infrastructure ............ .43 2.4.4 Promoting Private Savings and Investment (Domestic and For- eign) ........................................................................................................ 43 2.4.5 Developing Ability to Sell on the International Market (Exports) ................................................................................................. 43 2.4.6 Focusing on Transparency in Govemment.. ............................... 43 2.4.7 Harmonizing a Relationship between Wages Levels, Producti- vity and Taxation .................................................................................... 44 2.4.8 Preserving the Social Structure by Strengthening the Middle Class ........................................................................................................ 44 2.4.9 Investing Heavily in Education .................................................. .44 Chapter 3: Determinants of National Competitiveness ............................... 45 3.1 Production Resources ............................................................................. .45 3. I. I Endowment of Production Resources ......................................... 46 3. l.2 Classification of Production Resources and their Role ............. .48 3.2 Technology Development ....................................................................... 51 7 Phuc Hien Nguyen - 978-3-631-75113-8 Downloaded from PubFactory at 01/11/2019 08:10:49AM via free access 3.2.1 Technology and Competitiveness ............................................... 51 3.2.2 The Processing of Technology Development ............................. 53 3.2.2.l Technology Transfer ............................................................ 53 3.2.2.2 Technology Innovation ......................................................... 58 3.3 Market Conditions .................................................................................. 61 3.4 International Business and Economic Activities-IBEA .......................... 63 3.4.l Foreign Direct Investment (FDI), Multinational Corporations (MNCs), and Competitiveness ................................................................ 63 3.4.2 International Trade Activities and Competitiveness ................... 67 3.5 Company Strategy and Operation (Competitiveness) ............................ 68 3.5.l Company Strategy ....................................................................... 68 3.5.2 Company Goals and Management .............................................. 70 3.5.3 Company Size ............................................................................. 72 3.6 Government Role .................................................................................... 74 3.6. l Public Institutions ....................................................................... 75 3.6. l. l Institutional Concept ............................................................ 75 3.6.1.2 Institutions and Competitiveness .......................................... 76 3.6.2 Government Policy ..................................................................... 78 3.7 Interdependence among Determinants as a Dynamic of National Competitiveness ............................................................................................... 80 3.7.1 Effects on Production Resources ................................................ 80 3.7.2 Technology and Human Resources ............................................ 83 3.7.3 Influences on Market Condition ................................................. 84 3.7.4 International Business and Economic Activities and Techno- logy ........ ................................................................................................ 86 3.7.5 Effect ofIBEAs on Human Resources ....................................... 90 3.7.6 Government's Influence on all other Determinants .................... 91 3.7.6.1 Government's Effect on Production Resources ................... 91 3.7.6.2 Government's Effect on Technology ................................... 92 3.7.6.3 Government's Effect on Market Conditions ........................ 93 3.7.6.4 Government's Effect on IBEAs ........................................... 94 Chapter 4: Empirical Study of Determinants Driving Vietnam's National Competitiveness .................................................................................... 97 4.1 Overall Economic Development of Vietnam in the Last Two Decades ..................................................................................................... 97 4.1. l Background ................................................................................. 97 4.1.2 Economic Performance ............................................................... 98 4.1.3 International and Regional Economic Integration .................... 103 4.2 Testing Determinants Driving Vietnam's National Competitiveness .. 104 4.2. l Nature of Competitiveness Indices ........................................... 105 4.2.2 Data Resources ......................................................................... 109 4.2.3 Construction of Competitiveness Indices ................................. 111 8 Phuc Hien Nguyen - 978-3-631-75113-8 Downloaded from PubFactory at 01/11/2019 08:10:49AM via free access 4.3 Summary of Regression Analysis Result ............................................. 113 4.3.1 Model of Multiple Linear Regression ....................................... 113 4.3 .2 The Result of the Regression Models ....................................... 114 Chapter 5: National Competitiveness ofVietnam ...................................... 121 5. I Production Resource and Competitiveness ........................................... 121 5. I. I Infrastructure Development and Competitiveness .................... 121 5 .1.2 Human Resource and Competitiveness .................................... 123 5.1.3 Capital Resource and Competitiveness ..................................... 125 5 .1.4 Production Resources' Assessment .......................................... I 29 5.2 Technology Development.. ................................................................... 130 5.2.1 Technology Progress ................................................................. 13 l 5.2.2 Technology Development's Assessment.. ................................ 134 5.3 Market Conditions ................................................................................ 135 5.3.1 Competitive Environment.. ....................................................... 135 5 .3 .2 Assessment of Competitive Environment ................................ 13 7 5.4 International Business and Economic Activities (IBEA) ..................... 138 5.4.1 Foreign Direct Investment (FDI) Activity and Competitiveness ................................................................................... 138 5.4.2 International Trade Activity and Competitiveness ................... 143 5.4.3 Assessment oflnternational Business and Economic Activities .............................................................................................. 148 5.5 Company's Strategy and Operation (Competitiveness) ....................... 150 5.5.1 Company's Development and Contribution ............................. 150 5.5.2 Assessment of Company's Competitiveness ............................ 153 5.6 Government Role and Competitiveness ............................................... 156 5 .6.1 Development of Institution and Government Policies .............. 156 5.6.2 Government Role's Assessment ............................................... 162 Chapter 6: Emerging Issues and Recommendations ................................. 165 6.1 Emerging Issues of Vietnam's Competitiveness .................................. 165 6.1.1 Production Resources Shortage and Low Quality .................... 165 6.1.2 Backward Technology .............................................................. 170 6.1.3 Bureaucracy, Red Tape and Corruption ................................... 174 6.1.4 Slow State-Owned Enterprise Reform ...................................... 177 6.2 Recommendations to Enhance the Competitiveness of Vietnam ......... 179 6.2.1 Address the Shortage and Quality of Production Resources .... 179 6.2.1. l Reform Higher Education and Develop Vocational Education .......................................................................................... 179 6.2.1.2 Improve Transport Infrastructure and Strengthen Electricity Supply.............................................................................. 182 6.2.1.3 Develop Financial Market and Reform Banking System ... 185 6.2.2 Develop an Independent and Vibrant Domestic Private Sector ............ ....................................................................................... 188 9 Phuc Hien Nguyen - 978-3-631-75113-8 Downloaded from PubFactory at 01/11/2019 08:10:49AM via free access 6.2.2.1 Strengthen State-Owned Enterprise Reform ...................... 188 6.2.2.2 Promote Development of the Private Sector ...................... 192 6.2.3 Strengthen Public Institution and Government Effectiveness .. 194 6.2.3.1 Launch a Strong and Effective Anti-Corruption Campaign ......................................................................................... 194 6.2.3 .2 Strengthen Public Administration Reform ......................... 197 6.2.3 .3 Improve Framework and Enforcement of Legal System ... 198 Chapter 7: Conclusion .................................................................................. 201 Appendices ........................................................................................................... 205 Bibliography ........................................................................................................ 238 10 Phuc Hien Nguyen - 978-3-631-75113-8 Downloaded from PubFactory at 01/11/2019 08:10:49AM via free access List of Abbreviations ADB APEC ASEAN ATC BOT CAV CCIA CIEM DAF EVN FDI GSO GTZ IAS IBEA IMD IMF IPO IPPs IT LUR MNCs MOF MOUSA MONRE MPI NAFTA NGO NICs NPLs NTBs OECD PAR QRs R§D S&T SAV SCIC Asia Development Bank Asia-Pacific Economic Co-operation Association of South-East Asian Nations Agency for Technical Coorperation Build - Operate and Transfer Custom Valuation Agreement Central Committee on Internal Affairs Central Institute of Economic Management Development Assistant Fund Electricity of Vietnam Foreign Direct Investment General Statistics Office of Vietnam Gesellschaft fuer Technische Zusammenarbeit International Accounting Standard International Business and Economic Activities Institute for Management Development International Monetary Fund Initial Public Offering Independent Power Producers Information Technology Land UsiPg Right Multinational Corporations Ministry of Finance Ministry of Labor, Invalid and Social Affair Ministry of Natural Resource and the Environment Ministry of Planning and Investment North America Free Trade Agreement Non - Governmental Organization New Industrialized Countries Non-Performing Loans Non-Tariff Barriers Organization for Economic Co-operation and Development Public Administration Reform Quantitative Restrictions Research and Development Science and Technology State Audit of Vietnam State Capital Investment Company 11 Phuc Hien Nguyen - 978-3-631-75113-8 Downloaded from PubFactory at 01/11/2019 08:10:49AM via free access SEDP SMEs SOCBs SOEs SVB UEL UNCTAD UNIDO VCCI VNC VND VNPT WB WEF WIR WTO 12 Social Economic Development Plan Small and Medium-Sized Enterprises State Owned Commercial Banlcs State Owned Enterprises State Bank of Vietnam Unified Enterprise Law United Nation Conference on Trade and Development United Nations Industrial Development Organization Vietnam Chamber of Commerce Industry Vietnam National Competitiveness Vietnamese Dong Vietnam Post and Telecommunication World Bank World Economic Forum World Investment Report World Trade Organization Phuc Hien Nguyen - 978-3-631-75113-8 Downloaded from PubFactory at 01/11/2019 08:10:49AM via free access List of Figures Figure 1.1 Annual GDP Growth,% (1990-2007) ................................................ 19 Figure 1.2 Labor Productivity Perfonnance ........................................................ 19 Figure 2.1: Porter's Diamond Model.. .................................................................. .36 Figure 2.2: Stages of Competitive Development... ................................................ 38 Figure 4. I: Labor Productivity and GDP Growth Rate (1990-2006) ................... 99 Figure 4. 2: Labor Productivity and GDP per Capita Perfonnance ( 1990-2006) ......................................................................................................... 100 Figure 4. 3: Sector Share of Total Product .......................................................... 100 Figure 4. 4: Total Imports, Exports and GDP (US million) ................................ 101 Figure 4. 5: Share of Export and Imports by Countries (2006) ........................... 102 Figure 4. 6: Total FDI Stock and GDP ................................................................ 103 Figure 5. I: Gross Domestic Capital Fonnation (% ofGDP) .............................. 126 Figure 5. 2: M2 as a Percentage of GDP ............................................................. 127 Figure 5. 3: National Saving Rate(% of GDP) ................................................... 128 Figure 5. 4: Capital Resource .............................................................................. 128 Figure 5. 5: Quality of Production Resources ...................................................... 130 Figure 5. 6: FOi and Technology Transfer .......................................................... 132 Figure 5. 7: High-Technology Exports as% of Manufactured Exports .............. 134 Figure 5. 8: Competitive Environment ................................................................ 138 Figure 5. 9: Inward FDI (% ofGDP) ................................................................... 139 Figure 5. 10: Export Growth and Inward FDI Inflows ........................................ 141 Figure 5. 11: FOi Inflow as a Percentage of Fixed Capital Formation ............... 142 Figure 5. 12: Inward FDI Stock (US dollar million) ........................................... 142 Figure 5. 13: Openness ofEconomy .................................................................... 144 Figure 5. 14: Annual Export Growth Rate ........................................................... 145 Figure 5. 15: Customs and Hidden Barriers ........................................................ 149 Figure 5. 16: Export by Principle Commodities (2006) ...................................... 154 Figure 5. 17: Company's Strategy and Operation ................................................ 155 Figure 5. 18: Public Institution ............................................................................ 157 Figure 5. 19: Budget's Revenue and Expenditure ................................................ 159 Figure 5. 20: Efficiency of Public Financial Management... ............................... 160 Figure 5. 21 : Government Transparency and Burden of Regulation ................... 162 Figure 6. l: Survey Technology Development.. .................................................. 172 Figure 6. 2: Personal Computer per 1,000 Inhabitants ........................................ 173 Figure 6. 3: Corruption Perception Index ............................................................ 176 13 Phuc Hien Nguyen - 978-3-631-75113-8 Downloaded from PubFactory at 01/11/2019 08:10:49AM via free access Figure 6. 4: The most concerning problem for doing business ........................... 237 Figure 6. 5: Priorities for the Government in the next five years ........................ 237 14 Phuc Hien Nguyen - 978-3-631-75113-8 Downloaded from PubFactory at 01/11/2019 08:10:49AM via free access List of Tables and Boxes Table 4. I: Summary of regression results of hard data ( 1990-2005) and sur- vey data ................................................................................................................ 118 Table 4. 2: The regression results of hard and survey data (with independent variables of production resources -PR) ................................................................ 119 Table 5. I: Access to Infrastructure Services (2004) ........................................... I 22 Table 5. 2: A Comparison oflnfrastructure Service-Related Cost among Asia Cities .................................................................................................................... 123 Table 5. 3: Population and Labor Force .............................................................. 124 Table 5. 4: Literacy and Enrollment Rate ............................................................ 125 Table 5. 5: Growth of Foreign Trade in Selected Countries, 1990-2006 ............ 144 Table 5. 6: Nominal Tariffs Rates and Dispersion in Selected Asia Countries ... 146 Box I The salient features of technology and learning ......................................... 54 Box 2 Noticeable features of recent FOi ............................................................... 65 Box 3 A number of privatization methods (OECD 2000) ................................... 189 15 Phuc Hien Nguyen - 978-3-631-75113-8 Downloaded from PubFactory at 01/11/2019 08:10:49AM via free access Phuc Hien Nguyen - 978-3-631-75113-8 Downloaded from PubFactory at 01/11/2019 08:10:49AM via free access Chapter 1: Introduction 1.1 Research Context and Problem The "Doi moi" policy has brought expressive economic fruits and radical changes within the Vietnamese economy. The GDP growth remained relatively high, hav- ing an average annual rate of 7.5% between 1990 and 2007. Physical infrastruc- ture and human resource have been improved compared to the previous phase, and the financial market has been initially set up. International trade and foreign investment activities have become more liberal and open, and as a result they have performed remarkable achievements. The business environment has become more attractive due to simplification of administrative procedures. All of the above fac- tors have led to an improvement in Vietnam's national competitiveness and pro- ductivity. However, Vietnam's competitiveness, productivity, and economic growth in the new context reveal some concerned problems that need to be exam- ined and clarified. Firstly, national competitiveness has become a central preoccupation of policy makers and business leaders in both developed and developing countries. Al- though its importance has been acknowledged, national competitiveness remains a widely unaccepted concept (Porter 2004, p 19) and it has been a controversial issue among professional economists who are often skeptical of the concept (Lall 2001a, p32) while governments and policy makers are particularly interested in the issue of competitiveness (Lall 200 I a, p 2), specifically the policies that can improve it. Governments have established councils and competitiveness commit- tees have written white papers and organized conferences on the subject (ADB 2003, p204). In fact, national competitiveness is a real concept (Lall 2001b) and the most meaningful concept of competitiveness at national level is national pro- ductivity (Porter 1990, p 6). Productivity is a fundamental for national competi- tiveness and a nation's living standard in the long term. Productivity will secure sustained economic growth and citizens' improvement in living conditions (Porter 2004, p 21 ). The central challenge in economic development then is how to create the conditions for rapid and sustained productivity growth (Porter 2003, p 25). Secondly, although Vietnam has had a relatively high growth recently, it should not be complacent and needs to pay continued attention to being competitive (Dapice 2003). The clearest evidence that Vietnam could develop even faster comes from a comparison with China (Vu 2003, pl); both countries have fol- lowed a similar way and institution from a planned to a market oriented economy, but economic growth in China has typically exceeded Vietnam's by about two percentage annually (Figure 1.1) and inflows of foreign direct investment (per 17 Phuc Hien Nguyen - 978-3-631-75113-8 Downloaded from PubFactory at 01/11/2019 08:10:49AM via free access capita) in China are higher two fold than that in Vietnam. This view was widely held in the words of United Nation Development Program resident representative in Hanoi, Jordan Ryan, "Vietnam should not be lulled by its success ... [It] can and must do much better as it faces intense global competition" 1• Thirdly, the principle economic goal of a nation is to produce a high and rising standard of living for its citizens. The ability to do so depends on its competitive- ness and productivity with which a nation's resources (labor and capital) are em- ployed (Porter 2003, p 25). Productivity is a value of the output produced by a unit labor and capital. It depends on both the quality and features of products (which determine the prices they can command) and the efficiency with which they are produced (Porter 2004, p 22). In line with economic growth, labor pro- ductivity performance (defined and measured as output per employee) in Vietnam has improved over time (Figure 1.2). However, labor productivity performance in Vietnam still lags behind neighboring countries, especially with China. If in 1990 labor productivity level between two countries was not quite different, now there is a significant difference in productivity level (Figure 1.2). Obviously, China has made a greater progress in productivity and competitiveness than Vietnam, and China's labor productivity growth is much higher than the rate of its counterpart. What causes lead to this issue need to be understood. Fourthly, there are some emerging key issues of Vietnam's national competitive- ness such as production resources shortage, out-dated technology, dominance of SOEs and slow their reform, red-tape and corrupt administration. These issues impact negatively the productivity and competitiveness as well as sustainable economic growth in the long-term. At the same time, Vietnam cannot do every- thing to improve its competitiveness due to a limitation of resources and compe- tence. Furthermore, national competitiveness is a large scope concept relating to many areas of an economy. Therefore, the problem is that we have to point out the most urgent key issues and the top priorities measures to enhance Vietnam's na- tional competitiveness and productivity as well as sustain its economic growth. The key to success in the coming years is that the Vietnamese government should design strategies to take full advantage of the potential benefits that globalization and competition offer. The government and its enterprises need to understand what competitiveness means and how it fits in the development process. As reported by Agence France Press, August 13, 2003 18 Phuc Hien Nguyen - 978-3-631-75113-8 Downloaded from PubFactory at 01/11/2019 08:10:49AM via free access