Authors: Guanie Lim, GRIPS and Chengwei Xu, NTU
In late August 2022, news broke that Apple was in talks to produce its famous Apple Watches and MacBooks for the first time in Vietnam. Some see this as a move by transnational corporations and their key suppliers to diversify production outside of China and protect themselves from intensifying geoeconomic competition between the US and China.
Others interpret this as a sign of Vietnam’s increasing manufacturing prowess built on its famous 1986 doi moi (renovation) program. The reforms were designed to reintegrate the country into the global economy. More important measures included the creation of stock exchanges, the promotion of private property and the encouragement of private-public partnerships.
US-China relations have been the talk of the town lately and several transnational corporations have relocated their facilities from China to neighboring economies such as Vietnam for reasons including, but not limited to, trade tensions.
But long-term overtures from other countries are also important. Former South Korean President Park Geun-hye (2013-2017) has lobbied hard for closer economic ties between Seoul and Hanoi. One of the most prominent ways she did this was by inviting the chaebols (large family businesses) to invest in Vietnam.
While the chaebol-led investment was economically motivated, a less discussed factor is the backlash they faced in the Chinese market after Park decided to deploy the Terminal High Altitude Area Defense (THAAD) missile defense system. Any contemporary tourist strolling through Hanoi and Ho Chi Minh City would have a hard time ignoring the ubiquitous presence of these chaebols, ranging from consumer electronics brands (Samsung) to retail giants (Lotte Group).
Vietnamese economic planners have done their homework. The business environment has improved over the past ten years. Vietnam has risen in the World Bank’s Ease of Doing Business ranking from 98th in 2012 to 70th in 2020, with other emerging economies equally hungry to attract investment dollars making a leap forward.
One of the most concrete manifestations of Vietnam’s success is its industrial zones, without which no overture to foreign investors would have paid off. In exchange for the soft and hard infrastructure facilities provided in these industrial zones, foreign transnational corporations establish a local presence and generate positive externalities – local employment and technology transfer – fueling Vietnam’s export-oriented industrialization.
The active cultivation of such industrial zones over the past decade has coincided with some of Vietnam’s highest current account surpluses, as transnational corporations began using Vietnam as a regional business center. Thanks to the much improved current account, the threat of a balance of payments crisis, the nightmare of many emerging economies, is a thing of the past.
Much remains to be done. Economists have long pushed for another round of economic reforms inspired by doi moi. Despite some positive developments, growth has slowed down especially in recent years. A renewed focus on the transformation of Vietnam’s production structure is needed.
A key part of this new doi moi would involve a more sweeping restructuring of the country’s state-owned enterprises (SOEs). As part of Vietnam’s socialist roots, they are widely expected to lead the country’s industrialization efforts, especially in strategic sectors. But their achievements are far from impressive, even in the post-1986 era.
Despite multiple rounds of administrative reform, many of these state-owned enterprises remain plagued by inefficiency, mismanagement and poor export performance. Vietnam’s export earnings have mainly been received by foreign investors. At the beginning of 2021, 76.3 percent of exports were orchestrated by transnational companies. Domestic business groups account for only 23.7 percent of exports.
As is often the case with economies in transition, deeper and more sustainable growth depends on how meaningfully government can reorganize these state-owned enterprises to meet the challenges of globalization. Vietnam is no exception.
To leverage the assets and goodwill of Vietnamese state-owned companies, the same companies must be subject to more public scrutiny. Greater transparency will promote a better understanding of their operations, limiting rent searches. More robust corporate governance is also likely to build investor confidence, allowing the government to get higher prices when it privatizes these state-owned companies.
A related policy measure would be to provide increased financial and technical assistance to small and medium-sized enterprises (SMEs) in Vietnam. Unlike state-owned enterprises, they do not suffer from administrative prerogatives and other ‘social functions’, making them more agile and responsive to market forces. But SMEs generally lack capital and technology, so they need support to ensure vitality.
Vietnam should explore well-designed support programs to better integrate these enterprises into the production networks of state-owned enterprises and foreign transnational corporations, especially in export markets. The country’s motorcycle industry has witnessed significant technological deepening following the efforts of Japanese transnational corporations to leverage Vietnam as an export hub.
The challenge now is to establish closer cooperation between foreign and local companies in other export-oriented industries. Export targeting stimulated organizational learning and broader technology connections in the earlier generation of latecomers in Asia.
Small or medium-sized economies such as Vietnam cannot realistically influence geopolitical tensions at the international level. Vietnam needs long-term policies aimed at acquiring product and process knowledge, both of which are crucial for increasing competitiveness. The experience could provide lessons for other East Asian states seeking to pursue policies compatible with their socioeconomic conditions while managing the fallout from the geoeconomic rivalry between the US and China.
Guanie Lim is an assistant professor at the National Graduate Institute for Policy Studies, Japan.
Chengwei Xu is a Research Fellow at the Nanyang Center for Public Administration, Nanyang Technological University, Singapore.
Read original article eastasiaforum.com
