Vietnam should reduce dependence on FDI firms in value chains: economist

Vietnamese enterprises should become self-reliant and reduce their dependence on foreign invested peers in developing supporting industries and integrating into value chains, said eminent economist Nguyen Dinh Cung.

Speaking at a seminar on Vietnamese firms’ integration into the global value chain through FDI linkages in Hanoi Tuesday, Cung, former head of the Central Institute for Economic Management (CIEM), said that the Vietnamese government should look beyond enhancing connections between the two economic sectors.

“We should look at the broader picture of global manufacturing and value chains. Vietnamese companies need to vie for stronger and higher connections in the global value chain,” Cung said.

Citing the Thai automotive industry as an example, Cung said local companies have become providers of spare parts for industries in other countries. Similarly, Vietnam should improve their internal strengths and become a provider for all buyers, not just foreign firms in the country.

Nguyen Quoc Viet, deputy director of the Vietnam Institute for Economic and Policy Research (VERP), pointed out that the localization rate in Vietnam’s auto industry was just 10-20%, much lower than 45% in Thailand.

Illustrating the contrast between Vietnam and Thailand, Viet highlighted that the former has around 20 major auto assemblers, but just 81 tier-1 and 145 tier-2 and tier-3 suppliers. Meanwhile, to serve 16 auto assemblers, Thailand has 690 tier-1 providers and 1,700 tier-2 and tier-3 suppliers.

Viet also noted that the Vietnamese auto industry was mainly engaged in low-end segments of the value chain with products like tires, batteries and wires. Local firms were heavily dependent on production allocation by global players and have not mastered core industries yet. These factors have hindered Vietnamese firms from scaling up their operations, he added.

In addition, tax incentives provided by the Vietnamese government, mainly via excise duty, are not attractive enough to encourage firms to expand their manufacturing capabilities at home, he added.

Skilled manpower

Prof. Nguyen Dinh Duc, chairman of the Council of the University of Engineering and Technology, under Vietnam National University-Hanoi, pointed out that Vietnam and South Korea were at similar starting points in the 1960s.

In the early days of post-war development, South Korea focused on developing technology by learning from foreign companies and working with multinational companies.

Meanwhile, foreign firms in Vietnam operate mainly in the fields of manufacturing, processing and real estate. They have made use of their competitive edge, incentives and cheap labor in Vietnam.

In the first decades of Vietnam’s economic reopening, foreign firms contributed greatly to the country’s growth and job creation. However, in the long run, home strength in science and technology will be decisive, Duc said.

From the similar starting point four to five decades ago, Japan and China have become major powers thanks to human resources and science and technology strengths.

“Therefore, for Vietnam to take off, a skilled workforce and science-technology must be considered the ‘magic wand’ that will drive development in the time ahead,” he added.

Duc stressed that Vietnam had great potential for high-tech development, with the government giving priority to policy, human resources and infrastructure.

With ample rare earth reserves, Vietnam can develop the semiconductor industry. The agreements signed during the Hanoi visit by U.S. President Biden will provide opportunities for Vietnam to make breakthroughs, he added.