Fdi And Development Of Manufacturing Industries In Vietnam

INSTITUTE OF WORLD ECONOMY– IDRC/CIDA PROJECT

FDI AND DEVELOPMENT OF MANUFACTURING INDUSTRIES IN VIETNAM

This work was implemented with the aid of a grant from the International Development Research Centre, Ottawa, Canada.

Hanoi, May 2002

TABLE OF CONTENT TABLE OF CONTENT..................................................................................2 Acknowledgements..........................................................................................4 1. Introduction................................................................................................6 2. Literature review .......................................................................................6 2.1 FDI and technology imports and local R&D...........................................................7 2.1FDI and spillovers effect.............................................................................................9 a) Relationship between spillovers of knowledge, R&D and productivity..............10 b/ Impact of FDI on local economy through linkages of firms...............................12 2.3 FDI and exports of local manufacturing industries..............................................13 2.4 Technology selection and local industry.................................................................15 2. 5 Labour and wages..................................................................................................16

2.6 Remarks...................................................................................................16 3.1 Introduction.............................................................................................17 3.1.1 Objectives of surveys.............................................................................................18 3.1.2 Methodology..........................................................................................................18

3.2 Report of the findings from surveys......................................................20 3.2.1 Structure of samples..............................................................................................20 FIEs..................................................................................................................................20 3.2.2 Contribution of sectors.........................................................................................21 3.2.3. Performance of foreign invested firms in manufacturing industries .............22 3.2.3.1 Employment and output...............................................................................22 3.2.3.2 Output/sales and growth...............................................................................24

Sales in 1999...................................................................................................25 3.2.3.4 Capital intensity............................................................................................27 3.2.3.5 Export intensity............................................................................................27

Year.................................................................................................................28 T&G.................................................................................................................................28 Electronics.......................................................................................................................28 3.2.3.6 Profitability...................................................................................................28 3.2.3.7 Investment ...................................................................................................29 3.2.3.8 Wages...........................................................................................................30 3.2 Remarks....................................................................................................................31

4. An in-depth analysis of FDI in manufacturing industry .........................................................................................................................32 4.1 Employment .............................................................................................................32

Years...............................................................................................................32 Total

32

Year 1999........................................................................................................33

Total

33

Year 2000........................................................................................................33 Total

33

Total

33

4.2 Training.....................................................................................................................33

Total

34

Table 27: Training in the three sectors in the T&G in 2000 (%)..............................34 Table 28: Training in the three other industries in 2000...........................................35 4.3 Linkages and imports..............................................................................................35 FIEs..........................................................................................................................35 Automobile...............................................................................................................35 FIEs..........................................................................................................................37 Automobile...............................................................................................................37 4.4 Export........................................................................................................................40 4.5 Research and development (R/D) and technology transfer..................................40 6. Finance........................................................................................................................45 7. Business environment...............................................................................................46 8. Conclusion...................................................................................................................50

5. Policy recommendations..........................................................................51 References .....................................................................................................53

ACKNOWLEDGEMENTS

This report was prepared by a research team led by Dr. Le Bo Linh (Institute of World Economy) and received various contributions from Dr. Bui Quang Tuan, Bui Truong Giang, Dr. Chu Duc Dung, Dao Viet Hung, Nguyen Minh Le, Dr. Nguyen Xuan Thang, Dr. Nguyen Tran Que, Dr. Nguyen Van Tam, Dr. Luu Ngoc Trinh, Dr. Ta Kim Ngoc (Institute of World Economy), Vu Quoc Huy (UNDP), Nguyen Viet Cuong, Nguyen Manh Hung (Vietnam Commercial Bank), Dr. Phung Xuan Nha (Hanoi National University), and Nguyen Ngoc Manh (Vietnam Asia Pacific Economic Center). The survey data were collected in cooperation with Dr. Nguyen Thanh Ha, Dr. Cu Chi Loi, Nguyen Van Tien (Institute of Economics), Bui Ngoc Son, Nguyen Ba Ngo, Nguyen Duc, Nguyen Hong Son, Nguyen Thu Huong, Nguyen Van Trien, and Pham Hong Tien (Institute of World Economy). The project would not have been completed without extremely useful assistance and generous support provided by Dr. John Cockburn and Dr. Bernard Decaluwé (CREFA, Université Laval, Quebec, Canada) and Dr. Remco Oostendorp (AIRD, Cambridge, MA, USA). The team would like to express its deep gratitude to the team of academic advisors for the continuous intellectual support and guidance. Special thanks go to the IDRC and CIDA (Canada) and their enthusiastic staff including Dr. Rodney Schmidt, Dr. Randy Spence, Dr. Steve McGurk and Vu Cuong for their helpful financial and institutional support. The team is indebted to Dr. Nguyen Thang and his team for their useful assistance in calculating weight data of the survey. The team would like to thank the Institute of World Economy, particularly Prof. Vo Dai Luoc for the academic and institutional support. Sincere thanks go to all other people who involved and helped in collecting data, a crucial input for this report.

Abstract Understanding and assessing the performance of FDI enterprises helps shed light on the role of FDI for the economy and the problem of improving attractiveness of investment environment for development. Based on two survey samples in textile and garment, electronics, automobile, and food processing industries in 2001, and using method of comparative analysis this study examines the performance of the FDI enterprises in manufacturing industries in Vietnam and draws some policy implications. The main findings of the study are that the FDI enterprises had a very important contribution to overal turnover and employment. In comparison with the state and the private sectors, the FDI sector had the highest average labour productivities. Products of the FDI enterprises in textile and garment industries were found to be the most export oriented among enterprises of the three ownership sectors and the percentage of exports based on quota in the FDI enterprises were less than the percentage based on non-quota exports. However, FDI enterprises in other manufacturing industries such as automobile, and electronics were mainly domestic market targeted. The average wage rate of the FDI enterprises in textile and garments was at the highest level among the three ownership sectors. Unskilled workers were one of the most important targets of the FDI in Vietnam and “on job training” was the more preferable way of training applied in FDI sector. While cheap labour source was one of the most important targets, high quality of input and material seems to be more important than cheap domestic materials. FDI enterprises were found to invest little on R&D, preferring using research achievements of their mother companies. Thus imported technologies were found to use more frequently than importsubstituted technologies. The production network generated by FDI seems to be weak. There was an unfair competition across ownership sectors in accessing credit market. Although the business environment was found to improve significantly, there were still some problems for the government to address. Poor output market access and labour recruitment were among the most important problems existed. Other problems such as lack of capital, non-transparent legal environment, poor access to input market and less developed infrastructure were of concern of the foreign investors. Some policy implications were drawn based on the findings. They are associated with the assessment of the role of FDI, technology capacity building, innovation and investment on R&D, improving investment and business environment, and creation of fair competition in credit market.

1. Introduction FDI can be a very useful force for development, bringing many important benefits to the host countries. FDI is more important for the countries of low-based development and in need of fast growth and development like Vietnam. Therefore, attracting FDI has been paid a special attention from Vietnam’s government. Since the Law of foreign investment was passed in 1987, the flows of FDI into Vietnam have been considerable and increasing over time. However, after a big jump in the period of 1988 – 1996, Vietnam experienced a sharp decline in FDI inflows, mostly because of the Asian financial crises in 1997 – 1998. However, in the beginning of the period of 2000 - 2001, the investment flows into Vietnam have shown a gradual increase again. Overall, since 1987 to the end of 2001, Vietnam has issued 3796 investment licenses with more than US$ 41 billion of registered capital. Among them 3047 project are still active. These projects have a total registered capital of US$ 38.9 billion. The contribution of FDI has been considerable to Vietnam’s economy. Apart from the decrease of FDI inflows in the subsequent period of the Asian crises, the share of FDI in the total investment was increasing and reached a peak of 31.3 percent in 1997. In 2000, the FDI sector accounted for 39.2 percent of industrial output, 23.2 percent of export values and 13.3 percent of the GDP of Vietnam. In addition, these figures have a steadily increasing tendency over the period 1995 – 2000. Although the important role of FDI in contribution to the economy is clear, the relationship between FDI and building competitive manufacturing industries in the context of increasing globalisation and regional integration is still not so clear. How FDI performs and extends its impact on manufacturing industries should be well examined to make a good and appropriate strategy for development of manufacturing industries. There has not been a major in-depth and thorough study on this issue in Vietnam so far. This project is expected to fill this gap and have a helpful contribution to a more understanding of the nature of the relationship between FDI and development of manufacturing industries in Vietnam. The particular aims of the projects are as follow: First, to examine the situation of studies on the impact of FDI in manufacturing industries in the literature; Second, to provide a through assessment of impact of FDI on development of manufacturing industries in Vietnam based on surveys; Third, to provide some policy recommendations in the regards of the relationship of FDI and development of manufacturing industries in Vietnam. The structure of the report are as follows: the second part provides a short literature review; the third part reports the findings of analysis of survey data in four manufacturing industries including textile and garments, automobile, electronics, and food processing; and the forth part discusses policy implications.

2. Literature review Foreign direct investment (FDI) and economic development in developing countries is a theme that has been drawing much attention of economists during the past decades. One of the focuses of the attention of researchers is the impact of FDI on development of manufacturing industries of the host countries. This part, based on limited sources, provides a brief review of studies on the relationship between FDI and development of manufacturing industries in developing countries. The following aspects of FDI impact are

of interest: technology imports, research and development (R&D), spillover effect, vertical integration linkage, technology selection, labour training and wages in manufacturing industries in developing countries. 2.1 FDI and technology imports and local R&D FDI in manufacturing industries is often associated with technology imports, R&D of the local firms. As a result, the relationship between technology imports and local R&D attracts considerable attention of studies on FDI in manufacturing industries in developing countries. Currently, there are two quite contrary strands of literature: the first strand views technology imports as a substitutability for local R&D. Thus, an excess of technology imports can result in a reduction of local R&D. The second strand argues that, in general, technology imports needs supplementary support and efforts in knowledge and technology from the local firms. These support and efforts will help raising efficiency of technology imports and making imported technologies adaptive and suitable to local conditions. Thus, according to this view, technology imports and technology research investment are supplementary but not substitutable. It is possible to say that India is a country that has considerable studies on the relationship between technology imports and local R&D. For example, Desai (1980) and Lall (1983) concluded that R&D of India in manufacturing industries mainly is adaptive and technology imports would encourages and increase “in-house” R&D. In a survey on technology imports conducted in India, Alam (1985) showed that 74 % of local firms involving in technology imports have supplementary R&D activities. The most important motivation of R&D activities of the local firms is to make technologies adaptive to production conditions of the firms. The second motivation is to indigenisation of production, or in other words, to make technologies gradually become local technologies. This also includes adaptation and imitation of imported technologies. Thus, the nature of the relationship of local R&D and imported technologies is also complementary. Alam has also pointed out the cases where negotiations with foreign companies are not successful due to certain reasons, for example, interference of the government and local R&D is needed to replace the imported technology. In these cases, the relationship of local R&D and technology imports may also be substitutable. While some other studies such as Lall (1983), Katrad (1985, 1989), Siddhathan (1988, 1992) observed and confirmed complementary nature of this relationship, Desai (1980, 1985) noticed the mix nature of the relationship of both complementation and substitution characteristics by the fact that many Indian firms intensified R&D activities after imported technologies agreements expired and when it was difficult to get government approval for technology agreement extension. In another study in India, Kumar (1987) argued that the essence of the relationship between imported technologies and local R&D depends on the mode of imported technologies. If firms are affiliates of the multinational enterprises (MNE), they import technologies internally under the form of FDI and thus they do not to concentrate on R&D activities. The reason is that local affiliates of MNE able to use update technologies and apply new technological achievements provided by R&D divisions of parent firms. In addition, MNE do not have tendency to encourage their affiliates in developing countries to concentrate on R&D activities. By contrast, they want to set control on R&D activities and tend to centralize these activities near their headquarters. Thus, imported technologies through FDI may not positively associate with stepping up local R&D activities. However,

if the firms are not affiliates of MNE, the things may turn around. These firms may obtain technologies via licensing and often invest in R&D activities just because of anxiety to absorb technologies during the life of the licensing agreement while lacking of supports in information and technology. As a result, licensing imports may be complemented by further technological efforts. To test the hypothesis that FDI mode may be characterised by a substitution and licensing by complement, Kumar used a data set of 43 Indian industries for a period of 1978 - 1981 in his inter-industry study. Two variables representing technology imports were used in this study: the share of foreign controlled enterprises in industry sales that represents importance of FDI and proportion of royalty and technical fees remitted abroad, which represents licensing. The result of the study showed that both these variables turned out to be significant in explaining variation of R&D intensity with negative sign and positive sign for foreign share and royalty payments, respectively. This result supports the hypothesis and helps in conclusion that FDI may have depressing effect on the levels of local R&D spending while licenses increase effect on the level of absorbability, application and additional development of technology. From the point of view of development strategy, Subrahmanian (1991) argued that whether local firms develop technology much or not depending on the development strategy of protectionism or liberalisation of the local economy. Under the strategy of protectionism, firms supplement their technology imports by local internal R&D effort and strengthen their manufacturing capability. However, under protectionism, attention is not much paid on improvement of patterns and styles of products. Under liberalisation, firms build up technology capacity through continued reliance on technology imports. This implies that technology imports may not be complemented by internal R&D under liberal environment. In an study on India, Deolalika and Evenson (1989) used a data set of 50 Indian industries of a period 1960 - 70 to estimate an input demand system based on a generalised quadratic cost function where R&D and technology purchase were treated as jointly determined by characteristics of Indian industries, prices and supply of purchasable foreign technology. The result of the study showed that there is some evidence of complementarity of purchased technology and inventive activity. The study also gave a result that, except for the chemical industry, both foreign and state ownership did not have a significant relationship with domestic patenting in the country. In the chemical industry, the positive association of domestic patenting the state ownership was explained by the fact that the state sector should play a considerable role to lessen the dependence of the country on foreign technology and on drugs. The negative relation of domestic patenting with foreign ownership was due to the tendency of MNE in chemical industry to rely on their parent companies’ invention but not local R&D. In a rather sizable study of Brazil including 4342 firms and companies, Braga and Willmor (1991) used a logit model to analyse the probability of a firm doing in-house R&D and its relationship with ownership and technology import variable. They concluded that firms that import technology were more likely to undertake R&D than other firms. Other factors such as firm size, diversification and export-orientation also significantly and positively related with R&D while foreign or state ownership, profitability, protection and market concentration did not have any significant impact on R&D activities. While arguing that most studies of relationship between technology import and local R&D activities are suffered from a problem of simultaneity in that they treat one of the two as an exogenous variable and from sampling biases, Fikkert (1993) treated R&D and foreign technology purchase as jointly determined by including cross equation and some restriction in the model in a study covering 305 Indian private sector firms. The result of the study showed that technology imports and R&D have a significantly negative relationship; firms

involving in foreign equity participation have an insignificant direct effect on R&D and more importantly, they tend to depend significantly more on foreign technology purchases which in turn tend to reduce R&D; and trade restrictions have induced adaptive R&D. From these results, the author concluded that, the closed technology policies with respect to FDI and technology licensing have positive effects on encouraging indigenous R&D. In addition, because R&D of India have positively absorbed imported technologies, there is a spillover effect of imported technology on local R&D. As consequence, a weak patent regime may allow spillovers simultaneously to promote R&D and to have a positive effect on productivity. Overall, results of studies give an observation that, relationship of imported technology and local R&D is rather complex. On the one hand, depending on particular circumstances, imported technology may be learn and indigenised by local R&D. Thus, local R&D may be complementary to imported technology. On the other hand, imported technologies may also reduce R&D activities of local firms, especially, when local firms are affiliates of parent companies or involved in ownership of foreign firms. In this case, import technology and local R&D are substitutable. Among the reasons that can explain the complex nature of the relationship, the mode of technology imports seems to be most important. When imported technology is undertaken via FDI, R&D activities of branches of MNE is put under an international united strategy of MNE. R&D activities are often located in the areas near headquarter of MNE in developed countries and are closely controlled. Only in the cases that R&D activities are decentralised for particular purposes and for taking advantage of local scientific and technical potential, will local R&D activities of their firms-subsidiaries be encouraged in developing countries. As a result, R&D of local firms that are affiliates of MNE depended much on the strategy of their parent firms. By contrast, when the mode of imports of technology is carried out by lincensing, R&D activities depend considerably on the strategy of local firms. Whether improvement is needed depends on the capacity and demand for reforms and inventions so that to satisfy the comprehensive demand for the goods in the market. Besides, other factors such as environment and policies on patents and inventions, closed or open structure of the market, policy of encouraging investment in R&D of host country may have an important influence on the relationship between local R&D and technology imports. These factors need to take into account when conducting analysis on the relationship of these factors. 2.1 FDI and spillovers effect For economic sectors in general and manufacturing industry in particular, FDI has an indirect important impact: transfer and dissemination of new knowledge of technology and management to local firms. This new knowledge will gradually and popularly be applied due to characteristics of competition in markets and the demand for application of new factors of technology and management that aim at improving quality and reducing prices of products. The needs of applying new knowledge of technology and management also come from the competition between the local firms and foreign firms - affiliates of MNE. In other words, FDI creates spillovers effect of new knowledge and technology, and as a consequence, bringing an external effect on local economy. Among the studies on spillover effect, there are two main groups of studies that are quite distinctive and related to the origin of spillovers from MNE to local economy. Studies of the first group tried to provide quantitative analyses of the impact of the factor of foreign presence on productivity and efficiency of local firms. Many studies often used multiple regression in analysing works, some of them relied on production function as a

starting point for analysis of the impact of spillover effect of imported technology and R&D. The studies of the second group focused on backward and forward linkage of MNE affiliates and training and employee mobility that are ones of main sources of the spillovers effect. These studies often applied a case study approach. In this subsection, we will examine in more detail these two groups of literature. a) Relationship between spillovers of knowledge, R&D and productivity Spillovers of knowledge are associated with transfer of new knowledge of technology and management to host countries where affiliates of MNE are located. This creates a feel that the studies on spillovers of knowledge is applied only to developing countries which are new markets and new opportunities for MNE to expand their activities and influences. However, one of the very first studies on this issue was applied not for developing countries but for a developed nation. Caves (1974) conducted a study on spillovers in Australian manufacturing and examined the effect of foreign share in an industry on labour productivity of locally owned firms. The result of the study showed that the effect was found to be positive implying foreign share and productivity moved in the same direction. The study by Caves provided an interesting and original approach of research such that many subsequent studies used this approach to tackle this issue for both developing countries and developed countries. Blomstrom (1989) and Blomstrom and Wolff (1989) used the Cave's approach and applied for a case in manufacturing in Mexico. Their study gave result that there was a strong positive association between labour productivity of locally-owned enterprises and foreign share in employment. However, the foreign presence, which was defined as a change in foreign share between 1970 and 1975, was not found related with changes in technology nor changes in labour productivity of least efficient plants. In addition, they found increasing convergence of productivity levels of locally owned firms to that of foreign owned firms. Nevertheless, this study did not take into account the factor of concentration of FDI in industries that have a high productivity level. This could lead to overestimating the effect of spillovers in the industries with a relatively high level of productivity. It is noted that, knew knowledge and management as a result of FDI also create an inequality of productivity level in industries of host economy. Taking a panel data on 4000 Venezuelan firms for the period 1975 - 1989, Aitken and Harrison (1993) conducted a study using the similar approach of examining the relationship between foreign share and productivity in both locally-owned firms and foreign owned firms. The result of the study showed that, on average, foreign owned firms had higher labour productivity, higher propensity to import as well as export and paid higher wages than their domestic counterparts even after controlling for size and capital intensity. Foreign ownership was found to affect the productivity of domestically owned firms and the negative effect were found to be large and robust. This implies that FDI has obvious direct impact on productivity improvements from imported technology by firms receiving foreign participation. The effect on domestically-owned firms is limited and spillover to other local enterprises are negligible and do not justify the incentives granted by host government to foreign investors. In a study of manufacturing industry in Marocco, Haddad and Harrison (1993) examined the impact of FDI on labour productivity of firms using a panel data for a period 1985 - 1989. Taking into account characteristics of firms such as firm size, the study found that the level of labour productivity in foreign firms is not higher than locally - owned firms, although foreign firms pay higher real wages than locally - owned firms do. On average, foreign firms had a higher level of total factor productivity than local firms did,

but the growth rate of their productivity was not higher. Their study gave evidence that sectors with high levels of FDI have a lower dispersion of productivity levels across firms. No significant relationship was found between higher productivity growth in domestic firms and greater foreign presence in a sector. As a result, a higher foreign share may not lead to a faster productivity growth of domestic firms. Kokko (1994) also examined Mexican data and found no evidence of spillovers in industries where the foreign affiliates have much higher productivity and larger market shares than local firms. However, he found that, in other industries, there appeared to be a positive relationship between foreign presence and local productivity. This result suggests that spillovers from foreign enterprises are dependent on the local capability in the industry. In particular, if local firms are too weak they will not be able to absorb spillovers and might loose in competition with foreign firms. One of the recent studies on direct and indirect impact of foreign technology on labour productivity is a study of Goldar (1994) in India. In this study, he used data of 330 large Indian enterprises in six major Industries over the period 1987 - 88 to 1989 - 90 to explain the total factor productivity growth attained in terms of R&D expenditures and technology imports among other factors. However, his empirical study gave a result that there are no significant relationships between the variables representing technology and labour productivity. He explained this result as a different motivation of technology imports: Indian firms do not import technology to improve productivity but to fulfil other objective such as diversification and expansion of production. In fact, while the motivation of technology imports is important, the timing of the effect of the technology factors may play more important role. Both technology generation and imports are activities involving significant lags in their returns to investors. Current expenditures on R&D and technology imports could improve labour productivity not immediately but in the subsequent period. Thus, is useful to take the data with longer time series and with the variables of lagged measurements of technology factors. A number of studies used the approach of production function to estimate the marginal products of R&D, technology imports and their spillovers to other firms following the tradition of studies conducted for the developed countries. Basant and Fikkert (1993), for example, in a study covering a panel data for 787 large Indian private sector firms for the period 1974-75 to 1982-83 estimated the impact of in-house R&D, expenditures on foreign technology purchase and spillovers of foreign and domestic R&D on productivity. The result of the study showed that there are high rates of return to both R&D and technology purchase expenditures. The private returns to technology imports ranged between 124 to 165 per cent and the returns to own R&D varied between 19-80 per cent and were highly sensitive to the specification. The R&D activity of other firms tended to have a significant positive impact on output, while foreign R&D activity significantly raised the marginal productivity of in-house R&D. In an another study in India, Haksar (1995) used the similar approach and a data set of 642 firms across 65 industries for 1975 - 90 to estimate marginal products of R&D and technology imports and their spillover effects of other firms' productivity. The result of his study showed that both local R&D and technology imports had positive spillovers. Haksar's estimation gave 141 per cent rate of return on own R&D, nearly 30 per cent return on technology imports expenditures and that the social rate of returns were higher than their private returns which were 145 and 45 per cent, respectively. Thus, he concluded that although technology imports had a much smaller rate of return to the importer than similar investments in R&D, the spillover to other firms were quite substantial. Haksar also

estimated these rates for specific sectors and found them to be larger for the scientific industries such as pharmaceutical industry, in which the rates of return both private and social to R&D were the highest, at 173 and 198 per cent, respectively. The reason of it, according to Haksar, is that Indian firms in this industry have achievement in investment in R&D to develop products in the conditions of weak patent laws, which did not allow patents on pharmaceutical products. However, technology imports had quite low rate of return in this industry that was at 22 per cent and there were no obvious spillovers of technology imports. Summing up, the studies on the impact of FDI and spillovers effect in developing countries showed that this is an important and attracted considerable interest of scholars. Technology imports and R&D in general create a certain impact on local R&D and productivity of local firms. This implies that there may be a spillover effect to local economy. Nevertheless, the level of spillover effect is not so clear and the conclusion of assessment on the level of this effect is different across cases. b/ Impact of FDI on local economy through linkages of firms FDI flows into a country create a close relationship among firms that provide and receive materials and intermediate products for and from each other, or in other words, it develops vertical inter-firm linkages. This is also true for manufacturing industries. Studies on FDI of manufacturing industry therefore paid considerable attention on the vertical linkage of foreign firms and local firms. In a study on FDI in manufacturing sector of Argentina, Katrs (1969) showed that FDI into this industry have considerable impact on technology of local firms because foreign firms create a pressure on local firms and forced them to renovate technology to improve quality and ensure the time schedule of providing products for foreign firms. Thus, technical progress of foreign firms also improved application of scientific progress of local firms in the industry. However, the level of the vertical linkage between the firms depends much on the proportion of using domestic and foreign materials in these firms. Thus, many studies interested in the dependence of both domestic and foreign firms on imported materials. Alternatively, the extent of linkages generated in the domestic economy may be an important issue as local content in production is an indicator of the strength of local linkages. By that way, it is possible to assess the level of interdependency of firms and the level of vertical linkage local firms and business units. In a number of studies in New Industrialised Economies such as Cohen (1975) in the case of South Korea, Taiwan and Singapore, and Riedel (1975) in the case of Taiwan have found export-oriented foreign firms importing a greater proportion of their inputs than their local counterparts. Foreign firms concentrating on domestic markets were found to depend even more on imports than their local counterparts in studies by Kelar (1977) and Surahmanian and Pillai (1979) for India, Jo (1980) in South Korea, New farmer and Marsh (1981) in Brazilian electrical industry. The reasons to explain this results were that foreign affiliates can be expected to import a higher proportion of their raw materials and other inputs than local firms because they were familiar with foreign suppliers and the alleged inadequacies of local producers, and sometimes to provide markets for products of their associates elsewhere. However, some other studies did not support this hypothesis. For example, Lall and Streeten (1977), in a study of six developing countries, showed that there were no statistically significant evidence of difference between the import dependence of foreign and local firms.

Studies using direct assessment of the degree of vertical linkage between firms did not give the same results. For example, Cohen (1975) found that among export-oriented enterprises in Taiwan, South Korea and Singapore, the local firms had a greater degree of vertical integration than foreign firms did. Newfarmer and Marsh (1981) and Willmore (1986) found a reverse pattern in the case of Brazil. Lall (1980) did not find any significant difference between the extent of subcontracting of a foreign subsidiary and a local company both producing trucks in India. After controlling for firm size, profitability and financial variables in the framework of multivariate analysis, Kumar (1990) found that foreign controlled had a greater extent of vertical integration than their local counterparts in 43 Indian manufacturing industries. While Pangetsu (1991) found that export-oriented FDI in Indonesia have little creation of domestic linkages and diffusion of know how. Some studies on the impact of FDI on the host economies through the effect of spillovers have concentrated on the issues of training and education of affiliates of MNE. These studies include works by Gerchenberg (1987) and Chen (1983). In his study, Gerchenberg examined detailed career data for 72 top and middle level managers in 41 manufacturing firms and concluded that MNE affiliates offer more training to their managers than local private firms even though the mobility seemed to be lower for managers employed by MNE than for those in private local firms. Similarly, Chen (1983) also found significantly higher training expenditures on the part of MNE affiliates in Hong Kong than for local firms in three of the four industries of the sample. This suggests that while MNE affiliates may invest more in human resource development, the diffusion of these resources within the host economies may be significant. In sum, studies on the impact of technology imports and knew knowledge on the activities of local firms showed that knew knowledge may play a role for spillover effect. However, the empirical studies gave the mixed result implying that the spillover effect is still weak and unclear. In order to have more robust conclusion, it is necessary to have more studies on this aspect. 2.3 FDI and exports of local manufacturing industries MNE has a crucial role in creating FDI flows in the world. Because of advantages of technology, brand names, influence and knowledge of markets in the world, MNE are often considered to be having positive on exports of local economies. For this reason, there is a hypothesis that FDI and MNE presence have a positive role in improving capacity of exports and market expansion of local industries and local firms. The empirical studies concentrate on testing this hypothesis and assessing the impact of MNE and FDI on export activities of local firms in manufacturing industries. However, these studies do provide unclear and divergent results of this impact. For example, using data of South Korea, Singapore and Taiwan, Cohen (1975) came to a conclusion that local firms seem to export more than foreign firms did. In the mean time, Riedel (1975) using data of Taiwan also showed that there were insignificant difference in exports between local firms and foreign firms, except for electronic industry. Some other studies, comparing export proportion of sales of two groups of local and foreign firms, such as Lall and Streeten (1977), Subrahmanian and Pillai (1979) in India, Jenkins (1979) in Mexico, and found that foreign controlled firm predominantly producing for domestic markets perform more poorly than local firms. In contrast, Morgenstern and Mueller (1976) for 10 Latin American countries, Newfamer and Marsh (1981) for the Brazilian electric industry, and Fairchild and Sosin (1986) for Latin American countries did not find a significant difference between export performance of foreign controlled and

local enterprises. Reza et al. even showed that, for the case of Bangladesh, foreign firms performed better than local firms in terms of exports and highly depend on imports from parents and other affiliated firms. In addition, a considerable interest has been given in the relationship between the degree of foreign ownership of firms and industry export performance. For example, Lall and Mohammed (1983) found a positive influence of the degree of foreign ownership on export performance in India though the influence seemed to be weak. But in an another study also for the case of India, Lall and Kumar (1981) for a sample of 100 engineering firms found that foreign share had insignificant effect on export performance of the engineering firms. For a case of 17053 Brazilian industrial firms, Willmore (1992) found that foreign ownership has a large positive effect on both export performance and import propensities independently of other determinants of trade such as firm size, sill intensity and advertising. Pant (1995) in a study covering 218 chemical and 202 engineering firms in India found no significant difference between export-orientation of MNE affiliates and local firms except for pharmaceutical industry where local firms actually performed better than foreign firms. Studies in some Asian countries and Mexico showed a clearer impact of foreign ownership on improving exports. For example, Nayyar (1978), Blomstrom (1990) found that MNE have played an important role in expanding manufactured exports from their host countries. Tambunlertchai and Ramstetter (1991) also found a significant role of foreign firms in improving export growth of Thailand. While in India, Roa (1994) concluded that foreign firms have played a relatively minor role in export expansion with a share between 5-7 percent in exports. The reason of this divergence in export may be due to the orientation characteristics of FDI. If FDI is export-oriented, it will help growth exports of host countries via export activities of MNE. In the countries where foreign firm was found to have positive role in improving exports of host countries, the share of exportoriented FDI is rather high. In Malaysia and Indonesia, for example, the projects involving export-oriented FDI may be up to 70 %. Therefore, while FDI in general may have unclear effect on exports of host countries, export-oriented FDI may do have strong and positive effect on export promotion. From the point of view that foreign firms, especially export-oriented firms, have indirect effect on exports of host economy via spillovers of information on export potential and potential market, Aitken et al. (1994) tested a hypothesis that MNE is a export catalysts in Mexican manufacturing industry for the period 1986 - 1990. The logit estimations of the study show that after controlling for factor costs, output prices and other variables which affect the export decision, MNE were approximately twice as likely as domestic enterprises to export. More importantly, this study found that locating near a MNE exporter significantly raises the probability of exporting for an individual firm. While this effect is not observed from a higher concentration of export activity in general, it suggests that there maybe access spillovers from FDI in export activity in manufacturing industries. In sum, studies on assessing the role of foreign ownership on export performance of manufacturing industries show quite divergent results. To explain this, two important points may be accounted for: export-oriented FDI plays an important role in improving export performance of host economies, and different countries may have quite different policies to attract FDI including export-oriented FDI. Because of export-oriented FDI, the countries that draw more export-oriented FDI could raise more its export performance. In fact, export-oriented FDI satisfies mutual needs of two sides, the owner of FDI flows and

the receiver of FDI flows. The strategy of attracting FDI is suitable not only to the needs and development policy of outward-oriented developing countries but also to the strategy and demand for expansion of MNE to new markets in developing countries. Thus, foreign ownership tends to be positively associated with export-oriented FDI, while it may not be so with the total FDI. For the countries that have policies of attracting less FDI, the opposite result will be expected: export expansion is limited, export growth is smaller, meaning a smaller of insignificant impact of foreign ownership on export growth. 2.4 Technology selection and local industry When MNE are penetrating into a new market via FDI, new technology is transferred to their affiliates depending on the conditions and characteristics of local market. Developing countries often have a cheap and abundant labour source thus transferred technology usually is the one requiring more labour. However, new technology bringing high productivity is capital intensive. Therefore, there is a contradiction emerged for firms that import technology. This issue is not neglected in the literature. In fact, the number of studies on technology selection is quite considerable in developing countries. Some studies while comparing MNE affiliates in developing countries and in developed countries, for example, Courtney and Leipziger (1979) found that, although applying different technologies, MNE affiliates in developing countries tend to import labour intensive than their counterparts. Many studies compared activities of local firms and foreign in developing countries, a majority of them concluded that foreign firms have a higher capital intensity of operation compared to local ones. These studies include Forsyth and Solomon (1977) for the Brazilian electrical equipment industry, Biersteker (1978) for Nigeria, Radhu (1973) for Pakistan, Wells (1973) for Indonesia, Jo (1980) for South Korea, Chen (1983) for Indonesia and Thailand. Mahmood and Hussain (1991) comparing 32 matched pairs of foreign and local firms in 25 manufacturing industries in Pakistan in 1981 and found that foreign firms used more capital intensive and sill intensive techniques and enjoyed a higher labour productivity than local ones even after controlling for their higher capital and still intensity. The studies that compared technology of export-oriented foreign firms and exportoriented local firms are not few. For example, Riedel (1975) in the case of Taiwan, Cohen (1975) in the case of Taiwan, South Korea and Singapore, Jo (1980) for South Korea found that export-oriented subsidiaries did not employ a significantly different technology from that of local export-oriented firms. This could be explained by the fact that those countries hold strategy of export - oriented development. Thus they tend to promote technology imports and new knowledge that helps their firms to compete successfully in markets. However, even in this group of literature, there are contradicted results. For example, Ramstetter (1993) found that in manufacturing industries of Thailand, foreign companies have more capital intensive technology and have higher productivity but these differences were statistically significant only in one third of the industries. Chen and Tang (1986, 1987) after studying 184 MNE firms in Taiwan’s electronics industry in 1980 and found that export-oriented MNE affiliates tended to be more labour intensive and employing a lager proportion of unskilled production workers than local market oriented ones. Overall, in spite of some exceptional cases, the studies of technology selection suggest that technology selection be closely related with market orientation. Foreign firms tend to be using more capital intensive technology while in opposite, local firms tend to be using more labour intensive technology. One of the important reasons to explain the differences of this pattern may be that technology selection often depends much on the

concrete export strategies of firms. Thus, irrespective of types of ownership, firms in export oriented economies will employ both technology that help take advantage of low cost of labour and compete in prices of products, and capital intensive technology that help to compete in quality of products. 2. 5 Labour and wages The comparison between foreign firms and local firms not only involve in technology but also in labour and wages of workers in these firms. Because of the higher level of living standard and development, MNE affiliates often have average wages larger than that of local firms. But if wages are too high, the overall costs of products are also to be high, thus reducing competitiveness of this product in markets. Studies in manufacturing industry therefore pay not less attention on wages of labour, both skilled and unskilled, in foreign and local firms. Although many studies supported the observation that the level of wages in foreign firms are higher than that of local firms such as Gershenberf and Ryan (1978) for Uganda, Maon (1973) for the Philippine and Mexico, Possas (1979) for Brazil, some other studies showed that this conclusion may not hold to be true when the characteristics of labour, that is unskilled and skilled labour, have been taken into account. For example, Chen (1983) found that while there was a significant difference between salary payment by foreign and local firms to managerial and skilled workers, there is no significant difference in the case of unskilled workers. Lim (1977) when examining the determinants of average hourly wages in West Malaysian manufacturing industries concluded that foreign firms pay higher wages because of greater capital intensity and higher productivity of their production process. Balasubramanyan (1984) in the case of Indonesia explained the difference in wages of the two sectors, foreign and local firms, in terms of quality of human capital. Since the human capital invested in workers in foreign sector is higher than that in local sector, the average wages paid by MNE affiliates is higher than their local counterparts. Kumar (1986) also found foreign controlled enterprises in Indian manufacturing industry to be paying higher than their local counterparts. In general, studies on labour and wages have a similar observation on the difference in the level of wages in foreign firms and local firms. However, the explanation may be different. Differentiation of unskilled and skilled labour provided a good framework for explanation of this difference because it helps to take into account human capital in the past. Nevertheless, it is only necessary condition but not sufficient condition because in many developing countries, there are still much differences in wage between labour and workers who may have the same level of investment in the past but have different level of wages because they work in different sectors of economy. 2.6 Remarks Studies on FDI in manufacturing industries in developing countries are an important component in research on FDI. The issues these studies have focused are quite broad, including many aspects from the impact of imported technologies, research and development (R&D), spillover effect, vertical integration linkage, technology selection, to labour training and wages in manufacturing industries in developing countries. Some progress has been made but a lot of debates and controversies have still been going on. The results in empirical studies have still been far from broad agreement. One can be sure that these issues continue to be “hot” when discussing the role of FDI for the host economy in developing countries.

The review of studies of Vietnamese scholars is not presented here but some main points on studies on FDI in Vietnam can be made briefly as follows: Firstly, these studies often focus on an overview of situation and policy analysis. Most of them aim at finding solutions in order to create a more attractive environment for FDI in Vietnam. In theses studies both favorable and adverse impacts of FDI are often highlighted, and bottlenecks and impediments to be removed are often the subject for analysis. Thus, it seems there is a contrast in approach and method of conducting research between the studies in Vietnam and the studies in other countries. Secondly, although majority of the studies on FDI in Vietnam discusses general issues associated with FDI, there have been little (if not any) in-debt studies on FDI in manufacturing industries which based on solid evidence at the micro level in Vietnam. Thirdly, due to the characteristics of common and traditional way the studies has been conducted, the approach and the analysis methodology of studies in Vietnam seems to be monotonic, empirically-less based, whereas studies on FDI and manufacturing industries in other countries are likely to use the approach of empirical studies more with different statistic tools and econometric techniques. The above discussion shows that there is still a gap for researchers to conduct studies to fill. The relation between FDI and manufacturing industries are often of the interest because they constitute a key sector in the course of industrialization and modernization in Vietnam. In addition, Vietnam’s manufacturing industries seem to be very promising in the years to come. By establishing solid evidence from the micro level, policy recommendations can be drawn to build an appropriate strategy for development of manufacturing industries in Vietnam. In this aspect, this study is among the first studies on the relation between FDI and development of manufacturing industries in Vietnam.

3. FDI and development of manufacturing industries: statistical analyses 3.1 Introduction The impact of FDI on the economy is essential. However, the impact of FDI on different economic sectors and different industries may be not the same. Following the model of the socialist-oriented market economy Vietnam still holds a strong government sector. The private sector, according to the policies of the government, is strongly encouraged to develop but still weakly developed so far. While the state owned enterprises plays a dominant role in the economy, it is argued that they perform no better than do the ones of the other sectors. In analysing the impact of FDI on Vietnam’s economy and manufacturing industries, it is interesting and useful to have a comparison and an assessment of the performance of enterprises of different ownership sectors in manufacturing industries. This part consists of three chapters. The first chapter discusses survey objective and methodology of the study. In the second chapter, the analysis results will be presented to provide a comparison of performance of the three types of ownership sectors, government sector or State Owned Enterprises (SOEs), the private sector and foreign invested sector (FDI sector or FIEs) in textile and garments industry. In addition, because the number of wholly foreign owned enterprises (100% FOEs) tents to increase over the recent years, it is also interesting to set light on performance of the different types of foreign investment (100% FOEs vs. joint ventures) to gain more understanding of the nature of FDI in Vietnam. The performance of FIEs in four manufacturing industries including automobile, electronics, food processing and textile and garments will also be presented.

In the third chapter, an in-depth analysis will be conducted to investigate the impact of FDI on the economy in general and manufacturing industries in particular. The issues associated with the relation between FDI and manufacturing industries such as technology, training, employment, R&D, export and import, linkage of production, finance, and business environment will be discussed in this chapter. The results of the chapters in this part are drawn from the analysis of two surveys on a total of 195 enterprises in manufacturing industries. Institute of Economics (IE) and Institute of World Economy (IWE) in Vietnam conducted these surveys in 2001. The first survey, or main survey, was on 150 enterprises in the textile and garment industry. The survey covers the different types of firms including SOE, joint venture, 100 % FOE and the private enterprise in Vietnam. The second survey, or additional survey, conducted by the IWE was on 45 FIEs in three other manufacturing industries, which are electronics, food processing and automobile. These two surveys will be discussed in detail in the following section. 3.1.1 Objectives of surveys The surveys on FDI enterprises (firms) in manufacturing industries have two main objectives. Firstly, it aims at assessment of the current situation and the current performance of foreign invested manufacturing enterprises in Vietnam. Secondly, it aims at providing a comparison of performance of FDI sector with that of the SOE and the private sector in textile and garments industry so that analysis can be conducted and suggestions and recommendations on policies to the government and market institutions can be made. 3.1.2 Methodology The approach. For the purpose of the research the survey concentrated on the enterprises of different types of ownership and different type of FDI enterprises in textile and garments industry. Although the forms of ownership are diversified, they can be grouped into three main types, which are state owned enterprises, FDI enterprises, and private enterprises. FDI enterprises in the sample include two types: 100% FOE and joint venture. In fact, there is one more type of FDI according to the Laws of Foreign Investment of Vietnam promulgated in 1987 that is Business Cooperation Contract. But this type is not popular and mainly concentrates on oil and gas exploration and exploitation so it does not take place in the research. The enterprises or firms taken in the sample are registered and located in different geographical regions, including northern, southern and central areas of Vietnam. Since the policies and environment for doing business are applied for the whole country, and the focus of analysis is on ownership sectors, a breakdown of the sample into different geographical regions is beyond the interest of this study. The population. The sample of the survey was created based on the various sources of information on enterprises in manufacturing industries. These information sources include database on enterprises of various industries and sectors and were provided by the General Statistical Office, local statistical offices, and various published company directories. The sample for textile and garments industry was drawn from a population of 765 enterprises of various ownerships including 140 FDI enterprises, 179 SOEs and 446 private enterprises. The sample of other three manufacturing industries was drawn from a population of the total number of 290 foreign invested enterprises in manufacturing industries (13 projects in

automobile, 154 projects in food processing industry and 133 projects in electronics industry). Sample selection. The samples of the two surveys were chosen by random method from the determined populations of enterprises in textile and garments industry and the three other manufacturing industries of the country. The sampling frame was constructed based on the census of manufacturing firms carried out by GSO/UNIDO in 1998. Sampling of the first sample was not done by simple random sampling. The first survey in textile and garments (T&G) covered 150 textile and garment firms that were drawn from eight provinces of Vietnam. These provinces are located in only two regions (North and South), but they rank top in terms of employment in the textile and garment industry. Firms in the North were deliberately over-sampled to enable the maximum participation of researchers, the overwhelming majority of whom are based in the North. These firms had a probability of being selected 5 times as high as that for firms in the south. The probability that firms were selected is proportional to their employment size, such that firms which are twice as large have probability of being selected twice as high (sampling proportionally to size). For the other three manufacturing industries, all firms had a same probability of being selected in the north and in the south. The sample in textile and garments covers different sectors of ownership such as SOE, private and FDI types and different geographic regions of the countries. The sample in other three industries covers only foreign invested firms. Due to perceived poor accounting books, very small firms in terms of employment were not covered in the sample. Firms with employment size of equal and less than 50 workers were not selected. The procedure of sampling in the T&G is as follow: 150 sample firms were chosen from a list of the textiles and garments firms in the sampling frame by stratified random sampling. Firms were stratified by ownership structure (SOEs, FIEs and domestic private firms) and by product profiles (textiles vs. garments) to capture the different characteristics of these strata. Firms were then randomly chosen with probability of being selected proportional to size. In addition, due to refusing to answer questions of the questionnaires, some firms in the choosing list were replaced by other firms. Replacement was sought among firms of the same sector (textiles vs. garments, or by ownership structure) and with the closest number of employees. The replacement rate was reasonable, at about 30%. The standard adjustment (weighting) techniques were applied to correct for the overrepresentation, geographical bias and replacement bias. The sample in other three manufacturing industries covers firms with two types of FDI: joint venture and 100 % foreign own enterprises and does not base on over-sampling method. Thus the analysis using the sample data does not need to apply weighting technique in calculating statistics and analysis. Questionnaires. A technical group designed the questionnaires with assistance of international experts, taking into account experiences of questionnaires used in other developing countries countries. Questions in the questionnaires were well discussed and cover almost all the main fields of activities of firms in manufacturing industries. The questionnaires were applied in a pilot survey of eight enterprises to assess whether it is workable and appropriate in the practice. After the pilot survey, the questionnaires were revised and then applied for the survey to collect the necessary information. Procedure of interview. The selected firms were initially contacted to organize interviews with managers of the firms. The questionnaires were subsequently sent to the firms for them to study before the interview was undertaken. In some cases, the questionnaires were

distributed during the interview and later the completed questionnaires were collected. Questions and discussions were used during the meetings with firms for having additional information for the later analysis. Data processing. Data of the collected questionnaires were digitalised, “cleaned” and processed by data management and statistical software – STATA. Subsequently, the values of means, medians, ranges for continuous variable and frequencies for discrete variables were calculated. Unreasonable observations of the sample were removed in the process of clearing data. A note to make is that, this report on the results of the surveys confined itself to description, so it can be considered as descriptive results only. To find the statistical significance of the relationship of the interested variables it is necessary to undertake further analysis of the data using appropriate econometric models. The following section presents the main descriptive findings of the surveys. 3.2 Report of the findings from surveys This section presents the results of analysis of the data set of the two survey samples. Comparison of performance between FDI sector and other ownership sectors was carried out in the sample in textile and garments industry. To assess FDI activities in different manufacturing industries, comparison of performance of FDI enterprises in separate industry also was a focus of analysis. Comparison of types of FDI across industries was taken place in some interested aspects only. 3.2.1 Structure of samples Table 1 shows the structure of the sample of the survey in textile and garments industry (T&G). In terms of ownership, the sample includes 40 state owned enterprises (SOEs), having a share of 26.7 % of 150 firms of the sample total; 76 private firms, contributing 50.7 % of the total, and the rest 34 foreign invested firms (FIEs or FI firms) account for 22.7 % of the sample total. The private firms in this sample include firms of organizations, cooperatives, private companies and other private share holding limited companies. The FIEs include two types: joint ventures and 100 % foreign owned enterprises (FOE). After applying weighting techniques to calculate the share of firms of different ownership in the sample, the weighted share of FIEs, private and SOEs are 21.6 %, 62.8%, and 15.6 %, respectively. Table 1: Legal status and ownership of enterprises in textile and garments industry FIEs Number of enterprises Share (%) Weighted share (%)

34 22.7 21.6

Private 76 50.7 62.8

SOE 40 26.7 15.6

Total sample 150 100 100

Structure of the second sample of enterprises in other three manufacturing industries is presented in Table 2. There are 9 firms in automobile, accounting for 20.9 % of the total sample, 14 firms in electronics, or 32.6 % of the sample, and 20 firms in food processing, or 46.5 % of the sample.

Table 2: Enterprises in Automobile, Electronics and Food processing industries

Number of enterprises Share (%)

Automobile 9 20.0

Electronics 16 35.6

Food processing 20 44.4

Total 45 100

After taking weight into account, among 34 FIEs in the first sample of T&G, there are 21 joint ventures, accounting for 60.9 % of the total FIEs, and 13 FOEs, equivalent to 39.1 % of the total sample. For 45 firms in other manufacturing industries, the number of joint ventures is 32, equivalent to a share of 71.1 %, and 13 FOEs account for 28.9 % of the total sample (Table 3). The result of the two samples shows that joint venture is dominated between the two types of FI enterprises. Table 3: Types of enterprises in Automobile, Electronics and Food processing industries

Number of enterprises Share (%)

100% FOEs 13 28.91

JVs 32 71.1

Total FIEs 45 100

3.2.2 Contribution of sectors The survey in the T&G industry revealed that the private sector had the highest contribution of employment to the total sample in the period 1999 - 2000, with the weighted share of 42.5% and 43.7 respectively for 1999 and 2000 (Table 4). The SOE also contributed a significant share of employment, which is 39.4% and 38.5% for the two corresponding years. Although the FDI sector has the least contribution of employment among the three sectors, its role of creating jobs is not minor, attracting more than 18 % of the total employment in the sample. In comparison between the two years of 1999 and 2000, employment share of the SOE had a tendency of slight decrease, falling from 39.4 % to 38.5 %. This contrasts the increasing share of the private and FDI sectors. The FDI sector had an increase in share of employment from 18.1% to 18.4%, while the private sector increased from 42.5% to 43.1%. The Table also shows that, if weights are taken into account, the pattern of share of employment can be different. The result without weights shows that the employment share of SOE sector was the largest, while with weights, the share of the private sector was the largest. The reason is that SOEs often are big and have the number of employee higher than that of the private ones so oversampling of large firms tends to be SOEs. Table 4: Employment and sale contribution of sectors in textile and garments (%) Sectors of ownership FDI Private SOE

Unweighted Mean of labour Mean of labour share in 1999 share in 2000 18.1 19.0 26.6 26.9 55.4 54.1

Weighted Mean of labour Mean of labour share in 1999 share in 2000 18.1 18.4 42.5 43.1 39.4 38.5

FDI Private SOE

Mean of sale Mean of sale Mean of sale Mean of sale share in 1999 share in 2000 share in 1999 share in 2000 32.7 33.4 36.1 36.0 17.1 17.3 29.0 29.8 50.2 49.3 35.0 34.2

In terms of contribution of share of turnover, the pattern is somewhat different from the pattern of share of sale in T&G industry. While SOE sector had the highest share of turnover, after taking into account weights, its share was no longer the highest, giving this position to the FDI sector. However, the difference of these two sectors is not so big (Table 5). The mean value of the share of turnover of the FDI sector for the two years, 1999 and 2000, were 36.1% and 36.0%, respectively. The share of the SOE sector was a little lower, 35% and 34.2% for the two corresponding years. The private sector shared the lowest portion with the figures of 29.0% and 29.8% respectively for the two years. Similar to the decrease of employment share of the SOE, the share of sales of the SOE sector also declined, falling from 35% to 34.2 %. This is in contrast to the increase in the share of sale of the private sectors. The FDI sector had almost a stable share in turnover, around 36% in two years, 1999 and 2000. This result supports the observation of a decreasing trend of the role of the SOE sector in the course of corporate reform and corporatisation conducted by the Vietnamese government. 3.2.3. Performance of foreign invested firms in manufacturing industries Performance of foreign invested firms (FI firms or FIEs) is assessed in different aspects of business activities of enterprises and based on comparisons between the different sectors in textile and garments industries and within the industries of automobile, electronics and food processing. 3.2.3.1 Employment and output Table 5 shows that the textile and garment industry experiences a strong employment growth in the year of 2000. The average employment growth rate (firm-level average) of the total sample of T&G industry was 6.1 %. The Table also shows the weighted average number of workers per enterprise and the employment growth rates of different ownership sectors of the sample in T&G industry. The average size of an enterprise of the SOE sector was the largest (1260 persons) followed by the FDI sector (437 persons) and the private sector (352 persons)1. This result suggests that the private enterprises in this industry have concentrated more on enterprises of smaller size in comparison with the FDI and SOE sector. Despite having the biggest average number of workers among the three sectors, the SOEs experienced the lowest average employment growth rate in 2000, which was 1.8 %. In contrast, the FDI sector and the private sector had much higher growth rates of employment, which were 5.6 % and 7.4%, respectively. A comparison of average number of employee of the textile and garments enterprises showed that, the textile enterprises had a little higher average number, 597 persons to 502 person in 2000 (not reported in the Table). Table 5: Weighted average employment per firm by ownership sectors in the T&G industry Total labor 2000 (person) Employment Growth in 2000 1

It is useful to note that only firms with at least 50 employees are included in the sample.

FIEs

437

(%) 5.6

Private SOE Total T&G

352 1260 512

7.4 1.7 6.1

Comparing employment of the FI enterprises in four manufacturing industries shows that the automobile industry had the largest average size of employment with 982 persons per enterprise, followed by the T&G industry with 437 persons per firm (Table 6). The electronics and food processing industries had the lowest corresponding average numbers that were 273 and 278, respectively. It is helpful to note that there was one enterprise in the automobile industry of the type of 100 % FOE that had a very high number of workers employed (4037 person and 5269 persons in 1999 and 2000, respectively). This made the average number of employee in this industry to be high compared to that of the other industries. The FIEs in the automobile industry had the highest average employment growth per firm with the figure of 18.2 %. The very high growth rates were observed mostly in the new established enterprises in this industry. Enterprises in the food processing industry also experienced a high employment growth in 2000 that was at 13.6%. The FIEs in the electronics and the T&G had considerably lower rates of employment growth with the rates of 7.4% and 5.6 %, respectively.

Industries Automobile

Table 6: Comparison of average employment of a FIEs in four manufacturing industries Labor in 2000 (persons) Employment Growth in 2000 (%) 982 18.2

Electronics

273

7.4

Food processing T&G

278 437

13.6 5.6

Note: Figures of T&G industry are weighted.

Table 7 provides a comparison of the average employment level per firm in 2000 of two FDI types - 100% FOE and joint venture – in four manufacturing industries. The results shows that, except the case of automobile industry, the type of joint venture had a higher average number of workers per enterprise compared to that of the type of 100% FOEs (the second column of the Table). In automobile industry, because there is only one 100% FOE in the sample and this enterprise had quite a high number of employment that was 5269 persons, the general conclusion cannot be made. The high number of employee of this enterprise made the average employment figure of the FIEs in the automobile industry to be high. A comparison among the joint ventures in manufacturing industries revealed that joint ventures in the T&G industry had the largest number of average workers per firm followed by the joint ventures in the automobile, electronics and food processing industries. This result can be explained by the fact that the T&G enterprises often are more labour intensive compared to the other manufacturing industries and just joint ventures in this industry also are not exceptional. In contrast to a strong employment growth in automobile, electronics and food processing that were more than 10 %, joint ventures in the T&G industry had a poor

performance in employment with a negative growth of – 1.2 % in the year 2000. This poor performance was compensated by a good performance of 10.3 % of the 100% FOEs in the T&G industry and, as a result, the overall level of employment growth of the industry was still improved to 5.6%. The picture of employment growth of the 100% FOEs in the three other industries is in contrast. While the 100% FOEs in the automobile and food processing industries experienced very strong employment growth rates of 30.5 % and 18.1 %, respectively, the enterprises in the electronics industry suffers a negative growth that was minus 2.4%. This is because among 16 enterprises in this industry there were two enterprises that had negative rates of growth (-6% and -2.5%). However, the employment growth of the FIEs in the whole three industries was 12.5%, quite high compared to the figure of 8.5% of the FIEs in T&G industry. Table 7: Average employment per enterprise and employment growth by types of enterprises in manufacturing industries Average labor in 2000 (persons)

Employment Growth in 2000 (%)

5269 446

30.5 16.7

144 302

-2.4 10.1

259 294

18.1 10.6

391 508

10.0 -1.2

Automobile FOEs Joint ventures Electronics FOEs Joint ventures Food processing FOEs Joint ventures T&G FOEs Joint ventures

Note: Figures of T&G industry are weighted.

3.2.3.2 Output/sales and growth A comparison in sale of the enterprises of the different sectors in the T&G in 2000 shows that the average sale of an enterprise in the SOE sector was the highest followed by that in the FDI sector. The figure of the average sale of the private sector was much smaller, 12035 million Vietnam Dong per firm (Table 8). This result is in accordance with the characteristics of the production scale of the different ownership sectors in the T&G industry. The SOEs also had the highest sale growth that was 38.6%, making the overall figure of average growth in T&G industry to be high (33.4%). The firms in the FDI sector and the private sector also grew very strongly in the average sale, increasing at the rates of 32.6% and 32.3%, respectively. Table 8 : Weighted average of sale of a firm by ownership sectors in T&G

Sales of 1999 (mil. VND) Sales of 2000 (mil. VND)

FIEs 43596 53284

Private 12035 15167

SOE 58417 69886

Average in T&G 26896 31946

Growth of sale in 2000 (%)

32.6

32.3

38.6

33.4

Table 9: Average sale comparison of a FI firm in the automobile, electronics and food processing industries

Sales in 1999 (mil. VND) Sales in 2000 (mil. VND) Growth of sale in 2000 (%)

T&G

Automobile

Electronics

43596 53284 32.6

176515 282675 98.4

211699 256334 24.4

Food processing 174365 187767 48.1

Note: Figures of T&G industry are weighted.

The average sale per enterprise of the other three manufacturing industries was higher than that of the T&G industry (Tables 8 and 9). This can be explained by the fact that the value of products in the financial terms of the capital-intensive industries such as automobile and electronics often are high compared to the products of T&G industry. Among the three industries, automobile had the highest number of average sale per enterprise, which is 282,675 million VND in the year 2000. The food processing industry had the lowest level of 187767 million VND in 2000. Compared to the other two industries, the automobile also held the fist place in the average sale growth with a very high rate of 98.4% in the year 2000. The FIEs in the food processing industry had a high average growth rate, 48.1%, which is higher than 32.6% of the FIEs in the T&G. The average growth in the FIEs in the electronics industry was the lowest among the four industries with the rate of 24.4%. This shows that, overal, these industries experienced a strong growth in this period. Table 10: Average sale of enterprises of different type in manufacturing industries Sales in 1999 Sales in 2000 Growth of sale in (mil. VND) (mil. VND) 2000 (%) Automobile 100% FOE JVs Electronics 100% FOE JVs Food processing 100% FOE JVs T&G 100% FOE JVs

176515

282675

98.6

247960 200821

314029 239025

17.3 26.5

81293 226072

99767 236657

81.47 29.5

38022 52259

45611 65208

21.9 29.6

Note: Figures of T&G industry are weighted.

Comparing the average sale of enterprises by types of investment in automobile, electronics, and food processing shows that both types of investment experienced strong increase in sale (Table 10). It is not clear whether joint ventures perform better than the

type of 100 % FOEs. The joint ventures showed a higher average sale than that of the FOEs in the T&G and electronics, but lower in the food processing. Using the median values of the variables for a comparison of the JVs and the 100% FOEs did not give any different pattern. The FOEs had an exceptional high average sale growth which was 81.47%. Because there is only one enterprise of the type of the 100% FOE in the automobile it was impossible to compare the average sale of this type of enterprise with the type of joint venture in this industry. The fact that the employment growth of the JVs in the T&G industry was negative seems to contradict with a strong increase in the average sale of these enterprises. A further investigation shows that only the textile joint ventures suffered a negative growth rate of employment, which was minus 4.97%, in spite of the increasing employment growth rate of the whole textile enterprises. However, the textile joint ventures could still keep sale growth of a high and positive level. The reason is because the textile industry is relatively more capital intensive than the garments industry. Thus, even the employee number is reduced in the textile firms, the sale can still be growing because of a more efficient utilisation of technology and equipment and higher efficient production. 3.2.3.3 Productivity Table 11: Weighted productivity of enterprises by ownership sectors in T&G (VND mil.) FIEs Private SOE Total sample in T&G

VAD to Labor in 1999 107.8 31.0 34.0 47.7

VAD to Labor in 2000 107.8 36.5 41.7 52.3

Productivity used in this report is defined as a ratio of value added to the number of employee in enterprises. Firms with calculated negative value added were omitted from the calculations as they suggest serious measurement problems. Table 11 shows that the FDI sector had the highest average productivity among the three ownership sectors in the T&G with a figure of 107.8 VND million for the two years of 1999 and 2000. The average productivity of both the SOE and the private sectors was much (nearly three times) lower than that of the FDI sector. Among the two these low-productivity sectors, the SOEs had a little higher yield per worker than that of the private enterprises. Both these sectors had an increase in the average productivity over the period of observation. Overall, the whole sample in the T&G experienced an increase in the average productivity. Table 12: Productivity by industries (VND mil.) Automobile Electronics Food processing Total sample in three industries

VAD to Labor in 1999 1667 1250 733 1104

VAD to Labor in 2000 1687 1404 1594 1541

Table 12 gives a comparison in productivity of the three other manufacturing industries. The result shows that the highest productivity was observed in the automobile industry. The food processing industry had the lowest productivity in 1999 but significantly improved it in 2000. The substantial changes in food processing industry can be explained by the fact that the value added for calculating productivity depends much on the revenues of enterprises in the industries. The revenues in turn depend much on the outside market. Thus, a stiff change in demand in export market could generate a bumper harvest and, as consequence, the productivity as it is defined could also change significantly. 3.2.3.4 Capital intensity In this report, capital intensity is defined a ratio of fixed asset value to the number of workers. The fixed asset value is measured by the purchased value minus depreciation. As indicated in Table 13, in the T&G industry the FDI sector was more capital-intensive than the private enterprises and the SOEs, which have per-worker capital being about double that of the other two types of ownership. But capital intensity in FIEs declined between 1999 and 2000 while it was improved for SOEs over the same period. This is the case possibly because employment in the FIEs grew at a quicker rate (8.32%) than that in SOEs (3.67%). Table 13: Weighed capital intensity in the textiles and garments industry by ownership type (million VND per worker) Year 1999 2000

FIEs 49.7 44.4

Private 29.8 28.1

SOE 16.5 20.1

Total T&G 32.0 30.1

It is clear from Table 14 that among the FIEs operating in the T&G, automobile, electronics and food processing industries, the car industry was the most capital-intensive. Its intensity was about 9 times that of the textiles and garments industry, and more than double the intensity of the electronics industry. This situation is in fact common in other developing countries. The capital intensity of the FIEs in all four industries was declining due to the quicker rate of employment growth in FIEs. Table 14: Capital intensity in FIE by industry (million VND per worker) Year 1999 2000

T&G 49.7 44.4

Automobile 437.7 395.3

Electronics 173.5 140.6

Food process 274.1 266.9

Note: Figures of T&G industry are weighted.

3.2.3.5 Export intensity Export intensity is defined as a share of export value to the total sales value. Export intensity in the T&G was high, above 70%, which implies a comparative advantage of the industry. The FIEs took the lead, exporting above three quarters of their products to the world. The private enterprises also showed a high export intensity and even higher than that of the SOE sector. However, the improvement of the export intensity of the FDI sector was strongest with 1.8 percentage points, much more than the changes in the FDI and the SOE sectors (Table 15).

In a sharp contrast with the T&G industry, that was successful in exporting products, FIEs in all remaining three industries did not export much of their products. Table 16 shows that electronics industry had the highest export intensity that was 19.1% and 20% for 1999 and 2000, respectively. The automobile industry had the lowest export intensity, implying that it aimed mainly at the domestic market. Table 15: Weighted average export intensity in textiles and garments industry by ownership type Year FIEs Private SOE Total T&G Export share (%) 1999 76.2 71.7 58.2 70.5 2000 78.0 72.4 59.1 71.5 Export share change (%) 2000-1999 1.8 0.7 0.9 1.0

Table 16: Export intensity in FIE by industry T&G

Automobile

Electronics

Export share (%) 1999 76.2 11.2 2000 78.0 11.2 Export share change (%) 2000-1999 1.8 0 Note: Figures of T&G industry are weighted

Food processing

19.1 20.0

15.3 17.1

0.9

1.78

3.2.3.6 Profitability Profitability is defined as the ratio of value added subtracting wages, divided by capital of enterprise. Compared to FDI and SOEs in textiles and garments industry, the private sector performed very well and was the best among three ownership sectors. The other two sector were not bad in performance with profitability of 1.45 and 0.94 (for SOEs) and 0.21 and 0.49 (for FIEs) in 1999 and 2000, respectively. All the three sectors made progress over time, having increased their profitability over the period 1999 - 2000. Apart from a high efficiency of production, the reason of the highest profitability of the private sector was probably because of a relatively low level of capital of enterprises of this sector compared to that of enterprises in the other sectors. In opposite, enterprises of FDI sector often have high capital, and thus, their profitability may not be so high (Table 17). Table 17: Weighted average profitability in the textiles and garments industry by ownership type Year 1999 2000

FIEs 0.21 0.49

Private 0.91 1.15

SOEs 0.45 0.94

Total T&G 0.70 0.98

In comparing performance of FIEs in textiles and garments industry with FIEs in the other three industries, Table 18 shows that FIEs in automobile was the best, having profitability nearly four times that of the textiles and garments. The profitability of the enterprises in all these sectors increased clearly in the period 1999 – 2000. The FIEs in the T&G had the highest growth, increasing from 0.21 in 1999 to 0.49 in 2000, more than double the previous year level. The result of the comparison of the industries suggests that profitability is higher in the industries that currently have relatively high protection such as automobile and electronics, and lower in the industries that have relatively lower protection such as food processing and textile and garments. Year 1999 2000

Table 18: Average profitability in FIEs by industry T&G Automobile Electronics Food process 0.21 1.46 1.10 0.65 0.49 1.71 1.47 0.76

Note: Figures of T&G industry are weighted.

3.2.3.7 Investment Investment in an enterprise is measured by investment intensity, which is a ratio of investment in the period under consideration to the total capital stock (after investment) of that enterprise. As demonstrated in Table 19, compared to the private enterprises and the SOEs within the textiles and garments industry, the FIEs invested least. Its new investment in 1999 and 2000 were only about 10% of the existing capital stock, while the respective figures for SOEs were double higher (about 20%). The high investment level of the SOE sector made the overall level of the T&G industry to be high, at 0.17 and 0.16 of the two years 1999 and 2000, respectively. These figures of investment may be associated with the strong growth in exports and sales of this industry and the recover after the Asian financial crises in this period. The high investment intensity of the SOEs in the T&G helped considerably these enterprises in increasing sale in period 1999 - 2000.

Year 1999 2000

Table 19: Investment intensity in textiles and garments industry by ownership type FIEs Private SOE Total T&G 0.09 0.19 0.21 0.17 0.10 0.16 0.20 0.16

Among the four industries, electronic enterprises had the highest investment intensity (Table 20). This indicates that there was a scope for the industry to make good returns in this period. The fact that the investment intensity in the electronics FIEs was high seems reasonable since profitability in this industry is also relatively high. But the level of the investment intensity in the automobile industry was low seems to be contradict with the high profitability of this industry in the condition of the current protection. Only high value of initial investment capital in this industry can possibly be helpful in explaining the relatively low investment intensity in this industry. As the denominator of the ratio of investment rate is high, the ratio itself cannot also be high. Year

Table 20: Weighted investment intensity in FIEs by industry T&G Automobile Electronics Food process

1999 2000

0.10 0.12

0.08 0.11

0.31 0.17

0.14 0.15

Note: Figures of T&G industry are weighted.

3.2.3.8 Wages In the T&G industry, although having the highest average wage level the FIEs had the lowest wage growth rate which was 8.93% (Table 21)2. The averaged wage per worker in the private enterprises was the lowest among the three types of ownership of enterprises. However, the wage growth rates of this sector in the T&G were 15.95 %, quite high in the period 1999 – 2000. Surprisingly, the wage growth rates of the SOEs were the highest for this period, which was 21.66 %. This helped making the average level of growth rates of the whole T&G industry to be high, at 15.36%. A note to make is that the difference of wages across the ownership sectors seems not to come from the large difference of quality of labour but may come from the efficient utilisation of labour and labour disciplines. An analysis of labour quality in the subsequent section shows that the FIEs seem to focus more on unskilled but cheap workers rather skilled workers. Table 21: Weighted averaged wages per worker in textiles and garments industry by ownership type FIEs Private SOE Total T&G Annual wage (mil. VND) 1999 13.82 8.04 8.47 9.34 2000 14.79 8.95 9.23 10.22 Growth of wage (%) 2000-1999 8.93 15.95 21.66 15.36 Among the FIEs, average wages in the automobile, electronics and food processing industries are more than twice as high as in the T&G industry. The wages per worker of the three industries were quite similar and significantly higher than that of the T&G industry (Table 22). This result suggests that workers in the labour-intensive industries in Vietnam tend to receive lower wages than those working in the capital-intensive industries, and this situation is quite common in developing countries with labour abundance and capital scarcity. While the FIEs in the food processing experienced a very high wage growth rate that was 20.93% in 1999 – 2000, the FIEs in electronics had a relatively low wage growth rate which was 3.09%. The FIEs in the automobile industry even had a negative rate in wage growth, which was –7.44%. Table 22: Average wages in FIEs by industry Annual wage (mil. VND) 1999 2000 Growth of wage (%) 2000-1999

T&G

Automobile

Electronics

Food process

13.82 14.79

36.90 32.59

35.97 37.23

29.66 34.28

8.92

-7.44

3.09

20.93

Note: Figures of T&G industry are weighted.

2

Wages are measured by the total wage bill including benefits of enterprise divided by number of permanent employee.

3.2 Remarks The analysis of the activities of the FIEs in the four manufacturing industries shows that these enterprises have performed well in the period 1999 – 2000. Their performance indicates an important contribution of FDI to Vietnam’s economy. This section summarises the main findings of the analysis. They are as follows: - Although the FIEs in the T&G industry had the lowest share of employment among the three ownership sectors, their contribution into the total employment of the industry was 18%, a quite considerable proportion. The employment share of the FDI sector increased with the highest growth rate. The result shows that the private sector is expanding strongly in employment. - The FDI sector had an important contribution to the total turnover of the industry, about as much as of the SOE sector. However, in contrast to the stable share of the FDI sector and increasing share of the private sector, the SOE sector experienced a decline in the contribution share. - The private sector concentrated more on the enterprises of small and medium size while the SOE and the FDI sectors embraced the bigger enterprises. - The FIEs in the automobile industry had the largest average number of employee per firm followed by those in the T&G, electronics and food processing industries. The automobile industry also gained the highest average employment growth rate with the figure of 18.2 %. The FIEs in the electronics and T&G had relatively lower rate of average employment growth among the four industries, which was 5.6%. - Joint ventures had a higher average number of workers per enterprise compared to the type of 100% FOE in the electronics, food processing and T&G industries. Except the electronics industry, the growth rates of employment of the 100% FOEs were higher than those of the joint ventures in the other three industries. - The FDI sector had the second highest average sale growth rate among the three sectors in the T&G industry, increasing at a rate of 32.6 % in 2000. The private sector also had a strong growth rate that was 32.3%. - It is not exceptional that the industries such as automobile and electronics had a higher average of sale per enterprise in comparison with the other industries. The automobile industry experienced the strongest growth rate of turnover among the four industries. Other three manufacturing industries also had rather high rates of turnover growth. - Overall, there is no evidence that the joint ventures perform in the sale growth better than the 100 % FOEs in the manufacturing industries. - The FDI sector had the highest average of labour productivity among the three ownership sectors in the T&G industry and much higher than productivity of the other two sectors. The productivity in the car industry was the highest among the four industries. The result also indicates a positive impact of the FDI in raising overall level of productivity of the industry. - The FIEs in the T&G are more capital-intensive than the private enterprises and the SOEs. The capital intensity in the FIEs in all four industries declined between 1999 and 2000. - The FDI enterprises in the T&G industry was leading in the export intensity among three ownership sectors, exporting above three quarters of their products to the world. The private enterprises in the T&G also was highly export-oriented. The FIEs in all the remaining three manufacturing industries did not export much of their products because of the domestic market target with automobile industry being the weakest in exports. - The private enterprises in the T&G industry performed very well in profitability. They did much better than the SOEs and the FIEs. The FIEs in automobile industry were

the best among the four industries, having profitability almost four times that of the textiles and garments industry. - In terms of investment intensity and in comparison with the private and the SOEs within the T&G industry, the FIEs invested least, considerably lower than that of the other two sectors. Among the four industries, electronic enterprises had the highest investment intensity. In the T&G industry, although the FIEs had the highest average wage rate level, the wage growth rate in the FIEs was low compared with the other two ownership types of enterprises. It seems there is a tendency of worker wage equalisation across industries. The labour intensive industries had relatively high average wage growth rates while the capital intensive industries had relatively low rates of wage growth.

4. An in-depth analysis of FDI in manufacturing industry This section looks at some aspects that have been often of the focus of the studies on FDI. The issues such as human resource development, technology transfer, export and import performance, and R&D are considered by comparing the FDI sector with other sectors in the T&G industry and the FIEs in the four industries, thereby drawing some useful conclusions. Assessment of business environment for these enterprises to operate is also the subjects of analysis of this section. 4.1 Employment Table 23 shows that labor composition within each ownership type of enterprises in the textiles and garments industry has not changed much between 1999 and 2000 (the weighted figures were reported in this table and in all other tables presenting statistics of the T&G industry). However labor composition differs across the three types of enterprises. While unskilled workers are dominant in the FIEs, skilled workers make a larger share in the SOE sector. A proportion of skilled employee in the private enterprises (about 30%) was also higher than that of the FDI sector (23-24%). Thus, the overall qualifications of employees in the FIEs tend to be lower than that in the SOEs. This situation results from the government labor market regulations combined with worker inclination toward the state sector. Jobs in the state sector may be lower paid but more secured and stable than those in the private and the FDI sectors. In addition, the FDI sector focuses primarily on cheap labour as a comparative advantage in Vietnam’s market. Table 23: Labor composition in the textiles and garments industry (%)3 FIEs Private SOE Years 1999 2000 1999 2000 1999 2000 Share of managerial labor 3.4 3.4 4.6 4.6 3.8 3.6 Share of professional labor 4.6 4.5 4.3 4.6 6.8 6.4 Share of skilled labor 23.9 24.3 30.8 30.7 57.2 54.1 Share of unskilled labor 61.7 61.6 54.3 53.7 26.7 30.6 Share of non-production staff 6.4 6.2 6.0 6.4 5.4 5.2 TOTAL 100.0 100.0 100.0 100.0 100.0 100.0 3

Figures for enterprises in the T&G industry in all tables in this chapter are weighed, ie. corrected for sample bias.

Among the FIEs in the four industries, labor qualification level (managers, professional and skilled labor) in the textiles and garments industry was the lowest, but it also had the smallest share of administrative staff (management and non-productive staff) (Table 24). Automobile industry is the most intensive in terms of labor skills reinforced by its largest increase between 1999 and 2000 in skilled labor (by about 4.0 percentage points). In general, except the automobile industry, the percentage of unskilled workers in the rest three industries was more than that of skilled workers in both 1999 and 2000. However, the differences of percentage of unskilled workers and skilled workers in the three industries of automobile, electronics, and food processing was not as big as in the T&G industry. The T&G industry had the highest share of unskilled employee followed by the food industry. Table 24: Labor composition of FIEs in the four industries (%) T&G Automobile Electronics Food processing Year 1999 Share of managerial labor Share of professional labor Share of skilled labor Share of unskilled labor Share of non-production staff

TOTAL Year 2000 Share of managerial labor Share of professional labor Share of skilled labor Share of unskilled labor Share of non-production staff

TOTAL

3.4 4.6 23.9 61.7 6.4 100.0

7.9 20.3 40.9 20.0 10.9 100.0

5.9 22.0 25.0 31.2 15.8 100.0

5.3 10.4 23.8 41.3 19.3 100.0

3.4 4.5 24.3 61.6 6.2 100.0

7.6 17.7 44.9 19.9 9.7 100.0

9.1 21.9 24.4 28.8 15.7 100.0

5.4 16.1 21.7 38.0 18.8 100.0

Regarding the educational level (Table 25), the SOE sector had more workers that completed higher secondary school with a proportion of 41.1 % of the total employee working in this sector, while the FDI sector had the largest proportion of employee that completed lower secondary school. The FDI sector tends to use more workers that completed primary school than other sectors. The share of workers completed higher secondary school and above in the private sector was the lowest (28.4%). Table 25: Educational level of labor in T&G industry in 2000 (%) FIEs Private Share of workers not completed primary school 1.6 5.1 Share of workers completed primary school 22.1 15.2 Share of workers completed lower secondary school 45.4 51.3 Share of workers completed higher secondary school and above 30.9 28.4 TOTAL 100.0 100.0

SOE 1.6 6.8 50.5 41.1 100.0

4.2 Training Different sectors have different focus in training policy. In 2000, the results of the survey show that the FDI enterprises focused relatively more on training for skilled and unskilled workers while the non-FDI sector paid relatively more attention on training for

professional employee. Training in the SOEs focused more on skilled workers (Table 26). The possible reasons are that in the FDI enterprises managerial and professional staff have been well trained already, while employed workers often are not trained or not well enough trained before joining the enterprises. Thus these workers are more in the focus of training activities of the FIEs. In contrast, because of the low quality of professional employee, training in the non-FDI enterprises needs to focus more on professional workers. The result implies that the quality of skilled workers in the labour force have been not as high as required by the foreign investors. Table 26: Situation of training in T&G industry in 2000 (%) FIEs Private SOE Managerial labor have been trained 0.06 2.34 16.01 Professional labor have been trained 0.32 50.89 19.91 Skilled labor have been trained 60.38 21.32 46.80 Unskilled labor have been trained 38.13 24.79 14.33 Non-production staff have been trained 1.09 0.65 2.93 TOTAL 100 100 100 There were one third of the enterprises in the T&G industry that had home training courses for their employees inside the enterprises. Among the three sectors, the SOE takes the lead in this respect with 76.9 % of them having trained workers at the enterprises in 2000 (Table 27). Surprisingly, could only 22.8 % of the FIEs manage to organise home training course for their employee, less than the share of 26.8% of the private enterprises. This suggests that training activities by courses in the FDI sector in Vietnam either was not enough, far behind the SOE sector, or the FIEs prefer more the way of on-job training. A further investigation show that the share of the SOE that was sending their employee abroad for training also was the highest among the three sectors. Only a small share of the FDI sector has sent their workers abroad for training with the share figure of just 3.4% of total FIEs in the T&G industry. The private enterprises almost did not send workers abroad probably because of the limited financial resource for this purpose. Combining with the fact that a high proportion of employees of the FIEs have been trained (see Table 26), it is possible to conclude that the FI enterprises prefer the way of “on-job training” for their employees. Table 27: Training in the three sectors in the T&G in 2000 (%) Sector Share of enterprises having Share of enterprises having sent home training out of total their employees to oversea enterprises in each sector training FDI 22.8 3.4 Private 26.8 0.2 SOE 76.9 17.5 Table 28 presents the situation of training in the other three industries. The result confirmed that the FDI sector used significantly home training activity inside the firms rather than sending their employees to outside training centers/places. The electronics industry had a highest share of the number of enterprises (13 out of 16 enterprises or 81.3 %) that sent their employee abroad for training in 2000.

Table 28: Training in the three other industries in 2000 Industry Share of enterprises having Share of enterprises having sent home training out of the FIEs their employees to oversea in each industry training Automobile 44.5 55.5 Electronics 50.0 81.3 Food processing 55.0 50.0 4.3 Linkages and imports One of the benefits for a country receiving FDI is linkages the FIEs generate in the domestic market. Table 29 shows the sources of materials and inputs which enterprises of the different ownership sectors used in the T&G industry in 1999 and 2000. The FIEs in Vietnam did not use very much domestic materials and inputs, just above 20 % of their total inputs value. The private enterprises and the SOEs used domestic inputs intensively with more than a haft of their input share (about 62 % and more than 50 % for the private and the SOEs, respectively). The average share of domestic inputs in the T&G industry was more than 50 %. This situation suggests that FIEs target mainly at the cheap labour source but not at the cheap domestic materials. It seems that even the price of material/inputs is low, the quality of inputs is more important for the FIEs. Although the imported materials may be more expensive, their quality usually is higher than the domestic materials. Table 29: Share of domestic material sources by different sector enterprises in the T&G industry (%) In 1999 In 2000 FIEs 21.3 20.6 Private 62.3 62.4 SOE 51.3 54.9 Total T&G 51.7 52.3

Table 30: Share of domestic materials used by FIEs in the different industries (%) In 1999 In 2000 Automobile 17.0 15.0 Electronics 35.2 54.3 Food processing 51.6 61.3 T&G 21.3 20.6 The survey in the other three industries shows that the FIEs in the food processing and electronics industries (in 2000 only) had a dominant domestic input share out of the total inputs (Table 30). The FIEs in the other industries of automobile and electronics used a relatively less share of domestic inputs for their production. The automobile industry used a quite small input share from the domestic market (17 % and 15 % in 1999 and 2000). The share of domestic inputs of the FIEs in electronics grew significantly from 35.2 % in 1999 to 54.3 % in 2000. The fact of using small input share of domestic sources in

manufacturing industries is in line with the situation that theses industries is assemblingoriented. Table 31 shows that most of raw materials/inputs used in the T&G industry were imported from Asian countries and regions. The shares of inputs imported from the NorthEastern Asia were the highest, 36.3 % and 29.0 % in 1999 and 2000, respectively. The FIEs also used a large proportion of their inputs from the North-Eastern Asia and the other Asian countries with the share of more than 35 % in both years of 1999 and 2000. This result implies that raw materials imported from the Asian countries are relatively cheaper than those from the Europe and the US, and the Asian markets of inputs are more familiar for Vietnamese firms. The FIEs in the other three industries also used raw materials mainly from the Asian countries among which the share of inputs from the ASEAN was the largest except the automobile in 2000 (Table 32). Table 31: Geographical origin of raw materials in the T&G (%) 1999 2000 T&G FIEs in T&G T&G FIEs in T&G ASEAN 10.3 11.5 18.2 11.9 North-Eastern Asia 36.3 39.4 29.0 39.2 Other Asian Countries 20.7 35.6 21.2 37.3 EU 3.9 0.2 3.1 0.2 Rest of Europe 2.6 4.0 2.3 4.2 North America 0.8 0.5 2.4 0.5 Other sources/unknown 25.4 8.8 23.8 6.7 Table 32: Geographical origin of raw materials in the other three industries (%) 1999 2000 Regions A E F A E F ASEAN 41.2 40.0 34.7 35.1 36.2 40.7 North-Eastern Asia 32.0 19.7 13.5 37.8 18.0 10.7 Other Asian Countries 11.3 21.4 7.4 18.6 20.9 10.9 EU 14.2 0.03 15.1 8.3 0.04 14.3 Rest of Europe 0.0 0.0 5.1 0.0 0.0 5.2 North America 0.1 3.1 0.5 0.1 3.1 0.6 Other sources/unknown 1.2 15.7 23.7 0.1 21.6 17.6 Note: A stands for automobile industry, E – electronics industry, F – food processing industry

The linkage of production entities can also be seen in delay of payment of suppliers and customers of the firms. The high proportion of delay payment of entities to other entities in industries shows a high link among the production networks. Table 33 shows that a high percentage of firms of all sector in the T&G industry allowed their customers or being allowed by their suppliers to pay latter than the time of receiving and delivering inputs/products. The SOE sector had the highest percentage of this kind of firms. A proportion of 90.2 % of the SOES had the late payment for suppliers and 95.1 % of firms of this sector accepted late payment from customers. The FDI sector had a high share of these firms with the corresponding figures of 73.5 % and 78.8 %. The private sector had the lowest proportions, which were 71.7 % and 74.9 %. This implies that the SOEs and the

FIEs gained a relatively more credibility in business relations in the market than the private enterprises. Table 33: Percentage of firms involving in delay payment for suppliers and from customers in sector in the T&G (%) Delay payment for suppliers Delay payment from customers FIEs 73.5 78.7 Private 71.7 74.9 SOE 90.2 95.1 Total T&G 74.9 78.9 Table 34: Percentage of firms involving in delay payment for suppliers and from customers in sector in the other three industries (%) Delay payment for suppliers Delay payment from customers Automobile 55.5 22.2 Electronics 93.7 93.7 Food processing 85.0 50.0 T&G 73.5 78.7 The FIEs in the other three industries had a different pattern in this aspect. The electronics industry had the highest percentage of firms involving in delay payment, which was over ninety percent, while the FIEs in the automobile had a much lower percentage which were 55.5 % and 22.2% respectively for delay payments for their suppliers and delay payment from their customers (Table 34). Table 35: Customers of enterprises in the T&G industry (% of sale) Sector Average percentage of sale goes to: 1999 2000 Final consumers 1.9 1.1 Other firms located in Vietnam 17.4 16.1 FDI Other divisions/branches of the firms in 6.4 6.7 Vietnam To other countries (export) 74.3 76.1 Final consumers 3.6 3.9 Private Other firms located in Vietnam 11.3 11.3 Other divisions/branches of the firms in 17.3 16.1 Vietnam To other countries (export) 67.8 68.7 Final consumers 15.0 13.6 Other firms located in Vietnam 23.3 24.5 SOE Other divisions/branches of the firms in 2.8 4.1 Vietnam To other countries (export) 58.9 57.8 Table 35 shows the structure of sale and customers of firms in each ownership sector in the T&G industry in 1999 and 2000. The FDI sector aims mainly at other countries’ market or export therefore the percentage of sale of FIEs firms going to the final consumers was small, 1,9% and 1,1% respectively in 1999 and 2000. The FDI sector had

17.4% and 16.1% of sale going to other firms located in Vietnam in respectively 1999 and 2000. Interestingly, the private firms had almost the same percentage of sale going to other firms (including firms other than manufacturing) located in Vietnam. The corresponding figures of the SOEs were 23.3% and 24.5%, considerably higher than those of the firms in the other two sectors. Table 36: Customers of enterprises in the other three industries (% of sale) Average percentage of sale goes to: 1999 2000 Final consumers 29.9 28.3 Other firms located in Vietnam 58.9 60.5 Automobile Other divisions/branches of the firms in Vietnam 0 0 To other countries (export) 11.2 11.2 Final consumers 26.9 24.9 Other firms located in Vietnam 54.0 55.1 Electronics Other divisions/branches of the firms in Vietnam 0 0 To other countries (export) 19.1 20.0 Final consumers 29.6 29.2 Food Other firms located in Vietnam 21.8 21.0 processing Other divisions/branches of the firms in Vietnam 31.6 32 To other countries (export) 17.0 17.8 The percentage of domestic customers of FIEs in the A-E-F industries was much higher than that of the T&G. More than a half of customers in the automobile and electronics industries were other firms located in Vietnam (Table 36). This implies that the integration upward in the chain of domestic production in these industries is high. The linkage among the entities in these manufacturing industries therefore seems to be high. The customers in the outside market had a low percentage of the total sale of the firms in these three industries. A note to make is that there is one FOE in automobile that aims at foreign market with 100% of their products for exports. This firm skewed the average proportion of exports in the total sale of the industry. Table 37: Subcontracting and FOB production in the T&G industry (%) FDI Private SOE

Subcontracting for other firms: Purchasing materials and selling finished products: Subcontracting for other firms: Purchasing materials and selling finished products: Subcontracting for other firms: Purchasing materials and selling finished products:

1999 17.1 82.9 68.9 31.1 31.8 68.2

2000 29.5 70.5 61.6 38.4 37.7 62.3

Firms in the T&G industry in Vietnam operate in two ways: the first is to implement subcontracts for other firms and the second is FOB production. In the first way, the firms sign a contract with other contracting firms (mostly with foreign firms) to finish some stages of production of products. Materials are provided to these firms, they have to do the rest to produce, and shift final products back to contracting firms. In the second way, the firms purchase materials, produce and sell finished products by themselves. Table 37 shows that the FIEs and the SOEs followed mainly the second way of production while

the private enterprises preferred the first. This result implies that the FIEs firms generate a linkage of production whish is not as strong as of the private firms. This situation can be explained by the fact that the FIEs and the SOEs are usually strong to establish a full production line ie. involving in purchasing inputs, producing and selling final products while the private enterprises cannot do so because of the small scale and the limited capacity. However, the proportion of FOB production of the private firms increased in 1999-2000, implying an improvement in strength of the private sector. Graph 1: Share of sub-contract revenue in total revenue by ownership sectors in the T&G industry (% of each sector) 12

10.8 9.2

Percentage

10 8

6.7

6.4

6 4 2 0 FDI

Private

SOE

T&G

Sector

Graph 1 supports the above findings. The share of subcontract revenue out of the total revenue of the FIEs and the SOEs are 6.4% and 6.7% while this share of the private enterprises is larger, 10.8%. The subcontracts in the T&G are especially popular for garments products because these products require a lot of labour contribution at some stages of production. Among the three sectors, the private enterprises often have a wide production network in agricultural areas and take the most advantage of cheap labour in producing products. However, because of limited capacity of equipment and skills of labour the quality of products produced by these enterprises still need to improve for exports. Graph 2: Share of sub-contract revenue in total revenue by sectors in other three industries (% of each industry) 6

5

Percentage

5

4

4 3 1.7

2 1 0 Automobile

Electronics Industries

Food processing

4.4 Export Table 38: Structure of exports of firms in different sector in the T&G industry (%) Sector Export allocation 1999 Exports based on quota 42.5 FDI Exports based on quota of other firms 0.9 Non-quota exports 56.6 Exports based on quota 18.7 Private Exports based on quota of other firms 25.8 Non-quota exports 55.5 Exports based on quota 42.9 SOE Exports based on quota of other firms 14.5 Non-quota exports 42.6

2000 44.7 0.7 54.6 22.2 19.7 58.1 47.1 10.4 42.5

Exports of textile and garments heavily depend on quota because they aim at the quota-based market for these products such as EU. Therefore quota location can influence very much export structure of firms in T&G. Export structure of firms in this industry is presented in Table 38. The result shows that the FDI and the SOE sectors enjoy a significant share of exports based on quota. But the difference is that the SOEs had the percentage of exports based on quota greater than that of non-quota exports while for the FIEs, there is a contrast picture: the percentage of export based on quota was less than that of non-quota exports The private sector seems to have limited quota and thus proportion of exports based on quota is much less than that of the FDI and the SOE (18.7% and 22.2% compared to the level of over forty percents of the FDI and the SOE sector in 1999 and 2000). No surprisingly that the private firms had a relatively high proportion to export based on quota of other firms (25.9% and 19.7% in 1999 and 2000). As expected, the FIEs had a highest share of direct and non-quota exports because of marketing channel and relations established by the foreign parent companies in the foreign markets. 4.5 Research and development (R/D) and technology transfer Graph 3: Share of spending on external research out of total cost in the T&G industry in 2000 (%) 0.12 0.1

Percentage

0.1 0.08 0.06 0.04

0.03

0.02

0.02

0.01

0 FDI

Private

SOE Sector

T&G

Research and development is often an important issue when discussing the impact of FDI. The result of the surveys in manufacturing industries shows that FIEs in all industries in the sample seem not to focus on R&D. Table 39: Spending of firms on R&D/designing in 2000 in the T&G industry (%) Not spend on R&D Spend on R&D Total FDI 98.0 2.0 100 Private 90.9 9.13 100 SOE 56.5 44.2 100 T&G 87.1 12.9 100 Table 39 shows the percentage of firms in the T&G industry that had funds for conducting the R&D/designing activities within the firms in 2000. It is clear that the FIEs did not spend much on these activities, just 2% of the total number of FIEs, while the private firms had a higher percentage of 9.13%. A significant share of the SOEs had spent on R&D in 2000 that was 44.2%. Graph 3 shows that, on average, the FIEs in the T&G spent only 0.02 % of total cost on the external research in 2000. This cost is for subcontracting for R&D. Although this share was larger than the share of the private firms it was much less than the share of 0.1% of the SOEs. To an extent, this result implies that the FIEs firms in the T&G industry in Vietnam prefer using achievements of R&D that are conducted in the R&D centers of the parent firms to conducting R&D in the host country. Graph 4: Share of spending on external research out of total cost in the other three industries (%) 3.8

4 3.5 Percentage

3 2.5 2 1.5 1 0.5

0.2

0.04

0 Automobile

Electronics

Food processing

Industries

The spending of firms for external R&D in the other three manufacturing industries also had the same pattern as in the T&G industry. Except the case in the electronics industry, which had a relatively higher share of 3.8% of total cost spent for R&D purposes, the shares of firms in the other two industries were low, at the levels of 0.2% and 0.04% (Graph 4).

Percentage

Graph 5: Share of spending for training /seminar by sectors in the T&G industry (%) 0.12 0.1 0.08 0.06 0.04 0.02 0

0.11

0.02

FDI

0.03 0.01 Private

SOE

T&G

Sector

Graph 5 shows that the FIEs did not concentrate on training or research activities inside the firms. The average share of amount spend for training and seminar activities out of the total cost of the firms in the T&G industry was low, only one fifth of the share of the SOEs. This result confirms again that FIEs in Vietnam does not put R&D activities in the focus of their policy. It is not surprising that the private firms had a lower share than that of the FIEs because of the often-limited financial resources for this purpose. The average percentage of firms in the T&G that had R&D subcontract to outside organisations in 2000 was 4.6%, very much lower than 95.4% of the percentage of firms that did not have such activities (Table 40). Comparing the FIEs with firms in other ownership sectors in this aspect, the FIEs had a percentage of 9.9%, higher than 1.3% of the percentage of the private enterprises but lower than 11% of the figure of the SOEs. The SOEs in the T&G had the highest figure among the three sectors.

FDI Private SOE T&G

Table 40: R&D subcontract to other firms/organizations in the T&G industry in 2000(%) Did not have subcontract Had subcontract Total 90.1 9.9 100 98.7 1.3 100 89.0 11.0 100 95.4 4.6 100

Table 41: Subcontract of R&D to other firms/organisations in the three other industries (%) Did not have subcontract Had subcontract Total Automobile 88.9 11.1 100 Electronics 87.5 12.5 100 Food processing 75.0 25.0 100 The other three industries had a relatively higher percentage of FIEs having subcontract to outside partners in 2000 in comparison with that in the T&G industry. However, the

percentage of firms that did not have subcontract of R&D was in majority. The food processing industry had a percentage of 25% of firms having subcontracts, the largest proportion among the three industries (Table 41). Table 42: Spending of firms on R&D/designing in 2000 in the A-E-F industries (%) Not spend on R&D Spend on R&D Total Automobile 55.6 44.4 100 Electronics 62.5 37.5 100 Food processing 60.0 40.0 100 The figures of firms having spending on R&D/designing activities in the three industries were much higher than the figures in the T&G industry (Table 42). However, the majority of firms in all three industries did not spend on this purpose. This result confirms again the argument that the FIEs did not focus much on R&D within the firms located in Vietnam. Table 43: Benefit from government fiscal support for R&D in the T&G industry (%) Have no benefits Have benefits Total FDI 100.0 0.0 100 Private 99.5 0.5 100 SOE 88.9 11.1 100 T&G 98.0 2.0 100 Table 43 shows how firms in the different sectors in the T&G industry received the benefits from the financial support of the government in R&D. The result shows that only some SOEs received support from the government (11% of firms in the SOE sector received this support) while the private received very little and the FIEs did not received any. An analysis in the other three industries also shows that all the FIEs did not receive any support of the government for R&D activities (the results are not reported).

FDI Private SOE T&G

Table 44: Spending on equipment innovation for import substitution in the T&G industry in 2000 Not spend on innovation Spend on innovation Total 69.1 30.9 100 86.3 13.7 100 66.5 33.5 100 79.5 20.5 100

Table 45: Spending on equipment innovation for import substitution in the other three industries in 2000 Not spend on Spend on innovation Total innovation Automobile 33.3 66.7 100 Electronics 62.5 37.5 100 Food processing 68.4 31.6 100

Majority of firms (79.5%) in the T&G industry did not spend much on equipment innovation for import substitution (Table 44). Comparing the different sectors in this industry, the SOE sector had the highest percentage of firms that spent on equipment renovation for import substitution, which was 33.5%, followed by the FDI sector – 30.9% and the private sector – 13.7%. This result shows that, in general, the local firms did not spend much on imported technology substitution. But the pattern is a little different in the case of the FIEs in the other three industries (Table 45). While a major part of firms in the electronics and food processing industries did not spend on equipment innovation for import substitution, two thirds of firms in the automobile industry did spend on it. This result poses a question on whether there is a possible link between the requirement of using domestic source in products in this industry and the proportion of domestic part of equipment used. Graph 6: Average proportion of imported equipment of the most recent acquisition of equipment in the T&G industry (%) 100

80.6

Percentage

80

79.6 68.3

61.2

60 40 20 0 FDI

Private

SOE

T&G

Sectors

In terms of technology transfer, most of equipment and technology of firms in the T&G industry was imported. Graph 6 shows that the FDI firms and the SOEs had a very high average proportion of imported equipment of the most recent acquisition of equipment in this industry which were 80.6% and 79.6% respectively for both types of firms. The private firms imported less with a lower percentage of 61.2%. The percentage of imported equipment in the other three industries were also very high (not reported here). This result implies that local firms relied mainly on imported technology and it is consistent with the above finding that the local firms did not paid much attention on technology substitution. Table 46 reports the result of an examination of sources of information on technology/equipment the firms have used. All firms in the different sectors use information through foreign clients and suppliers most frequently. The FIEs seems to enjoy more the networks of relationships they have with foreign firms/partners in obtaining information about technology and equipment. The SOEs and the private firms did not have such a wide network so in addition to the relationship with foreign clients they have to rely relatively more on domestic clients/suppliers than do the FIEs. Catalogues and trade shows are also the useful ways and were intensively exploited by the SOEs. The Table also showed that the private was in the least favourable position to access information. This situation is consistent with the limited resources they often have in the competition to possess new technology and equipment. Table 46: Sources of technology/equipment information (%)

Sources

Sector

Catalogue/trade exhibition

FDI Private SOE FDI Private SOE FDI Private SOE FDI Private SOE FDI Private SOE FDI Private SOE

Domestic clients/suppliers Foreign clients/suppliers Domestic firm/friend Foreign firm/friend Shareholder/partner

Percentage of firms Percentage of firms not using the sources using this source 6.16 93.84 11.77 88.23 48.54 51.46 20.39 79.61 36.63 63.37 42.94 57.06 30.68 69.32 30.01 69.99 55.54 44.46 9.54 90.46 16.54 83.46 18.01 81.99 23.86 76.14 26.95 73.05 12.74 87.26 36.75 63.25 3.67 96.33 0.00 100

6. Finance Table 47 to Table 49 present the structure of sources of collateral that firms in different ownership sectors in the T&G industry have used to borrow from the banks and financial institutions. Machinery and equipment is always the important source for the firms in all the three sectors to borrow. But in the private sector, land and buildings was found to be the most important for firms to make collateral to borrow. The percentage of using this source in the private sector was 36.5%, much higher than 9.3% of the FDI and 23.7% of the SOE sectors. Although land and buildings was important source of collateral for the SOEs to borrow the way of using reputation as collateral was found to be the most important for the SOEs (33.7% compared to 33.0% of machinery and equipment and 25.7% of land and buildings). Comparing with other sectors, the firm in the SOE sector had the highest percentage of using reputation as a way of guarantee, which was 31.9%, much higher than 6.9% of the private firms and 0.0% of the FIEs. This result is quite interesting because it would imply that there have been unfair competition going in the credit market. While the FIEs and the private firms have to have some physical and material sources for collateral to access credit the SOEs just enjoy more preferable credit by having good relationships with the banks and financial institutions and the reputation created by being state owned entities. Clearly, this is an unfair treatment towards the private and the FDI sectors in the credit policy of state owned banks and financial institutions.

Table 47: Collateral for loan in the FDI sector in the T&G industry (%)

Land and buildings Business/operating funds Machinery and equipment Guarantee/collateral of other business entities Guarantee by reputation

Percentage of using 9.3 2.1 16.8 6.8 0.0

Percentage of not using 90.7 97.9 83.2 93.2 100

Total 100 100 100 100 100

Table 48: Collateral for loan of the private sectors in the T&G industry (%)

Land and buildings Business/operating funds Machinery and equipment Guarantee/collateral of other business entities Guarantee by reputation

Percentage of using 36.5 1.1 33.6 0.3 6.9

Percentage of not using 63.5 98.9 66.4 99.7 93.1

Total 100 100 100 100 100

Table 49: Collateral for loan of the SOE sectors in the T&G industry (%)

Land and buildings Business/operating funds Machinery and equipment Guarantee/collateral of other business entities Guarantee by reputation

Percentage of using 25.7 1.2 33.0 18.4 37.1

Percentage of not using 74.3 98.8 67.0 81.6 62.9

Total 100 100 100 100 100

7. Business environment An examination of opinion of the FIEs in the T&G industry shows that, as expected, low labour cost was found the most important factor (60.4 % of opinions) for a firm to locate in Vietnam’s market (Table 50). Labour skills are also an important factor of interest of foreign firms with the percentage of opinion of 14.6%, followed by good infrastructure – 13.4 %. The opinion of FIEs also shows that almost the same pattern was observed in the case of the second most important factor for a firm to locate in the current site. It is worth noting that the analysis for the three other industries produced the same conclusion as in the case of the T&G industry. An additional factor of “near domestic market” was also found important among the important factors for the FIEs in these industries (the result is not reported here).

Table 50: The two most important factors determining the current location of FIEs in the T&G industry (%) Factors The most The second important most important factor factor Low labour cost 60.4 19.0 Low cost of land and buildings 4.7 14.5 Good infrastructure 13.4 20.1 Availability of skilled personnel 14.6 11.5 Availability of raw materials 0 1.2 Near local market 0 2.4 Near port facilities and air transport 2.9 8.8 Favourable tax regime 2.0 8.01 Low cost of credit 0 0.0 Near domestic market 2.0 0.0 Near regional market 0 3.78 Favourable legal and regulatory environment 0 10.6 Total 100 100

Table 51 and Table 52 show opinions of firms in assessment of the difficulties they have faced. Firms in all sectors in the T&G industry had almost the same serious problem which was to find market for their outputs. All opinions of firms agreed on a point that poor access to output market was the most important factor for them to operate. However, there are differences in assessment in other issues (Table 29). The FIEs on average hold the view that the issue of recruitment of labour was the second most difficult while the private and the SOEs firms thought that the issue of lack of capital was the second most problematic. Non-transparent legal environment was also found to be of concern of the FIEs and the private firms. Table 51: The most difficulty for firms to operate in the T&G industry Issues Lack of capital Poor access to output markets Poor access to input markets Difficult acquisition of land and spaces for business Difficult labour recruitment Less developed infrastructure Government deep intervention Non-transparent legal environment Others Total

FDI 13.4 59.7 1.8 3.1

Private 38.7 47.8 3.1 0.7

SOE 26.6 64.5 1.4 0.0

18.3 0.0 0.0 3.7 0.0 100

4.8 0.0 0.0 0.7 4.1 100

0.5 0.0 0.0 0.0 7.0 100

Table 52: The second most difficulty for firms to operate in the T&G industry (%) Issues Lack of capital Poor access to output markets Poor access to input markets Difficult acquisition of land and spaces for business Difficult labour recruitment Less developed infrastructure Government deep intervention Non-transparent legal environment Other Total

FDI 40.9 11.5 11.9 0.6 8.6 5.0 8.1 13.4 0 100

Private 21.6 31.4 13.9 7.23 11.2 5.5 1.0 6.9 1.1 100

SOE 22.8 22.9 3.5 1.2 17.3 9.3 11.4 3.4 8.2 100

Apart from the issues of poor access to output markets, labour recruitment, and lack of capital, the other issues which are the second most difficulties for firms were access to input markets, less developed infrastructure, government deep intervention and nontransparent legal environment. While the FIEs saw issue of non-transparent legal environment serious, interestingly that SOEs saw government deep intervention relatively serious. The private firms had difficulties in all issues, especially capital, output and input markets. Table 53: Average number of licenses and permits need for operation of firms in the T&G industry FDI Private SOE Average number of licenses needed for operation 1.9 2.2 2.4 Average number of licenses to renew in 2000 0.3 0.2 0.3 Average cost of a license/permit (VN dong mil.) 1.40 0.54 0.84 Comparing obstacles encountered by firms in the different sectors in the T&G, Table 53 shows that the average number of licenses required for operation of the FIEs was the least, 1.2 compared to 2.2 of the private firms and 2.4 of the SOEs. This result implies that the environment for FDI and the private firms is rather favourable and has been improved significantly in comparison with the past. However, the average cost for obtaining a license/permit in the FIEs was still the largest, 1.4 million VD dong compared to 0.54 mil. of the private firms and 0.84 of the SOEs. High frequency of visits often creates troubles for firms to operate. Thus, the frequency of visits of individuals and institution of the government can show whether the environment for firms to operate is favourable or not. Table 54 indicates that the FIEs in the T&G industry in fact suffered least from “concern” of the government at both the central and local levels. The average visit frequency of the government institutions to the FIEs was less than that to the firms in the other two sectors. An “index” was used to compare the visit number of the government institutions, which is an average of all the average frequency of the sector (average of column value). The index of visiting number for the FDI sector was the lowest, which was 0.34, followed by the figure of 0.45 of the private sector. The SOE sector had the highest figure of 0.57. This result indicates that the

environment for FIEs to operate was very much improved and even in a more favourable conditions compared to other sectors. Table 54: Average frequency of number of visits of inspectors and inspection institution by sector in the T&G industry Individual or organisations visiting the firms FDI Private SOE State inspection 0.03 0.15 0.33 People Committee (province, district, community levels) 0.0 0.15 0.38 Tax 1.06 1.06 1.25 Environment 0.44 0.51 0.85 Health Care 0.23 0.38 0.57 Market management 0.07 0.06 0.40 Labour 0.73 0.55 0.88 Land 0.15 0.11 0.27 Measurement 0.18 0.03 0.44 Fire prevention 1.29 2.01 1.59 Law application 0.07 0.10 0.07 Police 0.5 0.89 0.55 Others 0 0.07 0.11 Inter-sector inspection 0.01 0.18 0.27 The above analysis shows that adequate infrastructure is always of concern of firms for a normal operation. To assess the quality of infrastructure faced by firms in the T&G industry a comparison of firms in different sectors was conducted. The result shows that electric cut and water cut were actually happened more with the private and the SOEs than with the FIEs (Table 55). The FIEs were better in electric generator equipment. Sixty six percent of FIEs had their own generator, while the SOEs had the least percentage. Therefore, the proportion of electricity generated by their-own generator was modest at the 2 % level. Table 55: Average frequency of electric and water cut per month in 2000 in the T&G industry FDI Private Average number of electric cut in a month 1.21 2.47 Percentage of the firms having their own generator (%) 66 41 Proportion of electricity generated by their own generator 8 2 Average number of water cut in a month 0.22 0.22

SOE 2.08 35 2 3.47

Another issue, which also is in the attention of firms in the different sector, is custom procedure. Table 56 shows that the FIEs need to spend less average time for import and export transaction compared to the private sectors. It is no clear evidence that SOEs were treated more preferably than the FIEs. The FIEs on average sped less time to import while spend more time to export.

Table 56: Custom procedure in 2000 by sectors in the T&G industry (days) Average number of day needed for firm to finanlise customs and port procedures in the last import transaction The average longest time needed for imports of materials Average number of day needed for firm to finanlise customs and port procedures in the last export transaction The average longest time needed for export transaction

FDI 2.69

Private 2.83

SOE 3.22

4.37 2.34

4.62 2.82

5.80 2.10

3.10

4.31

3.00

8. Conclusion This section summarises the main findings of this chapter. They are as follows: -

Except the automobile industry, the percentage of unskilled workers employed in the FIEs in three industries of T&G, electronics, and food processing was more than that of skilled workers in both 1999 and 2000. However, the differences of percentage of unskilled workers and skilled workers in the three industries of automobile, electronics, and food processing was not as big as in the T&G industry. Unskilled workers are one of the most important targets of the FIEs in the T&G and food industries. - FIEs prefer the way of “on-job training” for their employees to organising training courses. - FIEs target at cheap labour source but not at cheap domestic materials. The high quality of inputs seems to be more important for them. - Most of raw materials/inputs used in the FIEs in manufacturing industries were imported from Asian countries and regions. - A high percentage of firms in all ownership sectors in the T&G industry applied delay payment among the suppliers and consumers. - The FIEs and the SOEs in the T&G industry used mainly the way of purchasing materials and selling finished products while the private enterprises used more the way of subcontracs. - In the T&G industry, the SOEs had the percentage of exports based on quota greater than that of non-quota exports while, in the FIEs and the private enterprises, the percentage of export based on quota was less than that of non-quota exports. - The FIEs firms in the manufacturing industries in Vietnam paid little attention on spending and investment for R&D. They prefer using achievements of R&D that are conducted in the R&D centers of the parent firms to conducting R&D in Vietnam. The FIEs in the industries of automobile, food processing, and electronics had paid more attention on R&D compared to those in the T&G industry. - The FIEs as well as enterprises in other sectors in the T&G industries received very little support from the government. - The local firms did not spend much on imported technology substitution but relied mainly on imported technology. - Information about technology and equipment through foreign clients and suppliers was used most frequently for firms in all sectors but the FIEs had more advantage of the networks of relationships they have established with foreign firms/partners in obtaining information about technology and equipment. - The SOEs had the highest percentage of using reputation as a way of guarantee for borrowing from the banks. There have been unfair competition in the credit market and

the FIEs and the private enterprises have been in the less favourable position compared to the SOEs. - Low labour cost was the most important factor for a foreign invested firm in the T&G industry to locate in Vietnam’s market. - The business environment was improved considerably for the FIEs in Vietnam. Poor access to output market was the most difficult for them to operate in the T&G industry. Labour recruitment was the second most difficult issue for operation of the FIEs. The other issues such as lack of capital, nontransparent legal environment, poor access to input market, less developed infrastructure were also of concern of the FIEs.

5. Policy recommendations The findings from the surveys in the four manufacturing industries in Vietnam help drawing some useful policy implications. This chapter discusses some main points of policy implications for development of FDI and manufacturing industries in Vietnam. - The analysis of FDI in this report has confirmed again that FDI has important contributions to the economy. For the country in need of capital, fast development and under the pressure of significantly growing labour force like Vietnam, FDI becomes more crucial. In the year 2000, the number of people of working age was 45.16 millions, in 2005, this number is expected to be 52.4 million, that means an increase in both absolute amount (7.15 millions) and proportion (58.1 % to 63.5 % of the 82.49 million of total population). The fact that FDI attracted a considerable proportion of unskilled and skilled labours in the sample survey shows the important role of FDI in reducing the employment pressure. The benefits of transfer of technology, knowledge, and skills of management, the high proportion of on-job training for workers in the FIEs would also imply that FDI can help raising capacity of not only technology but also capacity and quality of labour. Therefore, the policies that aim at attracting more foreign capital in the long term should continue to be in the focus of the development strategy. This point is important since there is still a view point arguing that FDI has an important role only in the beginning periods of the development process, but not important in the subsequent periods, and that development should not rely much on FDI in these periods. - There is another aspect where the role of FDI should be pointed out. FDI plays crucial role in helping developing fast manufacturing industries in Vietnam. This point should be stressed to have a clear vision in making development strategy. The reason is that in the context of increasing globalisation and international competition, factors of technology including information technology become more and more vital. To develop technology capacity in manufacturing industries, it is not wise to rely on just domestic resources, even in the long term. This would take time and good outcomes would not be guaranteed. The increasing process of integration has intensified specialisation and diversification of production and created a lot of valuable opportunities and advantages for the latecomers like Vietnam to take to upgrade technology. In addition, the findings that productivity of FIEs is relatively high put more pressure on non-FDI enterprises to innovate technology and improvement of production management to survive in competition. Therefore, FDI could be very useful in helping building good technology capacity, developing manufacturing industries that are capable of producing internationally competitive products. Because of this positive effect, FDI should be considered

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as the most important factor in creating and implementing a strategy of developing manufacturing industries in Vietnam. The issue of technology capacity draws with themselves the issues of capacity of labour force and human resource development. To function new technology and modern equipment in manufacturing industries, it is necessary to have an army of labour with the adequate skills. The findings that firms not only in the FDI sector but also in the private and SOE sectors had problem in labour recruitment show a need of adequate preparation of labour force to meet the demand from the firms. This is more important especially in the context of increasingly severe competition and a new wave of technology and information development. As quality of labour depends on the quality of collages, training centres and vocational schools, most of which belong to the government, it is necessary to improve quality of these institutions. Currently, the vocational training schools and centres are equipped with very backward training tools, the knowledge taught in these institutions are also not update and inadequate. To deal with this situation, more investment together with restructure of training and vocational system are really needed. In general, FDI can create a network of production in the domestic market, but this channel of FDI in Vietnam seems to work not so well. In other words, the linkage created by FDI in Vietnam is still weak. Therefore, the direct and indirect impacts of FDI through demand for material inputs and labour in the domestic economy seem to be limited. One of the important reasons of this situation is the low quality of products of the domestic suppliers. The FIEs cannot use materials/inputs of low quality to produce products of high quality. Thus they had to rely considerably on the imported inputs. This situation requires the government to have policies in the direction of assisting in raising technology capacity of the domestic business entities. The policies may include preferable regime of tariff and tax for imports of new technology and equipment, continuation of restructuring of SOEs to ensure higher competitiveness of these enterprises, and more assistance in R&D investment. It seems that the current regulation of requirement of using domestic inputs in products of some industries including automobile have a limited effect. To utilise more the positive impact of FDI, the requirements should be much broader, at the level of the whole economy, focusing on the issues such as promotion of technology innovation, R&D and raising quality of products/inputs of domestic enterprises. One of the interesting and encouraging findings from the survey is that the business environment for FDI to function was significantly improved in comparison with the other ownership sectors. However, this does not mean at all that all the major problems are solved. Many obstacles faced by the FIEs and the firms in the other sectors show that these problems need to be of special attention of the government. The first problem, which has been existed for long in the past but still serious at present time, is the legal environment. Stability, consistency and transparency are the primary issues to stress when discussing improvement of the legal environment. The quick changes of policies and regulations, inconsistency in policies and not transparent strategies and plans of the government are still of much concern and subject of complains of firms, and creating a negative impact on activities of firms in general and the FIEs in particular. Under such a situation, it is very difficult for firms to have a clear and long-term strategy of investment and development in Vietnam’s market.

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Improvement of legal environment therefore needs to implement in the direction of creating more stability, consistency and transparency in the policies of the government. From the findings, infrastructure is still problematic. As electric cut sometime can cost firms a considerable amount of money4, legal framework and mechanism for compensation toward the firms from electric provider should be created. In addition to the need of improving and ensuring stable supply of electricity, water, quality of transportation and storage, it is also necessary to paid attention on improvement of information infrastructure. Nowadays, information becomes an important component of products, especially products of manufacturing industries. Therefore, infrastructure of telecommunication and information (internet, satellite, communication gates, optic cables, hosts, etc.) have to be upgraded to the adequate level, thereby, helping enterprises including FIEs to utilise more information sources for marketing, finding markets of inputs and outputs, and expanding their production and distribution networks in both domestic and international markets. Apart from the need of improvement of training activities to ensure stable supply of skilled labour, labour market in its real meaning needs to fully function. at present time, flexibility of labour policies and mobility of labour in the labour market have not been up to requirements. These issues need to take into account to ensure a more free movement of labour among the different sector of ownership in the economy. More liberalised regulations on labour are also needed to facilitate the movement of labour, ensuring the availability of both skilled and unskilled labour sources and a high efficiency of recruitment for FIEs. The findings of the survey that there has been an unfair competition in the credit market show a need of correction from the government. If the type of collateral by reputation or by the name of the government is not removed, the SOEs are in the better position in competition, but their competitiveness capacity cannot be improved. This situation would restrain the process of the reform of the SOEs and would create negative impact on activities of the private firm and the FIEs. The reform of the SOEs really should address this problem. Assistance and support for firms to expand their export market is very important. The difficulties faced by firms in finding markets for exports as well as output market show that the institutions such as Boad of Export Promotion, which was established recently, are very useful and necessary. Show trades, exhibitions, and information centers can be organised easier with support of the government and export associations. These channels should be paid more attentions and exploited more efficiently for firms to do marketing and exporting their products.

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For example, there was a case happened with FDI firm in electronic industry that each time of unexpected electric cut can cost the firm about $US 20 000. And it was reported that electric cut have been often unexpected and frequently happened. However, the losses suffered by firms continue to be not covered by anyone.

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