Vietnam in the Regional and Global TNC Value Chain
Dr. Axèle Giroud
Lecturer in International Business
Bradford University School of Management
Paper prepared for the DFID Workshop on Globalisation and Poverty in Vietnam
Hanoi, 23-24th September 2002.
Vietnam in the Regional and Global TNC Value Chain
Abstract: This paper presents the background for the investigation of TNCs activities in
Vietnam, and the role of Vietnamese affiliates in the firms’ global and regional value chain. The
methodology to be adopted to gather data in Vietnam is presented, together with a framework of
analysis. The internationalisation of the Vietnamese economy, thanks to its liberalisation
programme, is analysed with emphasis on FDI trends and trade flows. The role played by foreign
firms in Vietnam is increasing rapidly. However, Vietnam ought to be studied in its regional
context. In a wider perspective Vietnam benefits from the development experience of Japan and
East Asian economies. Within the ASEAN context, Vietnam also benefits from being
geographically close to Singapore and other more developed Southeast Asian nations. With these
national and regional features in mind, the case of Fujitsu’s activities is discussed before
presenting an overview of the type of data currently being gathered in Singapore, Malaysia and
Thailand.
In this paper, we wish to draw a picture of Vietnam within the global
Transnational Corporations’ (TNC) value chain. TNC’s activities have increased
substantially over the past few decades, and integration of Vietnam within these activities
has deepen together with the flows of FDI going into the country. Rapid changes occur in
the geographical location of production. For many developing countries, hosting FDI may
be a powerful engine for development. Countries are therefore increasingly concerned
about their competitive position within the world production map. It is essential to
understand where firms locate particular activities and why they choose one site over
another. Host countries also need to understand how firms’ global and regional
production strategies impact upon their national economies. Because Vietnam is located
in the ASEAN region, one key additional aspect to be considered is therefore the role
played by the region in the firm’s strategic location decision. This paper was written in
the context of the research done by the Bradford team on FDI, Regionalisation and
Poverty Reduction. We analyse TNCs’ activities and how Vietnam is integrated into
these global, regional and national strategies. Southeast Asia has now become a major
manufacturing site for many TNCs in numerous industries. Vietnam can benefit from the
experience of its neighbour countries. In line with global trends, Vietnam has recently
reduced barriers to trade and investment, and is part of the AFTA agreements. This will
continue to help the country being part of the internationalisation of production.
METHODOLOGY ADOPTED FOR THIS STUDY
This research project examines the current strategies of TNCs in ASEAN
(whether they originate from within or from outside the region) and the implications of
2
these strategies for regional industrial restructuring. A large number of questions asked to
TNCs are related to the integration of the affiliates within the regional and international
value chain of the company. While not all companies interviewed have other affiliates in
the region, many do. Both primary and secondary data are in the process of being
gathered, of both quantitative and qualitative nature. The survey is taking place in two
stages. We are in the process of interviewing firms in the more developed ASEAN
countries (Singapore, Malaysia and Thailand), where the bulk of FDI has previously
taken place. To date, a total of 38 interviews were conducted, 30 are affiliates in
Singapore, Thailand or Malaysia (among which some are regional headquarters) and 8
with local firms1 having international activities (note that only a sample is presented in
this paper). The second stage of the project will lead researchers to interview firms in
lesser-developed ASEAN nations, namely Vietnam and Cambodia. The aim is first to
structure the activities of TNCs in the first group of countries, and the subsequent impact
on economic development. We will then apply the lessons learnt to the second group of
countries, while analysing the current role played by TNCs in order to draw conclusions
and recommendations for further actions to take place. The underlying goal of the project
is to analyse the impact of FDI on the development of host economies in the regional
context, in order to draw recommendations for countries in the Mekong sub-region, and
Vietnam in particular. Interviews were the preferred research means because
generalisation of results is enhanced by the extensive nature of interviewing through the
ability to query specific respondents and probe for meaning. Interviews last for a
minimum of one hour and a half and have lasted up to four hours. They are conducted
with top managers of TNCs2. In this paper, we select a small sample of information
gathered to indicate the place of specific ASEAN countries in TNCs’ regional and global
value chain. Two sectors of activities were selected for this research: the Electrical and
Electronics sector, and the Textile and Garment sector. This choice of sectors was
determined for ASEAN as a whole, not solely for Vietnam. The results presented aim at
1
These interviews were conducted as a test sample to provide a comparison between activities and
behaviour of TNCs and those of locally-owned firms.
2
For most interviews, the general manager or the managing director was present, often with other top
mangers. Role of respondents in their company include: senior finance director, vice-president, plant
director, managing director, general manager, human resource manager, corporate planning manager,
supplier control manager, marketing manager.
3
illustrating the potential of the study for Vietnam, once the full data set has been
collected. We will be using both figures gathered through the interviews and qualitative
information provided by the respondents during the interviews. Interviews with TNCs
located in Vietnam will take place during November and December 2002.
VALUE CHAIN: WHAT DOES IT INVOLVE?
The value chain consists of the full sequence and range of activities that go into
making a final product. It is composed of two main types of activities: support and
primary activities. Support activities are those that facilitate primary activities; they
consist of the general management, human resources, R&D facilities and materials
management. Primary activities consist of the manufacturing and assembling processes,
as well as marketing, sales and services. The value chain also includes the supply chain
of physical components. Today’s globalisation trend means that firm relocate activities
towards the most appropriate area. Contemporary producers have broken the steps of the
value chain into many discrete pieces. They have then analysed the economics of each
piece and located them around the world to achieve a number of objectives (Gourevitch
et al, 2000). Strategy is often concerned with identifying and taking actions that will
lower the costs of value creation and/or will differentiate the firm’s product offering
through superior design, quality, service, functionality, etc… Location economies will
arise from performing a value creation activity in the optimal location for that activity,
wherever in the world that might be (transportation costs and trade barriers permitting).
When a TNC begins business in a new country, it has to decide what core
activities will be allocated to the foreign entity, and how the activities performed by the
affiliate will be integrated into the global chain, or when appropriate into the regional
value chain. Many factors influence the decision to transfer core competencies abroad,
these include the industry concerned, the ownership advantages of the firm, and the
location advantages of the host economy. The idea is that the firm builds a global
network of value creation activities, with different stages of the value chain being
dispersed to those locations worldwide where value added is optimum or where the costs
of value creation are the smallest.
4
Primary activities tend to be relocated to developing areas. Production systems
include production equipment3, production management and organisational culture.
Usually, core production equipment is designed and fabricated in-house by the parent
firms then transferred to affiliates. Production in developing countries is generally
characterised by small-scale production, low-wage, unskilled workers, insufficient
maintenance, shortage of engineers, technicians and managers, underdeveloped
supporting industries and underdeveloped infrastructure (Yoshihara, 2000: 67). For this
reason, companies need to adapt their production equipment, affiliates’ level of
automation tends to be lower than that of parents. There is further a strong dependence on
the parent company for production management. Market-orientation of the firm is often a
key determinant behind the need for local responsiveness4.
Finally, the overall global strategy adopted by firms is of interest, in order to see
how the global or regional value chains are organised. In analysing this, we are keen to
understand how the affiliate relates to its parent firm, and possibly to the regional
headquarters (RHQs). The tendency among many manufacturing companies is to adopt a
matrix structure with a worldwide product division structure and an area division. The
area division is usually catered for by the RHQs, the latter being given a variety of
strategic activities to conduct.
On a national basis, the affiliate of a TNC is embedded in a network of specific
business relationships. The degree of affiliate embeddedness is a function of the
adaptation between the affiliate and direct and indirect counterparts (such as customers
and suppliers) of these relationships (Andersson, 2000). Thus, primary and secondary
activities of the firm can be further divided into internal and external activities linked to
the overall TNC value chain. It is by taking these various levels of analysis into account
that the place of a host country in the global and regional TNC value chain can studied.
What is the key activity performed by the affiliate in the host country and how does this
activity relates to the global and regional value chain of the TNC? When attempting to
answer this question, one must pay particular attention to the specific strategic role(s)
3
Production equipment is the core of the production system including machines, belt conveyers, tools, test
instruments or jigs.
4
Pressure to be locally responsive come from differences in consumer tastes, in infrastructure, in the
distribution system, or specific government demands.
5
played by the affiliate and the roles of internal and external networks in the activities
performed by the affiliate.
VIETNAM: LIBERALISATION AND INTERNATIONALISATION
In an international business context, globalisation finds its roots in the increasing
trade and investment flows between countries. It is on these two key types of flows that
we will focus this section, looking at how the Vietnamese economy has internationalised
over the past decade. We will see how TNCs have played a large role in the integration of
Vietnam in the global economy through their investment and their share into the
country’s trade.
Liberalisation programme
As the second largest country in Southeast Asia with 78 million inhabitants,
Vietnam is an attractive location and potentially big market for TNCs. It has gradually
opened to FDI since the late 1980s, when restrictions on private investment were
progressively lifted and foreign investment and ownership encouraged in line with similar
trends that were occurring through Southeast Asia (Cooper, 2002). Overall, the three key
liberalisation forces have been trade liberalisation, FDI promotion and recognition of
private ownership. Such liberalisation took place in the context of the Doi Moi policy.
Since the proclamation of the reform programmes in the late 1980s, the
Vietnamese government has shown greater preference for foreign investment in order to
carry out the process of renovation and socio-economic development. Private and
international sectors, whose participation in the Communist economy was previously
denied, were recognised as the major participants in the new economic order. One of
Vietnam’s earliest reforms was the Foreign Investment Law (1987), which opened the
economy to foreign capital. This law was reinforced by the 1992 Constitution and other
legislation that guarantee against nationalisation and offer various investment rights.
Despite this positive attitude towards FDI, real changes have been slow to be
implemented. It is mostly when the FDI inflows started to slow down during 1996 and
1999 that the government took stronger actions and instituted a series of new measures in
order to promote and attract more foreign investments into the country. Laws do not
address a number of institutional features that discourage FDI: foreign investment priority
industries; multi-agency approval of FDI; complex and opaque trade policies (as
6
compared to neighbouring competitors); a highly-regulated labour market for foreign
investors; and different playing fields for foreign and domestic investment (Gates, 2000).
The Doi Moi policy was successful and promulgated Vietnam into the rank of fast
growing economies, despite the US embargo on trade, which was only lifted in 1994. In
the late 1980s, Vietnam rationalised the tariff structure, reduced export duties on many
commodities, and decentralised and simplified the trade system. It also broke the state
trading monopoly by allowing additional state and then private companies to enter
foreign trade transactions. Some high tariffs were maintained: on luxury and nonessential goods. A list of goods subject to quantitative restrictions, licensing and other
non-tariff barriers remained (Gates, 2000). In the 1990s, Vietnam signed 39 bilateral
investment treaties, which provide additional guarantees for foreign investment, and 26
treaties for the avoidance of double taxation on income and capital. The most recent step
forward in Vietnam’s trade potential is the bilateral trade agreement, signed with the US
in 20015. This helped regularising trade exchanges between the two parties. Trade has
improved since the 2001 bilateral trade agreement. Trade experts say the accord, which
puts Vietnam on equal footing with America's other trading partners, is likely to be
giving a boost to Vietnamese exports of textiles, shoes and seafood. Tariffs on
Vietnamese goods will fall from an average of 40 percent to just 3 percent. The World
Bank has estimated that would increase Vietnamese exports to the United States more
than 50 percent6. Exporters to the US will therefore be the major beneficiaries7. The BTA
will also benefit major structural ramifications over the next three years as Vietnam
prepares to open its energy, financial services and telecommunications markets to US
companies and import-competing sectors face intensified competition.
In 1995, Vietnam became a member of the ASEAN, and this is where the next
step in trade liberalisation is due to occur. Vietnam is now continuing to restructure its
trade and tariff system, primarily through its integration into AFTA, which requires tariff
reduction on most goods and trade harmonisation (Phuong, 1997).
5
The Bilateral Trade Agreement between the two countries was signed in December 2001 into law by Tran
Duc Luong.Normal trade relations (NTR) are now in effect.
6
Wayne Arnold (2000). Vietnam’s Trade Imbalance and Economy Keeps Growing. The New York Times.
December 27th
7
Credit Control. Asia Pacific and Vietnam. 2002. Vol. 23-1, pp. 19-22
7
Recognition of private ownership was the third key issue addressed by the Doi
Moi. Reforming state-owned enterprises SOEs was central to this effort. Their number
was reduced from 12000 in 1990 to about 6000 in 1996 (Cooper, 2002:140). Large
military-run companies are also emerging, including those run purely for profit, in sectors
such as mining, power generation, infrastructure and building construction, textiles,
fishing and tourism. Outside of the agricultural and service sectors, private businesses
(larger than family level) accounted for only 7.1 percent of GDP in 1998, while non-state
sector in industry as a whole contributed just 17.1 percent (Cooper, 2002:150). Recently,
the climate for private investment has improved with the approval in December 2001 by
the National Assembly of a constitutional amendment guaranteeing for the first time
equal treatment of the private sector. This was followed by a resolution in March 2002
stating that party members should be allowed to engage in private business. More than
21,000 new entreprises registered in 2001 up from 14,000 in 2000, and capital formation
of these new enterprises roughly doubled. (World Bank, 2002: 21) This comes as a
positive move, since in the long run, the state-owned firms may hinder the growth of the
private sector. Private enterprise has flourished so far in part because it was starting from
a low base. The boom in new companies stems almost entirely from tiny, family-run
privately-financed firms8. To grow into bigger businesses, however, those ventures will
require resources that currently mainly go to state-owned firms. The key issue is that of
finance. Banks, mostly state-owned, favour public enterprises for loans. Moreover, many
banks are constrained and prevented from lending to risky start-ups. Another problem
faced by private firms is the lack of experience in capitalism9. The weakness of the
private sector is primarily due to unfavourable environment of discriminatory incentives
and rules of the game with respect to finance, investment, tax, trade.
As a conclusion, considerable efforts were conducted since the launch of the Doi
Moi as discussed above. However, the Vietnamese economy still suffers from a shortage
of adequate means for TNCs. As many of its neighbour countries, Vietnam is grappling
with a wide array of governance needs, including issues such as improving the
8
The Economist. Asia: Reluctant Capitalists, Vietnam. March, 16th, 2002
“Banks do not have many qualified loan officers, lawyers have little experience of commercial disputes,
and the National Assembly is having to grapple with the wholly unfamiliar notion of competition policy.
9
8
responsiveness and accountability of government and strengthening the rule of law and
bolster government effectiveness (World Bank, 2002). Other problems include the lack of
business skills and the lack of accurate marketing information (Vernard, 1998: 85). Thus,
to ensure further internationalisation of its economy, Vietnam ought to concentrate its
effort on improving the general business environment for companies to operate in.
FDI trends
Vietnam has been very successful at attracting FDI during the early 1990s, as is
illustrated on Tables 1 and 2. Overall FDI stocks have increased from a mere 294 million
US$ in 1990 to 17,956 million in 2000. While flows have decreased towards the end of
the 1990s10, they were picking up again in 2000. Vietnam has now gained a good
position amongst other ASEAN countries in terms of attracting FDI. In 2000, it ranked
fourth in terms of FDI inflows, behind Singapore, Malaysia, and Thailand. Inflows to
Vietnam were above 2 billion dollars, while Myanmar, Cambodia and Lao attracted 240
millions, 153 and 72 millions dollars respectively. Thus, Vietnam has definitely
established itself amongst the major hosts in ASEAN.
<<<Include Tables 1 and 2 Here>>>
In recent years, the top investing countries in Vietnam were from Asia. This partly
explains why FDI inflows into Vietnam fell sharply in the years following the Asian
economic crisis. Figure 1 shows that the top investing group/countries over 1995-2000
were the 3-Asian NIEs, Singapore and Japan. Clear independence between Vietnam and
other Asian countries appears through investment projects in the country. This will be
discussed more in-depth later in this paper.
<<<Include Figure 1 Here>>>
A large share of FDI is directed towards the manufacturing sector, which is the
focus of our research. Within the manufacturing sector, FDI flow concentrated in heavy
industry, light industry and construction, which accounted for 39.8, 25 and 18.5 percent
Accountancy and methods of dispute-settlement are still in their infancy. All these ideas are as new to most
Vietnamese as their motorbikes”. The Economist. Asia: Reluctant Capitalists, Vietnam. March, 16th, 2002
10
“To address these issues, in March 1999, the Government announced measures aimed at attracting
foreign investors, including gradual elimination of the dual pricing system, denomination of salaries of
foreign-invested enterprises in national currency, reduction of electricity and telephone charges and other
registration
and
business
fees,
and
simplification
of
administrative
procedures.”
http://www.adbvrm.org.vn/Economic_Update.html
9
respectively of the share of total foreign projects in the Vietnamese manufacturing sector
over 1995 to 1999 (see Table 3).
<<<Include Tables 3 and 4 Here>>>
Vietnam has attracted foreign projects in light industries since the late 1980s,
particularly textiles and garments and food processing. It is in the mid-1990s that the
share of heavy industry and construction and real estate increased more rapidly.
Investment in heavy industry mainly covered typical import substitution sectors such as
cement and the automobile industry. The share of investment capital in light industries
tends to be small, because of the small size of projects. Japanese FDI is concentrated in
heavy industry rather than light industry, particularly in terms of investment capital11.
As of 1996, foreign firms accounted for 15 percent of gross value of
manufacturing output. This share has increased since then, together with the increase in
inward FDI. Thus, overall, foreign firms account for an increasing share in the
Vietnamese manufacturing sector. While FDI inflows to Vietnam slowed down after the
Asian crisis, the trend seems to have reversed. The decrease was mainly due to the fact
that major investors in Vietnam originate from Asian countries, which were hit by the
crisis, and the relative costs had become more adverse for Vietnam. Also, the region’s
crisis undermined international investor’s confidence in Southeast Asia, and Vietnam is
not an exception (Tran, 1999). Other reasons for the decrease were mentioned above,
namely the investment environment of Vietnam is relatively less friendly than that of
other countries in the region. Vietnam’s physical infrastructure is underdeveloped, which
greatly increases costs for foreign investors (Vernard, 1998; Gates, 2000; Cooper, 2002).
Large investment is required to improve Vietnam’s transport-communication networks,
housing and commercial property stock and related goods, financial infrastructure, labour
resources and many other infrastructural components. An additional problem is that of the
property rights system. Foreign investors have difficulty obtaining and retaining user
rights to land. Finally, the opaque legal and bureaucratic procedures on project approval
and implementation are deficient. Vietnam must improve its business environment to
boost investors’ feelings.
Vietnam, trade and TNCs
11
For further details, see http://www.intellasia.com/pdf-stats/investment-fdi.htm
10
Vietnam’s external trade has expanded at a very rapid rate in the early 1990s.
Exports grew at an average annual rate of 29.1 percent, and imports by an even faster
37.9 percent between 1991 and 199612. This pattern changed during the Asian crisis, and
in 1998 reached standstill, with exports expanding by only 1 percent in dollar terms and
imports declining by 2.1 percent. This slower growth was the result of Vietnam’s
exposure to Asian markets, which account for a large share of total exports. The import
contraction was the combined result of temporary import bans, depreciation of the Dong,
and the economic slowdown. Recent efforts by Vietnam to pursue its international
integration (by joining the AFTA, and initiating negotiations for membership in the
World Trade Organisation and for most favoured nation status with the United States13)
helped revive the country’s trade performance. Exports increased by 24 percent in 2000.
Although the increase was mainly attributed to the increased in exports of crude oil,
exports of garments and knitwear also increased (to 1,820 million US$), together with
those of footwear (1,443 million US$), seafood (1,392 million US$) and electronic
products and computer components (655 million US$). As exports of agricultural
products declined in volume, such growths show an evolution from the export of
agricultural commodities towards manufactured exports. Imports were also on the
increase in 2000 and a sizeable part of these went to the manufacturing industry to
increase its capacity14. Asia remains the key trade partner for Vietnam, accounting for
over 47 percent of its total exports and 77 percent of its total imports in 200115. However,
the shares of Western Europe and North and Central America as final markets for
Vietnamese products have increased substantially over the past decade (see Table 5).
<<<Include Tables 5 and 6 Here>>>
Foreign companies are taking an increasingly important role in foreign trade, role
that should increase further in the future as restrictions are eased. Table 6 shows the
growing importance of FDI for Vietnam’s foreign trade. If oil trade were to be
discounted, the share of foreign firms in total trade would be significantly higher. The
share of foreign firms in total exports of goods has more than doubled in the late 1990s
12
Extracted from http://www.adbvrm.org.vn/Economic_Update.html
http://www.adbvrm.org.vn/Economic_Update.html
14
http://www.uk-vietnam.org/commerce/Economic%20Report.html#_Toc513881151
15
http://www.adb.org/Documents/Books/Key_Indicators/2002/default.asp#contents
13
11
from over 10 percent in 1996 to 23 percent in 2000. Similarly, foreign firms’ share in
total export has increased by more than a third, from over 18 percent in 1996 to over 28
percent in 2000. These figures clearly indicate that part of Vietnam’s internationalisation
through trade is occurring thanks to foreign firms’ operations.
VIETNAM IN A REGIONAL PERSPECTIVE
The analysis presented above with emphasis on FDI trends and trade has
highlighted how closely integrated within Asia Vietnam is. Hence, in this section, we will
try and grasp the particular place held by Vietnam amongst its neighbour countries.
Vietnam within East Asia
Similarly to many Asian countries, Vietnam has experienced high growth rates in
the early 1990s before the outburst of the Asian crisis, but a slower growth in the second
half of the decade. Still, growth rates in Vietnam have remained stable over the past three
years, and forecasts show that this stability should continue (see Table 7). Growth rates
achieved prior to the Asian crisis have not been recovered. Vietnam grew by 9.3 and 8.2
percent in 1996 and 1997 respectively, while its growth has thereafter levelled out at just
above 5 percent. Growth is now led by the industrial and construction activity, which
grew by 8.2 percent16 (World Bank, 2002). The economy of Vietnam is closely linked to
that of other Asian countries and higher growth rates in these latter are essential to the
growth of its economy.
<<<Include Tables 7 and 8 Here>>>
Table 8 shows Asian countries (except for Japan) can be categorised into four
groups in terms of economic development and per capita GNP. The first group is that of
advanced economies with Singapore and Hong Kong. The second group includes Taiwan
and Korea. The third group is comprised of Malaysia, Thailand, Indonesia, and the
Philippines. Finally, the fourth group includes China, Vietnam, Myanmar, Cambodia and
Laos. Asian countries’ development experience is often analysed in the light of that of the
whole of Asia, in the context of the ‘Flying Geese’ pattern of economic development,
whereby each country in the region follows successive stages of development. The key
16
In line with the country’s industrialisation, the share of agriculture in GDP has decreased substantially
over the past decade, from 50 percent of the GDP in 1980, down to just above 38 percent in 1990 and 24
percent in 2001. The share of industry increased from 23 percent in 1980 to 36.6 percent in 2001, while that
12
concept is that of hierarchical development17, with inter-related economic development of
countries. This was also labelled as the catching up product cycle (Kojima, 2000). Asian
countries have benefited from a movement of comparative advantage coming from the
developed countries, and in particular from Japan (Yusuf, 2002). Such a development
pattern is key to the integration of countries in TNCs’ value chain. Capital accumulation
and the creation by foreign firms of backward and forward linkages allow indigenous
firms in the less developed country to gain access to the technology and know-how
related to more advanced methods of production. Through its interdependence with
neighbour countries, Vietnam ought to reach a higher level of comparative advantage and
benefit from an improved industrial structure, mainly through the development of these
international and regional production networks. Japanese firms and firms from the NIEs
have been very pro-active at integrating Vietnam into its value chain, as illustrated in
Figure 1. One key explanation might be that of geographical proximity, which has
facilitated centralised control of Japanese and Asian firms in Southeast Asia (Ernst,
2000). First, regional integration has taken place through TNCs’ relocation to lower
developed countries in the region. Secondly, East Asian countries’ interdependence has
also arisen through gains from complementary exports between Japan and the NIEs, on
the one hand, and neighbouring developing countries on the other hand. This
complementary pattern is the result of the intra-industrial specialisation of the countries
in the region. ASEAN still differs from East Asia in that the success of specific sectors in
the region is nearly entirely due to foreign firms (Freeman & Hew, 2002). The specific
experience of Vietnam is still unclear, but the role played by foreign firms in its economy
is increasing.
Vietnam within ASEAN
The extent of indigenous technical capacity in Vietnam is lower than in the case
of other ASEAN countries, but some regional investment is taking place with companies
from Singapore, Malaysia, Thailand and on a smaller scale from Indonesia with interest
in Vietnam. Thus, ASEAN firms and foreign firms located within ASEAN have started to
integrate Vietnam within their regional value chain. Between 1995-2000, Singapore
of
manufacturing
levelled
out
with
only
18.7
percent
http://www.adb.org/Documents/Books/Key_Indicators/2002/default.asp#contents
in
2001.
13
invested a total of 1,406.43 million US$ Vietnam, followed by Malaysia with 372.84
million dollars, and Thailand with 272.17 million dollars. Indonesia invested a total of
2,344 million US$ in the region, the bulk of which went to Singapore (ASEAN, 2001:
15). Difference in the levels of economic development suggest a variety of options for
production strategies in the region. Labour-intensive industries tend to locate in lower
developed countries in the region, where labour costs lower although productivity may
not be high. In this context, Vietnam must be placed within the regional framework of
ASEAN, but also within the wider framework of Asia, with China as a key competitor to
attract TNCs. In the region, Singapore stands out by having a comparative advantage for
high-technology manufactured products, and by attracting regional headquarters (RHQs)
of many TNCs. When looking at comparative advantages, Vietnam is at par with
Myanmar for resource-based and labour-intensive industries, but the country’s large pool
of labour and potential market, and it political stability has given the country a clear
advantage.
VIETNAM, TNCs AND THEIR GLOBAL AND REGIONAL VALUE CHAIN
This section is meant to illustrate the depth of the data that will be collected
amongst TNCs located in Vietnam in both the Electrical & Electronics and the Textile &
Garment sectors. The aim is to provide an analysis of the complex structures existing
within and amongst firms as part of their value chain.
Functional areas of TNCs affiliates
With current advances in technology and the endeavour of many TNCs to focus
their business on core products through global rationalisation of the value chain, Vietnam
may well follow a different development path than that of its neighbours. Before the
1990s, Asian affiliates mainly produced mature products while parent companies
concentrated on new products. Production costs were kept low thanks to low wages in
developing areas. The standard technology was easier to use in developing countries, as
few skills were required of workers. Nowadays, production has become more technologyintensive (depending on the sectors), and many affiliates in Southeast Asia receive state
of the art technology. This results from TNCs’ strategic decision to only select a few
manufacturing locations in the world, as part of their global value chain activities. If an
17
which originated with Kaname Akamatsu in the early 1960s.
14
affiliate is merely integrated in the TNCs’ value chain as a screwdriver-type plant, it
receives semi-finished parts from its parent company and assembles it. This type of
affiliates used to be common a few decades ago in Southeast Asia. However, factories
that manufacture parts and components in-house have increased. With more integrated
plants in Southeast Asia, production of parts is either taken on by the affiliate, or
performed by other affiliates in neighbour countries. Sometimes parts are simply
procured from local producers, which is when the foreign firm may have linkages with
supplier firms.
In running their global operations, TNCs are faced with strategic choices over
control of key functions and the balance between in-house activities and contracting to
other firms. To illustrate the functional scope of affiliates across Southeast Asia, and how
they are integrated with each other, we will use the example of Fujitsu, which was one of
the companies interviewed so far. Fujitsu is structured around six key services and
products categories18, but also divides the world into sub-geographical units particularly
for sales and marketing purposes. The company interviewed was established in 1988 in
Thailand to assemble hard disk drive (HDD). Fujitsu produces 12 percent of world HDD,
6 percent of which are produced in Thailand. The Thai operations have no other
functional scope than assembling of the product. All sales and procurement functions are
performed by the RHQs located in Singapore, while the overall strategy and R&D
functions are performed by the parent company in Japan. Other manufacturing plants of
Fujitsu are located throughout Southeast Asia, namely Philippines, Malaysia, Singapore
and Vietnam. Operations of the Thai plant are integrated to those of its sister companies
within ASEAN. In Vietnam, Fujitsu has one representative office, one sales office and
three manufacturing plants19. All three manufacturing/assembling plants were established
after 1995, and clearly Vietnam was integrated into the regional value chain of the
company later than the other ASEAN countries. This indicates how Fujitsu has penetrated
ASEAN in stages, and it was only after being familiar with neighbouring countries and
the regional environment that Fujitsu penetrated Vietnam for manufacturing purposes.
The Thai operations are linked to Philippines and Vietnam for inputs and to the
18
These categories include (1) IT & Computers, (2) Peripherals, (3) Telcommunications, (4)
Microelectronics, (5) Software, (6) Speciality Products. http://www.fujitsu.com/products/
15
Singaporean RHQs for sales and marketing, while R&D is performed in Japan. The
whole of the affiliate’s production is sent to sales companies, then sold world wide (with
only 10 percent of it sold in other ASEAN market). About half of the affiliate’s inputs
originate from within the company. While a large share of these internal inputs come
from Japan, many come from affiliated companies in Singapore, the Philippines and
Vietnam. Hence, although the Thai plant does not manufacture for other affiliates, it uses
parts and components manufactured by other Fujitsu affiliates in Singapore, the
Philippines and Vietnam in its assembling activities. The assembling function of the plant
is part of the global and regional value chain of the company.
Of the firms in our sample, 8 originate from the USA, 8 from Japan, 4 from
Europe, 3 from Taiwan, 2 from Hong Kong, 2 from South Korea, and 1 is a minority joint
venture with an Australian partner. In terms of location, 4 affiliates are located in
Singapore, 14 in Malaysia and 9 in Thailand. Out of the 4 firms in Singapore, 2 are RHQs
for the global firm’s operation in Southeast Asia, one is in charge of further investment
plans in the region, and the fourth one is a distribution centre for ASEAN as well as
covering for major financial function as part of the global operations. One of the two
RHQs provides logistics, technical consultancy, and financial/treasury functions for other
affiliates in ASEAN countries. Other affiliates of the firm are also located in Singapore,
those are mostly in charge of manufacturing and sales. This illustrates how Singapore is
dominant in ASEAN for the position of regional headquarters (and major support like
procurement, testing, engineering services and training). The city-state has also become a
major hub for the region, with substantial spillover effects in neighbour countries (Wong,
2000). Singapore is the most advanced in the region technologically. To link this point
with the case of Fujitsu, Singapore is a major pole for production of HDD (Gourevitch,
2000). Seagate established the first significant HDD assembly operation in Singapore in
1982. By 1996, the six largest HDD in the world were present in the country. Some of
these companies have now started operations in neighbour ASEAN countries, and
suppliers for the whole industry have developed throughout the region.
Apart from a mere manufacturing/assembling function, other affiliates in our
sample also performed a sales function. Many affiliates had an in-house R&D centre, the
19
http://vn.fujitsu.com/sitemap
16
latter aiming primarily at processes. Hence, while the core research function is still
performed either by the parent firm or outside ASEAN, many affiliates nowadays have
their own development centre. These R&D centre are often small, and in many cases
were recently opened. Still, this indicates that affiliates in Malaysia and Thailand have
established themselves fully into their firms’ value chain, and are increasingly given
control over strategic functional areas.
In the case of Vietnam, it is not anticipated that particular functional areas will be
allocated to the foreign affiliates. In the Textiles and Garment, and Electrical and
Electronics
sector,
it
is
anticipated
that
TNCs
still
use
Vietnam
as
a
manufacturing/assembling base only. It is expected that either the parent company or the
RHQs will still heavily control affiliates. Because a large share of investors originates
from other Asian countries, it is anticipated that the majority of investors will have other
affiliates in either East Asian or Southeast Asian countries. Vietnam is not anticipated to
be the sole or first foreign location for manufacturing activities.
Exchange of goods: ‘make or buy’, origin and destination
Once the data is gathered amongst foreign affiliates in Vietnam, a clear picture of
how affiliates interact locally, regional and internationally within and outside the firm in
terms of exchange of goods will be drawn. The data presented in Table 9 is meant to
illustrate the information that is in the process of being gathered.
<<<Insert Table 9 Here>>>
Overall, a small share of the foreign affiliates’ output is sold on the local market.
Affiliates are clearly export orientated in nature, a little less in Malaysia than in Thailand.
We only have two companies with manufacturing activities in Singapore, and figures in
Table 9 are therefore not yet representative. What is interesting is to see the high share of
total output sold within the company. In the case of Malaysia nearly 26 percent of the
intra-firm sales remain in Malaysia itself, thus going to other affiliates located in
Malaysia. This clearly shows the importance of intra-firm activities within Southeast
Asia. This is not the case for Thailand and Singapore.
In terms of input, slightly more than a third of total inputs purchased by foreign
affiliates are bought within the host countries of Malaysia or Thailand. Affiliates in
Thailand bought a quarter of their input from other affiliates/parent company, of which
17
over 16 percent were bought from other affiliates in Thailand. While the Malaysian
affiliates rely more on intra-firm purchase, less comes from within Malaysia.
It is still early in this research project to draw any conclusions from our data.
However, it is important to show the type of information that will be gathered amongst
foreign affiliates in Vietnam.
Future investment plans: place of locations in the global and regional value chain
Few companies in the sample have plans to expand in other Southeast Asian
countries. From Table 10, we can see that affiliates have plans to invest further in either
Malaysia or Thailand. Two firms mentioned they were thinking of Vietnam as an
investment location, one would consider investment if opportunities arise, and the other
was seeking opportunities in the country. Most firms mentioned that regular investment
went into consolidating existing affiliates in Southeast Asia. Hence it is clear that reinvestment is becoming a very important phenomenon in ASEAN. Like its neighbour
countries, Vietnam must pay special attention to companies already located into its
borders.
CONCLUSION
In this paper, we have drafted ideas for the analysis of Vietnam within TNCs
global and regional value chain. Fieldwork in Vietnam is planned for November and
December 2002, after which, we will be able to draw a complete map of the place of
Vietnam within TNCs’ value chain in the Textiles and Garments, and Electrical and
Electronics sector. Our discussion has led us to structure the discussion around the two
key globalisation drives, namely FDI and international trade in the context of the
liberalisation programme followed by the Vietnamese government. While investment
flows have slowed down towards the end of the 1990s, they are peaking up again. The
role of foreign firms in the Vietnamese economy is thus increasing, as foreign firms’
share of the country’s exports is increasing rapidly. In this paper, the geographical
location of Vietnam was highlighted. Asian countries account for the bulk of investment
in Vietnam, and the country has taken place in the regional division of labour. Japan, East
Asian and Southeast Asian countries all play a substantial role in Vietnam. It is in this
regional perspective that Vietnam must be planning its internationalisation. In the final
part of this paper, we looked at the case of Fujitsu and its activities in Malaysia and intra-
18
firm links within ASEAN and Vietnam in particular. Expansion of the firm in Vietnam
came in the second half of the 1990s, and the Vietnamese manufacturing plants provide
the Malaysian affiliates with key parts and components. The regional aspect of TNCs’
activities is illustrated through this case. It is emphasised at the end of the paper that most
TNCs interviewed in Thailand and Malaysia have little future investment plans in the rest
of the region, but the parent firm is committed to consolidate existing plants in the two
countries. This shows that as well as attracting new investors, countries like Vietnam
must improve the overall business environment where companies operate to encourage
them to invest further in existing location and perhaps expand.
19
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Table 1 - FDI inward stocks in South and East Asia, 1980-2000 (Millions of dollars)
Host economy
World
China
Singapore
Malaysia
Thailand
Indonesia
Philippines
Vietnam
Myanmar
Cambodia
Lao
1980
1990
1995
2000
495,200 1761,198 2,743,391 6,314,271
6,251
6,203
5,169
981
10,274
1,281
7
5
191
2
24,762 137,435 346,694
28,565 59,582 89,250
10,318 28,732 54,315
8,209 17,452 24,165
38,883 50,601 60,638
3,268
6,086 12,688
230
6,286 17,956
173
1,091
2,408
191
498
758
13
211
659
Source: UNCTAD, 2001.
Table 2 - Inward FDI flows in South Asia and China, 1995-2000
(Millions of dollars)
Country
China
Singapore
Indonesia
Malaysia
Philippines
Thailand
Vietnam
Myanmar
Cambodia
Lao
1995
35,849
8,788
4,346
5,816
1,459
2,004
2,336
277
151
95
1996
40,180
10,372
6,194
7,296
1,520
2,271
2,519
310
294
160
1997
44,237
12,967
4,677
6,513
1,249
3,627
2,824
387
204
91
1998
43,751
6,316
-356
2,700
1,752
5,143
2,254
314
121
46
1999
40,319
7,197
-2,745
3,532
737
3,562
1,991
253
135
79
2000
40,772
6,390
-4,550
5,542
1,489
2,448
2,081
240
153
72
Source: UNCTAD, 2001
22
Figure 1 - FDI in Vietnam (BOP Basis) by source country, cumulative 1995-2000
Other
12%
Japan
16%
USA
4%
Europe
13%
ASEAN
20%
Asian NIEs
35%
Source: ASEAN, 2001b
Note: Other comprises all countries/regions not mentioned, joint countries' and international
organisations' investment. Within the category 'ASEAN' countries, Singapore accounted for the
bulk of the investment, with a total of 1,406.43 million of US$, that is over 65% of total ASEAN
investment in Vietnam.
23
Table 3 - FDI flow to the Vietnamese manufacturing sector by industry, 1995-1999
(approval and total project cost basis)
Number of
projects
Heavy industry
Light industry
Construction
Food processing
Aquaculture
Total
347
481
185
151
33
1,197
Value of
projects
Million US$
4,359.78
2,032.76
2,741.52
1,752.87
74.51
10,961.45
Share of total
(value basis)
39.8
18.5
25.0
16.0
0.7
100.0
Source: ASEAN Secretariat, 2001
Note: Light industry includes: Food and Food processing, Leather Products, Textiles and
Garments, and Wood Products. Heavy industry includes essentially Cement, Glass and Non-metal
products, Chemical industry, Electronics and Electrical products, Machinery and Metal products
Table 4 - Ownership shares in Vietnamese manufacturing
(Percentage of gross value of output)
Manufacturing
Textiles
Garments
1995
1996
1995
1996
1995
1996
“State”
“Non-state”
55
54
59
58
37
36
30
30
26
26
50
49
“Foreigninvested”
15
17
15
17
13
15
Source: Hill, 2000: 291
24
Table 5 - Direction of Vietnamese Trade: Merchandise Exports and Imports
Asia
Exports
Imports
1990
43.8
60.6
Western Europe
2001
47.6
77.2
1990
7.9
17.6
2001
28.1
11.8
North & Central
America
1990
2001
0.2
8.9
0.3
3.7
Rest of the World
1990
48.1
21.5
2001
15.4
7.3
Source: extracted from Asian Development Bank, 2002
Table 6 - Import and Export by FDI - Percentage over total 1996-2000
(Percentage of total)
Exports of goods by FDI, fob
Imports by FDI, cif
1996
10,83
18,33
1997
19,49
30,22
1998
21,18
24,87
1999
22,42
27,64
2000
23,08
28,48
Source: http://www.uk-vietnam.org/commerce/20
20
Exact internet site is http://www.uk-vietnam.org/commerce/Economic%20Report.html#_Toc513881151
25
Table 7 - East-Asia: Real GDP Growth
(Percentage growth)
Projection
Developing East Asia
East Asia 5
Indonesia
Korea
Malaysia
Philippines
Thailand
Transition
China
Vietnam
Small Economies
East Asia NIEs
Non-Japan East Asia
Japan
Memo: All East Asia
1999
6.9
6.8
0.8
10.9
6.1
3.4
4.2
2000
7.5
7.1
4.9
9.3
8.3
4.0
4.3
2001
4.9
7.1
4.9
9.3
8.3
4.0
4.3
2002
5.3
3.7
3.5
4.2
3.0
4.0
3.0
2003
5.9
4.9
4.0
5.6
6.0
4.5
3.5
7.2
4.5
6.3
4.8
6.4
0.8
2.8
8.0
5.5
2.0
8.0
7.6
1.5
3.6
8.0
5.5
2.0
8.0
7.6
1.5
3.6
7.0
5.2
3.0
2.4
4.7
-1.2
0.8
7.0
7.0
4.1
4.2
5.6
1.7
3.0
Small Economies are weighted average of Cambodia, Lao PDR, Mongolia, Papua New Guinea.
NIEs are Consensus Forecasts March ‘02’. Japan is World Bank DECPG Update March’ 02
Source: World Bank (2002) East Asia Rebound, But How Far? Regional Overview.
www.worldbank.org
Table 8 - Per capital GNP (US$) of selected Asian countries, 2001
Singapore
Hong Kong
Taiwan
Korea
Malaysia
Thailand
Indonesia
Philippines
China
Vietnam
Lao PDR
Cambodia
1998
30,170
24,060
12,276
8,600
3,670
2,160
640
1,050
750
350
320
260
1999
24,150
24,570
13,153
8,490
3,390
2,010
600
1,050
780
370
290
280
2000
24,740
25,920
14,087
8,910
3,380
2,000
570
1,040
840
390
290
260
Source: Data retrieved from Asian Development Bank, 2002
26
Table 9 – Foreign affiliates, final markets and input origin
(Percentages)
Affiliate
Location
Singapore
(2 firms)
Malaysia
(14 firms)
Thailand
(9 firms)
Final markets
Local market
Share of
output sold
internally
40.0
2.5
Intra-firm
sales on
local market
0
Input origin
Local market Share of input Intra-firm
purchase on
bought
local market
internally
2.5
17.5
0
28.9
56.2
25.9
32.7
42.7
5.6
7.9
49.4
0.0
34.4
25.3
16.7
Note: two firms interviewed in Singapore were RHQs, which is why figures do not appear in this
table for them. One firm interviewed in Thailand is in the Textiles and Garment industry. All
other firms are in the Electrical and Electronics sector.
Table 10 Future investment intention in ASEAN
(Number of firms)
Future investment
in
Brunei
Cambodia
Indonesia
Laos
Malaysia
Myanmar
Philippines
Singapore
Thailand
Vietnam
No possibility
24
23
23
24
19
24
22
23
16
23
If opportunity
arises
1
2
Seeking
opportunities
1
1
2
1
1
1
1
2
1
Likely
expansion
Definite
expansion
1
2
2
1
2
1
2
1
3
27