Industrial Strategy Formulation

This project was initiated in late 2003, even before the VDF was officially established. In close cooperation with the Ministry of Industry (MOI) and concerned Japanese officials and businesses, we provide concrete and realistic inputs for improving Vietnam's industrial visions, strategies and master plans. We study overall industrial orientation as well as key issues of individual industries. We are particularly interested in the different methods by which a number of countries formulate and execute their industrial strategies, especially Japan, Thailand and Malaysia.

Located in the heart of East Asia with diligent population, Vietnam has a great potential to industrialize and join Asian dynamism. Combining high-quality labor, FDI and technical absorption is the key. However, we feel that the poor quality of policy formulation and business management is currently preventing the realization of Vietnam's full potential.

We would like to offer concrete and realistic ideas for improving industrial policy design with special attention to Vietnam's global integration and participation in the East Asian production network.

We propose the five criteria below:

Relative income: join the middle-income group in East Asia (China and ASEAN4)

Export structure: more than 75% is manufacturing

Selected leading status: become top exporters in a few high-tech items based on industrial agglomeration and high quality

Supporting industries: significant development of parts and materials production

Supporting services: significant domestic capacity in design, management, marketing etc.

Government cannot decide which industries should expand. It is up to the market and competition. Thus, it is necessary to listen to businesses and understand them first. While industrial growth must be market-driven and business-led, government can provide vision, coordination and support where needed. Leading industries must also be chosen in this spirit.

Top priority: skilled labor-intensive manufacturing

In the next few decades, Vietnam's dynamic comparative advantage lies in skilled labor intensive manufacturing. Vietnam should fully realize this potential by (i) removing current barriers and problems; and (ii) actively supporting such processes.

This should include garment, footwear, electronic assembly, handicraft, furniture, food processing, household goods, software, etc. However, support should be given generally without specifying which firm or product should win.

In addition, activities which support the eading industries should also be supported.

Hard "supporting industries" (parts and intermediate materials)
Soft "supporting industries" (logistics, finance, insurance, information, etc)
Industries to fulfill growing domestic demand (steel, chemicals, plastic, paper, cement, etc). However, support should be given conditionally and under international competition.

We suggest the following orientations.

Industrial agglomeration

Reduce the cost of doing business in all aspects
Provide freest business environment in East Asia
Attract a critical mass of FDI and become no.1 investment destination in East Asia

Accelerate technical absorption

Assist domestic firms which want to link with FDI firms
Learn from (and later replace) foreigners
State should initially provide information, marketing, procurement and other services; these tasks are later to be taken over by the private sector

Be a crucial link in East Asia's production network

Localize processes in which Vietnam has dynamic comparative advantage
Outsource other things from neighboring countries
Become a bridge between China and ASEAN

According to the business architecture theory of Prof. Takahiro Fujimoto (Tokyo Univ.), there are two basic types of making things. The first is modular architecture, in which common and readily available parts are combined (computer hardware and software, bicycles, etc.), and the second is integral architecture, in which original parts are designed for each model and produced by suppliers with long-term relations (automobiles, household electronics, etc). Modularization can achieve quick results but the scope for later improvement is limited. Integration will take time and effort, but it can improve quality without limit.

Japan is a country of integral architecture, while USA and China are good at modularization. Prof. Fujimoto argues that, if ASEAN becomes good at integral manufacturing, it can become a strong partner of Japan in pursuing high-quality manufacturing with long-term vision. This specifically requires graduation from simple assembly into acquiring capability in parts design, molding, plastic and metal processing, production management, quality control, maintenance and repair without relying on foreigners. This, of course, is possible only if properly targeted human resource development is realized.

Neither Thailand nor Malaysia has achieved this despite their success in FDI attraction. Vietnam, with its diligent workers, perhaps has the highest potential to reach this level among ASEAN countries. This is also the best way to compete with China effectively. But to bring this potential to reality, Vietnam must set a clear policy goal and implement necessary measures with resolve and patience.

While the experiences of other East Asian countries cannot be directly copied to Vietnam, they can provide insights if proper care is taken and adjustments are made to reflect Vietnam's reality. While Thailand and Malaysia still have internal problems, their methods for facilitating inter-ministerial coordination and involving businesses in policy making are far more advanced than in Vietnam.

Malaysia--a comprehensive and explicit system of coordination

Under the strong leadership of Dr. Mahatir, the former prime minister, Malaysia constructed a very systematic and well-developed system of policy formulation and review. A large number of officials, experts and businesses are mobilized in steering committees and working groups in drafting an industrial strategy under the guidance of MITI. Malaysia's policy style owes much to administrative reforms and modern skills adopted from the West.

Thailand--top-down decision making unites ministries indirectly

Unlike traditional Thai governments, the current Thaksin administration has clear vision and business-like no-nonsense attitude toward policy making. Important initiatives come from Mr. Thaksin himself which ministries are required to concretize and implement. Top-down directives facilitate inter-ministerial coordination. However, the Thai system remains more flexible and less mechanical than the Malaysian system.

Japan in the 1960s--the super ministry approach

Japan's Ministry of International Trade and Industry (MITI) had dedicated officials, many working channels with businesses, and subtle but effective policy tools to achieve goals. MITI had broad authority over industrial, trade and technology policies. While there were times when MITI intervened too much, it generally followed market signals and competitive forces. While Japanese political leaders were less strong and charismatic than Dr. Mahatir or Mr. Thaksin, MITI still achieved good results by using its multiple functions to work with business, not against it.

Which model should Vietnam pursue, and what modifications are necessary? Whatever path may be chosen, the most crucial ingredient is the strong will and vision of the top leader. A bureaucrat-led bottom-up approach can hardly break through the vertical and horizontal segmentations of Vietnam's current decision making system.

Vietnam's position in the global and regional economies must first be analyzed. Next, define the gaps that must be narrowed with appropriate schedule. Then design concrete action plans.