Designing a
Comprehensive and Realistic
Industrial Strategy
Kenichi Ohno
Project Leader on the Japanese side
Vietnam Development Forum (GRIPS-NEU)
February 25, 2004
The Purpose


To offer concrete & realistic ideas for
industrial strategy formulation
Based on the past & present research
cooperation between Vietnam & Japan
--MPI-JICA (Ishikawa Project, 1995-2001)
--NEU-JICA (2000-2003)
--Vietnam Development Forum (GRIPS-NEU,
2004-2008)
Japan’s Near-Consensus
View on Vietnam



Vietnam has potential to industrialize
and join East Asian dynamism
Combining high-quality labor, FDI, and
technical absorption is the key
However, poor policy is preventing the
realization of Vietnam’s full potential
--FDI inflow and technical absorption are
slower than potential
--Domestic and foreign businesses are
frustrated (including Japanese firms)
Three Aspects of
Vietnam’s Industrial Policy Problem



Unclear overall vision & strategy
Lack of good master plans for individual
industries
Lack of unity and coordination among
different ministries and levels
This paper mainly discusses the first
problem (overall vision and strategy)
Menu for Discussion






Defining an industrial country
Setting the fundamental course
Industrial policy formulation
How to import East Asian dynamism
Overall industrial vision: suggested
contents
Japan’s new ODA policy
1. Defining an Industrial Country



Industrialization by 2020 is the national
goal, but what does it mean concretely?
The goal should be realistic and
achievable under good effort
The goal should reduce policy
uncertainty and promote strategic
planning of enterprises
Industrialization as a process
Simon Kuznets (1973) defines Modern
Economic Growth (=industrialization) as
follows:



Rapid growth of population and per
capita output
Rapid urbanization and changes in
economic structure
These changes are sustained for a long
time
Industrialization as a process
Ryoshin Minami (1986) defines industrialization
as follows:

Durability—manufacturing industries grow
continuously and at high speed

Contribution to overall growth—
manufacturing industries are the largest contributing
factor to GDP

Structural change—manufacturing industries
shift constantly from low-tech to high-tech
Problems with Classic Definition

It defines the process but not the end
state (what is an “industrial country”?)



It is derived from historical growth of
Europe, US and Japan (not LDCs)
It does not assume strong globalization
pressure
It is too general (not numerical or
operational)
For Vietnam we suggest the following:


Industrialization should be defined
concretely in the context of East Asian
dynamism and production networks
External factors should be highlighted
(FDI, China, competitiveness, trade liberalization,
technical transfer, etc.)


Relative income criterion, not absolute
Thailand should be the reference
country for 2020 (do at least as Thailand does
and even better)
Concrete Criteria for Vietnam 2020
1. Relative income—join the middle group (China +
ASEAN4)
2. Export structure—Manufacturing is (75%) or more
3. Selected leading status—Vietnam becomes No.1
or No.2 exporter in the world for a few high-tech items, based
on industrial agglomeration and high quality
4. Supporting industries—significant amounts of
parts and inputs are domestically produced (but not 100%)
5. Supporting services—domestic skilled labor
provides a large part of design, production management,
marketing, etc. replacing foreigners
2000
1800
1600
1400
1200
1000
800
600
400
200
0
Possible Paths of Per Capita GDP
Plan
High
Low
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
USD
For reference:
Income in 2002
Malaysia ($3,880)
Thailand ($1,990)
Philippines ($970)
China ($960)
Indonesia ($820)
Laos ($330)
Cambodia ($300)
Higher Income Group
Japan ($33,000)
Hong Kong ($24,000)
Singapore ($20,900)
Taiwan ($12,600)
Korea ($10,000)
(ADB data)
Why Thailand?




Similar population size (61 million)
Income level of $2,000 (reasonable target for
Vietnam 2020)
High manufactured export ratio (76%)
Excels in a few products—electronics & cars, with
sizable supporting industries
Problems with Thailand (VN should avoid)
--Excess urbanization & social problems
--Urban-rural income gap does not narrow
--Not-so-skilled labor & slow technical absorption
Manufactured Exports
(% of total exports)
100%
Japan
Top Group
80%
Taiwan
Thailand
Korea
2nd Group
Singapore
60%
China
Malaysia
40%
Latecomers
Thailand
Philippines
20%
Vietnam
Indonesia
Vietnam
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
1976
1975
0%
Source: ADB, Key Indicators of Developing Asian and Pacific Countries , 2003/2001/1993; IMF, International Financial Statistics Yearbook 1990.
For Japan, Japan Statistical Yearbook 2003/2002/1999, Statistics Bureau/Statistical Research and Training Institute,
Ministry of Public Management, Home Affairs, Posts and Telecommunications, Japan.
2. Setting the Fundamental Course
Vietnam should not debate the fundamental
strategy forever. It must decide what to do
and announce it clearly so businesses can
operate in a stable policy environment.
 Which sectors are promoted and prioritized:
SOEs, private sector, or FDI?
 What are the long-term policies for tariff
reduction, localization and technical transfer?
 Which are the key industries and how will
they be supported?
Ongoing Debate

State-led view
(Some Vietnamese)
State should guide and direct the market; otherwise, growth will be
too slow or imbalanced. Invest in upstream industries fast.

FDI-led view
(Japan team; some Vietnamese)
FDI is key for competitiveness; policy should support investors and
follow global market dynamics. Help local firms link with FDI
networks.


SME-led view
Market-led view
Comparison #1
Who
should
lead?
Localization
policy
State-led View
FDI-led View
State should guide
market; growth is
imbalanced or too
slow without it
Use reward/penalty
to speed up local
supply of inputs
Absorb critical mass
of FDI with open &
low-cost business
climate
Encourage natural &
demand-led localization (don’t force it)
Upstream State must invest
sector
upstream if FDI or
(materials &
private firms don’t
inputs)
do it
Don’t invest unless
globally competitive;
vertical integration
shouldn’t be aimed
Comparison #2
State-led View
ImportState must support
subst.
and protect it if
industries necessary; job &
industrial concern
Export
Little contribution
industries to VN’s economy
(garment,
due to low local
electronics...)
value-added
Trade
Inevitable, but
liberaliza- national interest
tion
must be considered
in the process
FDI-led View
Let market decide
under tariff reduction; but help firms
with realistic plans
Very important;
encourage them
with open & lowcost FDI climate
Choose appropriate
speed to encourage
efficiency & avoid
social crisis
Fundamental Direction
(My Suggestion)
Declare the following as key industrial strategy:
1. VN is irreversibly committed to
integration and market orientation
2. Government will play a key role in
promoting industries and reducing
various social costs
3. FDI is the main pillar of growth up to
2020; local firms are assisted to link
up with FDI firms
4. SMEs are important as:
(i) domestic source of income & jobs
(ii) supporting industries
(iii) global competitors (some)
5. SOEs will be selectively reformed:
--Separation of winners & losers
--Gradual reform for social concern
--Two-track approach:
Let SOEs decline relatively as private sector develops
faster, instead of forced “big-bang” privatization
Taiwan: Industrial Growth (%)
Taiwan’s
Two-Track
Approach
40
30
Private
20
10
0
SOEs
-10
1953
1955
1960
1965
1970
1975
1980
1985
1990
Taiwan: Share of Industrial Production
SOEs
100
80
60
40
Private
20
0
1953
1955
1960
1965
1970
1975
1980
1985
1990
3. Industrial Policy Formulation
We propose the following shifts in emphasis:
 From quantity to quality (=international
competitiveness)
 From product orientation to process
orientation
 From picking individual industries to
setting a broad direction
From Quantity to Quality

Current industrial plans are expressed
in “desired quantities”—output, exports,
domestic supply ratios, investments, etc.


Creation of global competitiveness
should be the goal, not desired
quantities
Competitiveness include:
Cost, time, specialization, small lot production,
choosing the appropriate production model for
VN, marketing, after-purchase support, etc.
How to Analyze Situation and Set Goals
STEP ONE:
Study recent global and regional trends of that industry.
STEP TWO:
Compare numerically the competitiveness of Vietnam and
the rival country (China, Thailand, etc. depending on each
industry). This defines the gap that must be narrowed.
STEP THREE:
Design concrete measures to raise VN’s competitiveness to
the level of the rival country (and above). Set realistic goals
and time schedule. Mobilize all means which are permitted
by WTO and other international commitments.
MORE LATER
From Product to Process



The idea that computer & DVD are high-tech
while food & garment are low-tech, is
mistaken.
For any product, high and low skills are
combined at different stages. Products are
not high-tech, but processes are.
VN can perform only low-tech processes now.
The real question is how to expand from lowtech to high-tech over time.
Value-Added in Computer Production
Value
Hightech
Software
Processor
Memory
LCD
Brand name
Sales channels
Sales management
Monitor
HDD
Motherboard
Lowtech
Vietnam should
start with assembly
but gradually
improve capability
Design
& parts
Upstream
Assembly
Marketing
Downstream
Source: Adopted from Yumiko Okamoto, “Electronics and Electrical Industries,” in K. Ohno & N. Kawabata eds,
Industrial Strategy of Vietnam, Nihon Hyoronsha, 2003, p.101 (Vietnamese translation in 2003, p.116)
How to Improve Value

Do low-tech processes well and be No.1
in quality, delivery, complexity, etc
Ex. Men’s white shirt  Ladies fashion

Learn from--and replace--foreigners
Ex. Factory management, procurement

Gradually move both upstream (design,
inputs) and downstream (marketing)
Industry A
Industry B
Industry C
textile
electronics
motorbike
Vietnam should
first concentrate
and improve on
skilled laborintensive
processes. From
this base, vertical
expansion should
be achieved
gradually (not
forced).
Upstream
Next step
Current size
Downstream
Further step
From Picking Individual Industries
to Broad Guidance



Needless to say, market & government
must be mixed properly in development
Government should generally support
certain production processes without
pre-judging specific industries
It is the market, not government, which
decides the ultimate fate of each
industry
Ranking Individual Industries?
Many studies classify VN’s industries according
to “competitiveness” (effective protection, RCA,
labor content, etc.)
However...
 They rely on past data, not future potential
 Dynamic comparative advantage partly
depends on policy (not predetermined)
 Competitiveness should be evaluated for
processes, not for products
Which Industries (Processes)
Should Be Leading?
We propose to target the following processes
(1) Top priority: skilled labor-intensive
In the next few decades, VN’s dynamic
comparative advantage lies in skilled labor–
intensive manufacturing. VN should fully
realize this potential by:
--Removing current barriers & problems
--Actively supporting such processes
Already successful (promote further)
Garment, footwear, electronic assembly, handicraft,
some furniture, pottery, frozen seafood, etc.
Also support other skilled-labor intensive processes
Software, agro processing, kitchen ware, household
goods, toys, etc.
However, support should be given generally without
specifying which firm or product should win:
--Information, marketing, management, procurement
--Technical transfer, training, quality standards, R&D
--Tax & tariff privileges, public investment, ODA (TA)
In addition, the following activities which support
the leading industries should also be promoted
(2) Hard supporting industries
Parts and intermediate materials for leading industries
However:
--100% domestic supply should not be aimed
--Natural promotion, not forced
(3) Soft supporting industries
(industrial services)
Design capacity, global marketing & procurement,
telecom, transportation, power, water, housing, etc.
--Initially assisted by the state, later by enterprises
themselves
(4) Industries to fulfill growing domestic
demand
Steel, chemicals, plastic, paper, cement, and other
material industries of import-substitution type
If they are all imported, it would be a burden on the
balance of payments
However:
--100% domestic supply should not be aimed
--Low cost and competitiveness must be achieved
under careful learning and gradual trade liberalization
4. How to Import
East Asian Dynamism
In the globalization age, industrial strategy
formulation must also include the following
three issues:
 Attracting a critical mass of FDI
 Building optimal regional linkage
 Breaking the “glass ceiling” (going
beyond Thailand)
Attracting a Critical Mass of FDI


FDI is the key for VN’s industrialization
VN’s FDI absorption is still too small to
ignite a full industrial transformation
Ex. Thailand & Malaysia in late 1980s
Main exports: Rice, tin, rubber  Electronics
Manuf. export ratios: 30-40%  70-80%

Agglomeration is necessary
One “Canon” effect is not enough; 50-100 FDI
firms need to be attracted in each sector
FDI Inflow into Vietnam
9
800
8
700
No. of projects
(right scale)
US$ billion
7
Approved
(left scale)
6
5
600
500
400
4
300
3
200
2
Implemented
(left scale)
1
100
0
Source: Ministry of Planning and Investment.
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
0
Japanese Electronics FDI in ASEAN
Cumulative number of manufacturing establishments
180
160
P arts & devices
140
Telecom & com puters
120
A udio & visual
100
80
60
40
20
0
M alaysia
Thailand Indonesia S ingapore P hilippines V ietnam
Source: Electronic Industries Association of Japan (2000), quoted by Yumiko Okamoto, "Electronics
and Electrical Industries,"in K. Ohno & N. Kawabata, eds, Industrialization Strategy of Vietnam ,
Nihon Hyoronsha (2003).
Agglomeration
Initial concentration has an
accelerating effect
Silicon
Valley
Fragmentation
PB: production block
SL: service link
International division of labor
in parts production & assembly
SL
PB
SL
PB
SL
PB
PB
SL
PB
SL
How to Participate in Asian Dynamism
Become a link in the regional production network by
agglomerating a particular process in Vietnam
--New products are always emerging (esp. electronics)
--MNCs are constantly looking for alternative location
Illustration
Vietnam
Parts
Assembly
Materials
Taiwan
R&D
Design
Japan
China
Parts
Marketing
Hong Kong
Thailand
Software
India
Japanese Firms: Choosing FDI Host Countries
China
Merits: Size, cheap & abundant labor,
engineering, material supply, etc
Demerits: policy & legal climate, lack of
IPR protection, energy shortage,
risk of concentration
ASEAN
Too costly:
Singapore
Malaysia
Thailand
Reliable but less
exciting
?
Too unstable:
Vietnam
Exciting but risky
Philippines
Indonesia
Myanmar
Survey on 606 Japanese MNCs
"Which Location Is Most Attractive?"
TOP FIVE ANSWERS
0
2
4
6
China (Central Coast)
China (Southern Coast)
Thailand
China (Northern Coast)
Vietnam
Source: Nikkei Newspaper and Japan Center for Economic Research,
September 2003. The scale is from 0 to 10.
8
Building Optimal Regional Links
While localization (agglomeration) is important, not
everything should be localized:
Internalize processes in which VN has
dynamic comparative advantage
 Outsource other things from the rest of Asia
If this choice is made incorrectly, VN will lose
competitiveness
VN is ideally located to become a bridge
between China & ASEAN (all Japanese
business men say so)

Breaking the “Glass Ceiling”
Technical
absorption
Agglomeration
STAGE ONE
Simple
manufacturing
under foreign
guidance
Vietnam
STAGE TWO
Have supporting
industries, but still
under foreign
guidance
Creativity
STAGE THREE
Technology &
management
mastered, can
produce high
quality goods
STAGE FOUR
Full capability in
innovation and
product design as
global leader
Japan, US, EU
Korea, Taiwan
Thailand, Malaysia
No ASEAN countries have broken through the
invisible barrier between Stage Two & Three.
Preparing to Go Beyond


While VN’s immediate goal is agglomeration
(Stage 2), it should also prepare for technical
absorption (Stage 3)
Vietnam can become the first country in
ASEAN to break through the barrier if its high
skilled labor is combined with
--Good government policy
--Good enterprise management
5. Overall Industrial Vision:
Suggested Contents
Historically, Japanese economists designed
industrial strategies along the following lines:
What is the
current global
situation?
What is the
domestic
situation?
Action plan A
What is our
position in the
world economy?
What are the
key national
goals?
Action plan B
Action plan C
Action plan D
Example:
Postwar Reconstruction Report
Saburo Okita et al, Postwar Reconstruction of the
Japanese Economy (MOFA, Sep.1946)
PART I
Chap 1: Basic Trends of the World Economy
Chap 2: International Environment of the
Japanese Economy
Chap 3: Peculiarities of the Japanese Economy
Chap 4: Conditions Newly Confronting the
Japanese Economy
Chap
Chap
Chap
Chap
1:
2:
3:
4:
Part II
Basic Problems of Economic Reconstruction
Guaranteeing the People’s Livelihood
Restructuring the Economy
Specific Problems of Economic Reconstruction
--Living standards and exports and imports
--Industrial structure in the future, which includes:
Textile, sundry goods, machinery, chemical, electricity, livestock,
fishery, shipping, tourism
--Future employment pattern
--Future national income
--Promotion of technology, etc.
For Vietnam 2020
Since VN faces far greater integration pressure
than Japan in 1946, even more external
considerations are necessary:
 East Asian dynamism & networks
 China, ASEAN rivals, WTO, FTAs, etc
 FDI dynamics
 Localization strategy
 Technical absorption
 How to join regional production network
Industrial Vision for Vietnam
(My Suggestion)
Part I: Analysis of the Current Situation
Chap 1: Global Review
Chap 2: Regional Review (China, ASEAN)
Chap 3: Vietnam’s Current Position
--Industrial achievements
--Position in regional network & global competition
--Vietnam as an FDI host
--Trade commitments
--Comparison with China & Thailand, etc
Part II: Industrial Strategy Up To 2020
Chap 4: Fundamental Strategy for Industrialization
Chap 5: Industrial Goals for 2020
Chap 6: Leading Industries and Supporting Industries
Chap 7: Reform of Industrial Policy Formulation
Chap 8: Linking Industrial Policy with Trade Policy
Chap 9: FDI Attraction and Promoting Parts Suppliers
Chap 10: Optimal Regional Linkage
Chap 11: Technical Transfer and Improving Domestic
Capability
Chap 12: Interim Roadmap
Japan’s New ODA Policy



Japan’s ODA Charter was revised in 2003
Japan’s Country Assistance Strategy for
Vietnam was also revised in 2003 by myself
and Mr. Mitsuru Kitano (Counselor, Japanese
Embassy in Hanoi)
Both were discussed intensively by the
Council of Comprehensive ODA Strategy
headed by Foreign Minister Kawaguchi
(of which I am a member)
New ODA Charter: Key Points

Dual Goals:
--Contribute to world peace & prosperity
--Pursue Japan’s national interest (security & economic)


Issues: poverty, growth, global issues, peace
Asia is the main area, but ODA should be given
selectively & in support of competitiveness &
regional integration



Policy dialogue with recipient country
Increased participation of stakeholders
Decentralization: more authority to embassy
ODA Strategy for VN: New Points





Drafted by Embassy (not Tokyo)
Support VN in (i) growth; (ii) social problems;
(iii) institution building
Enhanced sector studies—ODA for all sectors
but selectively within each sector
Future ODA volume will depend on policy
improvements, especially in trade & FDI
Policy dialogue with Vietnamese government
and other stakeholders will be strengthened.
Current Concern of Our Embassy
With respect to MOI:


Power sector is important for Japan’s ODA
Japan is deeply interested in the evolution of
motorbike and automobile policies
With respect to Japan’s ODA in general:



We are more interested in private sector
growth (domestic & FDI) than SOE reform
Japan’s ODA is conditional on policy
improvements (not to be taken for granted)
We will integrate policy dialogue, TA & loans
in our ODA to Vietnam
The End