Clustering: a strategy to increase FDI in Viet Nam

FDI Troubles

Foreign investment strategies need review and investment parks in Viet Nam are under-performing according to the news in 2012. These trends challenge the government of Viet Nam:

• Steep decline in Foreign Direct Investment (FDI) for 2012.
• Inability to meet targets for reinvestment as a set percentage of the revenues of foreign companies into local Research and Development (R&D).
• Low investment in high-technology fields.
• Legacy technology companies displace targeted high-technology companies.

R&D Spending (% of GDP, Last Available Year)
Viet Nam in the Lowest Tier
Source: World Bank and Financial Times

Government Recognizes the Problem

The Minster of Planning and Development, Bui Quang Vinh, said at a recent VIR workshop,

“Our adjusted policy and incentives must match our target of attracting high quality FDI [into Vietnam].”

Nguyen Van Lang, MoST deputy minister, told the same audience that current policies for attracting FDI were “inadequate”. This was particularly true in the high-tech sphere. The government needs to act, he said,

“It’s time to review and reassess incentives and regulations on high-tech investments”

Clustering

Harvard Business School Professor Michael E. Porter, an expert on competition and global competitive advantages, has long advocated the power of “clustering.”

You may be familiar with or are working on “clustering” to raise FDI levels, increase domestic R&D expenditures, and attract knowledge-based companies.

I’ve researched “clustering” and work with knowledge-based companies that benefit from clustering.

Here are some key points from some pertinent scholarship. The source articles are cited at the end of this post.

Clusters Defined

Clusters are concentrations of highly specialized skills and knowledge, institutions, rivals, related businesses, and sophisticated customers in a particular nation or region. Proximity in geographic, cultural, and institutional terms allows special access, special relationships, better information, powerful incentives, and other advantages in productivity and productivity growth that are difficult to tap from a distance.

Impact on a Knowledge-based Economy

[N]ew influences of clusters on competition have taken on growing importance in an increasingly complex, knowledge-based, and dynamic economy.

Roles of the Players

Clusters represent a new way of thinking about national, state, and local economies, and they necessitate new roles for companies, for various levels of government, and for other institutions in enhancing competitiveness.

Attracting FDI and Export Trade

Clusters are a driving force in increasing exports and are magnets for attracting foreign investment. Clusters also represent an important forum in which new types of dialogue can and must take place among companies, government agencies, and institutions such as schools, universities, and public utilities.

 Clustering is not the same as a National Industrial Policy

A role for government cluster development and upgrading should not be confused with the notion of industrial policy. … Industrial policy tends to centralize intervention decisions at the national level. … Cluster theory could hardly be more different. The concept of clusters rests on a broader and dynamic view of competition among firms and locations, based on the growth of productivity.

Clustering and Employment

We find that clusters contribute to the level of employment in young start-ups in regional industries, suggesting that a strong cluster environment in a region enhances the performance of start-ups.

Quotations taken from:

Delgado, Mercedes, Michael E. Porter, and Scott Stern. “Clusters and Entrepreneurship.” Journal of Economic Geography; 10.4 (2010) : 495 -518.

Porter, Michael E. “Location, Competition, and Economic Development: Local Clusters in a Global Economy.”

Economic Development Quarterly 2000; 14; 15 DOI: 10.1177/089124240001400105

Conclusion

Clusters could be a driver to reach and exceed the govenment’s FDI targets and development goals. Government policy appears to move in that direction, as provincial authorities get more power to manage foreign investments. Whether the government understands the power of clustering is an open question.

Viet Nam: New Growth Path and New Investment Partners

The economies of Thailand, Laos, Cambodia, and Viet Nam are growing. The global market needs and will get their low-cost and undeveloped resources of raw materials  and labor. As a result, their growth rate will be greater than China’s in the near-term.

Their economic potential has been long recognized and was a key in mission planning during World War 2. The Japanese attempted to develop the region’s resources to rescue its war production devastated by America’s destruction of Japan’s merchant marine supply lines. The Allies prevented the Japanese from unlocking the region’s resources by bombing rail connections throughout Viet Nam and near Hanoi and feigning an intention to invade Indochina that tied-down Japanese military forces and precipitated a diverting and crippling famine in Viet Nam that took more Vietnamese lives than were lost by North and South Viet Nam during the American War.

China today knows the region is resource rich and development poor. China sees Southeast Asia as a raw materials storehouse and outlet for its goods manufactured in SW China.

The region has gained international voice through Association of South-East Asian Nations (ASEAN) and financial advice through the Asian Development Bank (ADB).

The region’s countries welcome the growth needed to meet the demands of their growing populations. What development track should each country use? The answer to that question will depend on the country’s history, culture, and politics.

Viet Nam has three development path choices in its post-colonial, post-Soviet era, to use the categorizes identified by Daniel Altman of the Dalberg Global Development Advisors, which are to:

• Develop on its own, a slow and problematic process.
• Accept aid from international organizations that impose conditions and require transparency.
• Allow foreign nations, the new colonialists, to invest in sectors congruent with the foreign states’ economic plans.

Viet Nam pursued North Korea’s self-development path after reunification in 1975. Growth was too slow and would not support Viet Nam’s growing population.

The Sixth Party Congress of the Communist Party of Viet Nam adopted a change in development policy in December 1986, now known as Đổi Mới (renovation). Viet Nam opened both  to international aid organizations and to foreign investors. The CPVN moved from a planned economy to a “socialist-oriented market economy.”

Viet Nam is well on its way to getting development aid from international sources. Vietnam is an engaged participant in ASEAN, the ADB, and the World Bank. Viet Nam became the WTO’s 150th member on January 11, 2007. Viet Nam has an exemplary record for meeting its commitments under international treaties.

China's Rail Links in SE Asia from The Economist

China meanwhile realizes Viet Nam’s potential as part of China’s development plans. China is underwriting the costs of a new railway network in Southeast Asia to connect the region and China’s factories in the Kunming area. China persuaded Viet Nam’s leadership to develop Viet Nam’s bauxite resources needed for China, despite the daunting burden placed on Viet Nam’s electrical supply, the ecological costs, and the use of Chinese labor in the project.

The leaders of Viet Nam know their history with China and their people’s ambivalent attitudes toward China and its marketing practices. China’s economic strength makes it the largest new colonial power in the world.

An eight-fold increase in the trade deficit with China since 2002 to US$12.7 billion raised tensions, exacerbated by the increased smuggling of unauthorized Chinese goods into Viet Nam and their associated health and safety problems. China has built up military forces to enforce its territorial claims over Viet Nam’s Paracel and Spratly islands possessions in the South China Sea, which the Vietnamese call the East Sea. Chinese companies investing in Viet Nam import not only capital , equipment, and top-tier managers, but also front-line workers. China brings into Viet Nam both needed investment and unwanted problems.

The leaders and people of Viet Nam want American investment, and are willing to offer attractive terms for that investment. America has an outsized say in the world’s international development organizations. America’s political and economic interests in Southeast Asia act as a counterbalance to China’s.

I asked a manager at Vietsovpetro, the joint Viet Nam – Russia deep-sea petroleum extraction company, “Why do you continue this partnership when Viet Nam can go it alone?” He replied, “A Chinese fighter pilot  will think twice before firing on an oil platform manned with Russian workers.”

Viet Nam wants American investment and American people in Viet Nam for economic, political, and cultural reasons. The opportunity and rewards are there.