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A stronger link needed between foreign and Vietnamese firms    
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A stronger link needed between foreign and Vietnamese firms Manufacturing activity at Sumitomo Wiring System
May 23 2018

For the past 30 years, foreign-invested enterprises have been a major driver of Vietnam’s growth by creating more jobs, and boosting manufacturing and exports but the expectation of closer links with and support for domestic enterprises to grow and take part in global supply chains has yet to be realised.

Weak link

Vietnam has failed to take full advantage of the flow of foreign direct investment (FDI) capital when the connection between foreign and domestic enterprises is weak and the spillover effect in technology and productivity from foreign to domestic companies is fairly limited. This weak link is reflected first and foremost in the fact that four out of five FDI enterprises are wholly foreign-owned.

A survey by the Vietnam Chamber of Commerce and Industry (VCCI) shows that just 14% of private domestic companies have FDI enterprises operating in Vietnam as their partners. Only 27% of the inputs for the foreign sector are purchased in Vietnam, of which a significant proportion comes from other FDI enterprises. In particular, high-tech enterprises which are expected to bring about significant advances for domestic enterprises also tend to import inputs from their home countries, rather than from Vietnamese suppliers.

Former Minister of Planning and Investment Bui Quang Vinh stated that what Vietnam expects from foreign enterprises is that they forge a link with domestic private enterprises to boost this sector through the manufacturing of parts for the main products, which is anticipated to help Vietnamese enterprises gradually master technology, participate in global supply chains and increase the value of Vietnamese products.

As such, it is disappointing that Vietnam has yet to achieve that goal and this is the fundamental issue that needs to be dealt with in the time ahead, the former minister emphasised.

Tightening investment rules

Former Minister Vinh said that it is now time for Vietnam to tighten its foreign investment regulations in order to achieve the set goals, noting that sanctions which are strong enough are needed to oblige FDI enterprises to meet domestic content requirements and form partnerships with domestic parts suppliers.

According to some experts, the lack of connection between Vietnamese and foreign enterprises is primarily attributed to the capacity of domestic enterprises, whose products do not meet the required management and quality standards.

Therefore it is necessary to enhance the quality of the workforce, who need to be equipped with new technologies and management procedures. This task requires the government’s leadership on a range of issues, including the earmarking of greater resources to improve vocational training, connecting training with practical technological development, and encouraging investment in vocational training.

In addition, ground-breaking measures are needed to narrow the technological gap between domestic and foreign enterprises, such as offering technological consultancy services, and using tax preferences to encourage investment in high-tech industries. But government support alone is not enough. Domestic enterprises themselves also have to work hard to improve their competitiveness and meet the requirements of FDI enterprises.

Head of the VCCI’s legal department Dau Anh Tuan suggested strengthening the geographical connection between FDI and domestic enterprises. The concentration of FDI enterprises in dedicated industrial zones could enhance short-term manufacturing and exports but restrict the spillover effect for domestic private enterprises.

Research by the VCCI shows that geographical distance has a major effect on the connection between the two sectors. Therefore, the geographical connection with domestic private small and medium-sizes enterprises should be taken into consideration when designing dedicated zones for the foreign-invested sector. - NDO