A BRIEF DESCRIPTION OF THE “F LYING GEESE PARADIGM ”
The development model of East Asian economies, encompassing both first-tier and second-tier Newly Industrialized Economies (NIEs), aligns closely with the "flying geese paradigm" initially proposed by Akamatsu in the 1930s and later published in 1961 This section outlines the paradigm and demonstrates its relevance to Vietnam's economic growth over the past two decades, while also highlighting the inherent weaknesses and risks within Vietnam's economic framework.
5 First tier NIEs are South Korea, Taiwan, Singapore and Hong Kong; Second tier NIEs are Thailand, Indonesia, Malaysia and the Philippines
The East Asian catching-up process is effectively illustrated by a paradigm that assumes a hierarchical structure, where a dominant economy serves as the growth center for developing economies These follower nations strive for development by emulating the industries of advanced economies, adapting their approaches to align with their unique factors and technological capabilities As a result, these developing economies undergo three distinct stages of catching-up during their industrial development journey.
Exporting primary commodities while importing foreign goods and capital can initially provide benefits to domestic consumers through access to cheaper products However, this influx of affordable imports can adversely affect local producers, leading to economic challenges for them In response to the competition posed by foreign goods, local manufacturers are motivated to invest in technology and innovation to enhance their production capabilities and create similar products domestically.
Substituting imports: At this stage, local producers who acquire know-how and sufficient capital start producing import-substituted goods, and gradually drive foreign exporters out local market
Exporting: Local production increases further to extent that excessively produced goods to be exported
Figure 1 illustrates the sequence of industrial upgrading in a developing economy, beginning with the production of consumption goods followed by capital goods Initially, the economy focuses on crude commodities, including mining, unprocessed agricultural products, and basic consumption goods for domestic use and export, while relying on imports of complex commodities from advanced economies At time t1, the developing economy begins to produce some complex commodities by leveraging foreign technologies and capital, such as processed agricultural products and electronic items Concurrently, it starts manufacturing simple capital goods like mechanical equipment This industrial upgrading process mirrors the pattern shown in Figure 1, as local production gradually replaces imports, enabling the economy to export to more advanced markets by time t3 The transition to producing refined commodities, which necessitate core technologies and blueprinting capabilities, takes longer but follows a similar trajectory Ultimately, by advancing to technology-intensive production, the developing economy evolves into an advanced economy, ceasing the export of crude commodities and even importing them to facilitate the production of more complex and refined goods.
Figure 1: Sequence of industrial upgrading predicted by flying geese paradigm
The transition from importing goods to producing them domestically is heavily reliant on effective technology transfer However, the "flying geese" model proposed by Akamatsu and its supporters does not explicitly address the mechanisms involved in this technology transfer process.
The concept of "flying geese" suggests that competition from foreign exporters can motivate local producers to improve and innovate However, it is uncertain how local firms, already struggling due to import pressures, can navigate their challenging circumstances While imported goods may diversify consumer preferences and create new opportunities for local businesses, the intense competition can be so detrimental that it risks driving local firms out of the market entirely, leading to a monopoly of imported products This raises a critical question: if local firms are eliminated or the market is too small to support them, who will be left to pursue growth and opportunities within the local market?
Ozawa (1991) emphasizes the crucial role of transnational corporations (TNCs), especially Japanese firms, in facilitating technology transfer through foreign direct investment (FDI) He also highlights additional mechanisms that support inter-economy industrial relocation, including licensing, subcontracting, technical assistance contracts, turnkey operations, market agreements for improved access to leading markets, financial loans, and official economic aid, both financial and technical, aimed at infrastructure development.
Refined t 1 t 2 t 3 t 4 t industrial upgrading occurs along the correct inter-economy sequence, TNCs do facilitate the restructuring of the economies of home and host economies
Economic integration driven by transnational corporations (TNCs) fosters orderly progress among regional members and establishes a hierarchically organized division of industrial labor This collaboration allows economies to avoid an oversaturation in export-oriented production of limited product lines Foreign direct investment (FDI) from advanced economies enhances competitiveness by relocating less competitive industries to developing nations This strategic relocation not only revitalizes the advanced economies but also facilitates the transfer of essential technologies, thereby upgrading export-oriented industries in developing regions.
The "flying geese paradigm" illustrates the collective advancement of East Asian economies, emphasizing their synchronized catching-up process However, it lacks insight into how individual economies can progress relative to one another In this framework, each economy occupies a specific role within a production network led by a flagship firm from a more advanced economy, such as Japan, which controls essential technologies and marketing strategies Meanwhile, mid-level economies produce parts and components, while less developed nations like Vietnam focus on assembly and packaging This top-down industrial restructuring is driven by the leaders' need for internal improvements, resulting in followers losing their initiative in the process.
Figure 2: Orderly progress of the flock in a production network
It is worth noting that originally the “flying geese paradigm” that Akamatsu proposed for Japan’s policies to catch-up with western economies is a bottom-up process:
“the catching-up process is reflection of the follower economy’s development aspiration” As soon as this paradigm was exported out of Japan, contemporary theorists
(Japanese) advocated the top-down approach with Japan play the leading role in the region.
V IETNAM ’ S ECONOMIC PERFORMANCE SINCE D OIMOI
Overall view
Vietnam has experienced significant socio-economic advancements due to comprehensive economic reforms and international integration, coupled with the positive effects of robust growth in its major trading partners.
Between 1986 and 2008, GDP growth saw a significant increase, rising from approximately 3.6% in 1987 to a peak of 8.5% in 2007, before contracting to 6.18% in 2008 due to the impacts of the subprime crisis The annual average growth rate during this period was 6.95%.
The share of agriculture-forestry-fishery sector went down continuously from over 40.56 percent in 1986 to 17.93 percent in 2008 On the contrary, the share of the
The low-tech segment of the semi-final industry within the construction sector experienced a decline from 28.36 percent in 1986, reaching a low of 22.67 percent in 1989 However, it has shown a steady increase since then, rising to approximately 41.6 percent.
From 1986 to 2008, Vietnam experienced significant economic transformation, with the services sector increasing its share from 31.08% in 1986 to a peak of 44.06% in 1994, stabilizing around 40% thereafter The industry-construction sector demonstrated the fastest growth, with average annual growth rates of 3.8% for agriculture, 9.22% for industry, and 7.35% for services during this period Since the implementation of Doi Moi reforms, Vietnam has achieved high GDP growth rates and shifted its economic structure towards a more industry- and service-led economy, with the industry-construction sector acting as the primary driver of this growth and structural change.
Share of output by sector in GDP (%)
Source: Calculated from GSO 2008 and CEIC data base
From 1986 to 2008, Vietnam experienced significant trade expansion, with GDP growth largely driven by international trade This period marked Vietnam's increasing integration into the global economy, as both exports and imports grew impressively, with average annual growth rates of 19% for exports and 15% for imports Despite this growth, Vietnam faced a substantial trade deficit; in 1986, exports amounted to only 789.05 million USD compared to imports of 2.155 billion USD, and by 2008, the trade deficit had reached 16.619 billion USD (in 2005 prices).
Figure 4: Growth of GDP, export and import in real term
Real Export growth Real Import growth Real GDP growth
According to data from CEID and GSO 2008, which includes GDP growth and current USD figures for imports and exports, the author employs the US GDP deflator from the World Bank 2009 to determine the real growth rates of both imports and exports.
Figure 5: The coefficient of variation of growth of GDP and ex port
Vietnam Thailand Indonesia Malaysia S Korea
Source: Calculated from GSO 2008, CEIC Database for Vietnam and World bank 2009 for other countries
Between 1986 and 2006, Vietnam's economy exhibited a stable GDP growth despite significant volatility in its export and import activities Notably, from 1986 to 2008, the coefficient of variation for GDP growth was 0.26, while the coefficients for exports and imports were considerably higher at 0.88 and 1.1, respectively This indicates that while external trade figures fluctuated, the overall economic growth remained consistent.
During the same period, neighboring economies such as Thailand, Indonesia, Malaysia, and South Korea experienced significant fluctuations in export growth, with Indonesia and South Korea facing the most volatility In contrast, Vietnam exhibited even higher export volatility compared to Thailand and Malaysia Despite this, Vietnam's GDP growth remained notably more stable than that of its regional counterparts.
Before the 1997 Asian crisis, the economies of the region outperformed Vietnam in terms of growth and stability However, since emerging from the crisis in 1999, these economies have struggled to regain their previous growth rates and have experienced increased volatility In contrast, Vietnam's economy, which integrated more into the international market post-crisis, has achieved higher and more stable growth rates compared to the pre-crisis period This stability can be attributed to Vietnam's earlier stage of integration before 1997, which shielded it from the crisis's impacts Additionally, Vietnam capitalized on the regional recovery, leading to significant growth, as evidenced by the correlation between stability and economic growth in Table 1.
Table 1: GDP growth and its coefficient of variation in different periods
Periods Vietnam Thailand Indonesia Malaysia S Korea
Since the implementation of the Doimoi reforms, foreign capital has significantly influenced Vietnam's economy, with FDI growth closely mirroring GDP growth From 1991 to 1995, FDI saw an impressive annual growth rate exceeding 40%, while GDP grew over 8% per year However, the Asian financial crisis in 1997 led to a sharp decline in FDI, with growth plummeting from 4.3% in 1996 to -24.85% in 1998 and -2.8% in 1999, coinciding with a drop in GDP growth to 4.77% in 1999 Although FDI inflows began to recover between 2000 and 2003, the growth remained stagnant, with a modest increase of 1.18% in 2000 By 2004, the growth trend was still unclear, largely due to Vietnam's less attractive investment environment compared to neighboring countries, particularly China Despite the decline in implemented capital, the number of new FDI projects surged from 285 to 791 between 1998 and 2003.
Figure 6: Growth of real implemented FDI and GDP1991-2008.
FDI growth Real GDP growth
According to data from the General Statistics Office (GSO) and calculations based on the US GDP deflator (World Bank 2009), the article analyzes the relationship between Foreign Direct Investment (FDI) growth and GDP growth, with FDI growth represented on the left axis and GDP growth on the right axis.
Since 2004, FDI inflows into Vietnam started to go up The growth rate steadily increased from 4.65% in 2004 to 90.4% in 2007 and slightly slowed down to 41.34% in
Between 2004 and 2008, the number of new projects surged from 811 to 1,171, peaking at 1,544 in 2007 Correspondingly, total Foreign Direct Investment (FDI) registered capital experienced significant growth, escalating from over USD 4.5 billion in 2004 to USD 64.011 billion by 2008 This remarkable increase in FDI inflows can be largely attributed to the enhanced investment climate following revisions to the Foreign Investment Law, along with the government's decision to allow foreign investors into previously monopolized sectors such as electricity, insurance, banking, and communications.
Between 2004 and 2008, Vietnam intensified its efforts to attract both domestic and foreign investment The country's GDP growth rebounded significantly since 2000, peaking at 8.48% in 2007, before experiencing a decline to 6.15% in 2008 as a result of the subprime crisis.
A closer look
Between 1988 and 2008, East Asian economies were the primary contributors to Foreign Direct Investment (FDI) inflows into Vietnam, accounting for 65.08% of the total Notably, Japan, along with the first-tier Newly Industrialized Economies (NIEs) — Taiwan, South Korea, Singapore, and Hong Kong SAR — made substantial contributions, with shares of 10.61%, 12.81%, 10.19%, 10.43%, and 4.53%, respectively Additionally, Malaysia and Thailand, representing the second-tier NIEs, also played a significant role, with Malaysia's share matching that of Taiwan and South Korea at 11%.
This comparison focuses solely on the registered capital of foreign enterprises, disregarding the actual origin and implementation of that capital, which limits its informational value Due to data constraints, a comparison based on implemented capital is not feasible Consequently, the rankings would significantly differ if the true origins of the capital were considered A joint study by MPI/FIA and USAID/STAR in 2005 revealed that if the actual source of investment were taken into account, the United States would rank first, as much of its investment capital is funneled through third countries before arriving in Vietnam.
The majority of foreign direct investment (FDI) projects and registered capital are concentrated in the industry and construction sectors, which account for 68% of FDI projects and 65% of registered capital In contrast, the agriculture, forestry, and fishery sectors have attracted only 7% of FDI projects and 4% of registered capital, indicating a significant disadvantage in FDI attraction for these sectors.
Before the 2005 enactment of the Law on Investments and the Enterprise Law, foreign investors and foreign-invested enterprises were subject to different regulations than domestic investors and enterprises However, in 2005, these disparities were eliminated, leading to a unified regulatory framework where both foreign and national investors are governed by the Common Law on Investment and the Unified Enterprise Law.
Between 1988 and June 2006, US-related registered foreign direct investment (FDI) was found to be double the amount reported by the US, highlighting a significant discrepancy Despite its crucial contribution to Vietnam's socio-economic growth, the agricultural sector and its workers have benefited less from FDI compared to other sectors The services sector accounted for 25% of total projects and 31% of total registered capital However, this trend is anticipated to change dramatically as Vietnam prepares to liberalize its services sector in line with WTO commitments, leading to an influx of high-value and profitable FDI projects in the coming years.
Figure 7: Share of registered FDI by economies and region in the total: %
Hong Kong SAR, 4.53 China, 1.34 Japan, 10.61 S Korea, 10.19
Source: GSO in various issues
Foreign Invested Enterprises (FIEs) are playing an increasingly significant role in Vietnam's economy, with Foreign Direct Investment (FDI) rising from 18.0% of gross investment in 2000 to 29.8% in 2008 By 2008, FIEs employed 4% of the total workforce, contributing to over two-thirds of employment in the business sector when combined with domestic private firms Additionally, FIEs accounted for more than 40.2% of Vietnam's total industrial production and increased their share of the national budget revenues from 13.3% to 17.7% between 2000 and 2007.
Table 2 : Shares of FIEs in Vietnam’s employment, GDP, industrial production, and total investment
GDP (at 1994 prices) 10.82 10.85 10.86 11.18 11.56 12.07 12.75 13.26 13.53 Industrial output
Vietnam's import patterns mirror its foreign direct investment (FDI) trends, with East Asian countries serving as the primary import market From 1998 to 2008, East Asian economies accounted for 73.65% to 79.19% of Vietnam's total imports Throughout this period, ASEAN emerged as the largest market, with import shares ranging from 23.56% to 29.44%, significantly surpassing other regions, which held about 11% to 13% Notably, Japan, Taiwan, and South Korea also contributed over 10% each to Vietnam's imports.
Table 3: Shares of East Asian partners’ export in Vietnam import: percent of total
ASEAN 29.44 28.03 28.45 25.73 24.15 23.56 24.30 25.37 27.95 25.32 24.25 Taiwan 11.98 13.34 12.02 12.39 12.79 11.54 11.57 11.71 10.75 11.02 10.36 South Korea 12.36 12.65 11.21 11.63 11.54 10.40 10.51 9.78 8.71 8.50 8.75 Hong Kong 4.85 4.30 3.82 3.31 4.08 3.92 3.36 3.36 3.21 3.09 3.26 Japan 12.88 13.78 14.71 13.46 12.68 11.81 11.11 11.08 10.47 9.84 10.21 China 4.48 5.73 8.96 9.90 10.93 12.43 14.37 16.05 16.46 19.92 19.39 East Asia 75.98 77.83 79.19 76.42 76.18 73.65 75.22 77.35 77.55 77.69 76.23
* Euro zone here includes six main partners: Germany, France, Italy, Spain, Netherlands, and Belgium
Between 1998 and 2008, China's share of global trade surged from 4.48% to nearly 19.4%, significantly impacting the market presence of three East Asian economies and ASEAN nations Despite this shift, these economies still hold substantial portions of Vietnam's total imports.
Figure 8: Share of capital goods and its components in total imports
Share of Capital goods and its components in total imports
Machinery Instrument, assessory Fuels, raw materials
The salient characteristic of Vietnam’s import is the domination of capital goods
From 1986 to 1997, capital goods comprised a stable 85% of Vietnam's total imports, but post-crisis, this figure rose to over 90% This increase is largely attributed to the growing importation of fuels and raw materials, highlighting Vietnam's ongoing reliance on foreign inputs for production since 1986 Consequently, while Vietnam's economy has expanded superficially since the Doi Moi reforms, it has not developed a deeper capacity for domestic production Additionally, the data indicates that the majority of Vietnam's capital goods imports originate from East Asia.
From 1998 to 2008, the share of East Asian economies in Vietnam's total exports decreased from 55.45% to 43.48% During this period, ASEAN remained a vital market, accounting for approximately 16% of Vietnam's exports While South Korea, Taiwan, and China significantly exported to Vietnam, their share of Vietnam's exports was relatively small Fortunately, the decline in East Asia's export share was balanced by an increase in other regions.
US market Thanks to Vietnam-US bilateral trade agreement, which came into effect in
From 2001 to 2007, the United States' share of Vietnam's exports rose significantly from 5.06% to 20.8%, before experiencing a slight decline to 18.9% in 2008 In addition to the US, key export markets for Vietnam encompass Australia, The Netherlands, Germany, France, and the UK.
Table 4: Share of East Asian partners’ import in Vietnam’s export: percent of total
ASEAN 21.56 21.79 18.07 16.98 14.57 14.65 15.28 17.70 16.64 16.09 16.22 Taiwan 7.16 5.91 5.22 5.36 4.89 3.72 3.36 2.88 2.43 2.35 2.23 South Korea 2.45 2.77 2.43 2.70 2.81 2.44 2.30 2.05 2.12 2.58 2.84 Hong Kong 3.40 2.04 2.18 2.11 2.04 1.83 1.44 1.09 1.14 1.20 1.40 Japan 16.18 15.48 17.78 16.70 14.59 14.44 13.37 13.38 13.16 12.50 13.58 China 4.70 6.47 10.61 9.43 9.09 9.35 10.95 9.95 8.14 6.91 7.21
Between 1997 and 2008, Vietnam experienced a significant growth in the exports of manufacturing and semi-manufacturing, with their shares rising from 31.64% and 15.38% to 48.35% and 24.26%, respectively In contrast, the mining sector saw a drastic decline, dropping from 15.94% in 1997 to 1.61% in 1998, and stabilizing around 1.5% in subsequent years Additionally, the contributions of agriculture and services to non-oil exports also decreased during this period, indicating a loss of international competitiveness for Vietnam's services industry compared to its manufacturing sector.
Table 5 highlights the top 15 manufactured goods imported and exported by Vietnam, revealing that the country's primary exports consist of low-tech products, including apparel and metal goods While Vietnam does export some high-tech items, such as broadcasting machinery and electrical equipment, these products largely rely on imported components, limiting Vietnam's role to low-tech processes within the value chain Additionally, it's important to recognize that these key exports are also beneficial to neighboring economies like China, Thailand, and the Philippines.
Figure 9: Structure of non-oil exports 1987-2008
Structure of non-oil exports 1997-2008
Agriculture Mining Semi-Man Manufactured ServicesSource: GSO.
I S THERE ANY TECHNOLOGICAL IMPROVEMENT
Imported intermediaries
Figure 11 below shows that proportions of value-added to output of low-tech and high-tech products have been at low level: around 30 percent for low-tech products and
Between 1999 and 2007, the reliance of Vietnam's high-tech industry on imported inputs increased, with a significant decline in local value addition Currently, only 23% of high-tech products are produced domestically, reflecting a concerning trend of stagnation and deterioration over the past decade This situation underscores that Vietnam primarily manufactures low-tech components within the high-tech production chain, highlighting the need for improvement in local manufacturing capabilities and value creation.
Vietnam has not yet taken high-tech parts which give higher value-added
Figure 11: Proportion of value-added to output
Labor and capital income
Y =L w +K r +VC (1) be output of high-tech industries at time t; l l l l l l t t t t t t
Y =L w +K r +VC (2) be output of high-tech industries at time t
Where L, K, VC, w, and r are labor, capital, variable costs, wage and interest rate of capital used in production respectively; indexes h and l denote for high-tech and low-tech
High technology enhances the efficiency of inputs by boosting the productivity of both labor and capital It can be categorized into three distinct types: labor-augmenting, capital-augmenting, and Hicksian neutrality.
In empirics, the high-tech industries are characterized by:
- low rate of variable costs to output, i.e.: h l t t h l t t
- if high-tech industries are labor augmenting, share of labor income in output would be higher than that in low-tech ones: h h l l t t t t h l t t
- if high-tech industries are capital augmenting, share of capital income in output would be higher than that in low-tech ones: h h l l t t t t h l t t
- if high-tech industries are Hicksian neutrality both shares are better than the correspondents in low-tech industries
Table 6: Proportion of labor income and capital income in output (%)
Table 6 indicates that variable costs as a percentage of output are greater in high-tech industries compared to low-tech industries, suggesting that low-tech sectors utilize inputs more efficiently This raises questions about the authenticity of high-tech industries in Vietnam.
Since 1999, the shares of labor income and capital income have consistently declined in both groups of industries, indicating a lack of technological progress over the past decade.
Vietnam currently operates at a low-tech level in the production of high-tech products, primarily relying on labor and low-tech capital Unfortunately, this trend has deteriorated over the past decade.
Prices
Between 1999 and 2007, the prices of low-tech products surged by 150%, while high-tech product prices rose by only 126%, indicating a consistent decline in the relative prices of high-tech goods This trend can be attributed to rapid productivity improvements in high-tech industries on the international market If Vietnam's productivity growth lags behind global rates, its high-tech industries may experience unfavorable relative pricing, making investments in these sectors increasingly less profitable compared to low-tech industries Unfortunately, evidence suggests that this trend is already occurring within Vietnam's industrial landscape.
Total factor productivity
These reforms are anticipated to enhance Hicks-neutral productivity, which will be analyzed in the results section The model utilized for assessing Total Factor Productivity (TFP) growth and the production specifications will be detailed in the subsequent section.
An aggregate production function relates capital (K_t) and labor (L_t) to output (Y_t), with both factors being internally homogeneous and continuously substitutable This production function is characterized by its twice differentiable nature and linear homogeneity, ensuring consistent scalability in output relative to input changes.
Y = A F K L (1) where Qt, Kt, Lt are the level of output, capital stock and employed labour respectively, and At is level of technology at time t F(.) is homogeneous degree one
Ravankar (1971) and Bairam (1989) suggest the production function
Y = A K L a - e b (2) is defined as substitution parameter
This study utilizes the specification outlined by Bairam (1989) to effectively estimate the production function of Japan's economy during its industrialization from 1878 to 1939 Similarly, Vietnam commenced its industrialization process in 1986, prompting the application of this specification to assess Vietnam's production function from 1986 to 2007.
If b = 0, the production function is a Cobb-Douglass form, if b ạ 0, the production function is a variable elasticity of substitution (VES) one
This study posits that Total Factor Productivity (TFP) growth is influenced by learning-by-doing and other external factors The learning-by-doing concept was first introduced into macroeconomic modeling by Arrow in 1962, suggesting that technical change is not solely time-dependent but evolves from the experience gained during production The model mathematically represents this by indicating that a labor efficiency index for workers of a specific vintage increases with cumulative output or gross investment.
A = A E q (3) where A 0 is the initial level of technology E t is the index of experience at time t and 0 q > is the learning coefficient
Arrow (1962) posits that cumulative gross investment (E t = SI t) serves as a better index of experience compared to cumulative output (E t = SQ t), as supported by studies from Bairam (1987) and Stokey and Lucas (1989) He argues that the introduction of new machines more effectively stimulates innovation than cumulative output does This study utilizes both measures as proxies for experience, acknowledging that technological progress arises not solely from learning-by-doing, but also from various exogenous factors The technological change index, A t, is defined accordingly.
A = A e E l q (4) where l is Hicks-neutral rate of exogenous technological change which is a function of time
In summing up, the VES production function in which technological progress is partly exogenous and partly the result of learning-by-doing can be presented by
According to the VES model developed by Nguyen Tu Anh and Nguyen Thu Thuy in 2009, analysis of data from CEIC indicates that Vietnam's economic growth from 1986 to 2008 was primarily fueled by substantial capital accumulation Additionally, the study found no significant evidence of learning-by-doing effectiveness in Vietnam during the period from 1986 to 2007, with total factor productivity (TFP) making only a minimal contribution to overall economic growth throughout this timeframe.
Table 7: Contribution to economic growth 1986-2007 (%)
Year GDP Growth Capital Labour TFP
Vietnam's growth trajectory mirrors that of the Newly Industrialized Economies (NIEs) from 1965 to 1986, characterized by forced savings, investment, and long working hours, as noted by Krugman (1997) He expressed a pessimistic view, suggesting that the absence of technical progress would limit growth due to diminishing returns on capital accumulation However, this should be seen as a caution rather than a cause for concern, as Total Factor Productivity (TFP) contributed little to NIEs' growth until 1986, after which Lau and Park (2003) identified a positive impact of TFP on these economies Collins and Bosworth (1996) argued that a country's development stage influences its ability to adopt foreign knowledge and technology, with early growth primarily driven by capital accumulation and significant growth potential emerging only after reaching a certain development threshold Cuong Le Van et al (2010) highlighted that in a developing country with three sectors—consumption goods, new technology, and education—the productivity of consumption goods relies on new technology and skilled labor Initially, the focus is on producing consumption goods, followed by the necessity to import physical and technological capital, and ultimately investing in high-skilled labor training and education.
Vietnam is currently in the early stages of its development process, with a minimal contribution of Total Factor Productivity (TFP) to economic growth However, to ensure sustainable growth in the long term, Vietnam must reverse this trend Lessons from Newly Industrialized Economies (NIEs) highlight that achieving this reversal necessitates significant improvements in human capital and advancements in research and development (R&D) capabilities.
Remarks
In general, Viet Nam is following a similar economic pattern experienced by other East Asian economies, “flying geese”, but still is at an earlier stage of regional integration
East Asian economies initially experienced growth through the export of labor-intensive products; however, they have progressively shifted towards capital and technology-intensive goods Currently, Vietnam's manufacturing exports primarily focus on labor-intensive items, including textiles, garments, footwear, and furniture, which contribute low value added within the production value chains.
East Asia has emerged as the largest source of capital goods imports for Vietnam's industrial production; however, it does not serve as the primary market for Vietnam's exports, with most final products being directed to extra-regional markets The increasing significance of the EU and the US as major destinations for Vietnamese exports is evident, while China has become a vital trade partner, particularly for intermediate goods and components Despite this growing partnership, the trade relationship with China exhibits a "North-South" dynamic, resulting in a substantial trade deficit for Vietnam.
- Thirdly, Vietnam’s industry has move slowly towards higher step on technology ladder However, this movement is not a real one and characterized by followings:
Proportions of value-added to output in both high-tech and low-tech industries steadily decline; high-tech industries decline faster
The lack of supporting industries in Vietnam leads to a low value-added output across various sectors This situation is exacerbated by the country's heavy reliance on imported machinery, instruments, and accessories, as well as a growing dependence on imported intermediates.
Value-added in high-tech industries primarily originates from the low-tech stages of the production chain Despite this, Vietnam has yet to engage in the production of high-tech products Over the past two decades, there has been no significant technological advancement in the country Instead of enhancing productivity and technological capabilities, Vietnam's economy has expanded by increasing investments in physical capital.
C AUSALITY BETWEEN FOREIGN CAPITAL , EXPORTS AND GDP
Recent studies on Vietnam's economic growth often assume a direct link between foreign capital, exports, and GDP growth, yet lack clear evidence to support this claim The relationship between these variables is not strictly unidirectional; causality may also flow from GDP to foreign direct investment (FDI) and exports Empirical literature indicates that causality relationships can differ based on the time period analyzed, econometric methods applied, variable treatment (nominal versus real), and whether one-way or two-way causality is considered Consequently, findings may reveal bidirectional, unidirectional, or no causal relationships at all.
Research has demonstrated varying causal relationships between GDP, exports, and foreign direct investment (FDI) across different countries Liu, Burridge, and Sinclair (2002) identified bidirectional causality among real GDP, real exports, and real FDI in China from 1981 to 1997 In Thailand, Kohpaiboon (2003) found a unidirectional causality from FDI to GDP under an export promotion regime, based on data from 1970 to 1999 Similarly, Alici and Ucal (2003) reported a unidirectional causality from exports to output in Turkey between 1987 and 2002 Additionally, Dritsaki, Dritsaki, and Adamopoulos (2004) revealed bidirectional causality between real GDP and real exports in Greece, along with unidirectional causalities from FDI to real exports and FDI to real GDP, using annual IMF data.
1960 to 2002; in addition, Ahmad et al (2004) found unidirectional causalities from exports to GDP and FDI to GDP for Pakistan using undeflated annual data from 1972 to
Research by Cuadros et al (2004) indicates unidirectional causal relationships from real Foreign Direct Investment (FDI) and real exports to real GDP in Mexico and Argentina, while in Brazil, real GDP influences real exports Chowdhury and Mavrotas (2006) found that in Chile, GDP drives FDI, whereas Malaysia and Thailand exhibit bidirectional causality between these two variables Additionally, Nair-Reichert and Weinhold (2000) concluded through Holtz-Eakin causality tests that FDI, rather than exports, is a significant driver of GDP in 24 developing countries from 1971 to 1995, utilizing mixed, fixed, and random effects models.
Thus, it is very important that the assumptions, the treatment of variables, the sample period, estimation models and methods should be clearly indicated in the analysis
In any case, the general results appear to show the positive relation from FDI and exports
(or trade) to GDP, and that the above brief survey also seems to indicate that there may be some interesting causality relations among exports, FDI, and GDP
This section analyzes the causal relationships between three key variables in the Vietnamese economy—GDP, foreign capital, and exports—during the period from 1988 to 2008 The data utilized for this analysis is sourced from the CEIC database and the General Statistics Office (GSO) of Vietnam, with figures expressed in Vietnamese Dong and adjusted to 1994 prices.
The econometric technique involves converting all real variable values into their logarithmic forms, represented as gdp, ex, and fdi for the logarithm of GDP, exports, and foreign capital, respectively This transformation significantly reduces fluctuations in the variables Additionally, the technique requires calculating the first difference between consecutive logarithmic values, which reflect the continuous growth rates of the variables, denoted as dgdp, dex, and dfdi in this study.
This section outlines the procedures for analyzing Granger causality relationships among exports, foreign capital, and GDP using time-series data for each economy Initially, we conduct a unit root test to assess the stationarity of each series If necessary, we follow up with a cointegration test to examine the relationships among the three series Depending on the characteristics of the time-series data, we choose either the level series or the first-difference series for estimating a vector auto-regression (VAR) model to perform the Granger causality test.
Unit root and Cointegration tests
The Dickey-Fuller (DF) and augmented Dickey-Fuller (ADF) tests are the most widely utilized unit root tests in time-series analysis Due to the need for asymptotic approximation of critical values for small sample sizes, MacKinnon (1996) employed simulation methods to derive test p-values for datasets with 20 observations This study, with 21 observations, adopts MacKinnon’s p-values for conducting the DF or ADF unit root tests Although these tests are prevalent, alternative tests like the DF-GLS test offer greater power in rejecting the null hypothesis of a unit root, yet their application is limited by the requirement of a minimum of 50 observations.
Table 8 presents the results from ADF unit root tests for level series and first- deference series
Table 8: ADF unit root tests for level series and first-deference series
Null Hypothesis: has a unit root
Level series First difference series Series k t-statistics (p-value) k t-statistics (p-value) gdp 2 -0.8597 (0.7782) fdi 1 -9.8535 (0.000)* ex 1 -0.888576 (0.7703) dgdp 2 -2.9 (0.065)*** dfdi 1 -4.77 (0.0014)* dex 1 -5.33 (0.0004)*
represent rejection of the null hypothesis at the 1%, 5%, and 10% significance levels, respectively.
In Table 8, the left column indicates that while foreign direct investment (FDI) is a stationary series, both exports (EX) and GDP are non-stationary This non-stationarity prevents the use of level series for regression estimations in causality analysis Conversely, the right column of Table 10 shows that all first-differenced series are stationary, allowing for appropriate regression analysis.
Table 9: Johansen cointegration test summary
Unrestricted Cointegration Rank Test (Trace)
No of CE(s) Eigenvalue Statistic Critical Value Prob.**
Trace test indicates 2 cointegrating eqn(s) at the 0.05 level
* denotes rejection of the hypothesis at the 0.05 level
Unrestricted Cointegration Rank Test (Maximum Eigenvalue)
No of CE(s) Eigenvalue Statistic Critical Value Prob.**
Max-eigenvalue test indicates 2 cointegrating eqn(s) at the 0.05 level
* denotes rejection of the hypothesis at the 0.05 level
Table 9 presents the findings from the Johansen cointegration test, revealing that the level series of ex, FDI, and GDP are cointegrated according to both the trace test and the maximum eigenvalue test Consequently, based on the outcomes of the unit root and cointegration tests, we opted to utilize the first-difference series for estimating the VAR model in the causality test for Vietnam.
The VAR model and Granger causality test
In the VAR(p) model, we incorporate multiple variables such as dex, dfdi, and dgdp to analyze the interactions among their p-lagged values while testing Granger causality relationships This model requires the estimation of a system of equations that captures these dynamics effectively.
1 1 2 2 t t t p t p t y =à+ Λ y − + Λ y − + + Λ y − +ε (6) where y t is a (3 x 1) column vector of the endogenous variables, i.e.,
( , , ) t t t t y = dgdp dfdi dex ′, à t is a (3 x 1) constant vector, p the order of lags, each of
In this study, we analyze a (3 x 3) coefficient matrix represented as 1, 2, , p, where each lagged endogenous variable y t − 1, y t − 2, ,y t p − is structured as a (3 x 1) vector The random error terms are denoted by ε t, also a (3 x 1) vector To determine the optimal lag length p for the Vector Autoregression (VAR) model, we utilize the minimum Akaike Information Criterion (AIC), setting a maximum lag of 3 due to the limited observation count of only 20 Our findings indicate that the optimal lag length for this analysis is 3.
Table 10 displays the estimated VAR models along with the results from the Granger causality test The examination of Granger causality relationships is conducted through the Wald test of coefficients (F-test), with each null hypothesis detailed in the table's footnotes.
Table 10 reveals a strong unidirectional causality from foreign capital to exports and from foreign capital to GDP, both significant at the 5% level, while a weaker unidirectional causality from exports to GDP is noted at the 10% level These relationships highlight the interconnectedness of exports and foreign capital inflows in driving GDP growth, supporting the theories of export-led growth and FDI-led growth in Vietnam.
The relationship between foreign direct investment (FDI) and export performance in Vietnam is independent, indicating that FDI does not drive exports and vice versa This suggests that FDI inflows are primarily aimed at tapping into the domestic market rather than facilitating access to foreign markets, supporting the hypothesis that "FDI does not enhance exports." Meanwhile, Vietnam has experienced significant growth in exports over recent years.
20 years have not been promotive factor for FDI inflow
Table 10: Vector Autoregression Estimates VAR (3) and Wald test of coefficient causality direction
Coefficient Endogenous variables Dgdp Dfdi Dex c1 DFDI(-1) -0.00877 0.4458 -0.029 t statistics -0.7255 1.12 -0.224 c2 DFDI(-2) -0.0136 0.054 0.09 t statistics 2.723 0.33 1.68 c3 DFDI(-3) 0.0075 0.007 -0.04 t statistics -1.928 0.055 -0.97 c4 DEX(-1) 0.125 -0.1753 0.054 t statistics 2.698 -0.115 0.108 c5 DEX(-2) -0.0652 -0.572 -0.597 t statistics -1.788 -0.477 -1.52 c6 DEX(-3) 0.0021 -0.16 -0.34 t statistics 0.093 -0.213 -1.38 c7 DGDP(-1) 0.0442 -3.08 0.073 t statistics 0.095 -0.2 0.0145 c8 DGDP(-2) 0.757 10.6 4.533 t statistics 1.79 0.76 0.999 c9 DGDP(-3) -0.82 -8.345 1.82 t statistics -2.223 0.688 0.46 c C 0.063 0.268 -0.15 t statistics 2.54 0.33 -0.56
Notes:(1) The p-values are in the parentheses (2) In Wald test of coefficients, for VAR(3), the null hypothesis A is c1=0, B is c4 =0, and C is c7 =0, respectively (3)*,
**, ***, denote rejection of null hypothesis at the 1%, 5%, 10%, level of significance, respectively
C ONSTRAINTS IN TECHNOLOGICAL ACQUISITION
Economies with limited resources for research and development, such as highly educated human capital and a strong industrial foundation, struggle to generate technology Typically, new technologies are first developed in advanced economies and then tailored to meet local consumer preferences, often resulting in inelastic pricing due to monopolistic conditions and a lack of standardization Once these products mature in the domestic market, they are exported to economies with similar income levels and consumer tastes, leading to increased competition as rivals seek to capitalize on super profits As competition intensifies, the original inventing firm must standardize its products and shift parts of the production process to importing countries to reduce costs and maintain competitiveness This is when less developed economies, like Vietnam, can potentially acquire technology However, due to the emphasis on standardization, marketing costs become a significant factor, and less developed economies often struggle to compete with their developed counterparts due to inadequate distribution networks and market relationships, even if they manage to obtain and absorb the technology.
Technological transfer through Foreign Direct Investment (FDI) by Transnational Corporations (TNCs) is not an automatic process, as empirical studies indicate that productivity spillovers from FDI often yield limited positive effects Research by Hill and Athukorala (1998) suggests that these spillovers are positively linked to competition while being negatively impacted by the productivity gap between foreign and domestic firms; a significant gap can hinder domestic firms' ability to absorb new technologies effectively.
The growing complexity of technology has made its acquisition increasingly challenging, characterized by higher start-up costs, intricate know-how requirements, and a steeper learning curve that demands greater specialization Additionally, transnational corporations (TNCs) often hesitate to transfer technology, while exporting countries may face pressure to impose trade barriers to safeguard their declining industries, a practice known as "senile industry protection."
P OLICY RECOMMENDATION
Vietnam, with its limited resources, must establish a strategic integration roadmap while actively supporting ASEAN integration and the realization of the ASEAN Economic Community (AEC) and East Asian cooperation However, it is crucial for Vietnam not to confine itself to regional production networks, as competition from firms in developed economies is essential for accessing necessary technologies Therefore, Vietnam's foreign direct investment (FDI) policy should adopt a global perspective, prioritizing partnerships with advanced economies such as the United States, EU, and Russia, which excel in investment, technology transfer, and human resource development Furthermore, bilateral cooperation should extend beyond mere economic and trade agreements.
Vietnam must strategically position itself to capitalize on the rapid growth of China and integrate into the regional production network, thereby avoiding the pitfalls of the "low-cost labor trap." The country has several opportunities to engage in mutually beneficial partnerships with China, leveraging its vast and expanding market Additionally, foreign investors are optimistic about Vietnam's growth potential, making it an attractive destination for investment.
For over two decades, Vietnam has experienced significant economic growth and capital accumulation However, the underdeveloped financial sector and limited financial asset options have led to capital being funneled into speculative markets like real estate and stocks To effectively utilize this accumulated capital, it is essential to accelerate financial development and enhance transparency in the real estate sector, which will help reduce speculation and redirect funds toward more productive activities and research and development (R&D).
Educational and R&D activities should closely link with business sector
To address the challenges of core technology and marketing networks, Vietnam should consider acquiring select transnational corporations (TNCs) in the long term In the medium term, it is essential for Vietnam to foster an environment that encourages entrepreneurs to build capital in pursuit of this goal.
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