Vietnam’s Competitiveness and the Role of the Private Sector Professor Michael E Porter Harvard Business School Ho Chi Minh, Vietnam December 1, 2008 This presentation draws on ideas from Professor Porter’s books and articles, in particular, Competitive Strategy (The Free Press, 1980); Competitive Advantage (The Free Press, 1985); “What is Strategy?” (Harvard Business Review, Nov/Dec 1996); “Strategy and the Internet” (Harvard Business Review, March 2001); and a forthcoming book No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Michael E Porter Additional information may be found at the website of the Institute for Strategy and Competitiveness, www.isc.hbs.edu Version: November 18, 2008, 3pm 20081201 – PACE strategy.ppt Copyright 2007 © Professor Michael E Porter The Need For An Economic Strategy • Vietnam has experienced an impressive growth over the last two decades • However, reforms so far are insufficient to move Vietnam to a middle income economy • The next several years will determine whether Vietnam will follow the experience of Korea, or the Philippines • Vietnam’s reform have been piecemeal and reactive • Improving Vietnam’s standard of living will require a long term economic strategy – A set of interrelated policy changes, institutional structures, and rigorous implementation mechanisms 20081201 – PACE strategy.ppt Copyright 2007 © Professor Michael E Porter Agenda • Understanding Vietnam’s Economic Performance • Assessing Vietnamese Competitiveness • Identifying Action Priorities • Organizing for Competitiveness • Creating an Economic Strategy • Integrating Corporate Social Responsibility 20081201 – PACE strategy.ppt Copyright 2007 © Professor Michael E Porter Prosperity Performance Selected Countries PPP-adjusted GDP per Capita, 2007 $45,000 USA Ireland Singapore Switzerland Iceland Netherlands Canada Australia Austria Sweden Finland UK Germany Taiwan Japan France Bahrain Italy Spain Greece $40,000 $35,000 $30,000 New Zealand $25,000 Portugal $20,000 Israel Hong Kong Slovenia Korea Czech Republic Saudi Arabia Estonia Slovakia Hungary Lithuania $15,000 Croatia Mexico $10,000 Malaysia Poland Chile Costa Rica South Africa Turkey Thailand Colombia Egypt Indonesia Sri Lanka Philippines Pakistan Nigeria Bangladesh Latvia Russia Argentina Romania Brazil $5,000 $0 0% 2% 4% 6% Vietnam China India Cambodia 8% 10% 12% Growth of Real GDP per Capita (PPP-adjusted), CAGR, 2003-2007 Source: EIU (2008), authors calculations 20081201 – PACE strategy.ppt Copyright 2007 © Professor Michael E Porter Labor Force Utilization Labor Force Participation Rate, 2007 65% Participation Rates, Selected Countries Singapore (6.16%) China 60% 55% 50% Brazil 45% Colombia 40% Sri Lanka Iceland Norway Thailand Hong Kong Canada Australia Portugal Sweden Russia Japan New Zealand Germany Czech Rep Latvia USA UK Finland South Korea Spain Slovakia Lithuania Taiwan Indonesia Slovenia India France Bangladesh Poland Romania Chile Austria Hungary Italy Mexico Argentina Malaysia Vietnam Ireland Philippines Nicaragua Morocco 35% Bulgaria Turkey Pakistan 30% -3% -2% -1% 0% 1% 2% 3% Change in Labor Force Participation Rate, 2003-2007 4% 5% 6% Source: Economist Intelligence Unit (2008) 20081201 – PACE strategy.ppt Copyright 2007 © Professor Michael E Porter Comparative Labor Productivity GDP per employee (PPP adjusted US$), 2007 Selected Countries USA Hong Kong Ireland France Finland UK Sweden Denmark Singapore Taiwan Japan Iceland Germany Israel Switzerland South Korea Spain Greece Slovenia New Zealand Norway Australia Canada Italy Austria Chile Saudi Arabia Portugal Estonia Slovakia Latvia Malaysia Lithuania Turkey Czech Republic Croatia Hungary Kazakhstan Mexico Colombia Costa Rica Russia Syria Bulgaria Tunisia Thailand Sri Lanka Iran Peru Egypt South Africa Ecuador Ukraine Brazil Indonesia Yemen Pakistan Philippines Dominican Republic India Nigeria Cambodia Cote d’Ivoire Senegal Bangladesh Kenya Ethiopia Ghana Argentina Poland Venezuela Belarus China Vietnam Compound annual growth rate (CAGR) of real GDP per employee (PPP-adjusted), 2003-2007 Source: authors calculation Groningen Growth and Development Centre (2008) 20081201 – PACE strategy.ppt Copyright 2007 © Professor Michael E Porter Contribution to Annual GDP growth (%) Decomposition of Vietnamese Growth 10% Capital Labor TFP 8% 6% 4% 2% 0% -2% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Source: Ohno (2008) 20081201 – PACE strategy.ppt Copyright 2007 © Professor Michael E Porter Domestic Fixed Investment Rates Selected Countries Gross Fixed Investment as % of GDP (2007) 36% 34% China (40.4%) Latvia India Vietnam 32% Estonia Croatia Spain 30% Kazakhstan Korea 28% Slovenia Australia Slovakia Thailand 26% 24% 22% 20% 18% Greece Singapore Ireland Czech Republic Tunisia Japan Ukraine New Zealand Iceland Romania Lithuania Colombia Indonesia Venezuela Argentina Denmark Poland Canada Malaysia Italy Mexico Portugal Cambodia Egypt Pakistan France Turkey Hungary Austria Russi Chile Finland a Hong Kong Kenya South Africa Netherlands Norway Saudi Arabia Sweden Germany UK Brazil Dominican Republic 16% 14% -4% Sri Lanka USA Philippines -2% 0% 2% 4% 6% 8% 10% 12% Change in Gross Fixed Investment (as % of GDP), 2003 - 2007 Note: Includes inbound FDI Source: EIU, 2008 20081201 – PACE strategy.ppt Copyright 2007 © Professor Michael E Porter Inbound Foreign Investment Performance Stocks and Flows, Selected Countries Inward FDI Stocks as % of GDP, Average 2003 - 2007 80% Netherlands Estonia Singapore (160.1%, 64.7%) 70% Vietnam Chile Hungary 60% Switzerland New Zealand Sweden Slovakia Czech Republic 50% Denmark Cambodia Portugal 40% Australi a South Africa 30% Norway Slovenia 20% Germany Greece USA South Korea Indonesia 10% Indi a Japan 0% -5% 0% UK Spain 5% Thailan Philippines Canad d Latvia Poland a Finland Lithuania France Colombia Mexico Laos Austria Russia Brazil Turkey Italy Malaysia China Pakista n 10% Israel Iceland (46.7%) Saudi Arabia 15% 20% 25% 30% 35% 40% FDI Inflows as % of Gross Fixed Capital Formation, Average 2003 - 2007 Source: UNCTAD, World Investment Report (2007) 20081201 – PACE strategy.ppt Copyright 2007 © Professor Michael E Porter Export Performance Exports as Share of GDP (in %, 2007) Selected Countries 100% Malaysia (116.4%) 90% Slovakia Belgium 80% Estonia Netherlands Thailand 70% Slovenia 60% Saudi Arabia 50% Czech Republic Ireland Kazakhstan Tunisia Bulgaria Lithuania 0% -15% Ukraine -10% -5% 0% Austria Switzerland Philippines Croatia South Korea Finland Germany Latvia Chile China Poland 5% Vietnam Slovenia Cambodia Norway South Africa Canada Indonesia Russia France Portugal Sri Lanka Venezuela 30% Italy Mexico New Zealand Dominican Republic UK Argentina Colombi Turkey India Bangladesh 20% Spain a Australia Japan Pakistan Brazil USA 10% 40% Hungary 10% 15% Egypt 20% 25% 30% Change of Exports as Share of GDP, 2003 to 2007 • Imports as a share of GDP are equally high Source: EIU (2008), authors’ analysis 20081201 – PACE strategy.ppt 10 Copyright 2007 © Professor Michael E Porter Vietnam’s Exports By Type of Industry World Export Market Share (current USD) Processed Goods Semi-processed Goods Unprocessed Goods Services TOTAL 0.8% 0.7% 0.6% 0.5% 0.4% 0.3% 0.2% 0.1% 0.0% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Source: UNComTrade, WTO (2008) 11 20081201 – PACE strategy.ppt Copyright 2007 © Professor Michael E Porter Vietnam’s Cluster Export Portfolio 2000-2006 5% Change In Vietnam’s Overall Growth In World Export Share: 0.25% Footwear (5.68%, 1.91%) Vietnam’s world export market share, 2006 Fishing and Fishing Products 4% 3% Appare l 2% Coal & Briquettes Textiles 1% Furnitur e Plastics Tobacco Vietnam’s Average World Export Share: 0.31% 0% -0.3% -0.1% 0.3% 0.5% 0.7% 0.9% 1.1% 0% 0.1% Change in Vietnam’s world export market share, 2000 – 2006 Source: Prof Michael E Porter, International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director Underlying data drawn from the UN Commodity Trade Statistics Database and the 12 20081201 – PACE strategy.ppt IMF BOP statistics 1.3% 1.5% Exports of US$1.1 Billion = Copyright 2007 © Professor Michael E Porter Agenda • Understanding Vietnam’s Economic Performance • Assessing Vietnamese Competitiveness • Identifying Action Priorities • Organizing for Competitiveness • Creating an Economic Strategy • Integrating Corporate Social Responsibility 20081201 – PACE strategy.ppt 13 Copyright 2007 â Professor Michael E Porter What is Competitiveness? ã Competitiveness depends on the productivity with which a nation uses its human, capital, and natural resources – Productivity sets the sustainable standard of living (wages, returns on capital, returns on natural resources) – It is not what industries a nation competes in that matters for prosperity, but how productively it competes in those industries – Productivity in a national economy arises from a combination of domestic and foreign firms – The productivity of “local” or domestic industries is fundamental to competitiveness, not just that of export industries • Nations compete to offer the most productive environment for business • The public and private sectors play different but interrelated roles in creating a productive economy 20081201 – PACE strategy.ppt 14 Copyright 2007 © Professor Michael E Porter Determinants of Competitiveness Microeconomic Competitiveness Quality of the National Business Environment Sophistication of Company Operations and Strategy State of Cluster Development Macroeconomic Competitiveness Social Infrastructure and Political Institutions Macroeconomic Policies Natural Endowments • Macroeconomic competitiveness creates the potential for high productivity, but is not sufficient • Productivity ultimately depends on improving the microeconomic capability of the economy and the sophistication of local competition 15 20081201 – PACE strategy.ppt Copyright 2007 © Professor Michael E Porter Wage Level Comparison Selected Countries Monthly Minimum Wage USD, log scale, 2008 $3,000 Ireland United Kingdom Italy $1,000 Portugal $500 Poland Slovakia Korea Czech Republic $100 Bulgaria Thailand Cyprus Singapore Estonia Lithuania Latvia Romania Denmark Sweden Japan / Belgium / France Netherlands Austria New Zealand Spain Australia Slovenia Taiwan Greece Hungary Germany Malaysia China Philippines Indonesia $50 Cambodia Vietnam $0 Global Competitiveness Index Score, 2008 Source: Global Competitiveness Report, 2008; EuroStat, 2008; Philippines Department of Labor and Employment, 16 20081201 – PACE strategy.ppt 2008 Copyright 2007 © Professor Michael E Porter Rate of Competitiveness Improvement Low Income Countries, 2002 - 2007 BCI Value, 2007 High India Indonesia Sri Lanka Vietnam El Salvador Tanzania Uganda Zambia Zimbabwe Low Nigeria Madagascar Pakistan Gambia Mali Honduras Nicaragua Ethiopia Mozambique Bangladesh Paraguay Bolivia Chad Below average Average Above average Dynamism Score, 2002 - 2007 Source: Global Competitiveness Report 2007 17 20081201 – PACE strategy.ppt Copyright 2007 © Professor Michael E Porter Macroeconomic Competitiveness Social Infrastructure and Political Institutions • Basic human capacity – – • • Basic education Health system Fiscal policy – – – Political institutions – – – – – • Macroeconomic Policies • Political freedom Voice and accountability Political stability Centralization of economic policymaking Government effectiveness Government surplus/deficit Government debt Savings / Investment rates Monetary policy – – Inflation Interest rate spread Rule of law – – – – – – 20081201 – PACE strategy.ppt Judicial independence Efficiency of legal framework Civil rights Business costs of corruption Reliability of police Prevalence and costs of crime 18 Copyright 2007 © Professor Michael E Porter Macroeconomic Competitiveness Vietnam’s Position Social Infrastructure and Political Institutions Macroeconomic Policies Basic health and education + Solid provision of basic services Fiscal policy + Government budget and debt at acceptable levels – Government budget still reliant on foreign aid – Increasing concerns about the quality of these public services Political institutions + High levels of political stability Monetary Policy – High levels of inflation + Increasing decentralization of economic policy responsibilities – Little effective policy dialogue – Corruption remains a significant challenge Rule of law + Quality of laws tends to be good – Effectiveness of implementation remains weak 19 20081201 – PACE strategy.ppt Copyright 2007 © Professor Michael E Porter Governance Indicators Selected Countries Best country in the world Voice and Accountability Political Stability Government Effectiveness Regulatory Quality Rule of Law Control of Corruption Index of Governance Quality, 2007 La os Pa ki st an In di a Th la nd S ri La nk P a hi lip pi ne s In ne si a C hi na V ie tn am R us si a C am bo di B a an gl ad es h Br az il Ja pa So n ut h K or ea Ta iw an M al ay si a Si ng ap or e Worst country in the world Note: Sorted left to right by decreasing average value across all indicators The ‘zero’ horizontal line corresponds to the median country’s average value across all indicators 20 Copyright 2007 © Professor Michael E Porter Source: World Bank (2008) 20081201 – PACE strategy.ppt 10 Reducing Corruption • The government has repeatedly committed itself towards reducing corruption; and some action has been taken • Evidence reveals little progress • Vietnam needs to target corruption as a crucial barrier for growth and design an integrated strategy to tackle its occurrence Action priorities • Reduce the potential for corruption through simplified regulations, use of modern information technology, and improved SOE governance/ privatization • Set clear guidelines and reporting requirements for management of SOEs • Demonstrate a commitment for transparency, including support for a strong press 20081201 – PACE strategy.ppt 41 Copyright 2007 © Professor Michael E Porter Improving Infrastructure • Significant infrastructure investments have been made in recent years • Evidence on their impact is mixed as best There is significant duplication of efforts and companies complain about serious bottlenecks • Vietnam needs to better target infrastructure investments to meet the needs of its growing economy Action priorities • Establish a national fund for key infrastructure projects to be implemented under the supervision of the Prime Minister’s office • Utilize matching funds incentives to improve effectiveness if investments by provincial governments • Create a public-private council to advise on spending priorities 20081201 – PACE strategy.ppt 42 Copyright 2007 © Professor Michael E Porter 21 Deepening Financial Markets • Vietnam has made clear progress on opening up financial markets, more recently also to foreign companies as part of the WTO agreement • But the weakness of Vietnam’s financial markets even before the global crisis, and the financing constraints faced by private companies, indicate that serious challenges remain • Vietnam needs to develop a modern regulatory and institutional structure to enable an effective financial system Action priorities • Continue opening financial markets in line with WTO commitments • Create an effective, independent financial regulator, using outside help as needed • Establish a development bank to develop financing tools for private SMEs 20081201 – PACE strategy.ppt 43 Copyright 2007 © Professor Michael E Porter Regulatory Reform • Regulatory reform has been on the Vietnamese policy agenda for some time, especially over the last five years • Despite some progress, the overall regulatory burden on businesses and citizens remains high with no clear societal benefits • Vietnam needs a fundamentally new approach to regulatory reform and assessment of new regulations Action priorities • Aggressively pursue the work on regulatory reform initiated with foreign donors • Improve institutional capacity to evaluate and administer regulations, not just the rules themselves • Include an obligatory assessment of the administrative burden on business in the process of introducing new laws and regulations 20081201 – PACE strategy.ppt 44 Copyright 2007 © Professor Michael E Porter 22 Human Resource Development Basic education • Enrolment rates have increased significantly but quality is low and skills fail to meet company needs • Vietnam needs to dramatically improve educational quality, through setting standards, improving curricula, and involving the private sector in governance Vocational training • Vietnam lacks a skills training system • Companies have launched own training efforts to address skill bottlenecks • Vietnam needs a clear program for cluster-based workforce development Higher education • The number of universities has increased but quality is low and skills not match company needs • Higher university education standards must be set and enforced, drawing on international experts • Vietnam needs to develop a plan and enabling institutions for assimilation of global technology 45 20081201 – PACE strategy.ppt Copyright 2007 © Professor Michael E Porter Restructuring of State Owned Enterprises • The government has an explicit policy to promote private enterprise but there is deep-seated ambivalence towards privatization • Without a thorough reform of the SOE sector, there is little hope for Vietnam to reach the next level of economic development SOE governance Competition in markets with SOEs Privatization • Create independent boards of directors • Implement transparent financial reporting • Define clear financial objectives – Set corporate charters • Remove existing trade, investment, and artificial entry barriers protecting SOEs • Establish strong, independent regulatory bodies • Support start-ups and spin-offs from SOEs • Create clear legal conditions for privatization • Define explicit objectives for privatization process • Create a dedicated structure for implementing privatization • The creation of SOE groups is not a solution and can exacerbate problems if no other reforms are being implemented 20081201 – PACE strategy.ppt 46 Copyright 2007 © Professor Michael E Porter 23 Cluster Development in Vietnam • Vietnam’s clusters currently tend to be narrowly focused on individual products • There is limited collaboration among companies, suppliers and other institutions – Some clusters, like coffee, have the potential to significantly increase their performance if they adopt a collaboration approach • Cluster-based development thinking is crucial in improving the delivery of other economic policies – – – – Workforce skill development around clusters FDI attraction/industrial zones around clusters Cluster-based regional development initiatives Quality and technology transfer organization for each cluster • Policy should upgrade all existing and emerging clusters, not choose among them 47 20081201 – PACE strategy.ppt Copyright 2007 © Professor Michael E Porter Clusters and Economic Policy Science and Technology Investments (e.g., centers, university departments, technology transfer) Education and Workforce Training Management Training Standard setting and quality initiatives FDI/Business Attraction Clusters Market Information and Disclosure Export Promotion Environmental Stewardship Industrial parks and free trade zones Natural Resource Protection Physical Infrastructure • Clusters provide a framework for implementing public policy and organizing public-private collaboration to enhance competitiveness 20081201 – PACE strategy.ppt 48 Copyright 2007 © Professor Michael E Porter 24 Clusters and Economic Diversification Develop Related Clusters Turn Niche Products Into Clusters Deepen Existing Clusters Build Clusters Around MNCs Upgrade Existing Export Products and Services 49 20081201 – PACE strategy.ppt Copyright 2007 © Professor Michael E Porter Upgrading Vietnamese Niche Positions, 2006 Cluster Cluster World Export Share Plastics 0.490% Sporting, Recreational and Children's Goods Communications Equipment 0.284% Processed Food 0.260% Lighting and Electrical Equipment 0.256% Motor Driven Products 0.156% Entertainment and Reproduction Equipment 0.121% Analytical Instruments 0.047% Production Technology 0.046% Change in Export Value (in Share (1997$thousands) 2006) 0.125% Information Technology Industry Share of World Exports 7.82% 0.361% Subcluster Industry Rubber Plastic Waste Plastic Products Rubber Natural rubber, balata and similar natural gums Reclaimed unhardened rubber; waste Plastic sacks, bags Synthetic rubber Motorcycles and Bicycles Parts of other motorcycles Motorcycles and Bicycles Bicycles and other cycles, non-motorized Specialty Office Machines Electrical and Electronic Components Specialty Foods and Ingredients Food Products Machinery Specialty Foods and Ingredients Dairy and Related Products Specialty Foods and Ingredients Specialty Foods and Ingredients Glass Electrical Parts Electrical Parts Motors and Generators Appliances 3.40% $ 1,137,205 1.87% 0.65% 1.13% $ $ $ 6,084 150,234 143,316 1.42% 1.22% $ 60,962 1.27% -1.56% $ 49,628 Parts for calculating, accounting machines Insulted wire, cable and conductors Starches, inulin and gluten Distilling, rectifying plant Vegetable saps, extracts Milk, concentrated or sweetened Yeasts Homogenized food preparations Drawn, float, cast glass, worked Other inductors Other electric transformers Electric motors