the competitiveness of vietnam’s three … competitiveness of vietnam’s three largest cities a...

THE COMPETITIVENESS OF

VIETNAM’S THREE LARGEST CITIES

A Survey of firms in Hanoi, Haiphong,

and Ho Chi Minh City

Vu Minh Khuong Jonathan Haughton

December 2003

ACKNOWLEDGEMENTS The study could not have been completed without the assistance of a wide variety of individuals and institutions. Vu Minh Khuong is most grateful for the financial support provided by the Mekong Project Development Facility. We deeply appreciate the enthusiasm and cooperation of hundreds of business people in Hanoi, Haiphong, and Ho Chi Minh City, who spent a great deal of their precious time discussing and filling out the lengthy questionnaire used for this survey. In particularly, we very much acknowledge the contributions of Mr. Dang Ngoc Hoa of the DASO Company in Ho Chi Minh City, Mr. Nguyen Gia Hao of the ICCI Company in Hanoi, and Ms. Nguyen Thi Ngan and her colleagues at the Union of Non-State Businesses in Haiphong, who provided us with both valuable insights into the business dynamics in their cities as well as important support for our survey in the three cities. Our special thanks go to the people at the Vietnam Chamber of Commerce and Industry, the Young Business People Association, and Associations of Non-State Businesses and Statistical Bureaus in the three cities for their remarkable contributions to the successful organization of the survey. We are most grateful to Professors Michael Porter, Robert Barro, Dwight Perkins, and Richard Zeckhauser for their encouragement and guidance on this project; to Tim Campbell of the World Bank, Thomas Davenport of the International Finance Corporation, Michael Fairbanks of the Country Competitiveness group at the Monitor Company, and David Dapice and Thomas Vallely of Harvard’s Kennedy School of Government for their valuable advice and suggestions on the approach and framework of the study. We are indebted to Mario Fischel, John McKenzie, and Trang Nguyen at the Mekong Project Development Facility for the great support they have provided to all the work leading to this report. We would also like to thank Philip Marten, Joseph Tragert, Dao Duc Luyen, Randall Kempner, Duong Thanh Trung and Warigia Bowman for useful comments and support that helped us in completing the report. In particular, the intensive communication and in-depth comments from Trang Nguyen were very helpful in shaping the final form of the report, as were the detailed and most useful comments from Nick Freeman and Nguyen Van Lan. However, we are fully responsible for the views expressed in this report.

TABLE OF CONTENTS

EXECUTIVE SUMMARY ..........................................................................................................................................i Chapter 1. INTRODUCTION ..................................................................................................................................1

Purpose of the Study ..........................................................................................................................................1 Sketches of Hanoi, Haiphong and Ho Chi Minh City........................................................................................3

Chapter 2: METHODOLOGICAL BACKGROUND..............................................................................................5 Measuring Competitiveness...............................................................................................................................5 Competitiveness Matters....................................................................................................................................7 Why Competitiveness Is Relevant Within Vietnam ..........................................................................................8

Chapter 3: THE SURVEY OF BUSINESS LEADERS ..........................................................................................9 Sampling Procedures and Response Rate ..........................................................................................................9 Profile of Surveyed Firms................................................................................................................................10 Possible Sources of Bias ..................................................................................................................................13

Chapter 4: MEASURING COMPETITIVENESS OF THE THREE CITIES ...................................................14 Government .....................................................................................................................................................14 Institutions .......................................................................................................................................................16 Infrastructure....................................................................................................................................................17 Human Resources ............................................................................................................................................19 Technology ......................................................................................................................................................19 Finance.............................................................................................................................................................23 Openness..........................................................................................................................................................24 Supporting Industries.......................................................................................................................................27 Domestic Competition .....................................................................................................................................28 Competitiveness Overall..................................................................................................................................30

Chapter 5: BUSINESS ATTITUDES .....................................................................................................................31 Attitudes toward Business................................................................................................................................31 Attitudes toward Economic Development .......................................................................................................32 The Most Pressing Problems ...........................................................................................................................32 Medium-Term Priorities ..................................................................................................................................33

Chapter 6: FROM COMPETITIVENESS TO OUTCOMES...............................................................................35 A Composite Measure of Economic Success...................................................................................................39

Chapter 7: CONCLUSIONS AND FUTURE STUDY ..........................................................................................41 Broad Policy Recommendations......................................................................................................................41 City-Specific Recommendations .....................................................................................................................45

REFERENCES ..........................................................................................................................................................52 ANNEX 1. Maps of Hanoi, Haiphong and Ho Chi Minh City...............................................................................54 ANNEX 2. The Growth Dynamics of the Manufacturing Sector in the Three Cities (1995-2000)....................57 ANNEX 3. Performance of the Major Industrial Parks in the Three Cities .......................................................58 ANNEX 4. Summary of Survey Results..................................................................................................................59

I. BACKGROUND SECTION ........................................................................................................................59 II. BUSINESS ENVIRONMENT....................................................................................................................64 II. FIRMS’ STRATEGY AND OPERATION.................................................................................................67 1. MARKET POSITIONING ..........................................................................................................................67 2. MOST PRESSING PROBLEMS FACING FIRMS....................................................................................67 3. ACTIONS OF TOP PRIORITY ..................................................................................................................68 4. COMPUTERS AND INTERNET USAGE .................................................................................................68 III. ATTITUDES TOWARD BUSINESS AND ECONOMIC DEVELOPMENT .........................................70 IV. PRIORITIES FOR GOVERNMENTS IN THE NEXT 3 YEARS............................................................71

ANNEX 5. Construction of the Competitiveness Index.........................................................................................72 ANNEX 6. Listing of Comparative Advantages and Disadvantages for the Three Cities..................................73 ANNEX 7. Survey Questionnaire and Accompanying Letter (English Translation) .........................................76

i

EXECUTIVE SUMMARY

Purpose of the Study Vietnam has had one of the ten fastest-growing economies in the world over the past decade, with average annual growth in per capita Gross Domestic Product (GDP) of 5.9% during 1992-2002. However, the economic growth has been geographically uneven, with particularly rapid growth in and around Ho Chi Minh City, and slow growth in some urban and many rural areas. In this study we focus on Vietnam’s three largest cities – Ho Chi Minh City, Hanoi, and Haiphong – and ask why growth rates have differed so much among them. Brief introductions to the cities are given in Box 1.1. The ultimate purpose of the study is to determine what policies and underlying conditions are conducive to rapid economic growth. There are two main reasons for undertaking a study of this nature. First, it should provide pointers for those parts of Vietnam that hope to emulate the economic success of the larger cities, by helping better to identify those policies that enhance economic development, as well as those that hinder it. Second, despite its recent strong economic performance, Vietnam cannot afford to be complacent, and needs to pay continued attention to being competitive. The clearest evidence that Vietnam could develop even faster comes from a comparison with China; both countries have followed a similar path from a planned to a (largely) market economy, but economic growth in China has typically exceed the Vietnamese rate by about two percentage points annually, and inflows of foreign direct investment are twice as high (per capita) for China as for Vietnam. Our approach is to focus on competitiveness. Following the work of Michael Porter, we identify the key components of competitiveness in Ho Chi Minh City, Hanoi and Haiphong. This in turn enables us to identify strengths and weaknesses, and to draw out the policy implications. Competitiveness Matters There is clear evidence that countries and areas that are more competitive are able to achieve and maintain a higher level of affluence. But what is meant by competitiveness? We define a state, province or city as being competitive if it has in place the policies and conditions that ensure and sustain a high level of per capita income and continued growth. To achieve this, a state, province or city “needs to be able both to attract and incubate new businesses, and to provide an environment that is conducive to the growth of existing firms” (Haughton and Slobodyanyuk 2002). In the spirit of the Porter-inspired Global Competitiveness Report, we actually classify our indicators of competitiveness into nine groups. The nine groups are summarized in Table S-1, with brief descriptions of their contents.

Competitiveness of Hanoi, Haiphong and Ho Chi Minh City: Executive Summary Page ii

Table S-1 Nine Components of Competitiveness

Group Key measures Government and Fiscal Policy Tax rates; government efficiency and transparency. Institutions Regulatory burden, functioning legal system, low crime. Infrastructure Quality and cost of roads, electricity and telecommunications. Human Resources Cost and quality of labor. Technology Spending on research and development; number of scientists, engineers Finance Ease with which good entrepreneurial ideas can be financed. Openness Extent to which an area is open to trade with the outside world. Supporting Industries Availability of local supplies; industrial clustering. Domestic Competition Vigor of local competition. Note: Classification loosely based on those used by Porter (2003) and Haughton and Murg (2001).

The measures of competitiveness in this report are largely based on a survey of business leaders in Hanoi, Haiphong and Ho Chi Minh City that was conducted in summer 2002. We obtained 544 valid responses out of 1,400 questionnaires sent out, representing a respectable overall response rate of 39%. The response rates were 28% for Hanoi, 64% for Haiphong, and 38% for Ho Chi Minh City.1 The survey was confined to registered firms with five or more employees located in the three cities. Manufacturing firms were over-sampled, so as to ensure that they consisted of at least half of all firms interviewed in each city. This was done in the belief that such firms are particularly important at this point in Vietnam’s economic development, and would be well placed to provide insights into the business dynamics in each city. Almost a third (31%) of the firms surveyed were state-owned enterprises; the rest were owned privately (42%) or by foreign firms (16%) or had mixed ownership (11%). The details are provided in Table S-2. Results: Measuring Competitiveness We now summarize the results of the survey, organizing the ideas into the nine groups shown in Table S-1 above. Government. In each of the three cities, respondents felt that the most urgent priority was to “effectively fight corruption”, with particularly clear support for this proposition coming from business people in Haiphong and Ho Chi Minh City. There is considerable agreement among business leaders in Hanoi and Ho Chi Minh City about what else government should be doing to promote business development. In both cities, respondents would like to see a more streamlined regulatory system, an improved educational system, better transportation infrastructure, cheaper communications, and stronger incentives for business investment.

1 There were 128 responses to 450 questionnaires for Hanoi, 128 responses to 200 questionnaires for Haiphong, and 288 responses to the 750 questionnaires distributed in Ho Chi Minh City.

Competitiveness of Hanoi, Haiphong and Ho Chi Minh City: Executive Summary Page iii

Table S-2 Profile of firms surveyed

Hanoi Haiphong Ho Chi Minh City Total # of firms 128 128 288 544 % of firms 23.5 23.5 52.9 100.0 Ownership % % % % Private 37.7 50.8 41.3 42.3 State-owned 44.3 31.3 26 31.1 Foreign-invested 12.3 12.5 18.8 15.6 Joint ventures 10.7 5.5 13.9 11.0 All 100 100 100 100 Line of business % % % % End-Consumer Mnf. Products 43.8 43.8 52.8 48.5 Intermediate Mnf. Products 7.8 20.3 10.4 12.1 Trade, Business Service/ Banking 48.4 35.9 36.8 39.3 All 100 100 100 100 Firm was established % % % % Before 1954 3.9 0.8 1.7 2.0 1955-1975 19.5 17.2 2.4 9.9 1976-1989 7.8 10.2 21.5 15.6 1990-2000 52.4 20.8 53.8 52.7 After 2000 16.4 21.0 20.5 19.7 100 100 100 100 Source: Appendix 4.

Institutions. The most positive news is that business people in all three cities agree that the procedures for starting up a new business are simple. This represents an improvement, because this issue was widely perceived to be a serious problem until a few years ago. Opinion is divided as to whether local government treats all types of firms (private, state-owned, foreign-invested) equally, and there was no consensus on whether the regulatory system is “clear and effective.” There is serious concern about intellectual property rights, as evidenced in the problem of counterfeit products, which is seen as especially severe in Hanoi and Ho Chi Minh City. Infrastructure. Overall, the quality of infrastructure is considered to be neither particularly good nor bad. Land rent in the cities is viewed as being high, especially in Hanoi and Ho Chi Minh City, and the procedure for acquiring land is not simple. While the telephone system is considered to be good in Hanoi and Ho Chi Minh City, it received mixed reviews in Haiphong. Human Resources. Respondents agreed that the supply of unskilled labor is ample. They also expressed a relatively high degree of satisfaction, in all three cities, with the quality of basic education, from kindergarten through to the end of high school. However, some managers complained about a shortage of skilled personnel, suggesting weaknesses at the university level. Although the working environment in Hanoi and Ho Chi Minh City is “attractive to talented people,” this is definitely not seen to be the case for Haiphong. Technology. Some, but not all, firms are embracing technology quickly. Most business leaders use computers, e-mail and the Internet, although firms in Haiphong clearly lag behind those in the two bigger cities. Firms in Ho Chi Minh City have an easier time recruiting and retaining engineers, and appear to have the best information about technology and market demand. In all

Competitiveness of Hanoi, Haiphong and Ho Chi Minh City: Executive Summary Page iv

three cities there is substantial collaboration with foreign suppliers and customers, a key element in the process of technology transfer. However, links with universities and research institutes are not particularly strong, and strengthening them is not seen as a high priority in any of the cities. Between 1995 and 2000, the share of manufacturing in “low technology” industries fell sharply in Hanoi (from 49% to 41%) and more modestly in Ho Chi Minh City (from 67% to 62%), but actually rose in Haiphong (from 55% to 57%). Finance. In the two larger cities, banks are seen as responsive (although slightly less so in Ho Chi Minh City than Hanoi, perhaps because customers are more demanding there); loans are not too difficult to obtain; and the cost of borrowing is perceived to be “reasonable”. The difference in views on these between the private and SOE sectors is not significant in Ho Chi Minh City and only somewhat significant in Hanoi. The situation in Haiphong, however, is very different. The distinction between the private and SOE sectors is striking: respondents from the private firms report unresponsive banks, high borrowing costs, and problems in getting financing for projects while respondents from the SOE sector report experiences similar to their counterparts in Hanoi and Ho Chi Minh City (Annex 4, questions 8, 9,10). Openness. The simplest measure of openness is the ratio of exports to GDP, which is 123% for Ho Chi Minh City, 65% for Hanoi, and only 41% for Haiphong. Haiphong is twice as dependent on import substituting industries as either Hanoi or Ho Chi Minh City. As trade barriers continue to come down, the protected manufacturing sector will have to struggle to remain competitive. Supporting Industries. The survey results show that in Hanoi and Ho Chi Minh City, suppliers are competitive on price, but less so on quality (Figure 5.10). In all three cities, suppliers get high marks for being responsive to companies’ needs, and for communicating well with them; this is particularly true of foreign suppliers. This suggests that conditions are suitable for the development of industrial “clusters,” along the lines suggested by Michael Porter. Domestic Competition. Business leaders believe that they operate in a competitive environment. There is broad agreement that competition is “intense,” that one learns a lot from one’s competitors, and that customers provide “sophisticated” feedback on products and services. It is generally accepted that competition is “fair.” This is an important factor that is conducive to enhancing the competitiveness of the three cities in the future. Competitiveness Overall To construct a summary measure of competitiveness we

1. Re-scale each indicator variable so that it varies from 0 (least competitive) to 10 (most competitive).

2. Assign each of the indicator variables to one of the nine sub-indexes.

Competitiveness of Hanoi, Haiphong and Ho Chi Minh City: Executive Summary Page v

3. Compute the mean of these indicator variables within each group, in order to construct the nine sub-indexes (for “institutions”, “infrastructure,” etc.).

4. Compute the mean of the nine sub-indexes, to get the overall index. The results provided in Table S-2 show that Ho Chi Minh City is the most competitive of the three cities, with an index of 5.7; Hanoi is not far behind, with an index of 5.6; and the laggard is Haiphong, with an index of 4.9. However, if this study covered the whole country, Haiphong’s position would certainly look better.

Table S-3 Overall indexes of competitiveness Sub-index HCMC* Hanoi Haiphong Government and Fiscal Policy 5.01 5.51 3.69 Institutions 4.79 4.52 4.20 Infrastructure 4.99 5.25 4.69 Human resources 5.40 5.51 5.03 Technology 6.70 6.69 6.07 Finance 5.04 5.41 3.82 Openness 7.17 5.33 4.86 Suppliers and Supporting Industries 5.73 5.54 5.29 Domestic Competition 6.78 6.62 6.22 Overall 5.92 5.44 4.74 Note: The indexes range from 0 (least competitive) to 10 (most competitive). Numbers in bold face show highest values for each sub-index. * Ho Chi Minh City.

Of the nine indicators, Ho Chi Minh City has the highest score in five indicators, and Hanoi in the other four indicators. Haiphong lags in every dimension, but is especially far behind in indicators for finance, openness, and human resources. Attitudes Towards Business. Firms in all three cities have a strong appreciation of the need for business vision and strategy, and the importance of innovation. Among business people in Haiphong there is a very strong aversion to risk. Attitudes toward economic development. Business leaders in Hanoi and Ho Chi Minh City strongly believe that Vietnam needs to integrate with the world economy; their colleagues in Haiphong are more divided, with a majority there expressing support for tariff protection. In other matters there is broader support for an important role for government, with most respondents seeing access to government as vital to the success of a business, and believing that “major” state-owned corporations will play a “leading role” in the country’s industrialization. The Most Pressing Problems. Top of the list is a strong concern about the “unhealthiness of the business environment,” which refers to corruption, counterfeit products, and uncertainty in regulatory changes. In addition, in descending order of importance, firms appear to: have difficulty finding skilled labor, face high production costs, and have difficulty raising capital and acquiring land. It is interesting to note that the problems of over-staffing and low product quality, which used to be serious in the early 1990s, are now seen as less severe for firms in all three cities.

Competitiveness of Hanoi, Haiphong and Ho Chi Minh City: Executive Summary Page vi

From Competitiveness to Outcomes If the concept of competitiveness is to be useful, it should be a good predictor of economic success. There are at least four common ways to measure economic success: higher wages and labor productivity, higher profitability, higher economic growth, and higher job creation. We have chosen to create a composite measure of these variables, the Economic Success Index, whose components are:

(i) The average wage in 2000. A higher average wage indicates a better living standard, which is the ultimate goal of growth.

(ii) The profitability of the private sector in 2000, and the “efficiency ratio” (each weighted equally). The private sector enjoys few subsidies or special favors from the government, and so the performance of this sector may be taken to be a good indicator of the sustainability of growth.2

(iii) The growth rate of GDP, 1995-2000. This takes into account the growth of all sectors, and so is preferred to a measure of industrial growth only.

(iv) Job growth over 1995-2000: The more jobs are created, the better the growth process. These indicators are indexed against the national overall rates (by dividing each indicator for a city by the corresponding indicator for Vietnam). A scorecard of the four indices for the three cities is provided in Table S-3 and Figure S-1.

Table S-4. Scorecard of Economic Success for the Three Cities Index (vs. the national overall) HANOI HAIPHONG HCMC National average 1. Average Wage, 2000 1.00 0.76 1.35 2. Private Sector Profitability, 2000 0.95 0.48 1.23 Profitability: 1.0%. 3. GDP growth, 1995-2000 1.53 1.23 1.41 7.0% p.a. 4. Job growth, 1995-2000* 0.97 1.10 1.53 18% over 5 years Economic Success Index (ESI) 1.09 0.84 1.38 1.00

* Industrial workforce The overall Economic Success Index is computed as the geometric mean of the component indexes. By this measure, Ho Chi Minh City scores highest, followed by Hanoi and Haiphong; by construction, the index takes on a value of one for the nation as a whole. This is the order that would be predicted using the competitiveness index. Figure S-1. The Cities Positioned by their Economic Success Indexes Worse Haiphong (0.84) Vietnam (1.00) Hanoi (1.09) HCMC (1.38) Better

2 Private firms receive essentially no subsidies. However, they are eligible for a number of fiscal incentives (lower corporation tax rates if located in remote areas; tax holidays for startups; export credit). Nonetheless, it is widely believed that the playing field is not yet level, when comparing private with state-owned enterprises. See Economist Intelligence Unit (January 2003).

Competitiveness of Hanoi, Haiphong and Ho Chi Minh City: Executive Summary Page vii

Broad Policy Recommendations We have six broad recommendations, stated below with accompanying comments, as well as a number of recommendations that are specific to each of the three cities. Recommendation 1: Given the importance of competitiveness in increasing economic growth and development, the government should measure the competitiveness of each province and city on a regular basis. The results should be widely disseminated, in part to spur provincial and city governments to improve their “microeconomic” policies and procedures. Pressuring all provinces and cities to enhance the fundamentals of their competitiveness is also a very effective way to enhance the quality of local business environment. A practical step would be to publish an annual (or biennial) report ranking the competitiveness of the country’s 64 provinces and cities, with an in-depth analysis of the strengths and weaknesses of each province/city. The success of provinces such as Binh Duong, which is likely to stand out on the top of a competitiveness ranking report, will send a powerful message about what the local government in other provinces/cities should do to advance their growth and prosperity. The identification of areas of weakness is needed in order to help provinces and cities channel their energies into the most appropriate directions. Recommendation 2: There is a need to improve the professionalism of and provide training to government officials in the mid- and upper levels of the administration. The single clearest message from the survey is that business people are concerned about the corruption and lack of competence of government officials. The same message appears in international comparisons: on the key dimensions of governance indicators -- Regulatory Quality, Government Effectiveness, and Control of Corruption -- Vietnam ranks much lower than other countries in East Asia, except Indonesia (Figure 7.1) and improved very little in comparison to China over 1997-2001 (Figure 7.2). A practical step forward would be to modernize the curricula of the government and party schools at both central and provincial levels. China and Singapore have successfully designed curricula that effectively enhance the competence and commitment of government officials and staff, who go through mid-career training programs in these schools. The main focus of their training is on economic development strategy, policy analysis, and teamwork. Recommendation 3: Firm managers need training in business strategy, modern management skills, and information for making their strategic decisions. The government should proactively work with international donors and local economics and business schools to provide a series of intensive management training workshops in cities and provinces throughout the country. Management training is one of the most effective measures to boost the competitiveness of Vietnam for two reasons:

Competitiveness of Hanoi, Haiphong and Ho Chi Minh City: Executive Summary Page viii

1) Vietnamese managers have a good appreciation of business strategy (Annex 4, questions 84, 87, 90) and are very keen to improve their management capability (Annex 4, question 68);

2) There exists a huge gap between the potential and actual capabilities of Vietnamese managers, especially in the small and medium enterprise (SME) sector. For example, the hardship that private firms in Haiphong face in dealing with banks is partly due to their inability to develop sound business plans from good business ideas.

Many organizations and donors, such as the Mekong Project Development Facility, the German GTZ, and the US Agency for International Development, are likely to be willing to assist Vietnam in this effort. But a proactive role by the government will be crucial to make this assistance most effectively meet the needs of firm managers, especially in the SME sector. Recommendation 4: The government at both central and local levels should continue to improve the country’s infrastructure, including transport, power, and telecommunications. In responding to the survey, business leaders expressed only guarded satisfaction with the quality of the country’s infrastructure. The need for continued improvements must not be forgotten. Recommendation 5: More attention needs to be paid to improving the quality of schooling and vocational education. Despite the recent rapid expansion of the educational sector, many respondents complained about shortages of skilled labor, and worried about the quality of schooling. The shortage of skilled labor may be solved by a more effective partnership between the business sector and government in identifying the vocational skills most needed, and the most efficient ways to develop those skills. Spending a large amount of money on building vocational schools without the close cooperation of the business sector is unlikely to be very effective. A preferable approach would be to use “extension” courses, tailored to the needs of specific businesses, and provided by universities and technical institutes. Recommendation 6: A more pro-competitive mindset towards business and economic development is needed, both on the part of government officials and even on the part of some businesses. As discussed above, business people in the three cities strongly appreciate strategic thinking, managerial talent, and innovation. However, their efforts to build global competitiveness are still seriously hindered by some old attitudes, such as an over-reliance on government patronage and protection, and a reluctance to take risks in making business decisions. The problem is especially acute in Haiphong, where many managers are reluctant to grow their firms because they are concerned that then they will become targets (of officials, tax collectors, public envy) and hence vulnerable. Government officials would better understand business ways of thinking if there were more frequent contacts between business leaders and government officials. Typically the two groups meet when they are in “trouble-shooting mode,” or when businesspeople appear to be asking for

Competitiveness of Hanoi, Haiphong and Ho Chi Minh City: Executive Summary Page ix

favors. This is not conducive to the development of a healthy appreciation of the ways of business and the important role played by competitive markets. City-Specific Recommendations Hanoi. As the nation’s capital, Hanoi is likely to remain only moderately competitive as a manufacturing center, due to the high cost of land and the ample other opportunities (in government and services) for skilled labor. However, it has great potential to become a center of knowledge-intensive products and services. Hanoi enjoys a very large pool of highly educated workers provided by a wealth of universities and research institutes located in the city. In addition, the more knowledge-intensive industries already account for a significant share of Hanoi’s manufacturing output and they grew faster during 1995-2000 than in the country at large. The city has relatively good infrastructure and human resources, along with a strong presence of the banking sectors. The performance of the city government appears to be improving. Yet much remains to be done. The cost of living, particularly housing, is high; government officials, though seen by some as improving, are still considered to lack professionalism; local government is seen as unresponsive to the needs of the business sector; counterfeiting is widespread; and land acquisition is complex. This diagnosis suggests the following recommendations: Recommendations for Hanoi: (i) Encourage the further development of high quality and flexible higher education in

Hanoi, as the base for knowledge-intensive activities such as research and administration, and encourage collaboration between firms and universities/research institutes.

(ii) Review and if necessary simplify the procedures for land acquisition and transfer. (iii) Improve the system of roads and public transport, so that residents can live more cheaply

on land farther from the center and still commute to work. (iv) Curb counterfeit products. (v) Fight corruption. (vi) Coordinate better with neighboring provinces/cities, so as to enhance regional

competitiveness and the quality of growth in the region. As Hanoi grows, the city will necessarily encroach on the neighboring provinces, and cooperation will be needed on the planning of infrastructure such as roads, rail, and waste treatment.

Haiphong. The city has enjoyed strong growth in industrial output over the past decade. However, this growth has been heavily reliant on import-substituting industries such as cement and steel (as documented below). The most serious problems are:

• difficulties in attracting and retaining highly educated workers. • a protected industrial sector, which in turn prompts business people to continue to ask for

government help; the protected sector is vulnerable to tariff reductions, and the mentality of seeking government help corrodes the kind of business ethic that the city needs.

Competitiveness of Hanoi, Haiphong and Ho Chi Minh City: Executive Summary Page x

• local government is seen as only weakly responsive to business, short on skills, and resistant to change.

• private firms face real difficulties in gaining access to bank loans. Recommendations for Haiphong: (i) Substantially upgrade the motivation and qualifications of government officials,

especially in those positions dealing directly with the business sector. (ii) Form an effective partnership between the local government and the private sector by

improving the local business environment with a special focus on promoting the image and role of the private sector

(iii) Work with the banks to analyze and deal with the root causes of the problem facing the private sector in obtaining bank loans;

(iv) Fight corruption; and (v) Improve the power and telecommunications infrastructures. Ho Chi Minh City. Compared to Hanoi and Haiphong, Ho Chi Minh over the past decade has enjoyed more rapid and balanced growth, with vibrancy in all three sectors: state-owned, private, and foreign-invested. However, when compared with China’s leading provinces and cities, the growth of Ho Chi Minh City during 1990-2000 looks significantly less vigorous. Problems include a shortage of skilled labor; a regulatory system that is neither clear nor effective; extensive counterfeiting; and continued concerns about the competence and honesty of local government. The growth of manufacturing output in Ho Chi Minh City was actually lower than the national average during the 1995-2000 period (it grew by a factor of 2.0 versus 2.2 respectively). This indicates the critical need for the city to shift towards a center providing higher value-added products and services. Recommendations for Ho Chi Minh City. (i) Encourage the growth of the knowledge-intensive and higher value-added industries,

such as information technology, agro-technology, banking, education, and tourism; (ii) Fight corruption; (iii) Increase investments in human capital development, with a special focus on upgrading

the quality of K-12 education and (in consultation with business) vocational training; (iv) Encourage firms to develop a geographically broader growth strategy, which is more

focused on exploiting nation-wide resources and global opportunities, rather than staying confined to the provincial markets in which they operate.

Directions for Future Study This study represents a useful initial step, but considerable further work is needed to ensure that the study of competitiveness in Vietnam pays off in the form of concrete actions. Future studies are needed in two areas – expanding the analysis to other cities and provinces in Vietnam, and examining in more detail some of the issues that have been raised in the current report. It would be valuable to have an annual Provincial Competitiveness Report that would assess the competitiveness of each of the country’s cities and provinces, and identify areas that need

Competitiveness of Hanoi, Haiphong and Ho Chi Minh City: Executive Summary Page xi

improvement. The typical province in Vietnam has more than a million residents, which is a large enough unit for competitiveness to matter, and is larger than several of the states in the United States studied by Haughton and Slobodyanyuk (2001). Many entrepreneurs who are able to create a small enterprise find they have difficulty growing their businesses, because once a firm reaches a certain size the managerial and strategic skills required are not the same as those typically required for a small business. Our survey suggests that emerging firms need to devote more attention to formulating business strategies. In this context it would be helpful to develop a 30-page management tool kit, available both on-line and promoted in a series of workshops throughout the country, particularly in secondary cities and provincial towns. Subsequent modules could include further details on the construction and use of financial ratios; the conduct of customer surveys; the sources of business information; and the development of business plans. Experience from India has shown that a contest for the development of business plans can be helpful, and this might work in Vietnam too. No country is entirely free from corruption, but many of the managers that we surveyed indicated that they see this as a problem, and international surveys and top government officials concur. In combating corruption, transparency is important. It would be useful to study in some detail the ways in which greater transparency might help combat corrupt practices in Vietnam; the results could be discussed at government-business forums in order to refine any proposals. One specific problem raised in this report is that private firms appear to have difficulty obtaining credit in Haiphong. This needs to be investigated – perhaps by studying a score of loan proposals from small and medium enterprises that failed to obtain credit – in order to identify the sources of the problem and suggest solutions.

Competitiveness of Hanoi, Haiphong and Ho Chi Minh City Page 1

Chapter 1. INTRODUCTION Purpose of the Study Vietnam has had one of the ten fastest-growing economies in the world over the past decade, with average annual growth in per capita Gross Domestic Product (GDP) of 5.9% during 1992-2002.3 However, the economic growth has been geographically uneven, with particularly rapid growth in and around Ho Chi Minh City (HCMC), and slow growth in some urban and many rural areas. In this study we focus on the three largest cities – Ho Chi Minh City, Hanoi, and Haiphong – and ask why growth rates have differed among them; brief introductions to the cities are presented in Box 1.1. The purpose of the study is to determine what policies and underlying conditions are conducive to rapid economic growth in Vietnam. There are two main reasons for undertaking a study of this nature. First, it should provide pointers for those parts of Vietnam that hope to emulate the economic success of the larger cities, by helping better to identify those policies that enhance economic development, as well as those that hinder it. This is important, because there is evidence that the slight rise in expenditure inequality that has occurred over the past decade was largely due to a growing rural-urban gap [Haughton et al. 2001; Economist Intelligence Unit, December 2003]. Lagging areas will only be able to close this gap if they adopt best practices, and this is more easily done when there are useful lessons from the growth process in the top-tier cities. Second, despite its recent strong economic performance, Vietnam cannot afford to be complacent, and needs to pay continued attention to being competitive.4 The clearest evidence that Vietnam could develop even faster comes from a comparison with China; both countries have followed a similar path from a planned to a (largely) market economy, but economic growth in China has typically exceed the Vietnamese rate by about two percentage points annually, and inflows of foreign direct investment are twice as high (per capita) for China as for Vietnam.5 This view is widely held; in the words of United Nations Development Program resident representative in Hanoi, Jordan Ryan, "Vietnam should not be lulled by its success, … [it] can and must do much better as it faces intense global competition."6 Our approach is to focus on competitiveness. Following the work of Michael Porter (1990) and Jonathan Haughton and Vadym Slobodyanyuk (2002), we identify the key components of competitiveness in Ho Chi Minh City, Hanoi and Haiphong.7 This in turn enables us to identify

3 World Development Indicators CDROM, The World Bank, 2003. 4 For a recent argument along these lines, see David Dapice, Vietnam’s Economy: Success Story or Weird Dualism? A SWOT Analysis, Vietnam Program, Kennedy School of Government, Harvard University, May 2003. 5 Between 1992 and 2002, GDP per capita rose at an annual rate of 5.9% in Vietnam and 8.3% in China, according to World Bank figures (from World Development Indicators CDROM, 2003). Foreign direct investment inflows to China averaged $34 p.a. in 1997-99 and $35 p.a. in 2000-02. The equivalent figures for Vietnam were $23 and $17 respectively, according to the IMF, International Financial Statistics, various issues. 6 As reported by Agence France Presse, August 13, 2003. 7 The seminal work is Michael Porter, The Competitive Advantage of Nations, Free Press, New York, 1990. For an application to urban competitiveness, see Jonathan Haughton and Corina Murg, Metro Area and State


strengths and weaknesses, many of which may be influenced by the actions and decisions of local authorities, even in a country as administratively centralized as Vietnam. We are thus able to draw out a number of useful policy implications. To measure competitiveness, we rely heavily on the responses of 544 business managers to a survey that was undertaken in summer 2002, supplemented where possible by more ‘objective’ data such as wage and profit rates, and GDP and job growth rates. The questionnaire used in the survey is modeled on one developed by Michael Porter, adapted to the conditions of Vietnam. The overall response rate to the survey was a respectable 39%; further technical details are given in Chapter 3 and Annex 4.

Box 1 A Primer on the Three Large Cities

Hanoi, Haiphong, and Ho Chi Minh City are the three largest cities in Vietnam. They have “first-tier city” status,8 which means that they not only have provincial status, but also enjoy certain special privileges and priority from the central government in budget allocation and infrastructure investments. Hanoi is the capital of Vietnam. With an official population of 2.7 million (including about 1.1 million living in rural areas) and GDP per capita of US$821 in 2000, Hanoi accounts for 7.1% of GDP, 7.6% of industrial output, and 16.3% of cumulative foreign direct investment (FDI) commitments. The combined annual growth rate of GDP9 during 1995-2000 was 10.7%, substantially higher than the national rate of 7.1%. Hanoi is positioned by the central government to be the major pole of a strategic growth triangle that stretches to Haiphong and Quang Ninh. Haiphong is the major gateway to the sea for the provinces of northern Vietnam. Haiphong port is handling a rapidly increasing throughput, which exceeded 5 million tons in 2000. The population of Haiphong is 1.7 million (including about 1.1 million living in rural areas). With a GDP per capita of US$426 in 2000, Haiphong accounts for 2.3% of national GDP, 4% of industrial output, and 5% of FDI commitments. The combined annual growth rate of GDP Haiphong was 8.6% for the period of 1995-2000, or one fifth higher than the national growth rate. Ho Chi Minh City is the economic center of southern Vietnam, with an official population of 5.2 million (including 0.9 million living in rural areas). Ho Chi Minh City enjoys the highest GDP per capita (except Vung Tau) in the country, at US$1,030 in 2000. The city accounted for 17% of GDP, 25.5% of industrial output, and 25.4% of cumulative FDI commitments in 2000. During 1995-2000 the annual growth rate of GDP of Ho Chi Minh City was 9.9%, or two fifths above the national growth rate.

Competitiveness Report 2002, Beacon Hill Institute, Boston, 2002. A fuller description of Porter’s work is given below. 8 There are only four cities in Vietnam that have provincial status. The fourth city, Danang, was granted this status in 1996. 9 However, the GDP growth rates for provinces/cities should be used with caution because they are not perfectly compatible with the national rate, although all these data are prepared under the auspices of the Central Statistical Bureau and published in the country’s statistical year books.


The methodological approach is set out in the next section, followed by an explanation of the survey in section 3. We then provide further background on the three cities (section 4) and describe the measurement of competitiveness (section 5), before turning to business attitudes (section 6). We link competitiveness to outcomes, such as economic growth, in section 7, before drawing some conclusions in section 8. Sketches of Hanoi, Haiphong and Ho Chi Minh City Hanoi and Haiphong are the two main industrial centers of northern Vietnam. During 35 years of the centrally planned economic system (1955-1990), the two cities were developed mostly through investments made by the central and local governments, based on the domestic projected by a series of five-year plans. This favored heavy industry in the model of the countries in the socialist block, especially China and the Soviet Union. For most of this period, especially during 1960-1975, the private sector was not legally existent (Mekong Project Development Facility, 1999). The entrepreneurship of the two cities, therefore, atrophied for about three decades, until its rebirth in the late 1980s, when economic reform (“doi moi,” or “renovation”) was initiated in the country. Ho Chi Minh City came under the socialist economic planning system in 1975 when the country was unified. Private firms of medium to large size were nationalized during the 1975-1978 period. While the private sector still existed legally, it was very weak. In 1979, under the critical pressure of a severe contraction of foreign aid from the Soviet Union and Eastern Europe, coupled with a complete cut in aid from China, the country leadership came to a decision to “unfetter the production and business activities” and allowed private businesses to re-emerge (MPDF, 1999). Taking advantage of this watershed change, Ho Chi Minh City has pioneered the effort, dubbed as ‘fence-breaking’, to promote the business activities of all sectors. As a result, the city has become a driving force in the country’s shift towards economic reform launched nationally in the late 1980s. Therefore, the industries of Ho Chi Minh City, which were market-oriented prior to 1975, were less distorted during the years of the planned economy than those in Hanoi and Haiphong. In 1989, the state-owned sector accounted for a dominant share of industrial production in all three cities. This share was over 80% in Hanoi and Haiphong, and about 70% in Ho Chi Minh City -- all higher than the national level of 66%. The true private sector, including household businesses and private firms, accounted for a small share in the three cities (4.4% in Hanoi, 8.4% in Haiphong, and 16.8% in Ho Chi Minh City), again lower than the national level of 21.8%, as Figure 1.1 shows.10

10 Source: Industrial Data 1989-1993, Statistical Publishing House, 1994.


Figure 1.1. Share of Industrial Production by Sector

0%10%20%30%40%50%60%70%80%90%

Hanoi Haiphong Ho Chi MinhCity

Vietnam

State-ownedCooperativesPrivate

In 1989, Hanoi, Haiphong, and Ho Chi Minh together accounted for about 38% of national gross industrial production. By 2000, the three cities represented 26.4% of GDP, 37.1% of gross industrial production,11 46.7% of accumulated foreign direct investment (FDI) commitments, and 56.4% of exports for the whole country. In addition, the GDP growth rate of the three cities exceeded that of the country overall. During the period 1995-2000, the GDP growth rates of the three cities were higher than the national average – 53% above the national average in Hanoi, 23% higher in Haiphong, and 41% higher in Ho Chi Minh City. The three cities, as such, have had a substantial impact on the dynamics and pattern of nationwide growth over the last decade, as the indicators in Table 1.1 show clearly. Table 1.1 Selected key indicators for Hanoi, Haiphong, and Ho Chi Minh, 2000

Hanoi Haiphong Ho Chi Minh Indicator Vietnam Number HN/VN Number HP/VN Number HCM/VN

Land area (km2) 329,600 921 0.3% 1,508 0.5% 2,095 0.6% Population (million) 77.6 2.7 3.5% 1.7 2.2% 5.2 6.7% GDP (million, US$)* 31,724 2,112 6.7% 719 2.3% 5,476 17.3% Industrial production, 1989** (billion VND, current price)

13,583

1,008

7.4%

253

1.9%

3,922

28.9%

Industrial production (billion VND, 1994 price)

198,326 15,168 7.6% 7,995 4.0% 50,533 25.5%

Industrial Labor Force (‘000)

3,506 196 5.6% 108 3.1% 677 19.3%

* The GDP data at current price (2000) are converted into $US at the rate 14,000 VND=1USD. ** Industrial Data 1989-1993, Statistical Publishing House, 1994 Note: HN is Hanoi, HP is Haiphong, HCM is Ho Chi Minh City, and VN is Vietnam.. Source: Vietnam General Statistics Office, 2001.

11 The share of the gross national industrial production of the three cities would be even higher if oil production were excluded.


Chapter 2: METHODOLOGICAL BACKGROUND

There is clear evidence that countries and sub-national units (states, metropolitan areas) that are more competitive are able to achieve and maintain a higher level of affluence (e.g. Haughton and Murg 2002; Porter 2003). To the extent that sub-national units have some decision-making authority – and we argue that in Vietnam they have considerable and growing powers – then the study of competitiveness can provide useful pointers to the policies and procedures that provincial and city governments should put in place in order to encourage economic development. Measuring Competitiveness What is meant by competitiveness? We define a state, province or city as being competitive if it has in place the policies and conditions that ensure and sustain a high level of per capita income and its continued growth (Haughton and Slobodyanyuk 2001). To achieve this, a state, province or city “needs to be able to attract and incubate new businesses, and to provide an environment that is conducive to the growth of existing firms” (ibid, p.5). It is useful to think of competitiveness as a ‘catch-all’ term that covers what Michael Porter calls “the microeconomic foundations of prosperity” (Porter 2000). The three main cities in Vietnam face the same macroeconomic environment, but they differ in their microeconomic in terms of legacy, resources, and local policies. And these factors matter. In Porter’s words, “wealth is actually created at the microeconomic level … in the ability of firms to create valuable goods and services using productive methods” [(2000, p.40). Thus the outcome of competitiveness should be greater affluence. For the concept of competitiveness to be useful, it needs to be ‘operationalized’, so that it can be measured. The World Economic Forum has done this in its annual Global Competitiveness Report, and the Beacon Hill Institute has followed the same route in three recent reports on competitiveness at the sub-national level of the United States. However, there has been as yet no attempt to measure competitiveness at the sub-national level in Vietnam. In measuring competitiveness, it is helpful to begin with the basic economic relation:

Y = f(K, L, technology) This says that income (or output) depends on the amount of inputs of capital (K), labor including human capital (L), and technology. More inputs lead to more outputs. But what influences raise input levels? And why do some cities mix the ingredients more successfully than others? The most systematic recent approach to answering these questions is given by the ‘diamond’ model developed by Michael Porter (1998). Porter finds it useful to group the influences into four inter-related components (see Figure 2.1):

i. Factor conditions, which cover the availability, quality and cost of inputs, including human resources, capital goods, natural resources, and infrastructure (physical, administrative, and informational).

ii. Demand conditions, and particularly the sophistication of local demand.


iii. Related and supporting industries, which focuses on the capability of locally based suppliers.

iv. The context for firm strategy and rivalry, which covers the rules, incentives and pressures governing local rivalry, including the role played by government. Porter believes that keener competition spurs innovation and the growth of productivity.

Figure 2.1. Determinants of Regional Competitiveness

Source: Porter 1998: 211. These are still very broad categories, and so, in the spirit of the Porter-inspired Global Competitiveness Report, we actually classify our indicators into nine groups. The first two groups refer to government and related institutional factors; the next four groups refer to input conditions and supporting industries; the seventh group covers openness; and is followed by groups that refer to the nature of suppliers, and the extent of domestic competition.

Context for Firm Strategy and

Rivalry

Context for Firm Strategy and

Rivalry

Related and Supporting Industries

Factor (Input) Conditions

Demand Conditions

• A local context that encourages investment and sustained upgrading

• Vigorous competition among locally based rivals

• Sophisticated and demanding local customers

• Customer needs that anticipate those elsewhere

• Unusual local demand in specialized segments that can be served globally

• Factor (input) quality, cost, quantity, and specialization:

- Natural resources - Human resources - Capital resources - Physical infrastructure - Administrative Infrastructure - Information infrastructure - Scientific and Technological infrastructure

• Availability of capable, locally based suppliers and supporting industries

• Presence of clusters of firms instead of isolated industries

GOVERNMENT

CHANCE


The nine groups into which we classify the determinants of competitiveness are summarized in Table 2.1, with brief comments on why they are expected to be important to enhancing growth in an area.

Table 2.1 Nine components of Competitiveness Government and Fiscal Policy

Businesses are more likely to flourish in an area with moderate tax rates, and with efficient, transparent government.

Institutions An area will be more attractive to business if the legal system is sympathetic to business concerns, if the regulatory burden is light, and if crime is low.

Infrastructure The quality and cost of the infrastructure – roads, electricity, water, and telecommunications – are important components of competitiveness because they affect the cost of doing business.

Human Resources Businesses can compete successfully if they can hire good quality workers at moderate wages.

Technology The development and application of technology is at the very heart of economic development, and has been so since the industrial revolution.

Finance Businesses need to be able to mobilize financing for investment, both internally and from the financial system, both in order to grow and in order to spread risk.

Openness When cities and provinces are open to trade, their businesses are more likely to be competitive, because they are subject to the discipline of the world market. This makes them more productive, and less prone to lobby for continued protection from imports.

Supporting Industries A region will be more competitive if capable locally based suppliers and supporting industries are available. This creates clusters of firms, which potentially reinforce each other.

Domestic Competition Firms become more competitive if their customers are sophisticated and demanding, because it forces firms to improve the quality and price of their output.

Note: Classification loosely based on those used by Porter (2003) and the Beacon Hill Institute (2001, 2002).

Competitiveness Matters For competitiveness to be useful as a guide to policy, it needs to be measured in a coherent and consistent fashion, and the measure needs to be associated with economic growth and development. It turns out that the measures of competitiveness that have been constructed are relatively successful at “explaining” economic success. Using an approach similar to the one outlined here, the Beacon Hill Institute constructed indices of competitiveness for the 50 states of the United States (Haughton and Slobodyanyuk 2001), and for the 50 largest metropolitan areas in the country (Haughton and Murg 2002). In both cases the authors found that a higher index of competitiveness was clearly related to the level of real personal income per capita (a good measure of affluence), and to its growth rate. Also using a 9-factor model to create a “microeconomic competitiveness index,” Porter (2003) found that countries with better scores on this index were more affluent. Using data on 80 countries in 2001, he found that “the measured microeconomic differences among nations prove to account for 81 percent of the variation across countries in the level of GDP per capita” (Porter 2003: 24). In short, it makes sense to measure competitiveness, because it is a useful guide to the economic potential and performance of countries, states and cities. Before discussing the


competitiveness of Hanoi, Haiphong and Ho Chi Minh City, we first will describe how the survey data were collected, and provide some additional information on the three cities.

Why Competitiveness Is Relevant Within Vietnam The study of competitiveness is of purely academic interest unless the units that one is examining, whether provinces, cities, or countries, have significant decision-making power. Only then can these units make the policy and administrative changes – the “microfoundations” – that would improve competitiveness. Vietnamese provinces have less autonomy than, for instance, a typical state or even city in the United States. All key personnel are appointed, or at least approved, by the central authorities; major financial decisions must be approved centrally; and there is little local autonomy in determining school curricula or staffing levels. In this regard, Vietnamese provinces are closer in concept to the French départements (on which they were modeled) than to an American state. However, Vietnamese provinces have considerable authority in some key areas. For instance, in some cases they can grant investment permits. They can facilitate land clearance. They can help smooth the way for investors. They have a role in planning and building roads and other infrastructure, can appropriate and sell land, and can often issue project bonds for infrastructure. These decisions are made at the provincial (including city) level by the People’s Council and mayor, and in the parallel structure of the Communist Party. There is considerable overlap in personnel between the two structures, which helps ensure that information flows easily and that decisions are made in a consistent fashion. The importance of provincial/city government in supporting economic growth and development has only recently become clear. David Dapice (2003), in an interesting commentary on the state of the Vietnamese economy, argues that “the importance of shrewd provincial economic policies may not yet be fully appreciated” (p.12). While not every province can attract much foreign investment, he argues that investment by government and by private businesses is larger, and more widely spread, and increasing private investment should be the main target of provincial efforts. In his words, “while a survival strategy is to rely on state funding, a success strategy is to try to attract more domestic investors in general, and perhaps foreign investors in particular cases” (p.14). Recognizing the importance of sub-national government to economic growth, the United Nations Development Program has called for strengthened local governance in Vietnam.12 They are also more similar to municipalities in the Philippines, where in 2002 the Asian Institute of Management and the Department of Trade and Industry ranked 33 cities and towns by their levels of competitiveness.

12 As reported by Agence France Press, August 13, 2003.


Chapter 3: THE SURVEY OF BUSINESS LEADERS There are two approaches to measuring competitiveness. One is to base the measure on “objective” data, using variables such as the tax burden, the number of Internet connections per capita, average educational level per capita, and so on. This is the approach taken by Haughton and Murg (2002) for the metropolitan areas of the United States; provided the data are available, this approach is inexpensive, and the results highly defensible. However, it is sometimes necessary to collect information directly from business leaders, especially if one is trying to measure attitudes. The excellent annual Global Competitiveness Report combines survey data with objective measures in constructing its measures of competitiveness. The main problem with specially designed surveys is that they are expensive to administer. In the case of Vietnam, the amount of objective information on competitiveness at the provincial and city level is relatively limited. Thus is was necessary to undertake a survey of business leaders in order to obtain the necessary data. In this section we discuss the design of the survey and the sampling procedures followed. Sampling Procedures and Response Rate The measures of competitiveness in this report are largely based on a survey of business leaders in Hanoi, Haiphong and Ho Chi Minh City that was conducted in summer 2002. The survey had two main objectives: (i) to document the microeconomic foundations of growth and competitiveness in Vietnam’s

three largest cities: and (ii) to solicit the opinions of business people about strategies for the future, and policy

changes that need to be made. The survey was confined to registered firms with five or more employees located in the three cities. Manufacturing firms were over-sampled to ensure that they consisted of at least half of all firms interviewed in each city. This was done in the belief that such firms are particularly important at this point in Vietnam’s economic development, and would be well placed to provide insights into the business dynamics in each city. The information on all registered firms, as of December 31, 2000, for the three cities is given in Table 1.1, and represents the universe from which the firms were sampled. Table 3.1 Registered Firms in Hanoi, Haiphong, and Ho Chi Minh City, December 31, 2000

All Registered Firms Of which: Manufacturing Firms City

Total

1-5 employees

More than 5 employees

Total

1-5 employees

More than 5 employees

Hanoi 4,643 477 4,166 1,044 21 1,023 Haiphong 1,090 197 893 337 5 332 Ho Chi Minh 8,583 1,910 6,673 2,043 21 2,022 TOTAL 14,316 2,584 11,732 3,424 47 3,377

Source: GSO, 2002


In cooperation with the Vietnam Chamber of Commerce and Industry (VCCI), local units of the General Statistics Office, and local business associations in the three cities, a sample of 1,400 firms, including 450 firms in Hanoi, 200 firms in Haiphong, and 750 firms in Ho Chi Minh, was randomly selected, taking into account the two criteria set out above. A complete list of firms with more than 5 employees was generated, using a database from the VCCI in combination with information from the Department of Industry and Provincial Statistical Offices. Then 20% of the manufacturing firms on the list, and 10% of all non-manufacturing firms, were chosen as randomly as possible in order to construct the sample13. The survey questions were based on those used by Michael Porter in generating data for the Global Competitiveness Report. The questionnaire (translated into English) is reproduced in Annex 7. Over half of the questions in the questionnaire were new or were adapted to Vietnamese conditions, while the remainder were taken directly from Porter’s questionnaire. Most of the questions about business attitudes, corruption, counterfeit goods, and the role of local government are unique to the questionnaire designed for the Vietnam study. The questionnaire was first tested on a small sample of business leaders, which allowed for some additional fine-tuning before it was used in the field. The survey questionnaire was sent to the 1,400 selected firms.14. Each firm was invited to participate in one of a series of workshops on “Competitive Strategy of Firms and Regional Competitiveness” organized in each of the three cities, in cooperation with VCCI, local business associations, and executive training programs in the three cities. These workshops significantly enhanced the cooperation of participating firms in the survey process. We obtained 544 valid responses, representing a respectable overall response rate of 39%. The response rates for each of the cities was: 28% (128 out of 450) for Hanoi, 64% (128/200) for Haiphong, and 38% for Ho Chi Minh City (288/750). The notable effectiveness of and special cooperation of the Union of non-state businesses in Haiphong substantially enhanced the response rate of private firms from the city. Profile of Surveyed Firms In this section we provide a brief profile of the firms surveyed, looking at their age, size, line of business, and export orientation. This helps provide some context for the subsequent discussion. Ownership Almost a third of the firms surveyed were state-owned enterprises, with a higher proportion (44%) in Hanoi and a lower proportion in Ho Chi Minh City (26%). Locally owned private firms made up two-fifths of the total surveyed, with foreign-owned and joint-venture firms making up the balance, as Table 3.2 shows.

13 About 70% of the sample are perfectly randomly selected in this process. The remaining 30% of the sample is selected based on the recommendations by the participants in the strategy workshops. 14 See Annex 4 for the survey questionnaire.


Table 3.2 Profile of firms surveyed, by ownership

Hanoi Haiphong Ho Chi Minh City

Total

# of firms 128 128 288 544 % of firms in the entire sample 23.5 23.5 52.9 100.0 Ownership % % % % Private 37.7 50.8 41.3 42.3 State-owned 44.3 31.3 26.0 31.1 Foreign-owned 12.3 12.5 18.8 15.6 Joint ventures 10.7 5.5 13.9 11.0 All 100 100 100 100 Period of establishment About half of the firms surveyed in each city were established during the period 1990-2000, as the country was moving rapidly from a planned to a largely market economy15 and experiencing rapid economic growth, as Figure 3.1 shows. Approximately 20% of the surveyed firms in each city were established after 2000, when a new enterprise law came into effect, substantially simplifying the procedures for starting a new business. The remaining 30% of firms were established before 1990, and most of them have some experience of working in a planned economy. The similarity of the distributions of surveyed firms by period of establishment across the three cities partly confirms the randomness of our sample selection.

Figure 3.1. Distribution of Surveyed Firms by Year Founded

31% 28% 26%

53%51% 54%

16% 21% 20%

0%10%20%30%40%50%60%70%80%90%

100%

Hanoi Haiphong Hochiminh

Sha

re o

f City

Sub

sam

ple

After 20001990-2000Before 1990

15 The start of Vietnam’s transition from a planned to a market-driven economy is usually given as December 1986, when the Party Congress approved the policy of doi moi (“renovation”). The major reforms were implemented in the following years, including the institution of use rights for property, price and exchange rate liberalization, creation of a modern banking system, and encouragement of foreign investment.


Line of Business As a consequence of the deliberate bias towards the manufacturing sector in our sample selection, the shares of manufacturing firms in the sub-samples of all three cities are high (52% for Hanoi, 64% for Haiphong, and 63% for Ho Chi Minh City), as indicated in Figure 3.2. The ratio of surveyed firms producing consumer products to those producing intermediate inputs are similar for Hanoi (44%:8% =5.5) and Ho Chi Minh City (53%:10%=5.3), but much lower for Haiphong (44%:20%=2.2). A possible explanation for this difference is the long-standing bias of Haiphong firms towards the production of intermediate goods.

Figure 3.2. Distribution of Surveyed Firms by Line of Business

48%36% 37%

8%20%

10%

44% 44%53%

0%10%

20%30%

40%50%

60%70%

80%90%

100%


Services

Intermediate Inputs

End-Consumer Products

Size of employment The size distributions of surveyed firms are similar in the three sub-samples, as Figure 3.3 shows. Most of the firms interviewed have fewer than 500 employees (82% for Hanoi, 88% for Haiphong, and 85% for Ho Chi Minh City).

Figure 3.3. Distribution of Surveyed Firms by Employment

21% 28% 32%

35%37% 28%

26%22% 25%

18% 13% 15%

0%10%20%30%40%50%60%70%80%90%

100%


>500

100-499

50-99

<50 employees


Exports A substantial proportion of surveyed firms – 63% in Hanoi, 74% in Haiphong, and 54% in Ho Chi Minh – are not involved in exporting at all, as the data in Figure 3.4 show. At the other end of the spectrum, the share of firms earning more than half of their revenue from exporting varied from 20% in Hanoi and 23% in Ho Chi Minh City, to just 9% in Haiphong. The low export-orientation of Haiphong businesses is consistent with the view that the city has a high concentration of import-substituting firms.

Figure 3.4. Distribution of Surveyed Firms by Export Share

63%74%

53%

17%

16%

24%

20%10%

23%

0%10%20%30%40%50%60%70%80%90%

100%


Export> 50% ofrevenuesExport <50% ofrevenuesNo export

Possible Sources of Bias In interpreting the results of the survey it must be borne in mind that the respondents are business people. There is a natural tendency for people to blame others when things do not work well, so one might expect business people to be more critical of government, their competitors, and the banks than they are of their own performance. Yet we know that business leaders frequently have weaknesses: many lack a clear business strategy, pay inadequate attention to developing managerial skills within their firms, and cannot put together a bankable business plan. It is difficult to assess the extent of such weaknesses on the basis of an opinion survey. A second possible source of bias arises because of the “anchoring” problem. One manager might be satisfied with the business environment because he or she has a narrow frame of reference, having had limited opportunities to travel or to observe conditions elsewhere. Another manager, with more experience of the wider world, might be thoroughly dissatisfied because he or she is, implicitly, using a higher standard of reference. We cannot measure the extent of anchoring bias, but the possibility of such bias should be kept in mind when reviewing the results reported below.


Chapter 4: MEASURING COMPETITIVENESS OF THE THREE CITIES

In this chapter we assess the competitiveness of Hanoi, Haiphong and Ho Chi Minh City, based largely on the results of the survey of business leaders that was undertaken for this study in the summer of 2002. In setting out the results of the survey, and evaluating the competitiveness of the three cities, we essentially follow the organization used by Michael Porter and his co-authors in the Global Competitiveness Report. We discuss each of nine dimensions of competitiveness, report the results, and aggregate them into a single summary measure. Government Businesses are more likely to flourish in an area with moderate tax rates, and with efficient, transparent government. By these measures, how do the three cities rate? The answers are shown in Figure 5.1, where respondents are asked to state, on a scale of 1 (not urgent) to 5 (extremely urgent), how strongly they felt about a set of statements about government priorities. Respondents in Haiphong were somewhat more likely to see overall needs as urgent (mean response 4.1) than in Ho Chi Minh City (3.9) or Hanoi (3.8), which needs to be borne in mind when interpreting the results. In each of the three cities, respondents felt that the most urgent priority was to “effectively fight corruption”, with particularly clear support for this proposition coming from business people in Haiphong and Ho Chi Minh City. This view is echoed in the results shown in Figure 4.2, where most respondents clearly disagreed with the statement that “corruption is not rampant”. Second on the list of urgent tasks for government was the need to “enhance the competence and working ethics of government officials” (Figure 4.1). Many disagree with the proposition that local government officials are “in general” competent (Figure 4.2), and on balance do not consider that local government is “responsive to the needs of the business sector” (Figure 4.2). The message here is clear: business people see a significant number of those working in government as lacking professionalism, and want this to change. Despite being unimpressed by the quality of government officials, respondents do recognize, in Hanoi and Ho Chi Minh City at least, that the performance of local government has improved “significantly” (Figure 4.2). The outlier here is Haiphong, where opinion is divided on whether there has been any such improvement.


Figure 4.1. Priorities for Government

3.34

3.5

3.84

3.69

3.61

3.99

3.89

3.78

3.94

4.19

4.06

4.13

3.96

4.23

4.31

4.55

3.39

4

3.73

4.1

4.15

3.82

4.04

4.18

3.92

3.89

4.19

3.99

4.39

4.5

4.54

4.55

3.24

3.5

3.61

3.41

3.66

3.77

3.71

3.68

3.8

3.98

3.9

4.05

4

4.04

4.17

4.3

1 1.5 2 2.5 3 3.5 4 4.5 5

Provide support to the collaboration between business sector anduniversities/research institutes

Promote public-private partnership and business networks

Upgrade telecom. infrastructure

Upgrade the banking system

Speed up privatization

Reduce the costs of telecom and Internet Services

Establish a strong business information center to support firms in market researchand technology acquisition

Upgrade the sources of power supply

Promote gloabally the image of Vietnam and your city

Upgrade the quality of K-12 education system

Upgrade transportation infrastructure

Invest in vocational education to train skilled workers

Introduce stronger incentives for business investment and expansion

Streamline and upgrade the regulatory system

Enhance the competence and working ethics of government officials

Effectively fight corruption

Mean response (1=not an urgent priority, 5=extremely urgent priority)

HanoiHaiphong

HCMC

There are considerable similarities in opinion among business people in Hanoi and Ho Chi Minh City about what else government should be doing. In both cities, respondents would like to see a more streamlined regulatory system, an improved educational system, better transportation infrastructure, cheaper communications, and stronger incentives for business investment. Business people in Haiphong agree with the need for an improved regulatory system and stronger investment incentives, but they also expressed other priorities, most notably faster privatization, an improved banking system, and better power supply.


Box 2 Corruption

Corruption stands out as the most severe problem in all the three cities. On a scale of 1 (completely disagree) through 7 (completely agree), the average response to the statement “corruption is not rampant” was just 2.2 for Hanoi and 2.4 for Haiphong and Ho Chi Minh City. In other words, there was significant agreement that corruption is widespread. Interviews with survey respondents show that there are three main practices that are commonly referred to as corruption:

(i) “lubrication payments”: firms have to pay some cash to government officials of business-related departments, such as customs, taxation, land management, and the agencies with licensing/approving authority, in order to get favorable treatment, or at least avoid unfavorable treatment;

(ii) “corrupt officials”: these officials have certain power over some businesses (e.g. inspections) and they consistently abuse it for their own interests; and

“kickbacks”: firms dealing with procurement or construction related to government and state-owned enterprises are mostly obligated to pay a kickback, which is typically proportional to the value of the transaction. The government and donors are well aware of the problem. At a conference on finance in December 2003, Prime Minister Phan Van Khai spoke out against “corruption, losses and wastefulness,” while also saying that it is difficult to fight corruption successfully. In an interview with Tuoi Tre magazine in November 2003, Minister of Police Le Hong Anh spoke of “three epidemics,” with people paying for state positions, to win state contracts, and to get protection from prosecution. The World Bank has also begun to take a stronger position on the issue, arguing in a recent report that “the abuse of public office for private gain risks making everyday life miserable … and leading to resource misallocation and waste” (World Bank 2003, p.ii) and argues for making the fight against corruption a priority. The United Nations team in Vietnam recently wrote that . "administrative inefficiency and growing corruption have resulted in diminishing returns on investment and call into question the sustainability of the current economic growth over the long term” (as reported by Agence France Presse, December 2, 2003). Institutions The second dimension of competitiveness focuses on the quality of institutions. An area will be more attractive to business if the legal system is sympathetic to business concerns, if the regulatory burden is light, and if crime is low. The importance of institutions is emphasized by Adam Smith in “The Wealth of Nations”,

“Commerce and manufactures can seldom flourish long in any state which does not enjoy a regular administration of justice, in which the people do not feel themselves secure in the possession of their property, in which the faith of contracts is not supported by law, and in which the authority of the state is not supposed to be regularly employed in enforcing the payment of debts from all those who are able to


pay. Commerce and manufactures, in short, can seldom flourish in any state in which there is not a certain degree of confidence in the justice of government”.16

The most positive news is that business people in all three cities agree that the procedures for starting up a new business are simple (see Figure 4.2). This represents an improvement, because it was a serious problem until a few years ago, and indicates that the new Enterprise Law, which went to effect in 2000, has exerted a significant positive impact.

Figure 4.2 Instutional Underpinnings of Competitiveness

5.2

5.1

4.0

3.9

3.8

3.6

5.1

2.4

5.0

3.9

3.6

3.1

3.8

2.8

4.4

2.4

4.8

4.8

3.8

3.7

4.0

3.6

5.1

2.2

1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5

The procedure for starting up a new business is simple

Local government has signif icantly improved its performance in thelast three years

Local government treats f irms of all types of ow nership equally

Local government is responsive to the needs of the business sector

The regulatory system is clear and effective

Local government off icials, in general, are competent

Fake goods are rampant

Corruption is not rampant

Mean Response (1=completely disagree, 7 = completely agree)

HanoiHaiphong

HCMC

Opinion is divided as to whether local government treats all types of firms (private, state-owned, foreign-invested) equally (Figure 4.2), and there was no consensus on whether the regulatory system is “clear and effective” (Figure 4.2). There is serious concern about intellectual property rights, as evidenced by the problem of counterfeit products, which is seen as especially severe in Hanoi and Ho Chi Minh City (Figure 4.2). This could become a major obstacle to firms in these two cities as they try to move up the value-added chain. Infrastructure The quality and cost of infrastructure – roads, electricity, water, and telecommunications – are important components of competitiveness because they affect the cost of doing business. How

16 Adam Smith, Wealth of Nations, p. 910, Chapter III, Book Five. First published 1776.


satisfied are business people in Hanoi, Haiphong and Ho Chi Minh City with the infrastructure there? Overall, the quality of the infrastructure is considered to be neither particularly good nor bad; satisfaction ran somewhat higher in Ho Chi Minh City (4.3) than in Hanoi (4.0) or Haiphong (3.7), on a scale that runs from 1 (low satisfaction) to 7. The significant point here is that there is considerable room for improvement in creating an infrastructure that is favorable to business growth.

Figure 4.3 Infrastructure

4.9

4.1

4.8

4.3

4.1

2.62

1.96

4.3

3.9

4.2

4.3

4.3

4.0

2.43

2.75

3.7

4.8

4.5

5.0

4.1

4.2

2.3

1.92

4.0

1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5

The supply of pow er is reliable

The quality of the Internet service is high

The quality of the telephone system is high

The quality of services provided by international ports is high

The overall quality of the road system is high

The land acquisition procedure for business set-up or expansion issimple

Land rent is low er relative to the average rate in neighboringprovinces

The overall quality of infrastructure is satisfactory


HanoiHaiphong

HCMC

The details are revealing, and are set out in Figure 4.3. Land rent in the cities is considered to be very high, especially in Hanoi and Ho Chi Minh City, and the procedure for acquiring land is regarded to be complicated. The quality of roads and port services is considered to be similar across the three cities. But while the telephone system is considered to be good in Hanoi and Ho Chi Minh City, it received mixed reviews in Haiphong. Hanoi also led in the level of satisfaction with Internet services. Power was considered to be reliable in the two larger cities, but much less so in Haiphong. Respondents in Ho Chi Minh City were slightly less satisfied with telephone and Internet services than were respondents in Hanoi; we have interpreted this as reflecting poorer services in Ho Chi Minh City, but it is also possible that firms there are more demanding, and expect better service than is considered adequate elsewhere in the country.


Human Resources Businesses can compete successfully if they can hire good quality workers at moderate wages. Figure 4.4 provides some information on this element of competitiveness. Respondents agreed that the supply of unskilled labor is ample. They also expressed a relatively high degree of satisfaction, in all three cities, with the quality of education from kindergarten through to the end of high school (Figure 4.4). But there are warning signs too. A significant number of respondents, especially in Haiphong, said that the supply of skilled labor is not ample (Figure 4.4), and respondents in all three cities stated that improving the quality of K-12 education and vocational education are urgent priorities (Figure 4.1). A possible explanation for these apparently contradictory findings is that schools and colleges in Vietnam vary widely in quality; workers who attended one of the better school are seen as well educated, but this does not apply to all. If this interpretation is correct, a Vietnam will need to pay more attention to improving the quality of its weaker schools. Although the working environment in Hanoi and Ho Chi Minh City is “attractive to talented people,” this is definitely not seen to be the case for Haiphong. Managers in Haiphong appear to have difficulty recruiting top graduates from major universities; a problem that is not unusual in second-tier cities elsewhere. It is worthy to note that most respondents do not see government support for more collaboration between businesses and universities as a high priority (Figure 4.1). A possible reason is that universities have not become highly capable partners for businesses in their efforts to enhance growth and competitiveness.

Figure 4.4 Human Resources

5.08

4.78

4.03

4.5

2.87

5.05

3.38

4.46

4.54

4.54

4.02

4.81

1 1.5 2 2.5 3 3.5 4 4.5 5 5.5

The w orking environment isattractive to talented people

The supply of unskilled labor isample

The supply of skilled labor is ample

The overall quality of the K-12education system is high


HanoiHaiphong

HCMC

Technology The development and application of technology is at the very heart of economic development, and has been so since the industrial revolution. In this section we review the use and application of technology by businesses in the three cities. The responses are summarized in Figure 4.5.


Some, but not all, firms are embracing technology quickly. Most business leaders use computers, e-mail, and the Internet, although firms in Haiphong clearly lag behind those in the two bigger cities. According to the survey, 61% of firms in Hanoi and 67% in Ho Chi Minh City have their own e-mail, while this figure is only 30% for Haiphong. Firms in Ho Chi Minh City have an easier time recruiting and retaining engineers, and appear to have the best information about technology and market demand. There is substantial collaboration with foreign suppliers and customers, a key element in the process of technology transfer. However, links with universities and research institutes and not particularly strong (Figure 4.7), and strengthening them is not seen as a high priority (Figure 4.1).

Figure 4.5 Technology

5.5

5.1

4.7

5.1

5.1

4.9

4.7

4.2

5.2

4.6

4.0

4.6

5.0

4.0

4.2

4.3

5.7

5.1

4.8

5.1

5.2

4.3

4.4

4.4

1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0

Computers are extensively used for management

E-mail is extensively used for communication

The Internet is extensively used for market research and learning

Using the Internet and computers potentially creates sizeable valuesfor the company

Firms collaborate closely w ith foreign suppliers and customers toshare information and transfer technology

It is easy for a f irm to recruit and retain qualif ied engineers

Firms have access to updated and reliable information on newtechnology and market demand

Firms have close partnerships w ith research institutes anduniversities in tackling their business challenges


HanoiHaiphong

HCMC

Another way to examine the dynamics of structural change in the manufacturing sector in the three cities is to group industries by the levels of their technological intensity. Based on the UNIDO technological classification for manufacturing industries (OECD 2001), we classify industries into four groups: • High-tech, including two industries: TV-Radio-Telecommunication Products, and Medical &

Precision Instruments/Watches & Clocks. • Medium-high tech, including three industries: Chemicals and Related products, Motor

Vehicles, and Machinery-Office Equipment-Electric Apparatus. • Medium-low tech, including four industries: Non-metallic Mineral Products, Products

fabricated from Metals, Other transportation means (ships, wagons), Rubber and Plastic Products.


• Low-tech, including ten industries: Textiles, Garments, Shoes and Leather Products, Basic Metals, Foodstuffs and Beverages, Tobacco, Paper and Related Products, Furniture, Wooden and Bamboo products, and Others.

This is necessarily an imperfect classification, since there are high-tech firms even in low-tech industries, but it represents an adequate approximation. The sectors are listed in Table 4.1, which also shows how they were classified into technological groups.

Table 4.1. Structural Shift of Vietnam’s Manufacturing Sector by Industry

National Structure Manufacturing Industries 1995 2000

Technological Intensity

Export orientation

1. Textiles 7.4% 5.5% Low tech Export oriented

2. Garment 3.5% 3.3% Low tech Export oriented

3. Shoes and Leather Products 4.3% 4.9% Low tech Export oriented

The Export-oriented Group (1+2+3) 15.2% 13.7% 4. Chemicals and Related products 6.1% 6.1% Med-High tech Protected 5. Non-metallic Mineral Products 11.0% 10.0% Med-Low tech Protected 6. Metals 4.1% 3.2% Low tech Protected 7. Motor Vehicles 1.8% 1.8% Med-High tech Protected The Protected Industries Group (4+5+6+7) 23.0% 21.1% 8. Products fabricated from Metals 2.8% 3.2% Med-Low tech Other 9. Machinery, Office Equipment, and electric Apparatus 2.9% 3.5% Med-High tech Other 10. TV, Radio, and Telecom. Products 2.5% 2.4% High tech Other 11. Medical & Precision Instruments/Watches & Clocks 0.2% 0.2% High tech Other 12. Other transportation means (ships, wagons) 2.3% 3.5% Med-Low tech Other 13. Foodstuff and Beverage 32.4% 24.0% Low tech Other 14. Tobacco 4.8% 3.2% Low tech Other 15. Papers and Related Products 2.3% 2.2% Low tech Other 16. Rubber and Plastic Products 2.7% 3.5% Med-Low tech Other 17. Furniture 2.4% 2.2% Low tech Other 18. Wooden and Bamboo products 4.0% 2.0% Low tech Other 19. Others 2.4% 15.3% Low tech Other The Other Industries Group (8----19) 61.7% 65.2% All The Manufacturing Sector 100.0% 100.0% Source: Computed from GSO, 2001.

Using the information from Table 4.1 and Annex 2, we broke down industries by technological intensity for each of the three cities, as shown in Figure 4.6. Both Hanoi and, to a lesser extent Ho Chi Minh City, moved away from low-tech and towards high tech manufacturing between 1995 and 2000. Haiphong, however, moved in the opposite direction, with the share of low technology manufacturing actually increasing slightly, from 55% in 1995 to 57% in 2000.


Figure 4.6. Structure of The Manufacturing Sector by Technology Intensity, 1995 and 2000

67% 66%

49%41%

55% 57%67% 62%

19% 20%

18%24%

35% 34% 16%17%

11% 11%

23% 22%

7% 9%13% 17%

3% 3%10% 13%

3% 0% 4% 4%

0%10%20%30%40%50%60%70%80%90%

100%

1995 2000 1995 2000 1995 2000 1995 2000

Vietnam Hanoi Haiphong HCMC

Low Tech Medium-Low Tech Medium-High Tech High Tech

Case 1 Corruption Impedes the Development of Technology Firms

The TL Computer company [not its real name] sells computer hardware and software in Hanoi. The owner of this private company believes that government corruption is seriously impeding the growth of technology companies in Vietnam. The problem arises because government itself is the biggest single purchaser of computer equipment and software, and its purchasing managers typically want kickbacks of 20-30% of the market price of the equipment. Quite apart from reducing the amount of equipment that the government can acquire, this policy has a corrosive effect on business people: The kickback practice not only increases the cost, but also requires enormous investment in building trust and relationships. The managers now have to spend more time cultivating relationships (such as drinking together, visiting karaoke bars, etc.), which means they pay less attention to improving the efficiency of their businesses. In the words of the manager, one has to choose whether to invest in relationships (build to live) or in product development (build to last). Most firms choose the first option. Economist Jagdish Bhagwati of Columbia University has referred to such activity as directly unproductive behavior (Bhagwati 1982), and considers it a major cause of poor economic performance wherever it occurs.


Finance Rapid economic growth requires an increasingly sophisticated financial system, to collect funds from millions of savers, and channel credit to businesses with growth potential. The ability to tap outside funding allows firms to grow more quickly, and also to spread risk more efficiently.

Figure 4.7. Finance

4.4

4.35

4.22

2.23

3.48

3.02

3.17

3.08

4.39

4.34

4.29

2.44

1 1.5 2 2.5 3 3.5 4 4.5 5

It is not diff icult for a good projectto get f inancing

The total costs of borrow ingmoney from banks (including

interest and informal fees) arereasonable

Banks are responsive to f irms’demand

The cost of living is low relative tothe average national standard


HanoiHaiphong

HCMC

The key information on finance from the survey is shown in Figure 4.7. There is a clear difference between the experience of businesses in Hanoi and Ho Chi Minh City on the one hand, and private firms in Haiphong on the other. In the two larger cities, banks are seen as responsive (although slightly less so in Ho Chi Minh City than in Hanoi, perhaps because customers are more demanding there); loans are not too difficult to obtain, even for private firms; and the cost of borrowing is “reasonable”. However, respondents from private firms in Haiphong report a very different situation, of unresponsive banks, high borrowing costs, and problems in getting financing for projects. The sharp contrast between the experience of private and state-owned firms in Haiphong emerges clearly from the information presented in Table 4.2. It is not clear to what extent this is due to a restricted supply of loans by banks, who are wary of private borrowers, or to a limited demand for loans by managers of small and medium enterprises who lack the skills to prepare sound and bankable business plans. Table 4.2 Perception of responsiveness of banks, and cost of borrowing

Ho Chi Minh City Haiphong Hanoi Private SOE Private SOE Private SOE

Banks are responsive to firms’ demand 4.1 4.2 2.1 5.1 3.5 4.8 The cost of borrowing is reasonable 4.1 4.4 2.1 4.5 4.1 4.4 A good project can get bank financing 4.2 4.5 2.6 5.2 3.6 5.0 Notes: “Private” refers to the response by business people in the private sector, while “SOE” refers to state-owned enterprises. The scale runs from 1 (strongly disagree) to 7 (strongly agree).


Openness When cities and provinces are open to trade, their businesses are more likely to be competitive, because they are subject to the discipline of the world market. This makes them more productive, and less prone to lobby for continued protection from imports. The simplest measure of openness is the ratio of exports to GDP, which is 123% for Ho Chi Minh City, 65% for Hanoi, and only 41% for Haiphong (Table 4.3). The low export ratio for Haiphong, a port city, is surprising, but is confirmed by the observation that while the city accounts for 4% of national manufacturing output, it provides just 2% of the country’s exports.

Table 4.3. Export Indicators Vietnam Hanoi Haiphong HCMC Export, 2000 (millions US$) 14,483 1,402 286 6,402 National Share of Export 100% 10% 2% 44% Export/GDP 0.48 0.65 0.41 1.23 Sources: - GSO 2001; Hanoi Statistical Office 2001; Haiphong Statistical Office 2001; Ho Chi Minh City Statistical Office 2001.

A more indirect way to measure openness is in the success of the three cites in attracting foreign direct investment (FDI) into non-protected industries. The occupation rates of the major industrial parks established for attracting FDI projects are informative. As of August 2002, this rate was 71% for Ho Chi Minh City, 40% for Hanoi, and just 12% for Haiphong. This striking variation may reflect differences in the fundamental conditions for true openness in the three cities, although it may also be due to overly optimistic programs for building industrial zones in Haiphong and Hanoi. A somewhat different approach to measuring openness is to ask to what extent the manufacturing firms in a city are export-oriented, protected/import substituting, or neutral. To do this we first divide industries into three groups:

a. Export oriented industries. These include textiles, garments, and footwear. Together they make up 14% of manufacturing output, but accounted for about 70% of Vietnam’s manufactured exports in 2000. Exports by these sectors roughly tripled from $1.15 billion in 1995 to $3.36 billion in 2000 (GSO 2001), dominating overall manufactured exports, which rose from $1.6 billion to $5.0 billion over the same period.

b. Protected industries. These include chemicals (including fertilizers), non-metal mining products (such as cement), steel and other metals, and motor vehicles, accounting for over a fifth of all manufacturing output. These industries have been highly protected by the government, using a combination of quotas and import tariffs.

c. Other industries. The remaining 65% of industry falls into this residual category. The detailed breakdown is given in Table 4.1 above. We use this information to examine the breakdown of manufacturing, by group, for the three cities, which is our central interest here.


Figure 4.9. Structure of The Manufacturing Sector 2000 vs. 1995

15% 14% 15% 13%

29% 27%18% 20%

23% 21% 18% 20%

29%41%

21% 19%

62% 65% 67% 67%

42%32%

61% 61%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1995 2000 1995 2000 1995 2000 1995 2000

Vietnam Hanoi Haiphong Hochiminh

Export-oriented Protected Others

The most striking feature of Figure 4.9 is that Haiphong is twice as dependent on import substituting industries as either Hanoi or Ho Chi Minh City. As trade barriers continue to come down, the protected manufacturing sector will increasingly struggle to remain competitive. On the other hand, Haiphong is also the city that is most dependent on export-oriented industries, which offsets to some degree the heavy dependence on continued protection. The change in the structure of manufacturing – using our three categories – was modest between 1995 and 2000. However, it is worth noting that only in Ho Chi Minh City did the share of manufacturing in export-oriented industries rise, and in protected industries fall. Haiphong moved sharply in the opposite direction, thereby putting it in a weaker long-term competitive position.

Box: Why Openness Matters Economists tend to agree on the benefits of opening an economy to trade and (in due course) to capital flows. Although the theoretical arguments for the benefits of openness are strong, the pragmatic case may be more compelling. Thus Sachs and Warner (1995), find that historically, greater openness speeds up the convergence of rich and poor countries. The effects are especially strong for countries with highly educated labor forces (Thomas et al. 2000). Countries that have emphasized opening markets to trade and developing human capital, of which South Korea, Taiwan and Singapore are among the prominent examples, have grown especially rapidly. For instance, the average annual GDP growth rate of South Korea was 8.6% during 1960-70, 9.5% during 1970-80, and 9.6% during 1980-91; while the respective figures for Singapore were 8.8%, 8.5%, and 6.6% [Corbo, 1996].


Although protectionism favors industrial growth initially, this growth is not sustainable, for several reasons:

• Resources such as land, skilled labor, capital, and government time and effort shift to protected industries, which hurts the growth of other industries, especially export-oriented ones.

• Local governments may become complacent and do little to improve their own efficiency or the local business environment.

• The protected industries, which are reliant on government protection and favors are more likely to participate in bribery and corruption, further weakening both the effectiveness of the local governance and the local business environment.

• To survive and succeed in a business environment heavily influenced by government protection, firm executives may get used to a mindset that government favors and protection are critical to their business success.17

It is easy to get caught in a vicious cycle, where weak governance and unfavorable initial conditions lead to protectionism and subsidies, which in turn distorts the growth process and further weakens provincial governance and the conditions needed for healthy growth (Figure 4.8). To break out of this cycle, government at both central and local levels must upgrade local governance, and turn outwards. Ireland provides a recent successful example. Figure 4.8 Vicious Cycle of Unhealthy Growth

17 As shown in question 75 of the survey (Appendix 4) the firm executives in Haiphong (the city with growth driven by heavily protected industries) have a significantly stronger interest in government intervention and access to government favors.

Weak governance and Other Unfavorable

Conditions for Healthy Growth

Reliant on Government

Protection for Growth

Growth Process is distorted


Case 2 Quotas and Government Suspicion Lead to Defensive Behavior by a Successful

Garment Producer ABClothing [not the real name] is a private garment manufacturer in Ho Chi Minh City that employs over a thousand workers. Its main activity is producing jackets for Nike, and it has been successful selling its products in the United States and elsewhere. It sees good opportunities for further expansion into the US market. Despite its success, the firm has two main worries: obtaining enough export quota, and being treated with respect. The desire for respect is not an idle quest for status; it is a wish to be appreciated as a contributor to economic development, rather than to be excoriated as an “exploiter” or tax cheater. It is in effect a call for a different attitude, on the part of government officials, toward private business. In order to avoid too much dependence on a single overseas market, ABClothing has made a point of selling some garments in the European Union. Such sales require the provision of quota, which the firm buys on the black market. It pays about $1.20 for a Category 6 license, which allows it to sell one shirt in the EU. With the cost of the quota, this line of activity is not profitable. The payments made to buy quota frequently end up in the hands of favored state-owned enterprises or their managers. The company is therefore concerned that if the US puts quotas on garment imports from Vietnam, this will squeeze out private suppliers to that market. The firm is concerned about its size. It is large enough to be highly visible, and so the owner is considering setting up a separate company with a different name, rather than increasing the size of ABClothing. His fundamental concern is that government officials do not genuinely respect private firms, and their efforts can come close to harassment at times – multiple inspections, criticisms (justified or not) about the treatment of workers, and so on. He also has a memory of private assets being seized in the 1970s, and worries that this could happen again. The owner would like garment quota to be distributed in a more transparent and equitable manner, which does not discriminate against private firms. He would also like attitudes towards the private sector, the main source of wealth and job creation, to become substantially more positive. Supporting Industries Michael Porter argues that a region will be more competitive if capable locally-based suppliers and supporting industries are available, such as leather for shoe making, or textiles for garments. This creates clusters of firms, which potentially reinforce each other. The survey results show that in Hanoi and Ho Chi Minh City, suppliers are competitive on price, but less so on quality (Figure 4.10). In all three cities, suppliers get high marks for being responsive to companies’ needs, and for communicating well with them; this is particularly true of foreign suppliers. This


is most applicable to current inputs, since most equipment used by firms comes from elsewhere in the country or from overseas. Firms in all three cities are willing to work together to improve their local business environment (Figure 4.10), although not to share information on technology (Figure 4.1). The role of institutions for cooperation is perceived to be somewhat positive.

Figure 4.10. Suppliers and Supporting Industries

4.24

4.3

4.86

5.1

3.0

4.7

4.7

4.3

4.8

4.1

4.23

4.94

5.0

1.9

4.8

4.6

3.8

4.1

4.31

4.36

4.91

5.2

2.3

4.9

4.4

4.0

4.5

1 1.5 2 2.5 3 3.5 4 4.5 5 5.5

The institutions for business collaboration in your region are proactivein promoting business linkages

The forums for businesspeople in your city to gather to learn andexchange ideas are organized frequently

Firms in our region are eager to work together to improve the localbusiness environment

Firms have a close collaboration with foreign suppliers and customersfor information sharing and technology transferring

Most equipment used by your firm is made by local firms

Your company has a good relationship with local suppliers andcustomers in terms of information sharing and communication

The local suppliers of your firm are responsive to your company’sdemand

The local suppliers to your firm are competitive on quality

The local suppliers of your firm are competitive on price


HanoiHaiphong

HCMC

Domestic Competition Firms become more competitive if their customers are sophisticated and demanding, because it forces them to improve the quality and price of their output. The evidence in Figure 4.11 shows that business leaders believe that they operate in a competitive environment. There is broad agreement that competition is “intense”, that one learns a lot from one’s competitors, and that customers provide “sophisticated” feedback on products and services. It is generally accepted that competition is “fair”. On most of these indicators there is little difference in the perceptions of firms in the three cities. However, there is one dimension where Haiphong differs from Hanoi and Ho Chi Minh City. There is less agreement in Haiphong with the statement that “firms are aggressive in improving their product offerings”, which is possibly suggestive of a more lackadaisical business environment there.


Figure 4.11. Domestic Competition

5.8

4.4

5.4

5.4

5.6

3.81

5.0

5.0

4.5

4.6

5.4

5.3

3.49

4.9

5.3

4.5

5.2

5.6

5.5

3.85

4.9

1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0

The presence of foreign f irms is strong

Competition is fair

Firms are aggressive in improving their product offerings

Your company has learned a lot from your competitors

The competition is intense

Firms in your city are w illing to share information on new technology marketopportunities

Local customers provide sophisticated feedback on your products and services


HanoiHaiphong

HCMC

Case 3 Licensing Woes and Lack of Strategy Nearly Sink the

Yellow Dragon Bus Company The Yellow Dragon bus company is a relatively small private firm that began with a simple idea: providing a “good quality” bus service between Haiphong and Hanoi. By good quality is meant a scheduled service (instead of waiting for the bus to fill before leaving); adequate equipment; drivers that treat passengers courteously; and a bottle of water and reusable napkin for each passenger. The company thrived, and added a courier service between Haiphong and Hanoi. With a substantial cash flow, the founder planned to branch out and, in common with many others, invested in shrimp farming. This was a business where he, a former bus driver, was not knowledgeable, but which was expanding in Haiphong and elsewhere. Although he would have liked to expand his business by adding bus service from Hanoi to Thai Binh, Quang Ninh, and Vinh, he was deterred by the difficulty in obtaining licenses. After discussions with business experts in a strategy training workshop, the owner decided to drop his plan to invest in shrimp business and put his scarce time and managerial talent into expanding the bus company, and with persistence he has begun to expand beyond the original Hanoi-Haiphong route. There are two important points here.

• First, complicated and expensive licensing procedures can be serious barriers to the expansion of businesses.

• Second, as firms grow they need to think carefully about strategy. Business leaders need opportunities to continue to learn – in workshops, executive training


sessions and the like. Organizations such as the Vietnam Chamber of Commerce and Industry have a role to play here in exposing business people to sound and innovative ideas.

Competitiveness Overall It is helpful to construct a summary measure of competitiveness. In order to do this, we take the following steps:

1. Re-scale each indicator variable so that it varies from 0 (least competitive) to 10 (most competitive).

2. Compute the mean of these indicator variables, in order to construct the nine sub-indexes (for “institutions”, “infrastructure”, etc.).

3. Compute the mean of the nine sub-indexes with a double weight for Openness, the most objective and important sub-index of competitiveness, to get the overall index.

The results, shown in Table 4.4, show that Ho Chi Minh City is the most competitive city, with an index of 5.92; Hanoi is behind, with an index of 5.44; and the laggard is Haiphong, with an index of 4.74, although if this study covered the whole country, Haiphong’s position would certainly look a lot better relative to other parts of Vietnam. Of the nine indicators, Ho Chi Minh City has the highest score in five indicators, especially in Openness, and Hanoi does in the other four indicators (government, where dissatisfaction is less; infrastructure, where roads and telecommunications are fairly good; human resources, an area of traditional strength; and finance, where firms appear to be less demanding). Haiphong lags in every dimension, but is especially far behind in the indicators for finance, openness, and human resources.

Table 4.4. Overall indexes of competitiveness Subindex HCMC Haiphong Hanoi Government and Fiscal Policy 5.01 3.69 5.51 Institutions 4.79 4.20 4.52 Infrastructure 4.99 4.69 5.25 Human resources 5.40 5.03 5.51 Technology 6.70 6.07 6.69 Finance 5.04 3.82 5.41 Openness 7.17 4.86 5.33 Suppliers and Supporting Industries 5.73 5.29 5.54 Domestic Competition 6.78 6.22 6.62 Overall 5.92 5.44 4.74 Note: The indexes range from 0 (least competitive) to 10 (most competitive). Numbers in bold face show highest values for each sub-index.


Chapter 5: BUSINESS ATTITUDES Although not conventionally included as a determinant of competitiveness, the attitudes of business leaders are nonetheless important. If business people favor protection, then they will channel their scarce time and resources into lobbying for protection, a “directly unproductive profit-seeking (DUP) activity” (Bhagwati 1982). On the other hand, if they display a “can do” attitude, then they are more likely to put their energies into productive activities. Attitudes toward Business Firms in all three cities have a strong appreciation of the need for business vision and strategy, and the importance of innovation, as Figure 5.1 shows. There is also a strong belief that business success is not founded mainly on luck; by implication, success is founded on hard work and clear strategic thinking. One feature stands out, however, and that is the very strong aversion to risk by business people in Haiphong. Most respondents from Haiphong strongly agree with the statement that “a good business decision should have no risk at all”; support for this view is significantly weaker in Hanoi and Ho Chi Minh City. Even more strikingly, respondents in Haiphong strongly agree that “staying small and low-profiled is critical for a private firm to be safe in the long-term”, whereas in the other two cities most respondents disagree with this statement. Nervous, risk-averse entrepreneurs could be one of the main hindrances to vigorous economic development of Haiphong.

Figure 5.1. Business Attitudes

6.6

5.9

5.7

5.3

5.0

5.2

5.0

3.1

2.7

6.7

5.8

5.9

5.4

6.1

5.5

5.2

5.4

2.5

6.4

5.9

5.5

5.5

5.1

5.1

4.8

3.2

2.6

1 2 3 4 5 6 7

Vision and long-term strategy is critical for a firm to achieve a lastingsuccess

Innovation (in both management and product offerings) is critical for afirm to sustain its competitive edge

It is possible for companies to collaborate and compete at the same time

Cheap resources (such as labor, raw materials) are the most importantsources of competitive advantage for Vietnam

A good business decision should have no risk at all

It is not sufficient for a firm to achieve competitive advantage by onlyimproving its operational efficiency

Too intense competition in an industry is harmful to its growth andefficiency

Staying small and low-profiled is critical for a private firm to be safe in thelong-term

The success of a businessman is dependent more on his “ luck” than onhis talents

HANOI HAIPHONG HOCHIMINH


Attitudes toward Economic Development Based on the responses to the survey, business leaders are strong believers in the need for Vietnam to integrate with the world economy (see Figure 5.2). Consistent with this position, respondents in Hanoi and Ho Chi Minh City are not generally in favor of high tariff protection. Compared to the other two cities, business people in Haiphong are strong believers in tariff protection. They, even more than their colleagues in Ho Chi Minh City and Hanoi, see access to government as vital to the success of a business, and think that “major” state-owned corporations will play a “leading role” in the country’s industrialization. It appears that the evolution of business thinking, away from a static, protectionist view, has been slowest in Haiphong.

Figure 5.2. Attitudes Toward Economic Development

6.2

6.0

5.7

5.2

5.2

5.1

4.6

4.0

6.4

6.0

5.9

6.0

5.2

5.5

4.5

5.2

6.3

5.8

5.5

5.4

5.3

5.0

4.6

3.9

1 2 3 4 5 6 7

Export and integration into the world economy are critical to the prosperityof the country

A firm can enhance its competitiveness by strengthening its businessnetwork

The government should invest in large industrial projects (such as fertilizers,refinery) to ensure the self-reliance of the country

Access to government favors is very important to the success of abusiness

The business environment in our country will be substantially better in thenext three years

The major state-own corporations will play the leading role in the country’sindustrialization

The current business environment in our country is favorable

The government should impose high tariff to protect local firms fromforeign competitors


Firms in all three cities are optimistic about the improvement of the country’s business environment in the next three years, while they are only moderately positive about the current situation. This may be interpreted as a vote of confidence in the future direction of economic policy. The Most Pressing Problems What do firms themselves see as the most pressing problems they face? Top of the list is a strong concern about the “unhealthiness of the business environment” (see Table 5.3). What respondents appear to mean by this is that the business environment is not enabling, in the sense that it imposes burdens that mean that they cannot be as productive as they would wish. In particular, corruption, unexpected changes in policy and regulations, and incompetence of law enforcement officials are among the most salient concerns. In addition, in descending order of importance, firms appear to have difficulty finding skilled labor; face high production costs, and have difficulty raising capital and acquiring land. It is interesting to note that the problems of


over-staffing and low product quality, which used to be serious in the early 1990s, are now seen as less severe for firms in all three cities. This may suggest that the economic reform process has helped surviving firms significantly improve their efficiency and quality in the last decade.

Figure 5.3. Most Pressing Problems

5.9

5.6

4.9

4.9

4.7

3.8

3.5

3.5

3.0

6.3

5.3

5.1

5.2

4.6

4.1

4.1

3.5

3.4

5.8

5.2

4.9

4.7

4.6

3.9

3.7

3.1

3.0

0 1 2 3 4 5 6 7

Unhealthiness of the business environment

Shortage of skilled labors

High production costs

Scarcity of capital

Diff iculty in acquiring land for expansion

Lack of new market opportunities

Low eff iciency and productivity

Burden of overstaff

Low product quality


Medium-Term Priorities Firms in all three cities are ambitious in setting their priorities for the next 18 months. The top priorities shared by firms in all three cities are to enhance their management capability, understand markets and customers better, enhance marketing activities, seek foreign partners, reduce production cost, recruit talented employees, and purchase new production equipment (their ratings range from 5.2 to 6.3), as Figure 5.4 shows. The lowest priority, except in Haiphong, was to “seek special support from the government.” However, even in Hanoi and Ho Chi Minh City a significant number of respondents did call for more government support. Thus the mentality of reliance on government intervention is still relatively widespread among firms.


Figure 5.4. Firms' Top Priorities over Next 18 Months

6.3

5.9

6.1

5.9

5.8

5.5

5.5

5.6

5.4

4.9

6.2

6.0

6.0

6.0

6.0

5.5

5.3

5.6

5.7

5.4

6.1

5.8

5.7

5.7

5.7

5.5

5.4

5.3

5.2

4.8

0 1 2 3 4 5 6 7

Upgrade the management capability

Invest in improving know ledge about market andcustomers

Enter new markets

Enhance marketing activities

Strengthen the distribution netw ork

Seek out a foreign partner

Substantially reduce production costs

Recruit talented employees

Purchase new production equipment.

Seek a special support or aid from the government



Chapter 6: FROM COMPETITIVENESS TO OUTCOMES In measuring competitiveness, we found that Ho Chi Minh City leads, followed closely by Hanoi. Haiphong lags behind, but mainly because it is being compared to two star performers. If the study were to include all the provinces of Vietnam, Haiphong would probably rank relatively high. How are the differences in competitiveness reflected in economic and social outcomes? Although our sample contains only three cities, it is still useful to look for a pattern in the outcomes. Labor Productivity and Average Wages Labor productivity measures how much net output the average worker in a city generates per year, and the average wage indicates how much the average worker earns per month. Higher productivity and wage levels are indicators of success. Figure 7.5 shows indices of labor productivity and wages for the three cities, relative to a national index of 100 (in 2001). Wage and productivity levels are almost twice the national average in Ho Chi Minh City and slightly above the national average in Hanoi. Again, Haiphong is the laggard, with industrial wages 14% below the national average. Of Vietnam’s 61 provinces and cities, manufacturing wages in December 2000 were highest in Ho Chi Minh City (VND1.27 million/month), followed by nearby Kien Giang (VND1.25m) and Dong Nai (VND1.23m). Hanoi ranked sixth (VND0.99m). Haiphong was thirtieth (VND0.73m) on the list, with manufacturing wage rates below most of the provinces of the south and center, but above those of the more remote provinces, especially in the north.

Figure 6.1. Productivity and Average Wage, City vs. National Level

1 1

1.21.1

0.7

0.9

1.3 1.3

0

0.2

0.4

0.6

0.8

1

1.2

1.4

Productivity Average Wage

Inde

x by

Nat

iona

l Lev

el

VietnamHanoiHaiphongHochiminh

Source: Calculated from [GSO, 2002]


Efficiency and profitability Efficiency is measured by the fixed asset turnover ratio, and profitability is measured by the profit margin.18 These indicators show how efficiently and profitably investments have been made in a city. The indicators, therefore, provide insight into the sustainability of economic growth in the city. In particular, the profit margin enjoyed by the private sector is an important indicator how favorable the local business environment is for business. As shown in Table 7.1, the asset turnover ratio is higher in Hanoi and Ho Chi Minh City (2.8 and 2.9, respectively) than in Haiphong (1.7); whereas the national average is 2.0. The difference in profitability is even more striking. Firms (private and state-owned) in Ho Chi Minh City are slightly more profitable than those in Hanoi (2.1% against 1.7%) and much more profitable than those in Haiphong (-0.5%); the results for private firms follow a similar pattern (1% against 0.5% and 0.1%). Profit rates tend to be highest in the southern provinces, and where new firms dominate the traditional state-owned enterprises. It is also worthy noting that the tax revenues from the business sector in Haiphong increased very little over the period 1995-2000, compared to the levels of the other two cities and the nation.

Table 6.1 Efficiency and Profitability

Vietnam Hanoi Haiphong HCMC Efficiency (Fixed Assets Turnover) 2.0 2.8 1.7 2.9 Profitability (Profit Margin)

• All sectors 2.7% 1.7% -0.5% 2.1% • Non-State sector 1.0% 0.5% 0.1% 1.0%

Five-year Increase in Tax Collection from the Business Sector (2000/1995)* 1.7 1.82 1.13 1.53 Sources: - [GSO, 2002], [HNSO, 2001], [HPSO, 2001], [HCMSO, 2001] * For Vietnam, the increase is for total tax revenues.

Economic Growth An appealing way to measure success is to look at the pace of economic growth. Some of the most important figures are gathered in Table 6.2. Between 1995 and 2000, national GDP rose by 7% annually, on average. Among the three cities, average GDP growth was fastest in Hanoi (10.7% per year) followed by Ho Chi Minh City (9.9%) and then Haiphong (8.6%). By historical and international standards, these are rapid growth rates, suggesting that the cities are indeed moving toward becoming highly competitive. 18 Fixed asset turnover ratio = Revenues / Book value of fixed assets. Profit margin = Net profits before tax / Total revenues.


Table 6.2 Selected indicators for Hanoi, Haiphong, and Ho Chi Minh, 2000 Hanoi Haiphong Ho Chi Minh Indicator Vietnam

Number HN/VN Number HP/VN Number HCM/VN Population (million) 77.6 2.7 3.5% 1.7 2.2% 5.2 6.7% GDP (million, US$)* 31,724 2,112 6.7% 719 2.3% 5,476 17.3% 1995-2000 GDP Growth, CAGR

7.0%

10.7%

1.53

8.6%

1.23

9.9%

1.41

GDP/Capita (USD)* 407 821 2.0 426 1.1 1,031 2.5 Industrial Labor Force (‘000)

3,506 196 5.6% 108 3.1% 677 19.3%

FDI accumulation*** (million, US$)

20,067 3,276 16.3% 998 5.0% 5,087 25.4%

Exports (million, US$) 14,483 1,522 10.5% 393 2.7% 6,256 43.2% * The GDP data at current price (2000) are converted into $US at the rate 14,000 VDN=1USD. ** Industrial Data 1989-1993, Statistical Publishing House, 1994 *** As of April 6, 2002 (MPI report). Note: HN is Hanoi, HP is Haiphong, HCM is Ho Chi Minh City, and VN is Vietnam. Source: [GSO-61, 2001]. If one focuses only on gross industrial output, the picture is somewhat different. Nationally, industrial output rose by a remarkable 14% annually between 1990 and 2000. Annual output growth rates in Hanoi (14%) and Ho Chi Minh City (13%) were close to the national average, while growth in Haiphong was an impressive 22% annually, as Table 6.3 shows. At first glance, the least competitive city appears to be the one with the best output performance!

Table 6.3 Growth of Gross Industrial Output over 1990-2000 Vietnam Hanoi Haiphong HCMC Growth over 1990-1995* 1.90 1.86 2.79 1.94 Growth over 1995-2000* 1.92 1.99 2.53 1.71 Growth over 1990-2000* 3.65 3.70 7.08 3.31 Annual % growth rate, 1990-2000 14% 14% 22% 13% National Share, 1990 100% 7.3% 1.8% 27.7% National Share, 2000 100% 8.5% 4.0% 25.4% Sources: From Statistical Yearbooks 1996 and Statistical Yearbooks 2001.

This result is not as paradoxical as it first appears, for several reasons. First, industrial output is not the same as industrial GDP, and over time gross output tends to grow more quickly than GDP. Second, the industrial sector only accounts for a third of total GDP, and the services sectors in Hanoi and Ho Chi Minh City grew much more rapidly than in Haiphong over the 1990s. The most interesting case may be that of Ho Chi Minh City, which had rapid GDP growth but a relatively modest increase in industrial output. The key explanation is that industrial expansion in the Southeast region of the country (which includes Ho Chi Minh City) has been exceptionally rapid in the provinces of Dong Nai and Binh Duong, as the industrial base has shifted somewhat out of Ho Chi Minh City proper. Both provinces have attracted substantial foreign direct investment inflows. Between 1995 and 2000, exports from Dong Nai rose 6.5-fold, with a 3.4-fold rise in neighboring Binh Duong. The combined industrial output and employment of these two provinces exceeds the combined total of Hanoi and Haiphong (see Table 6.4).


Table 6.4 Selected Indicators on Industrial Expansion in Dong Nai and Binh Duong

Dong Nai Binh Duong Indicators 2000 Growth

2000/1995 2000 Growth

2001/1996* Industrial Production (billion VND, 1994 price), of which:

17,992.3 2.5 9,282.1 4.0

+ Textile, Garment, Shoe &Leather 4,182.0 5.5 1,963.0 6.3 + Computer, electric and electronics products

2,549.3 3.3 933.8 7.2

Industrial Workforce (persons) 149,247 1.9 143,797 2.0 Export (million US$) 1,481 6.5 530 3.4 Note: * Binh Duong was separated to become a province in 1996; for this reason the data for 2001/1996 instead of 2000/1995 are used for the 5-year growth period comparison Sources: [DNSO, 2001], [BDSO, 2001] Job creation Vietnam has a labor force of nearly 38 million. Overt unemployment is low, and the labor force participation rate is high for both women and men. However, underemployment is substantial for many of the 24 million who work in the agricultural sector (GSO 2001). With a labor force that is growing by almost a million annually, Vietnam needs to continue to create jobs, and to create higher quality jobs. The industrial workforce rose rapidly in the three cities over the 1995-2000 period, with a particularly large increase in Ho Chi Minh City (+81%) and more modest rises in Haiphong (30%) and Hanoi (14%), as indicated in Figure 6.2. Nationally, industrial employment rose by 18% over this period. The solid performance of Haiphong is partly due to its substantial share in the national shoe-making industry (about 20%), which is highly labor intensive and has enjoyed tremendous growth in the last decade. However, Haiphong has not fully capitalized on this advantage, and the growth of the shoe-making industry in Haiphong was much lower than protected industries, such as steel or cement (see Table 1, Appendix I).


Figure 6.2. Growth of Industrial Workforce By Sector(Employment in 2000 relative to employment in 1995)

1.14 1.181.1 1.15

1.55

1.141.111.39

2.88

1.31.28

1.79

3.82

1.81

0

0.5

1

1.5

2

2.5

3

3.5

4

State Non-state Foreign-invested Total

Sector

Wor

kfor

ce G

row

th (2

000/

1995

)

VietnamHanoiHaiphongHochiminh

Sources: Statistical Yearbook 2001 of Vietnam, Hanoi, Haiphong, and Ho Chi Minh. A Composite Measure of Economic Success In this chapter we have discussed four ways to measure economic success: 1) higher wages and labor productivity, 2) higher profitability, 3) higher economic growth, and 4) more job creation. It is possible to create a composite measure of these variables. More specifically, the components are:

1. The average wage in 2000. A higher average wage indicates a better living standard,

which is the ultimate goal of growth. This indicator is preferred to the productivity ratio because it is more compatible across industries and regions.

2. The profitability of the private sector in 2000. The private sector enjoys no subsidies or special favors from the government. As a result, the performance of this sector is a good indicator of the sustainability of growth.

3. The growth rate of GDP, in the period 1995-2000. This takes into account the growth of all sectors, and so is preferred to a measure of industrial growth only.

4. Job growth over the 1995-2000 period. The more jobs are created, the better the growth process is. This measures the average of the growth of industrial employment and service employment (trade, food services, tourism) relative to the national average.

These indicators are indexed against the national rates (by dividing each indicator for a city by the corresponding indicator for Vietnam). A ‘scorecard’ of the four indices for the three cities is shown in Table 6.5 and Figure 6.3.


Table 6.5 Scorecard of Economic Success for the Three Cities Index (vs. the national overall) HANOI HAIPHONG HO CHI MINH 1. Average Wage, 2000 1.00 0.76 1.35 2. Private Sector Profitability, 2000 0.95 0.48 1.23 3. GDP growth, 1995-2000 1.53 1.23 1.41 4. Job growth, 1995-2000 1.05 1.06 1.33 Economic Success Index (ESI) 1.13 0.88 1.33

The overall Economic Success Index is computed as the geometric mean of the component indices. By this measure, Ho Chi Minh City scores highest, followed by Hanoi and Haiphong; by construction, the index takes on a value of one for the nation as a whole. This is the order that would be predicted using the competitiveness index. Figure 6.3. The Cities Positioned by their Economic Success Indexes Worse Haiphong (0.88) Vietnam (1.00) Hanoi (1.13) HCMC (1.33) Better


Chapter 7: CONCLUSIONS AND FUTURE STUDY In this chapter we draw some of the policy conclusions that arise from our analysis; first at a broad level, and then tailored to the specific situations of each of the three cities surveyed. Vietnam has made remarkable progress in economic development over the past decade, and has put in place many of the fundamentals that are needed to sustain this growth into the future. Among these fundamental conditions are the impressively strong commitments of the business sector to global integration and competition as well as their enthusiastic embrace of long-term vision, business strategy, and cultivation of managerial talent. When asked, business people show that they have a clear idea of what the top priorities should be for the central and local governments, and a list of things that must be done urgently to foster the growth and competitiveness of their business. But thorny problems remain. In the eyes of business leaders in all three cities, the most serious problems facing their growth are corruption and the low competence of government officials. They are also deeply concerned about the unhealthiness of the business environment, including counterfeit products and ineffectiveness of the regulatory system. They would like, and to some extent even expect, central and local governments to undertake a number of urgent actions in order substantially to improve the country’s business environment, by upgrading the regulatory system, introducing stronger incentives for business investments, investing in basic and vocational education, and upgrading the transportation system. The case of Haiphong provides a reminder that rapid growth need not always go hand-in-hand with enhanced competitiveness. There, recent growth has been led by the expansion of import-substituting industries, which has brought short-term expansion but will restrain growth over the longer term. Broad Policy Recommendations We have six broad recommendations, stated below with accompanying comments. Recommendation 1: Given the importance of competitiveness in increasing economic growth and development, the government should measure the competitiveness of each province and city on a regular basis. The results should be widely disseminated, in part to spur provincial and city governments to improve their “microeconomic” policies and procedures. Pressuring all provinces and cities to enhance the fundamentals of their competitiveness is also a very effective way to enhance the quality of local business environment. A practical step would be to publish an annual (or biennial) report ranking the competitiveness of the country’s 64 provinces and cities, with an in-depth analysis of the strengths and weaknesses of each province/city. The success of provinces such as Binh Duong, which is likely to stand out on the top of a competitiveness ranking report, will send a powerful message about what the local government in other provinces/cities should do to advance their growth and prosperity. The


identification of areas of weakness is needed in order to help provinces and cities channel their energies into the most appropriate directions. As more relevant “objective” information becomes available at the level of the provinces and cities of Vietnam, the measurement of competitiveness can rely increasingly on such indicators. Meanwhile it will be necessary to survey business leaders, along the lines done in the current study, in order to generate the information needed. Recommendation 2: There is a need to improve the professionalism of and provide training to government officials in the mid- and upper levels of the administration. The single clearest message from the survey is that business people are concerned about the corruption and lack of competence of government officials. The same message appears in international comparisons. Based on a recent survey by the World Bank Development Research Group (Kaufmann et al, 2002), Vietnam ranks much lower than other countries in East Asia, except Indonesia (Figure 7.1).19 on the three key governance indicators: regulatory quality, government effectiveness, and control of corruption. It is noteworthy that Cambodia has emerged as a country with relatively higher rankings in the three key indicators for the quality of governance.

Figure 7.1. Key Governance Indicators for East Asian Countries,2000-01

25 24

55

73

40

56 5862

81

100

3543

55

73

58 5664

68

81

100

12

25

3740

48

6267 69

74

98

0

20

40

60

80

100

INDONESIA VIETNAM PHILIPPINES THAILAND CHINA MALAYSIA CAMBODIA KOREA, S TAIWAN SINGAPORE

Wor

ld P

erce

ntile

Ran

k (%

)

R EGU A T OR Y QU A LIT Y GOV ER N M EN T EFFEC T IV EN ESS C ON T R OL OF C OR R U PTION

Source: Kaufmann et al (2002) Not only does Vietnam rank poorly in international comparisons of governance, but unlike many of its neighbors, it is not improving in the last few years in ranking (although it may have improved relative to itself). The Asian financial crisis, which erupted in 1997, put huge pressures on many countries, especially those in East Asia, to upgrade the quality of their governance. Compared to 1997-98, the world percentile ranks of Vietnam, in 2000-01, were

19 In the world percentile rank for 2000-2001, Vietnam ranked higher than 24% of countries in regulatory quality, 43% in government effectiveness, and 25% in control of corruption. However, the position of Vietnam among East Asian countries was nearly the lowest.


basically maintained in Regulatory Quality and Government Effectiveness but sharply decreased in Control of Corruption (Figure 7.2).20 This suggests that the country’s fight against corruption has been relatively ineffective. By way of contrast, China, a country facing similar problems in fighting corruption, improved its ranking in control of corruption over the 1997-2001 period.

Figure 7.2. Vietnam vs. China on governance improvement during 1997/98-2000/01

39.4 40.1

24.8 24

58.7 57.6

41.3 4346.8 48.4

43.5

25.2

0

10

20

30

40

50

60

70

1997/98CHINA

2000/01 1997/98VIETNAM

2000/01

Wor

ld P

erce

ntile

Ran

k (%

)

R EGU A T OR Y QU A LIT Y GOV ER N M EN T EF FEC T IV EN ESS C ON T R OL OF C OR R U PT ION

Source: Kaufmann et al (1999, 2002) To effectively tackle corruption, governments need to substantially improve the transparency and effectiveness of the regulatory framework and make rigorous efforts in recruiting highly motivated and talented people, especially for positions critical to the quality of business environment. This will require more attention to salary scales (and other incentives), training, and to the streamlining of bureaucratic regulations. A practical step forward would be to modernize the curriculum of the government and party schools at both central and provincial levels. China and Singapore have successfully designed curricula that effectively enhance the competence and commitment of government officials and staff, who go through mid-career training programs in these schools. The main focus of their training is on economic development strategy, policy analysis, and teamwork. Recommendation 3: Firm managers need training in business strategy, modern management skills, and information for making their strategic decisions. The government should proactively work with international donors and local economics and business schools to provide a series of intensive management training workshops in cities and provinces throughout the country.

20 In 1997-98, Vietnam ranked above 24.8% of countries in the world on regulatory quality, 41.3% on government effectiveness, and 43.5% on control of corruption. These figures in 2000-01 were 24%, 43%, and 25.2% respectively.


Management training is one of the most effective measures to boost the competitiveness of Vietnam for two reasons: 1) Vietnamese managers have a good appreciation of business strategy (Annex 4, questions

84, 87, 90) and are very keen to improve their management capability (Annex 4, question 68);

2) There exists a huge gap between the potential and actual capabilities of Vietnamese managers, especially in the small and medium enterprise (SME) sector. For example, the hardship that private firms in Haiphong face in dealing with banks is partly due to their inability to develop sound business plans from good business ideas. Many organizations and donors, such as the Mekong Project Development Facility, the German GTZ, and the US Agency for International Development, are likely to be willing to assist Vietnam in this effort. But a proactive role by the government will be crucial to make this assistance most effectively meet the needs of firm managers, especially in the SME sector. Recommendation 4: The government at both central and local levels should continue to improve the country’s infrastructure, including transport, power, and telecommunications. In responding to the survey, business leaders expressed only guarded satisfaction with the quality of the country’s infrastructure. The need for continued improvements must not be forgotten. Recommendation 5: More attention needs to be paid to improving the quality of schooling and vocational education. Despite the recent rapid expansion of the educational sector, it is important not to become complacent. Many respondents complained about shortages of skilled labor, and worried about the quality of schooling. Recognizing the need for a workforce that has not merely learned by rote, China has recently launched a thorough revision of its school curriculum. The shortage of skilled labor may be solved by a more effective partnership between the business sector and government in identifying the vocational skills most needed, and the most efficient ways to develop those skills. Spending a large amount of money on building vocational schools without the close cooperation of the business sector is unlikely to be very effective. A preferable approach would be to use “extension” courses, tailored to the needs of specific businesses, and provided by universities and technical institutes. Recommendation 6: A more pro-competitive mindset towards business and economic development is needed, both on the part of government officials and even on the part of some businesses. As discussed above, business people in the three cities strongly appreciate strategic thinking, managerial talent, and innovation. However, their efforts to build global competitiveness are still seriously hindered by some old attitudes, such as an over-reliance on government patronage and protection, and a reluctance to take risks in making business decisions. The problem is especially acute in Haiphong, where many managers are reluctant to grow their firms because


they are concerned that then they will become targets (of officials, tax collectors, public envy) and hence vulnerable. A global and competitive mindset is critical to the success of economic reform. In China, the leading provinces and cities have been the vanguard in pushing for modernizing the mindset of both their business and government sectors.21 Hanoi, Haiphong, and Ho Chi Minh City should play a more proactive role in modernizing the business mindset in their cities, as well as in the entire country. Government officials would better understand business ways of thinking if there were more frequent contacts between business leaders and government officials. Typically the two groups meet when they are in “trouble-shooting mode,” or when businesspeople appear to be asking for favors. This is not conducive to the development of a healthy appreciation of the ways of business and the important role played by competitive markets. City-Specific Recommendations An important reason for measuring competitiveness is to identify areas that call for improvement in each city. To do this we construct a summary table for each city, of its competitive advantages and disadvantages. Every component variable has been scaled from 0 (least competitive) to 10 (most competitive). When the score is below 5, the city is considered to have a competitive disadvantage in that area, relative to the other cities. Again we should emphasize that this comparison excludes the other provinces of Vietnam, and so may overstate the differences between the three main cities, which nonetheless have many similarities. Hanoi. As the nation’s capital, Hanoi is likely to remain only moderately competitive as a manufacturing center, due to the high cost of land and the ample other opportunities (in government and services) for skilled labor. However, it has great potential to become a center of knowledge-intensive products and services. Hanoi enjoys a very large pool of highly educated workers provided by a wealth of universities and research institutes located in the city. In addition, the more knowledge-intensive industries already account for a significant share of Hanoi’s manufacturing output and they grew faster during 1995-2000 than in the country at large. The city has relatively good infrastructure and human resources, along with a strong presence of the banking sectors. The performance of the city government appears to be improving. However, there are also weaknesses: the cost of living is high; government officials, though seen by some as improving, are still considered to be “lack professionalism;” local government is seen as unresponsive to the needs of the business sector; counterfeiting is widespread; and land acquisition is complex. This diagnosis suggests the following recommendations:

21 In the Third Plenary Session of the 11th Central Committee of the Chinese Communist Party, the party leader of Shanghai delivered a speech titled “Emancipating the mind, seeking truth from facts, unceasingly pushing forward reform and opening up, and the cause of building socialist modernization”, which strongly argued for upgrading the mindset of both government and business sectors to meet the challenges facing China’s modernization endeavor.


Recommendations for Hanoi: (i) Encourage the further development of high quality and flexible higher education in

Hanoi, as the base for knowledge-intensive activities such as research and administration, and encourage collaboration between firms and universities/research institutes.

(ii) Review and if necessary simplify the procedures for land acquisition and transfer. (iii) Improve the system of roads and public transport, so that residents can live more cheaply

on land farther from the center and still commute to work. (iv) Curb counterfeit products. (v) Fight corruption. (vi) Coordinate better with neighboring provinces/cities, so as to enhance regional

competitiveness and the quality of growth in the region. As Hanoi grows, the city will necessarily encroach on the neighboring provinces, and cooperation will be needed on the planning of infrastructure such as roads, rail, and waste treatment.

Haiphong. The city has enjoyed strong growth in industrial output over the past decade. However, this growth has been heavily reliant on import-substituting industries such as cement and steel (as documented below). The most serious problems are:

• difficulties in attracting and retaining highly educated workers. • a protected industrial sector, which in turn prompts business people to continue to ask for

government help; the protected sector is vulnerable to tariff reductions, and the mentality of seeking government help corrodes the kind of business ethic that the city needs.

• local government is seen as only weakly responsive to business, short on skills, and resistant to change.

• private firms face real difficulties in gaining access to bank loans. Recommendations for Haiphong: (i) Substantially upgrade the motivation and qualifications of government officials,

especially in those positions dealing directly with the business sector. (ii) Form an effective partnership between the local government and the private sector by

improving the local business environment with a special focus on promoting the image and role of the private sector

(iii) Work with the banks to analyze and deal with the root causes of the problem facing the private sector in obtaining bank loans;

(iv) Fight corruption; and (v) Improve the power and telecommunications infrastructures. The very rapid expansion of the highly protected industries -- such as cement, steel, electric cables -- will likely face a major setback in just few years, when the country is further integrated into the regional and global economies. Compared to Hanoi and Ho Chi Minh City, the business environment in Haiphong is poor and unproductive, especially for export-oriented and more knowledge-intensive industries.


Ho Chi Minh City. Compared to Hanoi and Haiphong, Ho Chi Minh over the past decade has enjoyed more rapid and balanced growth, with vibrancy in all three sectors: state-owned, private, and foreign-invested. However, when compared with China’s leading provinces and cities, the growth of Ho Chi Minh City during 1990-2000 looks significantly less vigorous. Problems include a shortage of skilled labor; a regulatory system that is neither clear nor effective; extensive counterfeiting; and continued concerns about the competence and honesty of local government. The growth of manufacturing output in Ho Chi Minh City was actually lower than the national average during the 1995-2000 period (it grew by a factor of 2.0 versus 2.2 respectively). This indicates the critical need for the city to shift towards a center providing higher value-added products and services. Recommendations for Ho Chi Minh City. (i) Encourage the growth of the knowledge-intensive and higher value-added industries,

such as information technology, agro-technology, banking, education, and tourism; (ii) Fight corruption; (iii) Increase investments in human capital development, with a special focus on upgrading

the quality of K-12 education and (in consultation with business) vocational training; (iv) Encourage firms to develop a geographically broader growth strategy, which is more

focused on exploiting nation-wide resources and global opportunities, rather than staying confined to the provincial markets in which they operate.

Ho Chi Minh City’s GDP growth rate during 1990-2000 was 11% (12% for 1990-1995, and 9.9% for 1995-2000). Although this growth rate was impressively high compared to the nation overall, it was significantly lower than those achieved by China’s leading provinces and cities. The GDP growth rate during 1990-2000 was 19.6% for Shandong, 15.4% for Fujian, 15.0% for Zhezang, 14.6% for Guangdong, 14.0% for Jiangsu, 12.8% for Hobei, and 12.2% for Shanghai [CSO 2000]. Moreover, the growth of manufacturing output in Ho Chi Minh City was actually lower than the national average during 1995-2000. This suggests that the city is already shifting towards providing higher value-added products and services.


Directions for Future Study This study represents a useful initial step, but considerable further work is needed to ensure that the study of competitiveness in Vietnam pays off in the form of concrete actions. Future studies are needed in two areas – expanding the analysis to other cities and provinces in Vietnam, and examining in more detail some of the issues that have been raised in the current report. It would be valuable to have an annual Provincial Competitiveness Report that would assess the competitiveness of each of the country’s cities and provinces, and identify areas that need improvement. The typical province in Vietnam has more than a million residents, which is a large enough unit for competitiveness to matter, and is larger than several of the states in the United States studied by Haughton and Slobodyanyuk (2001). Many entrepreneurs who are able to create a small enterprise find they have difficulty growing their businesses, because once a firm reaches a certain size the managerial and strategic skills required are not the same as those typically required for a small business. Our survey suggests that emerging firms need to devote more attention to formulating business strategies. In this context it would be helpful to develop a 30-page management tool kit, available both on-line and promoted in a series of workshops throughout the country, particularly in secondary cities and provincial towns. Subsequent modules could include further details on the construction and use of financial ratios; the conduct of customer surveys; the sources of business information; and the development of business plans. Experience from India has shown that a contest for the development of business plans can be helpful, and this might work in Vietnam too. No country is entirely free from corruption, but many of the managers that we surveyed indicated that they see this as a problem, and international surveys and top government officials concur. In combating corruption, transparency is important. It would be useful to study in some detail the ways in which greater transparency might help combat corrupt practices in Vietnam; the results could be discussed at government-business forums in order to refine any proposals. One specific problem raised in this report is that private firms appear to have difficulty obtaining credit in Haiphong. This needs to be investigated – perhaps by studying a score of loan proposals from small and medium enterprises that failed to obtain credit – in order to identify the sources of the problem and suggest solutions.


REFERENCES

Bhagwati, Jagdish. 1982. “Directly Unproductive, Profit-Seeking (DUP) Activities,” Journal of Political Economy,

90:3, 988-1002.

Binh Duong Statistical Office. 2002. Binh Duong Statistical Yearbook 2001.

China Statistics Office (CSO). 2000. China Statistical Yearbook 2000.

Corbo, Vittorio. 1996. “Chapter 5” in Andres Solimano (ed.), Road Map to Prosperity, University of Michigan Press, Ann Arbor, MI.

Dapice, David. 2003. Vietnam’s Economy: Success Story or Weird Dualism? A SWOT Analysis, Vietnam Program, Kennedy School of Government, Harvard University, May.

Dong Nai Statistical Office. 2002. Dong Nai Statistical Yearbook 2001.

Economist Intelligence Unit. January 2003. Vietnam: Country Report,. London.

Economist Intelligence Unit. December 2003. Vietnam: Country Report. London.

General Statistical Office. 2002. Vietnam Statistical Yearbook 2001. Hanoi.

______. 2001. Results of the April 2, 2001 Enterprise Census. Hanoi.

______. 2001. Socio-Economic Statistical Data of 61 Provinces and Cities of Vietnam. Hanoi.

Gyfason, Thorvaldur. 1999. Principles of Economic Growth, Oxford University Press, New York.

Haughton, Dominique, Jonathan Haughton and Nguyen Phong (eds.). 2001. Living Standards During and Economic Boom: The Case of Vietnam, UNDP/Statistical Publishing House, Hanoi.

Haughton, Jonathan and Vadym Slobodyanyuk. 2001. State Competitiveness Report 2001, Beacon Hill Institute, Suffolk University, Boston MA.

Haughton, Jonathan and Corina Murg. 2002. Metro Area and State Competitiveness Report 2002, Beacon Hill Institute, Suffolk University, Boston MA.

Ho Chi Minh City Statistical Office. 2002. Ho Chi Minh City Statistical Yearbook 2001.

Hanoi Statistical Office. 2002. Hanoi Statistical Yearbook 2001.

Haiphong Statistical Office. 2002. Haiphong Statistical Yearbook 2001

Kaufmann, Daniel, Aart Kraay, and Pablo Zoido-Lobaton. 1999. Governance Matters. The World Bank, October 1999.

Kaufmann, Daniel, Aart Kraay, and Pablo Zoido-Lobaton. 2002. Governance Matters II. The World Bank, February 2002.

Porter, Michael. 1998. On Competition. Harvard Business School Press, Boston MA.

______. 2000. “The Current Competitiveness Index: Measuring the Microeconomic Foundations of Prosperity,” in World Economic Forum, The Global Competitiveness Report 2000, Oxford University Press, New York, 2000.

______. 2003. “Building the Microeconomic Foundations of Prosperity: Findings from the Microeconomic Competitiveness Index,” in World Economic Forum, The Global Competitiveness Report 2002-2003, Oxford University Press, New York.

Sachs, J., and A.M. Warner. 1995. “Economic Reform and the Process of Global Integration”. Brookings Paper on Economic Activity, 1:1-118.

Thomas, Vinod, et al, 2000. The Quality of Growth, Oxford University Press, New York


Vu Minh Khuong, 2002. “Enhancing the growth of Vietnam’s economy”. Vietnam Economic Studies, v.290, July 2002.

World Bank et al.. 2003. Vietnam Development Report 2004: Poverty, Joint Donor Report to the Consultative Group Meeting, Hanoi, December 2-3, 2003. Hanoi.

World Economic Forum. 2003. Global Competitiveness Report 2002-2003. Geneva.


ANNEX 1. Maps of Hanoi, Haiphong and Ho Chi Minh City Maps and Basic Information (from Vietnam Ministry of Planning and investment Website)

APPENDIX 1.a. HANOI

1. Basic Information

Area: 920.97 square km Districts and sub-districts: 7 sub-districts: Hoan Kiem, Ba Dinh, Hai Ba Trung, Dong Da, Thanh Xuan, Tay Ho, and Cau Giay and 5 districts: Soc Son, Dong Anh, Tu Liem, Gia Lam and Thanh Tri. Population: 2.734 million people

2. Economy

2.1 In 2001 - GDP: VND 32,614,000 million - Average GDP growth rate: 10.03% - GDP per capita: VND 11.8 million - GDP structure: * Industry: VND 12,184,590 million (37.36%) * Agriculture – Silviculture - Aquaculture: VND 870,794 million (2.67%) * Service: VND 19,424,898 million (59.56%) 2.2 Socio-economic development plan in the period of 2001-2005 - GDP: VND 50,000,000 million - Average GDP growth rate: 10-11% - GDP per capita: VND 16 million - GDP structure: * Industry: VND 20,750,000 million (4.5%) * Agriculture – Silviculture - Aquaculture: VND 1,500,000 million (3%) * Service: VND 27,750,000 million (55.5%)


ANNEX 1.b. HAIPHONG


Area: 1,519 square km Districts and subdistricts: 13 + Subdistricts: 4 (Hong Bang, Ngo Quyen, Le Chan and Kien An) + Districts: 8 (An Hai, Tien Lang, Vinh Bao, Thuy Nguyen, An Lao, Kien Thuy, Cat Hai and Bach Long Vy) + Towns: 1 (Do Son) Population: 1,715,200 (in 2001)

2. Economy

2.1. In 2001 - GDP: VND 11,383,978 million (current price) - Average GDP growth rate: 8.56% / year (1996-2000) - GDP per capita: VND 6.7 million - GDP structure: * Industry: VND 4,100,257 million (33.6%) * Agriculture – Silviculture - Aquaculture: VND 1,946,815 million (17.8%) * Service: VND 5,336,906 million (46.6%) 2.2 Socio-economic development plan in the period of 2001-2005 - Average GDP growth rate: 11% / year - GDP per capita: US$ 1,000 - GDP structure: * Industry: 37% * Agriculture – Silviculture - Aquaculture: 13.4% * Service: 49.6%


ANNEX 1.c. HO CHI MINH CITY


Area: 2,095.01 km2 Districts and districts: 17 sub districts (1, 2, 3, 4, 5, 6,7, 8, 9, 10, 11, 12, Tan Binh, Phu Nhuan, Binh Thanh, Go Vap, Thu Đuc) and 5 districts (Cu Chi, Hoc Mon, Binh Chanh, Nha Be, Can Gio) Population: 5,285,500 people (in 2001)

2. Economy

2.1. In 2001 - GDP: VND 84,852,000 million - Average GDP growth rate: 9.5% per annum - GDP per capita: VND 16.04 million - GDP structure:+ Industry: VND 39,242,491 million (46.3%) + Agriculture-Forestry-Aquaculture:VND 1,610,383 million (1.9%) + Service: VND 43,988,883 million (51.9%) 2.2.Socio-economic development plan in the period of 2001-2005- GDP: VND 89,072,000 million - Average GDP growth rate: 11% per annum - GDP structure:+ Industry: VND 43,058,000 million (48.37%) + Agriculture -Forestry -Aquaculture:VND 1,248,000 million (1.4%) + Service: VND 44,913,000 million (52.42%)


ANNEX 2. The Growth Dynamics of the Manufacturing Sector in the Three Cities (1995-2000)

National Structure NATIONAL SHARE 1995 GROWTH 2000/1995 Manufacturing Industries 1995 2000 Hanoi Haiphong HCMCity Vietnam Hanoi Haiphong HCMCity

Textiles* 7.4% 5.5% 12.9% 1.1% 41.1% 1.6 1.4 2.6 1.6 Garments* 3.5% 3.3% 6.4% 2.1% 45.9% 2.0 2.3 1.8 2.4 Shoes and Leather Products* 4.3% 4.9% 6.6% 19.9% 34.3% 2.5 2.5 2.8 3.0 Chemicals and Related products** 6.1% 6.1% 8.6% 1.6% 48.7% 2.2 2.1 3.4 2.3 Non-metallic Mineral Products** 11.0% 10.0% 5.1% 5.7% 17.1% 2.0 2.5 3.3 1.6 Metals** 4.1% 3.2% 1.0% 6.4% 37.7% 1.7 11.0 6.9 1.2 Motor Vehicles** 1.8% 1.8% 35.7% 1.2% 33.5% 2.2 1.7 0.6 1.9 Products fabricated from Metals*** 2.8% 3.2% 11.8% 6.4% 41.2% 2.5 2.8 2.5 2.4 Machinery, Equipment, and electric Apparatus*** 2.9% 3.5% 39.5% 4.9% 26.9% 2.6 2.0 4.4 4.8 TV, Radio, and Telecom. Products*** 2.5% 2.4% 37.6% 3.5% 48.2% 2.1 2.6 (-)! 1.6 Medical & Precision Instruments/Watches & Clocks*** 0.2% 0.2% 8.5% 0% 65.1% 2.1 8.6 0.0 2.5 Other transportation means (ships, wagons)*** 2.3% 3.5% 30.6% 12.0% 22.4% 3.4 2.7 1.4 1.9 Foodstuff and Beverage 32.4% 24.0% 3.4% 0.9% 30.6% 1.6 1.6 1.6 1.6 Tobacco 4.8% 3.2% 12.8% 4.4% 48.9% 1.4 1.1 1.6 1.7 Papers and Related Products 2.3% 2.2% 6.8% 2.6% 32.8% 2.0 2.1 4.8 2.0 Rubber and Plastic Products 2.7% 3.5% 8.6% 5.6% 69.1% 2.8 3.3 3.4 2.6 Furniture 2.4% 2.2% 8.4% 1.2% 22.1% 2.0 1.7 2.4 2.6 Wooden and Bamboo products 4.0% 2.0% 3.8% 0.5% 21.5% 1.1 1.2 3.1 0.9 Others 2.4% 15.3% 50.3% 0.9% 36.6% 14.2 1.7 0.4 3.3 All The Manufacturing Sector 100.0% 100.0% 10.0% 3.5% 34.1% 2.2 2.0 2.9 2.0

* Export-oriented industries; ** Highly protected industries; *** More tech-intensive industries (categorized by the author). (-)! This industry disappears in Haiphong. Source: Calculated from “Statistical Yearbook of Vietnam, 2001”.


ANNEX 3. Performance of the Major Industrial Parks in the Three Cities

INDUSTRIAL PARKS/CITY

Year of Licensing

Total Area (ha)

Area for Rent (ha)

Number of foreign direct

investmentProjects

Total registered

investments (US$)

Actual investments

(US$)

Leased area

Occupation rate

Employment

Jobs/ha

Tan Thuan EPZ 1991 300 210 116 635 360 142 68% 32,327 227 Linh Trung I 1992 62 42 33 188 70 46 109% 32,065 699 Linh Trung II 1997 61.26 43.4 25 28 7 22 50% 14,000 651 HO CHI MINH 423.26 295.4 174 851 437 210 71% 78,392 374 Nomura 1994 153 123 21 105 79 15 12% 2191 147 Dinhvu 1997 164 120 2 34 11 15 13% 77 5 HAIPHONG 317 243 23 139 90 30 12% 2,268 76 Noibai 1994 100 75 7 52 5 12 17% 780 63 Saidong B 1996 97 73 20 356 271 42 58% 3667 87 Thang Long 1997 198 145 16 182 NA 45 31% 279 6 HANOI 295 218 36 538 271 87 40% 3,946 45


ANNEX 4. Summary of Survey Results

Note: In this Annex, HN refers to Hanoi, HP to Haiphong and HCMC or HCM City to Ho Chi Minh City.

I. BACKGROUND SECTION B.1. Where is the primary location of your firm? Hanoi Haiphong Ho Chi Minh Total # firms % # firms % # firms % # firms % 128 23.5% 128 23.5% 288 52.9% 544 100.0% B2. When was your firm established or reincorporated?

Hanoi Haiphong Ho Chi Minh Total Period # firms % # firms % # firms % # firms %

Before 1954 5 3.9 1 0.8 5 1.74 11 2.0 1955-1975 25 19.5 22 17.2 7 2.43 54 9.9 1976-1989 10 7.8 13 10.2 62 21.5 85 15.6 1990-1995 33 25.8 32 25 81 28.1 146 26.8 1996-2000 34 26.6 33 25.8 74 25.7 141 25.9 After 2000 21 16.4 27 21 59 20.5 107 19.7 All 128 100 128 100 288 100 544 100 B3. Which best describes the ownership of your company?

Hanoi Haiphong Ho Chi Minh Total Type of Ownership # firms % # firms % # firms % # firms % Private 46 37.7 65 50.8 119 41.3 230 42.3 State-owned 54 44.3 40 31.3 75 26 169 31.1 FDI 15 12.3 16 12.5 54 18.8 85 15.6 Mixed 13 10.7 7 5.5 40 13.9 60 11.0 All 128 100 128 100 288 100 544 100 B4. Which best describes your primary line of business?

Hanoi Haiphong Ho Chi Minh Total Line of Business # firms % # firms % # firms % # firms %

End-Consumer Mnf. Products

56 43.8 56 43.8 152 52.8 264 48.5

Intermediate Mnf. Products

10 7.8 26 20.3 30 10.4 66 12.1

Trade, Business Service/ Banking

62 48.4 46 35.9 106 36.8 214 39.3

All 128 100 128 100 288 100 544 100


B5. Which of the following industries best describes the primary focus of your company (please choose only one industry)?

Hanoi Haiphong Ho Chi Minh

Total Code

Industry #

firms % #

firms % #

firms % #

firms %

1 Textile and Garment 15 11.7 4 3.1 44 15.3 63 11.6 2 Food, Beverage, & Tobacco 9 7 9 7 34 11.8 52 9.6 3 Pharmaceutical 0 0 1 0.8 5 1.7 6 1.1 4 Shoe and Leather 4 3.1 8 6.3 7 2.4 19 3.5 5 Entertainment & Sporting Products 1 0.8 1 0.8 5 1.7 7 1.3 6 Mining and Building Materials 5 3.9 11 8.6 4 1.4 20 3.7 7 Cleaning & Personal Care Products 0 0 1 0.8 8 2.8 9 1.7 8 Computer-related Products 1 0.8 0 0 2 0.7 3 0.6 9 Metal Fabrication 9 7 9 7 9 3.1 27 5 10 Toys, Handicrafts 2 1.6 3 2.3 10 3.5 15 2.8 11 Packaging Products

And Containers 1 0.8 3 2.3 8 2.8 12 2.2

12 Machinery 6 4.7 5 3.9 7 2.4 18 3.3 13 Consumer Electronics/ Electrics 1 0.8 2 1.6 8 2.8 11 2 14 Paper 1 0.8 1 0.8 7 2.4 9 1.7 15 Electrical, Electronics, & Telecom 2 1.6 2 1.6 8 2.8 12 2.2 16 Furniture 1 0.8 4 3.1 9 3.1 14 2.6 17 Chemicals, Plastics 4 3.1 13 10.2 23 8 40 7.4 18 Real States Development 5 3.9 5 3.9 4 1.4 14 2.6 19 Other Consumer Products 14 10.9 10 7.8 23 8 47 8.6 20 Transportation Equipment 5 3.9 11 8.6 10 3.5 26 4.8 21 Construction 6 4.7 3 2.3 9 3.1 18 3.3 22 General Service (Banks, Consulting,

Law) & Tourism 24 18.8 8 6.3 22 7.6 54 9.9

23 Others 12 9.4 14 10.9 22 7.6 48 8.8 All 128 100 128 100 288 100 544 100 B6a. What best describes your company’s revenues in 2001?

Hanoi Haiphong Ho Chi Minh Total Range of Revenues (VND) # firms % # firms % # firms % # firms % Under 1Billion 6 5.2 24 20.9 27 9.6 57 11.1 1-5 Billion 15 12.9 34 29.6 55 19.6 104 20.3 5-10 Billion 16 13.8 16 13.9 46 16.4 78 15.2 10-20 Billion 21 18.1 11 9.6 32 11.4 64 12.5 20-50 Billion 12 10.3 8 7.0 39 13.9 59 11.5 Over 50 Billion 46 39.7 22 19.1 82 29.2 150 29.3 All* 116 100.0 115 100.0 281 100.0 512 100.0 * 32 firms did not fill out this question (12 in Hanoi, 13 in Haiphong, and 7 in Ho Chi Minh) B6b. What best describes the export of your company as a share of 2001 revenues?


Hanoi Haiphong Ho Chi Minh Total Export as % Share of

Revenues # firms % # firms % # firms % # firms % 0% 81 63.3 95 74.2 154 53.5 330 60.7 0.1-10% 11 8.6 10 7.8 28 9.7 49 9.0 10-25% 6 4.7 5 3.9 19 6.6 30 5.5 25-30% 5 3.9 6 4.7 22 7.6 33 6.1 50-75% 16 12.5 5 3.9 19 6.6 40 7.4 More than 75% 9 7.0 7 5.5 46 16.0 62 11.4 All 128 100.0 128 100.0 288 100.0 544 100.0 B7. What best describes your company’s employment as of December 31, 2001?

Hanoi Haiphong Ho Chi Minh Total Number of Employees # firms % # firms % # firms % # firms % Less than 50 25 21.0 34 28.1 92 32.4 151 28.8 50-99 31 26.1 45 37.2 78 27.5 154 29.4 100-199 28 23.5 21 17.4 52 18.3 101 19.3 200-499 14 11.8 6 5.0 20 7.0 40 7.6 500-999 21 17.6 15 12.4 42 14.8 78 14.9 Over 1000 0 0.0 0 0.0 0 0.0 0 0.0 All 119 100.0 121 100.0 284 100.0 524 100.0 * 20 firms did not fill out this question (9 in Hanoi, 7 in Haiphong, and 4 in Ho Chi Minh)

B8. What best describes the growth of your company’s revenues in 2001 and 2000?

Hanoi Haiphong Ho Chi Minh Total 2001/2000 # firms % # firms % # firms % # firms %

Negative 9 7.7 8 9.6 31 11.7 48 10.3 0-10% 29 24.8 19 22.9 71 26.7 119 25.5 10-25% 44 37.6 31 37.3 127 47.7 202 43.3 25-50% 16 13.7 15 18.1 24 9.0 55 11.8 50-100% 13 11.1 9 10.8 9 3.4 31 6.7 Over 100% 6 5.1 1 1.2 4 1.5 11 2.4 All* 117 100.0 83 100.0 266 100.0 466 100.0 * 78 firms did not fill out this part of the question (11 in Hanoi,45 in Haiphong, and 22 in Ho Chi Minh)

Hanoi Haiphong Ho Chi Minh Total 2000/1999 # firms % # firms % # firms % # firms %

Negative 5 4.6 5 6.8 31 12.1 41 9.3 0-10% 23 21.1 30 40.5 82 32.0 135 30.8 10-25% 51 46.8 21 28.4 111 43.4 183 41.7 25-50% 19 17.4 10 13.5 24 9.4 53 12.1 50-100% 9 8.3 5 6.8 8 3.1 22 5.0 Over 100% 2 1.8 3 4.1 0 0.0 5 1.1 All* 109 100.0 74 100.0 256 100.0 439 100.0 * 105 firms did not fill out this part of the question (19 in Hanoi, 54 in Haiphong, and 32 in Ho Chi Minh)


B9. How do you expect the average annual growth of your company (in revenues) during the next three years (2002-2004)?

Hanoi Haiphong Ho Chi Minh Total Expected Growth # firms % # firms % # firms % # firms %

Negative 2 1.7 2 2.6 10 3.6 14 3.0 0-10% 23 19.5 21 27.6 78 28.2 122 25.9 10-25% 53 44.9 34 44.7 134 48.4 221 46.9 25-50% 23 19.5 10 13.2 31 11.2 64 13.6 50-100% 11 9.3 9 11.8 14 5.1 34 7.2 Over 100% 4 3.4 0 0.0 5 1.8 9 1.9 Uncertain 2 1.7 0 0.0 5 1.8 7 1.5 All* 118 100.0 76 100.0 277 100.0 471 100.0 * 73 firms did not fill out this question (10 in Hanoi, 52 in Haiphong, and 11 in Ho Chi Minh) B10. Which best describes your position in your company?

Hanoi Haiphong Ho Chi Minh Total Position # firms % # firms % # firms % # firms %

Gen. Director/CEO 32 26.2 56 45.9 63 22.3 151 28.7 Deputy Gen. Director 16 13.1 17 13.9 46 16.3 79 15.0 Manager/Dept. Head 48 39.3 24 19.7 146 51.8 218 41.4 Others 26 21.3 25 20.5 27 9.6 78 14.8 All* 122 100.0 122 100.0 282 100.0 526 100.0 * 18 firms did not fill out this question (6 in Hanoi, 6 in Haiphong, and 6 in Ho Chi Minh) B11. Which best describes your educational attainment?

Hanoi Haiphong Ho Chi Minh Total Education Attainment

# firms % # firms % # firms % # firms %

No College 6 5.0 7 6.7 16 5.7 29 5.7 Some College 2 1.7 1 1.0 14 5.0 17 3.4 College Graduate 99 82.5 82 78.8 209 74.4 390 77.2 Post-Graduate 13 10.8 14 13.5 42 14.9 69 13.7 All* 120 100.0 104 100.0 281 100.0 505 100.0 * 49 firms did not fill out this question (8 in Hanoi, 24 in Haiphong, and 7 in Ho Chi Minh) B12. Which best describes your age?

Hanoi Haiphong Ho Chi Minh Total Age # firms % # firms % # firms % # firms %

Under 30 32 26.4 4 3.6 42 14.9 78 15.2 30-39 35 28.9 13 11.7 101 35.9 149 29.0 40-49 36 29.8 41 36.9 112 39.9 189 36.8 50-59 17 14.0 48 43.2 26 9.3 91 17.7 60 and older 1 0.8 5 4.5 0 0.0 6 1.2 All* 121 100.0 111 100 281 100.0 513 100.0 * 31 firms did not fill out this question (7 in Hanoi, 17 in Haiphong, and 7 in Ho Chi Minh)


B13. How long have you been working in the region?

Hanoi Haiphong Ho Chi Minh Total Time Living in the City # firms % # firms % # firms % # firms % Less than 3 Years 12 9.8 3 2.7 18 6.4 33 6.4 3-5 Years 13 10.7 5 4.5 25 8.9 43 8.4 5-10 Years 23 18.9 24 21.4 69 24.6 116 22.6 Over 10 Years 74 60.7 80 71.4 168 60.0 322 62.6 All* 122 100.0 112 100.0 280 100.0 514 100.0 * 30 firms did not fill out this question (6 in Hanoi, 16 in Haiphong, and (8 in Ho Chi Minh)


II. BUSINESS ENVIRONMENT Note: In answering a question, respondents circle a number in the range of 1-7, for which:

1 means “disagree completely” 2 means “disagree generally” 3 means “disagree somewhat” 4 means “neither disagree nor agree” 5 means “agree somewhat” 6 means “agree generally”; and 7 means “agree completely.”

Respondents circle “NA” if the question is irrelevant to the context of his/her business or he or she is not comfortable answering it. We interpret the answers as follows:

• Under 2.5 or over 5.50 the disagreement or agreement is very significant (marked by ***) • Between 2.51—3.0 or 5.01—5.50 disagreement or agreement is generally significant (marked by

**) • Between 3.01-- 3.49 or 4.51—5.0 disagreement or agreement is somewhat significant (marked by *) • Between 3.50—3.99 or 4.01—4.5 the issue is not really significant

1. FACTOR CONDITIONS In your city… Hanoi Haiphong HCMC 1. The supply of unskilled labor is ample (HN=123; HP=127;

HCM=284)22. 4.54* 5.05**

4.78*

2. The supply of skilled labors is ample (HN=123; HP=119; HCM=281)

4.02 3.38 4.03

3. The overall quality of the K-12 education system is high (HN=124; HP=121; HCM=284).

4.81* 4.46 4.50

4. The working environment is attractive to talented people (HN=125; HP=120; HCM=282).

4.54* 2.87** 5.08**

5. The cost of living is low relative to the average national standard (HN=126; HP=122; HCM=287).

2.44*** 3.08* 2.23***

6. The land acquisition procedure for business set-up or expansion is simple (HN=125; HP=120; HCM=285).

2.30*** 2.43*** 2.62**

7. Land rent is lower relative to the average rate in neighboring provinces (HN=118; HP=114; HCM=269).

1.92*** 2.75** 1.96***

8. Banks are responsive to firms’ demand (HN=124; HP=122; HCM=281).

4.29 3.17* 4.22

9. The total costs of borrowing money from banks (including interest and informal fees) are reasonable (HN=124; HP=118; HCM=282).

4.34 3.02* 4.35

10. It is not difficult for a good project to get financing (HN=126; HP=122; HCM=285)

4.39 3.48* 4.4

22 Numbers of respondents from each of the three cities, who answered the question, are given in the parentheses.


2. QUALITY OF INFRASTRUCTURE In your city… Hanoi Haiphong HCMC 11. The supply of power is reliable (HN=126; HP=120;

HCM=287). 4.79* 3.93 4.87*

12. The overall quality of the road system is high (HN=123; HP=116; HCM=282).

4.22 3.97 4.09

13. The quality of services provided by international ports is high (HN=121; HP=88; HCM=282).

4.06 4.26 4.25

14. The quality of the telephone system is high (HN=126; HP=111; HCM=286).

4.98* 4.32 4.81*

15. The quality of the Internet service is high (HN=123; HP=87; HCM=286).

4.45 4.17 4.10

16. The overall quality of infrastructure is satisfactory (HN=124; HP=101; HCM=283).

3.98 3.71 4.27

3. CLUSTERS AND NETWORKING

Share as % of Total Number of Responding Firms (HN=107; HP=120; HCM=267)

17. In the total input materials purchased by your firm in 2001, purchase from local* suppliers made up ... Hanoi Haiphong HCMC

Less than 25% 34.6 28.4 34.8 25-49% 27.1 11.6 24.0 50-74% 22.4 47.5 23.6 Over 75% 15.9 12.5 17.6 Total 100.0 100.0 100.0 * A supplier is considered local if it is located in your economic region. Hanoi Haiphong HCMC 18. The local suppliers of your firm are competitive on quality

(HN=113; HP=101; HCM=261). 3.99 3.82 4.31

19. The local suppliers of your firm are competitive on price (HN=115; HP=100; HCM=260).

4.51* 4.10 4.76*

20. The local suppliers of your firm are responsive to your company’s demand (HN=117; HP=111; HCM=274).

4.44 4.58* 4.70*

21. Most equipment used by your firm is made by local firms (HN=113; HP=115; HCM=261).

2.32*** 1.91*** 3.02*

22. Your company has good relationship with local suppliers and customers in terms of information sharing and communication (HN=124; HP=101; HCM=285).

4.87* 4.84* 4.68*

23. Firms in your city are willing to share information on new technology market opportunities (HN=126; HP=87; HCM=284).

3.85 3.49* 3.81

24. The local customers usually provide sophisticated feedbacks on your products and services (HN=125; HP=92; HCM=273).

4.92* 4.88* 5.04**

25. Firms in our region are eager to work together to improve the local business environment (HN=125; HP=83; HCM=285).

4.91* 4.94* 4.86*

26. The institutions for business collaboration in our region are proactive in promoting business linkages (HN=124; HP=102; HCM=286).

4.31 4.10 4.24

27. The forums for businesspeople in your city to gather to learn and exchange ideas are frequently organized (HN=125; HP=113; HCM=285).

4.36 4.23 4.30


4. LOCAL GOVERNMENTS In your city… Hanoi Haiphong HCMC 28. The local government has a clear vision and strategy for

economic development (HN=123; HP=121; HCM=285). 4.80* 4.37 4.72*

29. The local government equally treats firms regardless their type of ownership (HN=124; HP=123; HCM=286).

3.77 3.55 4.02

30. The government officials, in general, are competent (HN=124; HP=122; HCM=283).

3.58 2.79** 3.63

31. The regulatory system is clear and effective (HN=125; HP=119; HCM=284).

3.96 3.82 3.84

32. The procedure for starting up a new business is simple (HN=124; HP=121; HCM=286).

4.77* 5.03** 5.15**

33. The local government is responsive to the needs of business (HN=125; HP=122; HCM=277).

3.68 3.09* 3.88

34. Corruption is not pervasive (HN=124; HP=121; HCM=283). 2.23*** 2.42*** 2.43*** 35. The local government has significantly improved its

performance in the last three years (HN=123; HP=113; HCM=284).

4.76* 3.86 5.07**

36. The overall effectiveness of the local government is high (HN=124; HP=93; HCM=286).

3.93 4.03 4.27

5. RIVALRY In your city… Hanoi Haiphong HCMC 37. The competition is intense (HN=124; HP=113; HCM=286). 5.48** 5.29** 5.64*** 38. Competition is fair (HN=125; HP=111; HCM=285). 4.46 4.48 4.44 39. Your company has learned a lot from your competitors

(HN=123; HP=112; HCM=283). 5.64*** 5.35** 5.43**

. 6. INNOVATIVE CAPACITY In your city… Hanoi Haiphong HCMC 40. Counterfeit goods are rampant (HN=124; HP=100; HCM=279). 5.05** 4.40 5.05** 41. Firms have a close partnership with research institutes and

universities in tackling their business challenges (HN=123; HP=99; HCM=282).

4.35 4.31 4.19

42. The presence of foreign firms is strong (HN=117; HP=76; HCM=282).

5.29** 5.04** 5.76***

43. Firms have a close collaboration with foreign suppliers and customers for information sharing and technology transferring (HN=121; HP=80; HCM=286).

5.18** 5.04** 5.07**

44. It is easy for a firm to recruit and retain qualified engineers (HN=123; HP=81; HCM=286).

4.28 4.0 4.85*

45. Firms are aggressive in acquiring new equipment and/or new technology (HN=123; HP=115; HCM=286).

5.11** 4.50 5.08**

46. Firms are aggressive in improving the quality of existing products and developing new ones (HN=123; HP=109; HCM=286).

5.16** 4.60* 5.35**

47. Firms have access to updated and reliable information on new technology and market demand (HN=122; HP=95; HCM=285).

4.44 4.18 4.70*


II. FIRMS’ STRATEGY AND OPERATION 1. MARKET POSITIONING Relative to the average player in your industry… Hanoi Haiphong HCMC 48. The quality of your company products is better (HN=120;

HP=110; HCM=280). 5.60*** 5.54*** 5.64***

49. The price of your company products is higher (HN=120; HP=95; HCM=279).

4.23 4.38 4.32

50. The market share of your company is larger (HN=122; HP=95; HCM=279).

4.57* 4.24 4.67*

51. The product range of your company is broader (HN=125; HP=106; HCM=286).

4.69* 4.40 4.76*

2. MOST PRESSING PROBLEMS FACING FIRMS Among the most pressing problems facing your company today is the…

Hanoi Haiphong HCMC

52. Burden of overstaff (HN=116; HP=112; HCM=261).

3.54 3.50 3.10*

53. Shortage of skilled labors (HN=121; HP=115; HCM=282)

5.57*** 5.32** 5.20**

54. Scarcity of capital (HN=115; HP=113; HCM=281)

4.90* 5.21** 4.71*

55. Difficulty in acquiring land for expansion (HN=110; HP=109; HCM=253)

4.69* 4.57* 4.58*

56. High production costs (HN=112; HP=117; HCM=273)

4.93* 5.11** 4.86*

57. Low product quality (HN=115; HP=104; HCM=272)

2.97** 3.43* 3.02*

58. Low efficiency and productivity (HN=116; HP=97; HCM=276)

3.54 4.13 3.68

59. Weak company’s brand name and image (HN=114; HP=92; HCM=270).

4.11 4.34 4.14

60. Weak distribution network (HN=115; HP=112; HCM=275).

3.57 3.20* 3.91

61. Limited capability for developing new products (HN=118; HP=115; HCM=285)

3.95 3.10* 3.97

62. Lack of in-depth information about customers and markets (HN=117; HP=113; HCM=279).

4.52* 3.53 4.55*

63. Lack of new market opportunities (HN=114; HP=108; HCM=277).

3.84 4.10 3.92

64. Unhealthiness of the business environment (HN=124; HP=99; HCM=285)

5.93*** 6.26*** 5.84***

65. Other


3. ACTIONS OF TOP PRIORITY Among the most urgent actions that your company plans to take within next 18 months is to…

Hanoi Haiphong HCMC

66. Substantially reduce production costs (HN=117; HP=118; HCM=284).

5.53*** 5.31** 5.37**

67. Purchase new production (HN= 123; HP=119; HCM=286) equipment.

5.40** 5.72*** 5.16**

68. Upgrade the management capability (HN=123; HP=118; HCM=287)

6.33*** 6.21*** 6.09***

69. Launch an effective marketing program (HN=122; HP=115; HCM=284).

5.89*** 6.02*** 5.69***

70. Strengthen the distribution network (HN=120; HP=112; HCM=285).

5.81*** 5.97*** 5.65***

71. Recruit talented employees (HN=122; HP=76; HCM=286)

5.64*** 5.62*** 5.29**

72. Invest in improving knowledge about market and customers (HN=123; HP=113; HCM=286).

5.93*** 5.96*** 5.82***

73. Enter new markets (HN=123; HP=113; HCM=285).

6.12*** 6.04*** 5.74***

74. Seek out a foreign partner (HN=121; HP=80; HCM=287).

5.46** 5.54*** 5.53***

75. Seek a special support or aid from the government (HN=122; HP=80; HCM=285).

4.92* 5.35** 4.79*

4. COMPUTERS AND INTERNET USAGE Hanoi Haiphong HCMC

Yes

60.8% 30.0% 67.3% 76. Does your company have its own email account? (HN=125; HP=121; HCM=284).

No 39.2% 70.0% 32.7%

Yes 49.6%

23.3% 43.3% 77. Does your company have its own website? (HN=123; HP=116; HCM=282).

No 50.4%

76.7% 56.7%

Dial-up 63.4% 55.6% 72.5% 78. What kind of Internet connection does your company have? (HN=82; HP=45; HCM=233). ISDN & Others 36.6% 44.4% 27.5%

In your company… Hanoi Haiphong HCMC 79. Computers are extensively used for management (HN=125;

HP=75; HCM=285). 5.66 5.15 5.53

80. Emails are extensively used for communication (HN=124; HP=69; HCM=284).

5.06 4.61 5.07

81. Internet is extensively used for market research and learning (HN=124; HP=69; HCM=284).

4.77 4.04 4.74

82. Using the Internet and Computers potentially creates sizeable values for the company (HN=125; HP=70; HCM=285).

5.12 4.64 5.07


5. FACTORS CRITICAL TO THE GROWTH OF FIRMS

83. Each firm lists the five elements that have the most positive impact on its success and the five factors that are considered the greatest obstacles to its growth.

The factors that are most significant to the success of firms:

Number of Firms As % of All Firms Major Determinants of Firms’ Success HN HP HCM SUM HN HP HCM SUM Availability of Cheap labor 68 86 145 299 53% 67% 50% 55% Location 73 52 162 287 57% 41% 56% 53% Availability of Skilled labor 55 84 140 279 43% 66% 49% 51% Low Cost 49 67 121 237 38% 52% 42% 44% Access to capital 37 81 109 227 29% 63% 38% 42% Local availability of raw materials 43 77 102 222 34% 60% 35% 41% Capability of Local suppliers 48 56 86 190 38% 44% 30% 35%

The factors that are major obstacles to firms’ growth:

Number of Firms As % of All Firms Major Obstacles to Growth of Firms HN HP HCM SUM HN HP HCM SUM Fake products 60 76 118 254 47% 59% 41% 47% Intensity of Competition 60 57 132 249 47% 45% 46% 46% Corruption 44 73 129 246 34% 57% 45% 45% Competence and working Ethics 47 75 94 216 37% 59% 33% 40% High Costs 54 43 117 214 42% 34% 41% 39% Regulatory System 45 57 112 214 35% 45% 39% 39% Macroeconomic factors 61 42 89 192 48% 33% 31% 35% Infrastructure 39 61 82 182 30% 48% 28% 33% Access to capital 44 30 98 172 34% 23% 34% 32%


III. ATTITUDES TOWARD BUSINESS AND ECONOMIC DEVELOPMENT

Hanoi Haiphong HCMC 84. The success of a businessman is dependent more on his “luck”

than on his talents (HN=124; HP=119; HCM=286). 2.73** 2.45*** 2.63**

85. Staying small and at low profile is critical for a private firm to be secured in the long-term. (HN=123; HP=121; HCM=286).

3.10* 5.40** 3.19*

86. A good business decision should have no risk at all (HN=124; HP=117; HCM=280).

5.02** 6.14*** 5.06**

87. Vision and long-term strategy is critical for a firm to achieve a lasting success (HN=125; HP=117; HCM=287).

6.57*** 6.66*** 6.41***

88. Cheap resources (such as labor, raw materials) are the most important sources of competitive advantage for Vietnam (HN=124; HP=103; HCM=286).

5.33** 5.37** 5.45**

89. It is not difficult to attract or retain talented employees once a company enjoys a good financial performance (HN=124; HP=84; HCM=287).

4.73* 5.33** 5.23**

90. It is not sufficient for a firm to achieve competitive advantage by only improving its operational efficiency (such as production cost, product quality reliability) (HN=125; HP=103; HCM=287).

5.23** 5.50** 5.06**

91. Innovation (in both management and product offerings) is critical for a firm to sustain its competitive edge

(HN=127; HP=127; HCM=284).

5.92*** 5.79*** 5.86***

92. Too intense competition in an industry is harmful to its growth and efficiency (HN=123; HP=84; HCM=284).

4.96* 5.20** 4.75*

93. It is possible for companies to collaborate and compete at the same time (HN=125; HP=82; HCM=285).

5.72*** 5.92*** 5.50***

94. The government should impose high tariff to protect local firms from foreign competitors (HN=125; HP=116; HCM=285).

3.97 5.16** 3.87

95. Export and integration into the world economy are critical to the prosperity of the country (HN=125; HP=111; HCM=285).

6.16*** 6.38*** 6.26***

96. The major state-own corporations will play the leading role in the country’s industrialization (HN=125; HP=77; HCM=284).

5.14** 5.49** 5.02**

97. The government should invest in large industrial projects (such as fertilizers, refinery) to ensure the self-reliance of the country (HN=126; HP=74; HCM=283).

5.71*** 5.91*** 5.50***

98. Access to government favors is very important to the success of a business (HN=124; HP=108; HCM=285).

5.24** 6.0*** 5.35**

99. A firm can enhance its competitiveness by strengthening its business network (HN=123; HP=80; HCM=286).

6.0*** 6.0*** 5.80***

100. The current business environment in our country is favorable (HN=125; HP=97; HCM=285).

4.55* 4.48 4.60*

101. The business environment in our country will be substantially better in the next three years (HN=125; HP=84; HCM=285).

5.22** 5.23** 5.33**


IV. PRIORITIES FOR GOVERNMENTS IN THE NEXT 3 YEARS. In this section, a list of priorities for governments (at both central and provincial levels) is given. Respondents are asked to assess the urgency of these priorities in relation to the growth of their firms. Note: For the 1-5 scale questions in this section, respondents circle a number in the range of 1-5 as follows:

1 means the action is “not urgent at all” 2 means the action is “slightly urgent” 3 means the action is “urgent” 4 means the action is “very urgent” 5 means the action is “extremely urgent”

We interpret the scores as follows: • Over 4.25: extremely urgent (marked with ***). • 3.75-4.25: very urgent (marked with **) • 2.75-3.74: urgent (marked with *) • 1.75-2.74: somehow urgent • Below 1.75: not urgent

Priorities Hanoi Haiphong HCMC 102. Upgrade the quality of K-12 education system (HN=125;

HP=126; HCM=283). 3.98** 3.89** 4.19**

103. Invest in vocational education and training programs to prepare and upgrade workers skills (HN=126; HP=126; HCM=284).

4.05** 3.99** 4.13**

104. Upgrade the quality of transportation infrastructure (HN=126; HP=126; HCM=282).

3.90** 4.19** 4.06**

105. Upgrade the quality of telecommunication infrastructure (HN=126; HP=124; HCM=282).

3.61* 3.73** 3.84**

106. Reduce the costs of telecom and Internet Services (HN=126; HP=124; HCM=285).

3.77** 3.82** 3.99**

107. Upgrade the reliability of power supplies (HN=124; HP=125; HCM=285).

3.68* 4.18** 3.78**

108. Upgrade the quality of the banking system (HN=124; HP=124; HCM=284).

3.41* 4.10** 3.69*

109. Introduce stronger incentives for business investments (HN=124; HP=126; HCM=283).

4.0** 4.39*** 3.96**

110. Promote the partnership between government and private sector and the networking among firms (HN=125; HP=125; HCM=281).

3.50* 4.0* 3.50*

111. Promote the image of your city and of Vietnam in the global market (HN=123; HP=102; HCM=282).

3.80** 3.92** 3.94**

112. Provide financial support to promote collaboration between universities/research institutes and the business sector (HN=120; HP=102; HCM=283).

3.24* 3.39* 3.34*

113. Speed up privatization (HN=125; HP=125; HCM=284). 3.66* 4.15** 3.61* 114. Streamline and upgrade the currently regulatory system

(HN=125; HP=125; HCM=284). 4.04** 4.50*** 4.23**

115. Enhance the competence and working ethics of government agencies (HN=124; HP=126; HCM=284).

4.17** 4.54*** 4.31***

116. Launch a strong and effective anti-corruption campaign (HN=125; HP=125; HCM=283).

4.30*** 4.55*** 4.55***

117. Establish a strong business information center to support domestic business in market research and foreign market penetration (HN=124; HP=120; HCM=284).

3.71* 4.04** 3.89**


ANNEX 5. Construction of the Competitiveness Index In chapter 5 we construct an index of competitiveness. In order to do this we took the following steps: 1. Rescale each original variable X so that it varies from 0 (least competitive) to 10 (most competitive. Call

the rescaled variables Y. The full list of variables and their scores for each city appear in Annex 6. None of the variables were scaled from 0-10 in their original form, so a set of transformations was necessary. We proceeded as follows:

a. Most of the variables asked respondents to express their opinions on a scale of 1 (completely disagree) through 7 (completely agree). In these cases the transformation gave Y = (10/6)×(X-1), which achieves the required rescaling.

b. Some of the variables asked respondents to indicate the priority that government should accord to an action, on a scale of 1 (not urgent at all) through 5 (very urgent). In practice the average scores all fell between 3 and 5. Thus we used the transformation Y = 5 – 5×(X-4).

c. For the variables on openness we did not have survey data, but we did have information for Vietnam overall (XV) as well as for each city (Xi). In this case we created an index Yi = 5 – 3 ×((Xi – XV)/XV). The choice of 3 was arbitrary, but reasonable, as it was consistent with all the transformed values falling between 0 and 10.

2. We then computed the mean of these transformed variables in order to construct the nine sub-indexes (for

“institutions,” “infrastructure,” etc.). 3. In the final step we computed the mean of the nine sub-indexes, to get the overall index.


ANNEX 6. Listing of Comparative Advantages and Disadvantages for the Three Cities

Hanoi

COMPETITIVE ADVANTAGES COMPETITIVE DISADVANTAGES

Variable/Index Index Rank Variable/index Index RankFinal Index 5.60 2 Final Index 5.60 2Government and fiscal policy subindex 5.51 1 Government and fiscal policy subindex 5.51 1Promote public-private partnership and business networks 7.50 1 Streamline and upgrade the regulatory system 4.80 1Speed up privatization 6.70 2 Enhance the competence and working ethics of government officials 4.15 1

Establish a strong business information center to support firms in market research and technology acquisition

6.45 1 Effectively fight corruption 3.50 1

Promote gloabally the image of Vietnam and your city 6.00 1Introduce stronger incentives for business investment and expansion 5.00 2

Institutions subindex 4.52 2 Institutions subindex 4.52 2The procedure for starting up a new business is simple 6.28 3 Local government treats firms of all types of ownership equally 4.62 2Local gov has significantly improved its performance in the last 3 yrs 6.27 2 Local government is responsive to the needs of the business sector 4.47 2

The regulatory system is clear and effective 4.93 1Local government officials, in general, are competent 4.30 2Fake goods are rampant 3.25 1Corruption is not rampant 2.05 3

Infrastructure subindex 5.25 1 Infrastructure subindex 5.25 1The supply of power is reliable 6.32 2 Land acquisition procedure for business set-up or expansion is simple 2.17 3

Upgrade the sources of power supply 6.60 1 Land rent is lower relative to the average rate in neighboring provinces 1.53 3

The quality of the Internet service is high 5.75 1 The overall quality of infrastructure is satisfactory 4.97 2The quality of the telephone system is high 6.63 1Upgrade telecom. infrastructure 6.95 1Reduce the costs of telecom and Internet Services 6.15 1The quality of services provided by international ports is high 5.10 3The overall quality of the road system is high 5.37 1Upgrade transportation infrastructure 5.50 1Human resources subindex 5.51 1 Human resources subindex 5.51 1The working environment is attractive to talented people 5.90 2 Invest in vocational education to train skilled workers 4.75 1

The supply of unskilled labor is ample 5.90 2The supply of skilled labor is ample 5.03 2Upgrade the quality of K-12 education system 5.10 1The overall quality of the K-12 education system is high 6.35 1Technology subindex 6.69 2 Technology subindex 6.69 2Computers are extensively used for management 7.77 1E-mail is extensively used for communication 6.77 2The Internet is extensively used for market research and learning 6.28 1

Using Internet, computers can create sizeable values for the Co. 6.87 1

Firms collaborate closely with foreign suppliers and customers to share information and transfer technology

6.97 1

It is easy for a firm to recruit and retain qualified engineers 5.47 2Firms have access to updated and reliable information on new technology and market demand

5.73 2

Firms have close partnerships with research institutes and universities in tackling their business challenges

5.58 1

Provide support to the collaboration between business sector and universities/research institutes

8.80 1

Finance subindex 5.41 1 Finance subindex 5.41 1It is not difficult for a good project to get financing 5.65 2 The cost of living is low relative to the average national standard 2.40 2

The total costs of borrowing money from banks (including interest and informal fees) are reasonable

5.57 2

Banks are responsive to firms’ demand 5.48 1Upgrade the banking system 7.95 1

Openness subindex 5.33 2 Openness subindex 5.33 2Protection index 5.18 2 Export orientation index 4.75 3

Export/GDP ratio 6.06 2

Suppliers subindex 5.54 2 Suppliers subindex 5.54 2The institutions for business collaboration in your region are proactive in promoting business linkages

5.52 1 Most equipment used by your firm is made by local firms 2.20 2

The forums for businesspeople in your city to gather to learn and exchange ideas are organized frequently

5.60 1 The local suppliers to your firm are competitive on quality 4.98 2

Firms in our region are eager to work together to improve the local business environment

6.52 2

Firms have a close collaboration with foreign suppliers and customers for information sharing and technology transferring

6.97 1


Haiphong


Variable/Index Index Rank Variable/index Index RankFinal Index 4.88 3 Final Index 4.88 3Government and fiscal policy subindex 3.69 3 Government and fiscal policy subindex 3.69 3Promote public-private partnership and business networks 5.00 3 Speed up privatization 4.25 3Promote gloabally the image of Vietnam and your city 5.40 2 Establish a strong business information center to support firms in market

research and technology acquisition4.80 3

Introduce stronger incentives for business investment and expansion 3.05 3Streamline and upgrade the regulatory system 2.50 3Enhance the competence and working ethics of government officials 2.30 3Effectively fight corruption 2.25 2

Institutions subindex 4.20 3 Institutions subindex 4.20 3The procedure for starting up a new business is simple 6.72 2 Local gov has significantly improved its performance in the last 3 yrs 4.77 3

Local government treats firms of all types of ownership equally 4.25 3Local government is responsive to the needs of the business sector 3.48 3The regulatory system is clear and effective 4.70 3Local government officials, in general, are competent 2.98 3Fake goods are rampant 4.33 1Corruption is not rampant 2.37 2

Infrastructure subindex 4.69 3 Infrastructure subindex 4.69 3The quality of the Internet service is high 5.28 2 The supply of power is reliable 4.88 3The quality of the telephone system is high 5.53 3 Upgrade the sources of power supply 4.10 3Upgrade telecom. infrastructure 6.35 2 The overall quality of the road system is high 4.95 3Reduce the costs of telecom and Internet Services 5.90 2 Upgrade transportation infrastructure 4.05 3The quality of services provided by international ports is high 5.43 1 Land acquisition procedure for business set-up or expansion is simple 2.38 2

Land rent is lower relative to the average rate in neighboring provinces 2.92 1The overall quality of infrastructure is satisfactory 4.52 3

Human resources subindex 5.03 3 Human resources subindex 5.03 3The supply of unskilled labor is ample 6.75 1 The working environment is attractive to talented people 3.12 3Invest in vocational education to train skilled workers 5.05 1 The supply of skilled labor is ample 3.97 3Upgrade the quality of K-12 education system 5.55 1The overall quality of the K-12 education system is high 5.77 3Technology subindex 6.07 3 Technology subindex 6.07 3Computers are extensively used for management 6.92 3E-mail is extensively used for communication 6.02 3The Internet is extensively used for market research and learning 5.07 3Using Internet, computers can create sizeable values for the Co. 6.07 3Firms collaborate closely with foreign suppliers and customers to share information and transfer technology

6.73 3


5.30 3


5.52 2


8.05 3

Finance subindex 3.82 3 Finance subindex 3.82 3It is not difficult for a good project to get financing 4.13 3The total costs of borrowing money from banks (including interest and informal fees) are reasonable

3.37 3

Banks are responsive to firms’ demand 3.62 3Upgrade the banking system 4.50 3The cost of living is low relative to the average national standard 3.47 1

Openness subindex 4.86 3 Openness subindex 4.86 3Export orientation index 7.91 1 Protection index 2.12 3





5.38 3 The local suppliers to your firm are competitive on quality 4.70 3


6.57 1


6.73 3

Your company has a good relationship with local suppliers and customers in terms of information sharing and communication

6.40 2

Local suppliersare responsive to your company’s demand 5.97 2The local suppliers of your firm are competitive on price 5.17 3

Domestic Competition subindex 6.22 3 Domestic Competition subindex 6.22 3The presence of foreign firms is strong 6.73 3 Firms are willing to share information on new technlgy mkt opportunities 4.15 3Competition is fair 5.80 1Firms are aggressive in improving their product offerings 6.00 3Your company has learned a lot from your competitors 7.25 3


Ho Chi Minh City


Variable/Index Index Rank Variable/index Index RankFinal Index 5.73 1 Final Index 5.73 1Government and fiscal policy subindex 5.01 1 Government and fiscal policy subindex 5.01 1Promote public-private partnership and business networks 7.50 1 Streamline and upgrade the regulatory system 3.85 2Speed up privatization 6.95 1 Enhance the competence and working ethics of government officials 3.45 2Establish a strong business information center to support firms in market research and technology acquisition

5.55 2 Effectively fight corruption 2.25 2

Promote gloabally the image of Vietnam and your city 5.30 3Introduce stronger incentives for business investment and expansion 5.20 1Institutions subindex 4.79 1 Institutions subindex 4.79 1The procedure for starting up a new business is simple 6.92 1 Local government is responsive to the needs of the business sector 4.80 1Local gov has significantly improved its performance in the last 3 yrs 6.78 1 The regulatory system is clear and effective 4.73 2Local government treats firms of all types of ownership equally 5.03 1 Local government officials, in general, are competent 4.38 1

Fake goods are rampant 3.25 2Corruption is not rampant 2.38 1

Infrastructure subindex 4.99 2 Infrastructure subindex 4.99 2The supply of power is reliable 6.45 1 Upgrade transportation infrastructure 4.70 2Upgrade the sources of power supply 6.10 2 Land acquisition procedure for business set-up or expansion is simple 2.70 1The quality of the Internet service is high 5.17 3 Land rent is lower relative to the average rate in neighboring provinces 1.60 2The quality of the telephone system is high 6.35 2Upgrade telecom. infrastructure 5.80 3Reduce the costs of telecom and Internet Services 5.05 3The quality of services provided by international ports is high 5.42 2The overall quality of the road system is high 5.15 2The overall quality of infrastructure is satisfactory 5.45 1Human resources subindex 5.40 2 Human resources subindex 5.40 2The working environment is attractive to talented people 6.80 1 Invest in vocational education to train skilled workers 4.35 3

The supply of unskilled labor is ample 6.30 2 Upgrade the quality of K-12 education system 4.05 3The supply of skilled labor is ample 5.05 1The overall quality of the K-12 education system is high 5.83 2Technology subindex 6.70 1 Technology subindex 6.70 1Computers are extensively used for management 7.55 2E-mail is extensively used for communication 6.78 1The Internet is extensively used for market research and learning 6.23 2Using Internet, computers can create sizeable values for the Co. 6.78 2Firms collaborate closely with foreign suppliers and customers to share information and transfer technology

6.78 2


6.17 1


5.32 3


8.30 2

Finance subindex 5.04 2 Finance subindex 5.04 2It is not difficult for a good project to get financing 5.67 11 The cost of living is low relative to the average national standard 2.05 3The total costs of borrowing money from banks (including interest and informal fees) are reasonable

5.58 1

Banks are responsive to firms’ demand 5.37 2Upgrade the banking system 6.55 2

Openness subindex 7.17 1 Openness subindex 7.17 1Export orientation index 6.39 2

Protection index 5.43 1





5.50 2


6.43 3


6.78 2

Your company has a good relationship with local suppliers and customers in terms of information sharing and communication

6.13 3

Local suppliers are responsive to your company’s demand 6.17 1The local suppliers to your firm are competitive on quality 5.52 1The local suppliers of your firm are competitive on price 6.27 1

Domestic Competition subindex 6.78 1 Domestic Competition subindex 6.78 1The presence of foreign firms is strong 7.93 1 Firms are willing to share information on new technlgy mkt opportunities 4.68 2Competition is fair 5.73 2Firms are aggressive in improving their product offerings 7.25 1Your company has learned a lot from your competitors 7.38 2


ANNEX 7. Survey Questionnaire and Accompanying Letter (English Translation)

Vietnam Regional Competitiveness Survey

INTRODUCTION TO SURVEY: Dear Sir or Madam: My name is Vu Minh Khuong and I am a PhD candidate in Economic Development Policy at Harvard University. As a supporting part of my research toward my PhD dissertation analyzing the driving forces of economic growth in developing countries, I design and conduct this survey to analyze the factors underlying the competitiveness and growth potentials in the two major economic regions of Vietnam: Hanoi-Haiphong-Quang Ninh (HN-HP-QN) and Ho Chi Minh City-Dong Nai-Binh Duong (HCM-DN-BD). The survey is structured around the major dimensions of competitiveness, which are depicted in the three following areas: business environment, business people’s attitudes concerning business and economic issues, and firms’ strategy and operation. The survey will be conducted for a sample of about 500 firms, of which 50% are located in HN-HP-QN and 50% in HCMC-DN-BD. Responses by business leaders or senior managers from these firms to the survey questionnaire will be aggregated to produce statistics and analysis featuring the fundamentals and dynamics of current and future competitiveness of these two regions. The questionnaire consists of 130 questions and it takes about 40 minutes to complete. The sincerity and accuracy of your answers are critical to the success of our survey. I greatly appreciate your time and cooperation. Please let me know if you would like to have a copy of my analysis report on the results of this survey, which I plan to complete in October 2002. For any questions about this study, please do not hesitate to contact me at my email [email protected]. Sincerely Yours, Vu Minh Khuong


THE QUESTIONAIRE

I. BUSINESS ENVIRONMENT Your company is located in one of the two economic regions: (i) Hanoi region (HNR) includes Hanoi and the provinces/cities in its radius of 150km. In our study, HNR is represented by three provinces/cities: Hanoi, Haiphong, Quang Ninh; (ii) Ho Chi Minh City region (HCMR) includes Ho Chi Minh City and the provinces/cities within a radius of 150km. In our study, HCMR is represented by three provinces/cities: Ho Chi Minh City, Dong Nai, and Binh Duong. The business environment in your province/city or in your region can be understood in terms of six critical areas:

1. Factor conditions 2. Quality of Infrastructure 3. Clusters and Networking 4. Local government 5. Rivalry 6. Innovation capacity

Instructions for Section I: Please indicate your agreement or disagreement with each of the following statements. Circle the appropriate number, which best expresses your opinion (based on your own experience) about the actual condition in your province (city) or in your region. 1 means “disagree completely” 5 means “agree somewhat” 2 means “disagree generally” 6 means “agree generally” 3 means “disagree somewhat” 7 means “agree completely” 4 means “neither disagree nor agree” You should circle “NA” in answering a question only when the question is irrelevant in the context of your business. 1. Factor conditions

In your province (city)… 83. The supply of unskilled labors is ample. 1 2 3 4 5 6 7 NA 84. The supply of skilled labors is ample 1 2 3 4 5 6 7 NA 85. The overall quality the education system (grades 1-12) is high 1 2 3 4 5 6 7 NA 86. The working environment in my province/city is attractive to talented people. 1 2 3 4 5 6 7 NA 87. The cost of living is low relative to the average rate in neighboring provinces. 1 2 3 4 5 6 7 NA 88. The process of acquiring a plot of land for building a new plant is simple. 1 2 3 4 5 6 7 NA 89. Land rent is lower relative to the average rate in neighboring provinces. 1 2 3 4 5 6 7 NA 90. Banks are responsive to firms’ demand 1 2 3 4 5 6 7 NA 91. The total costs of borrowing money (including interest and informal fees) are

reasonable. 1 2 3 4 5 6 7 NA

92. It is not difficult for a good project to get financing 1 2 3 4 5 6 7 NA 2. Quality of Infrastructure

In your region… 93. The supply of power is reliable 1 2 3 4 5 6 7 NA 94. The overall quality of land transportation system is high. 1 2 3 4 5 6 7 NA 95. The quality of services provided by international ports is high. 1 2 3 4 5 6 7 NA 96. The quality of the telephone system is high. 1 2 3 4 5 6 7 NA 97. The quality of the Internet service is high. 1 2 3 4 5 6 7 NA 98. Firms satisfy with the current conditions of the overall quality of general

infrastructure. 1 2 3 4 5 6 7 NA

3. Clusters and Networking


99. The share of local* suppliers in the total input materials purchased by your company in 2001 is ...

_[1]_Less than 25% _[2]_25-50% _[3]_50-75% __[4]_Over 75%

* A firm is considered local if it is located in your economic region. 100. The local suppliers of your firm are competitive in quality. 1 2 3 4 5 6 7 NA 101. The local suppliers of your firm are competitive in price. 1 2 3 4 5 6 7 NA 102. The local suppliers of your firm are responsive to your company’s demand. 1 2 3 4 5 6 7 NA 103. Most equipment used by your firm is made by local firms. 1 2 3 4 5 6 7 NA 104. My company has excellent relationship with local suppliers customers in terms of

information sharing and communication. 1 2 3 4 5 6 7 NA

105. Firms in our region are willing to share information on new technology market opportunities

1 2 3 4 5 6 7 NA

106. The local customers can provide sophisticated feedback about your products. 107. Firms in our region are eager to work together to improve the local business

environment. 1 2 3 4 5 6 7 NA

108. The institutions for business collaboration in our region are proactive in promoting business linkages .

1 2 3 4 5 6 7 NA

109. The forums for businesspeople in your province/city to gather and exchange ideas are organized frequently.

1 2 3 4 5 6 7 NA

4. Local government

In province/city… 110. The local government has a clear vision and strategy for economic development. 1 2 3 4 5 6 7 NA 111. The local government treats all economic sectors (private, state-own, and FDI-

invested) equally. 1 2 3 4 5 6 7 NA

112. The competence of government officials, in general, is high. 1 2 3 4 5 6 7 NA 113. The regulatory system is clear and effective. 1 2 3 4 5 6 7 NA 114. The procedure for starting up a new business is simple. 1 2 3 4 5 6 7 NA 115. The responsiveness of the local government to the needs of business is high. 1 2 3 4 5 6 7 NA 116. Corruption is not pervasive 1 2 3 4 5 6 7 NA 117. The local government has significantly improved its performance in the last three

years. 1 2 3 4 5 6 7 NA

118. The overall effectiveness of the local government is high. 1 2 3 4 5 6 7 NA 5. Rivalry 119. The competition in your economic region is fierce. 1 2 3 4 5 6 7 NA 120. Competition in your economic region is fair and healthy. 1 2 3 4 5 6 7 NA 121. Your company has learned a lot from your competitors. 1 2 3 4 5 6 7 NA 6. Innovative capacity

In your region… 122. The counterfeit products are pervasive 123. Firms have a close partnership with research institutes and universities in addressing

their business challenges 1 2 3 4 5 6 7 NA

124. The presence of foreign firms is strong. 1 2 3 4 5 6 7 NA 125. Firms, in general, have a close collaboration with foreign suppliers and customers for

information sharing and technology transferring. 1 2 3 4 5 6 7 NA

126. It is easy for a firm to recruit and retain qualified engineers. 1 2 3 4 5 6 7 NA 127. Firms, in general, are aggressive in acquiring new equipment and/or new technology. 1 2 3 4 5 6 7 NA 128. Firms, in general, are aggressive in developing new products and/or improving the

quality of their existing products. 1 2 3 4 5 6 7 NA

129. Firms have access to updated and reliable information on new technology and market demand.

1 2 3 4 5 6 7 NA

II. INFORMATION ABOUT YOUR COMPANY 1. Market positioning


Relative to the average player in your industry, which offers similar products… 130. The quality of your company products is better. 1 2 3 4 5 6 7 NA 131. The price of your company products is higher. 1 2 3 4 5 6 7 NA 132. The market share of your company is larger. 1 2 3 4 5 6 7 NA 133. The product range of your company is broader. 1 2 3 4 5 6 7 NA 2. The most pressing problems One of the most pressing problems facing your company today is… 134. Overstaffed 1 2 3 4 5 6 7 NA 135. Shortage of skilled labors 1 2 3 4 5 6 7 NA 136. Scarcity of capital 1 2 3 4 5 6 7 NA 137. Difficulty in acquiring land for expansion 1 2 3 4 5 6 7 NA 138. High production costs 1 2 3 4 5 6 7 NA 139. Low product quality 1 2 3 4 5 6 7 NA 140. Low efficiency and productivity 1 2 3 4 5 6 7 NA 141. Weak company’s brand name and image. 1 2 3 4 5 6 7 NA 142. Weak distribution network. 1 2 3 4 5 6 7 NA 143. Limited capability for developing new products 1 2 3 4 5 6 7 NA 144. Lack of information about customers and markets. 1 2 3 4 5 6 7 NA 145. Lack of new market opportunities. 1 2 3 4 5 6 7 NA 146. Unhealthy business environment 1 2 3 4 5 6 7 NA 147. Other, specify… 1 2 3 4 5 6 7 NA 3. Top priority actions One of the top priority actions for your company to take in the next 18 months is to… 148. Substantially reduce the production costs. 1 2 3 4 5 6 7 NA 149. Purchase new production equipment. 1 2 3 4 5 6 7 NA 150. Upgrade the management capability 1 2 3 4 5 6 7 NA 151. Launch an effective marketing program. 1 2 3 4 5 6 7 NA 152. Strengthen the distribution network. 1 2 3 4 5 6 7 NA 153. Recruit talented employees 1 2 3 4 5 6 7 NA 154. Invest in improving knowledge about market and customers. 1 2 3 4 5 6 7 NA 155. Enter new markets 1 2 3 4 5 6 7 NA 156. Seek out a foreign partner 1 2 3 4 5 6 7 NA 157. Seek a special support or aid from the government 1 2 3 4 5 6 7 NA 4. Computers and Internet Usage 158. Your company has its own email account. _[1]____Yes _[2]_No 159. Your company has its own website. _[1]__Yes _[2]__No 160. The Internet connection of your company is _[1]__Dial-up _[2]_ISDN

_[3]__Other, specify__________ In your company… 161. Computers are extensively used for management 1 2 3 4 5 6 7 NA 162. Emails are extensively used for communication. 1 2 3 4 5 6 7 NA 163. Internet is extensively used for market research and learning. 1 2 3 4 5 6 7 NA 164. Using the Internet and Computers creates sizeable values for the company. 1 2 3 4 5 6 7 NA

5. Factors Critical to the Growth of Your Company

118. Taking into account the key elements of the local business environment that we have considered so far, which five elements have the most positive impact on your business’s success? Which five factors do you consider the greatest obstacles to the growth of your company?

In the below table, please circle five elements in the left column (which have the most positive impact) and five elements on the right column (which are the greatest obstacles).


Positive

impact (+) Key elements Obstacles

(-) 1 Cost of doing business (labor cost, land rent, official and informal fees) 1 2 Quality of infrastructure (road, traffic, port, airport) 2 3 Location (the growth dynamics of the whole region) 3 4 Access to land 4 5 Access to capital 5 6 Distance to sources of raw materials 6 7 Availability of cheap labor 7 8 Quality of labor force (education, skills, discipline) 8 9 Rivalry and Competition 9 10 Quality and responsiveness of local suppliers 10 11 Quality of university and research institute in the region. 11 12 The presence of foreign firms in the region 12 13 The willingness to collaborate of firms in the region. 13 14 Macro-economic environment factors (such as exchange rate, inflation) 14 15 The competence of local government officials 15 16 The regulatory system 16 17 Special support from local government 17 18 Counterfeit goods and copy right piracy 18 19 Corruption 19 20 Other… 20

III. ATTITUES CONCERNING ECONOMIC AND BUSINESS ISSUES

119. The success of a businessman is more dependent on his “good luck” than on his strategy

or talents. 1 2 3 4 5 6 7 NA

120. It seems to be dangerous for a private firm when it becomes too big and high profile. 1 2 3 4 5 6 7 NA 121. An excellent business decision should bear no risk at all. 1 2 3 4 5 6 7 NA 122. Vision and long-term strategy is critical for the success of a firm in the long-term. 1 2 3 4 5 6 7 NA 123. Access to cheap resources (such as labor, raw materials, capital) is the most important

source of competitive advantage. 1 2 3 4 5 6 7 NA

124. It is not difficult to attract or retain talents once a company has a good financial performance.

1 2 3 4 5 6 7 NA

125. A firm needs only operational efficiency (such as low production cost, reliable quality control) to achieve a competitive advantage.

1 2 3 4 5 6 7 NA

126. Innovation (in both management and product offerings) is critical for a firm to gain a sustainable competitive advantage.

1 2 3 4 5 6 7 NA

127. Intense competition in an industry is harmful to its growth and efficiency. 1 2 3 4 5 6 7 NA 128. It is possible for companies to collaborate and compete at the same time. 1 2 3 4 5 6 7 NA 129. The government should impose high tariff to protect local firms from foreign

competition. 1 2 3 4 5 6 7 NA

130. Export and integration into the world economy are critical to the prosperity of the country.

1 2 3 4 5 6 7 NA

131. The major state-own corporations will play the leading role in the country’s industrialization.

1 2 3 4 5 6 7 NA

132. The government should invest in large industrial projects (such as fertilizers, refinery) to ensure the self-reliance of the country.

1 2 3 4 5 6 7 NA

133. Access to government favor is very important to the success of a business. 1 2 3 4 5 6 7 NA 134. A firm can compete better by making its linkages with its business partners more

reliable and productive. 1 2 3 4 5 6 7 NA

135. The current business environment in our country is favorable. 1 2 3 4 5 6 7 NA 136. The business environment in our country will substantially improve in the next three

years. 1 2 3 4 5 6 7 NA

IV. PRIORITIES FOR THE GOVERNMENT IN THE NEXT 3 YEARS. Below is a list of actions that governments (at both central and provincial levels) consider to take in order to promote the growth and competitiveness of business in your province. Please indicate how important is each, as a priority for government over the next three years.


In this section only: 1 means “not important at all” 2 means “slightly important” 3 means “important” 4 means “very important” 5 means “extremely important”

137. Make substantial investment in upgrading conditions and quality of primary and secondary education. 1 2 3 4 5 138. Invest in vocational education and training programs to prepare and upgrade workers skills. 1 2 3 4 5 139. Upgrade the quality of transportation infrastructure 1 2 3 4 5 140. Upgrade the quality of the information telecommunication infrastructure. 1 2 3 4 5 141. Reduce the costs of telecom and Internet Services 1 2 3 4 5 142. Upgrade the reliability of power supplies. 1 2 3 4 5 143. Upgrade the quality of the banking system 1 2 3 4 5 144. Introduce new policies with much stronger incentives for business investment and expansion 1 2 3 4 5 145. Promote the partnership between government and private sector and the networking among firms. 1 2 3 4 5 146. Promote the image of local business environment in particular, and of Vietnam in general in the global

market. 1 2 3 4 5

147. Increase financial support for encouraging the collaboration between universities/research institutes and the business sector in their research and development projects.

1 2 3 4 5

148. Speed up the privatization process. 1 2 3 4 5 149. Substantially streamline and upgrade the regulatory system. 1 2 3 4 5 150. Enhance the competence and working ethics of government agencies. 1 2 3 4 5 151. Launch a strong and effective anti-corruption campaign. 1 2 3 4 5 152. Make significant investment in developing an information center for supporting domestic businesses

in market research and for coordination in foreign market penetration. 1 2 3 4 5

153. Other 1… 1 2 3 4 5

V. BACKGROUND SECTION 1. Which year was your company founded? ______ 2. Which best describes the ownership of your company? _[1]___Private _[2]___State-Owned _[3]__100% Foreign-Owned _[4]__JV _[5]__Mixed _[6]__Other, please specify ______________________________________ 3. Which best describes your primary line of business? _[1]_End-Consumer Manufactured product _[2]_Intermediate Input _[3]_Trade/Business Service _[4]__Other, please specify _______________________________________________ 4. Which of the following industries best describes the primary focus of your company (please choose only one industry)? _[1]_Textile and Garment _[2]_Food, Beverage, and Tobacco _[3]__Pharmaceutical _[4]__Shoes and Leather _[5]__Entertainment, sporting products _[6]__Mining and Building materials _[7]__Cleaning and Personal care Products _[8]__Computer and Software _[9]__Metal products and Metal Fabrication _[10]__Toys, Handicrafts, jewelry

_[11]___Packaging and containers _[12]__Machinery and Machine Tools

_[13]_Consumer Electronics and Electrics _[14]__Paper _[15]__Electrical, Electronic, and telecommunication equipment

_[16]__Furniture _[17] Chemicals, plastics and related products _[18]___Real Estates Development _[19]__Other consumer products _[20]_Transport equipment and spare parts _[21]___Construction


[22]_Other, please specify ______________________________________ 5.Your company’s revenues in 2001 is: _[1]__under 1 billion VND _[2]__1-5 billion VND _[3]_5-10 billion VND _[4]__10-20 billion VND _[5]__20-50 billion VND _[6]__Over 50 billion VND of which, export accounts for about _[1]__less than 10 % _[2]__10-25% _[3]__25-50% _[4]__50-75% __[5]___Over 75% 6. Number of full-time workers in your company as of December 31, 2001 is _[1]____Less than 50 _[2]____50-99 _[3]____100-199 _[4]__200-499 __[5]___500-999 _[6]__Over 1000

7. Growth of your company’s revenues

2001/ 2000:

_[1]___Negative _[2]____0-10% _[3]___10-25%

_[4]__25-50% _[5]____50-100% _[6]___ Over 100%

2000/1999:

_[1]___Negative _[2]____0-10% _[3]___10-25%

_[4]__25-50% _[5]____50-100% _[6]___ Over 100%

8. How do you expect the average annual growth of your company (in revenues) during the next three years

(2002-2004)?

[1]__Below 0% __[2]___0-10% __[3]___10-25% [4]__25-50%

_[5]__50-100% _[6]___Over 100% _[7]__Don’t know 9. Which best describes your position in your company? _[1]__General Director/CEO _[2]___Deputy General Director _[3]__Manager _[4]__Other, please specify _________________________________ 10. Which best describes your education _[1]___Secondary School _[2]__Some College _[3]__College Graduate _[4]__Post-Graduate Degree 11. Which best describes your age _[1]__Under 30 _[2]__30-39 _[3]__40-49 _[4]__50-59 _[5]__60 and older 12. How long have you been working in the region? _[1]__Less than 3 years __[2]__3-5 years _[3]__5-10 years _[4]__Over 10 years

the competitiveness of vietnam’s three … competitiveness of vietnam’s three largest cities a...

Documents