MINISTRY OF PLANNING AND INVESTMENT MINISTRY OF EDUCATION AND TRAINING CENTRAL INSTITUTE FOR ECONOMIC MANAGEMENT VU THI THANH HUYEN SUPPORTING INDUSTRY DEVELOPMENT AND VIETNAM’S ECONOMIC GROWTH: A CASE OF ELECTRONIC SECTOR Major: Development Economics Code: 31 01 05 SUMMARY OF DOCTORAL DISSERTATION Hanoi - 2018 The dissertation is accomplished in: Central Institute for Economic Management Scientific supervisors: Dr Nguyen Thi Tue Anh A/Prof.Dr Nguyen Thi Minh Reviewer 1: A/Prof.Dr Nguyen Ngoc Son Reviewer 2: A/Prof.Dr Bui Quang Tuan Reviewer 3: Dr Truong Thi Chi Binh The dissertation will be defended at Dissertation Evaluation Committee at Institute level to be held in Central Institute for Economic Management at (time) Access to the dissertation is available at: - Library of Central Institute for Economic Management - Vietnam National Library, Hanoi INTRODUCTION Rationale Vietnam’s economic growth (EG) has shown signs of stagnation in the past 10 years The country’s growth model has revealed various economic troubles Besides, that Vietnam is participating more profoundly in international economic integration process and Industrial Revolution 4.0 is taking place eagerly has created both opportunities and challenges to the economy In this context, developing supporting industry is seen as one of the solutions to take opportunities, remove challenges and enhance economic growth quality Electronic industry (EI) is regarded as a fundamental production sector in a national economy In Vietnam, EI is experiencing rapid growth, mainly because it has attracted big investments from multinational corporations, which have made considerable contributions to export values of the entire sector However, Vietnam’s supporting industry (SI) has not yet met the development demand of the electronic sector (ES), resulting in the low added values created by the sector and its modest contribution to national economic growth Therefore, a study on the impact of SI development on EG to suggest solutions to develop SI to promote EG in case of electronic sectors becomes highly significant Dissertation significance Theoretical significance The dissertation helps to build up and complete theoretical frames on analyzing the situation of SI to electronic sector (ES) and the impacts of SI development on EG, investigate factors affecting the relations between SI development and EG in case of ES so as to create a foundation for theoretical references for other specific cases in future research Practical significance Based on the analysis and evaluation of the situation and impacts of developing SI for ES on Vietnam’s EG, the dissertation proposes some solutions to promote the development of SI for ES so as to promote EG in Vietnam CHAPTER RESEARCH REVIEW AND RESEARCH DIRECTIONS ON SUPPORTING INDUSTRY DEVELOPMENT AND ECONOMIC GROWTH IN CASE OF ELECTRONIC SECTOR 1.1 Review of domestic and foreign research on supporting industry and economic growth in the case of ES 1.1.1 Domestic research 1.1.1.1 Research on supporting industry and SI development Regarding the concepts and scopes of SI, Nguyễn Thị Xuân Thúy (2005) proposes the definition of SI in Vietnam as a group of industrial activities to promote intermediate inputs (including components, spare parts and tools to produce these components and parts) for assembly and processing industries Other studies, such as those by Nguyễn Thị Dung Huệ (2012), Hà Thị Hương Lan (2014), etc., present the definition where “SI are industries which produce materials, spare parts, components, semi-products for production and assembly industries to make finished products as production means or consumer products” Regarding features of SI, according to Hoàng Văn Châu (2010), the typical features of SI include multi-level; links according to production procedures, regions and dependence on the main industries; diversity in technology and technological levels; attracting a large number of enterprises, especially small and medium ones Regarding factors promoting the development of SI, according to Vietnam Development Forum (2007), these factors include: market size, high-quality industrial human resources; tax incentives; policy environment; information and awareness gaps; industrial and safety standards; development of raw material production industries Trần Đình Thiên (2012) supplements other factors determining the development of SI, including competitiveness, etc Regarding the criteria to evaluate the development level of SI, Hoàng Văn Châu (2010) introduces a set of criteria to evaluate the development of SI including: the number of SI enterprises; the scales of SI enterprises; the technological level of SI enterprises; the links between SI enterprises and customers and suppliers; the level of response of SI to main production industries 1.1.1.2 Research on the relations between SI development and EG Nguyễn Thị Xuân Thúy (2005) believed that SI development will promote industrialization and foreign investment attraction, so that Vietnam can compete with China According to Hoàng Văn Châu (2010), SI is the foundation for the implementation of industrialization and modernization process To economic growth (EG), SI contributes to long-term EG According to Lê Xuân Sang, Nguyễn Thị Thu Huyền (2011), SI is the direct momentum to create added values to the industry, raise competitiveness of the main industrial products and accelerate the industrialization process Regarding methods to evaluate the contributions of SI to EG Domestic research has just presented theoretical arguments; no study has investigated nor evaluated the contributions of SI to Vietnam’s EG However, to measure the impacts of an industry on the entire economy, some research has applied input-output table method to calculate the spillover effects and linkages of industries on Vietnam’s economy According to Nguyễn Mạnh Toàn and Nguyễn Thị Hương (2013), input-output analysis to calculate linkage indexes is an approach commonly used in many countries to analyze the industrial impacts In their research, Bùi Trinh et al (2011) use input-output table published by General Office of Statistics and fundamental theories of W.Leontief and J Keynes to analyze production-promoting indexes and importspromoting indexes based on the structures of the economy To evaluate the affecting factors to growth and productivity of an industry, one of the widely-used methods is Cobb-Douglas production function and regression method Specifically, the research by Chu Thị Thu and Hoàng Thị Dung (2013) uses Cobb-Douglas production function to analyze factors affecting coal mining output in Vietnam At enterprise level, using production function and panel data regression method with fixed effects, Phạm Thế Anh and Nguyễn Đức Hùng (2013) analyze and evaluate the impacts of business environment mechanism on performance of enterprises in Vietnam 1.1.2 Foreign research 1.1.2.1 Research on SI and SI development in nations Definitions of SI Ratana E (1999) defines SI as enterprises producing components, spare parts that are used in the final assembling stages of industries such as automobile, machinery, electronics Meanwhile, according to Ryuichiro Inoue (1998), in broad senses, SI produces components, spare parts and basic materials In narrow senses, it can be seen that SI is the process of material transformation, including molding and stamping, casting, forging, plating, soldering, engineering, heating and plastic processing As for conditions to develop SI, Keiko Morisawa (2000) believe that demand for components and spare parts is the most important condition for the development of SI while the development in technology, material industry, capital mechanism are also necessary requirements Besides, according to Ryuichiro Inoue (1998), the development of human resources, mechanism and strategies, policies and programs, technological transfer are also necessary factors to the development of SI in ASEAN countries 1.1.2.2 Research on the relations between SI and EG Contributions of SI to EG The roles of SI in economic growth have been affirmed in the views of some foreign researchers as follows: Michael Porter (2012) claims that one of the decisive factors to a country’s comparative advantages in an industry is the existence of supporting and relevant industries and their international competitiveness Junichi Mori (2005) states that the roles of SI in EG are reflected by the driving of FDI to the country, the attraction of investments from multinational corporations, the promotion of FDI accumulation, the acceleration of EG in the long term According to Kaldor (1966), there is a close relation between the growth in added values of an industry and the growth in GDP Ha-Joon Chang et al (2013) clarify the roles of processing – manufacturing industries as follows: promoting productivity growth; producing inputs for production; renewing organizations; creating demand for high-yield activities in other industries; having higher commercial values than agriculture and service Besides, research by Adam Szirmai (2009, 2010, 2012) indicates that production and industrialization process are a momentum to growth in developing economies Regarding methods to evaluate the contributions of SI to EG To calculate the spillover effects and the linkages of industries on EG, some studies use input-output table methods Rohana bt Kamaruddin, Zakariah Abdul Rashid and Kamaruzaman Jusoff (2008) use I-O model to investigate growth sources and key industries of Malaysian economy in the 1978-2000 period Loo sze Ying (2013) use I-O method to test the importance of processing and manufacturing industries in Malaysian economic growth At industry/enterprise level, to study the affecting factors to growth and productivity of industry/enterprise, many research projects have used regression method based on the theory of production function to come to research conclusions For instance, the research by Chu-Yao Tseng (2008) on the impacts of internal R&D, import technology on economic added values in case of Taiwan electronic sector, the research by Daniel Gonỗalves and Ana Martins (2016) on factors determining growth in Portuguese processing and manufacturing industry, etc 1.1.3 Summary of not-yet-researched issues (i) Research on supporting industry development In terms of theories, the theoretical grounds on the development of SI in general and SI for electronic sector (ES) in particular have not reached agreements in the concepts and scopes of SI; the criteria to evaluate the development have not matched the concepts and fundamental issues of development under the approach of development economics In terms of reality: previous research has not highlighted the situation of development, difficulties and limitations in the operations of SI enterprises in connection with specific main industries (for example, the electronic sector) (ii) Regarding the relations between SI development and EG, previous studies have been limited to theoretical arguments rather than quantified the impacts of the development of SI in general and SI for electronics in particular on some macro-economic indicators such as economic growth, export growth, FDI attraction, etc Regarding methods to evaluate the impacts: to evaluate the impacts of an industry on EG, main methods are often applied by domestic and foreign researchers: Input-output table method (I/O) and econometrics method (regression) (iii) Regarding factors affecting the relations between SI development and EG: previous studies have looked into factors affecting SI development but none of them has investigated the affecting factors to the development of SI in relations with EG 1.2 Dissertation’s research directions 1.2.1 Research goals General research goals: Finding out theoretical and practice evidence on the impacts of SI development on EG in the case of ES; on that basis suggesting some solutions and proposals to promote the development of SI for Vietnam’s ES towards the goals of fostering EG 1.2.2 Dissertation’s research questions (i) In terms of theory: clarifying theoretical grounds on SI development, including: what are the development of SI and development of SI for electronics; what criteria can be used to evaluate the development of SI?; What are the roles of SI development in promoting EG in case of electronics? What factors of the development of SI for electronics promote EG? (ii) In terms of reality: How have SI for electronics developed in Vietnam in recent years? How does the development of SI affect Vietnam’s EG? What are affecting factors of the development of SI for electronics to Vietnam’s EG? What should be done to develop SI for electronics to meet the demand of Vietnam’s ES and promote EG? 1.2.3 Research subjects and scopes The research subject of the dissertation is the one-way relations (impacts) between SI development and Vietnam’s EG – a case study in Vietnam’s ES; at the same time the situation of development of SI enterprises for electronics in Vietnam Research scope (i) In content: the theories are generally researched for SI, the reality merely focuses on the development of SI for Vietnam’s ES (ii) In research period: To analyze the development of SI for Vietnam’s ES, the dissertation only focuses on the 2011 – 2016 period To analyze the impacts of SI development on Vietnam’s EG using input-output table method, the dissertation uses input-output tables of the years 2007, 2012 and 2016 To analyze the impacts of SI development on ES, the dissertation uses the set of data from the general survey on enterprises in the two periods of 2006 – 2015 and 2012 – 2015 1.2.4 Research approaches, hypotheses and methods 1.2.4.1 Research approaches To gain the already-set research goals, the PhD learner approaches the research from the following angles: approach from development economics; approach from historic/logic view; approach from theories to reality; approach from multi sectors; approach from production and supply chains 1.2.4.2 Main research hypotheses Based on research approaches, the research questions that the dissertation needs to be tested quantitatively via the following 11 Criteria reflecting changes in quantity and output scale of supporting industry: the number of enterprises; the scales of enterprises; the business and production performance of enterprises Criteria reflecting changes in structure: can be expressed via the correlations between sources of supply, including: imports, internal sources, domestic sources Criteria reflecting the development in production capacity of supporting industry enterprises: Technological qualification and organizational renewal; The linkages between supporting industry enterprises and customers and suppliers 2.1.2 Theories on the relations between supporting industry development and economic growth 2.1.2.1 Theory of Kaldor Kaldor’s first growth rule (Kaldor, 1966) can be summarized in a phrase "industrial production is the momentum of growth" while his second rule (also known as Verdoorn rule) reflects the relations between quantity growth and productivity growth in the production of processing and manufacturing sector 2.1.2.2 Theories of Penélope pacheco-lópez and a p Thirlwall In an open economy of the developing countries, it is apparent that there exist close relations between output growth of processmanufacturing industry and export growth, between export grwoth and GDP growth 2.1.2.3 Other theories Firstly, SI plays an important role in raising productivity of the economy; Secondly, it can attract and drive investment flows, especially FDI; Thirdly, it can promote exports; Fourthly, it has spillover effects and linkages; Fifthly, it can ensure the autonomy for the economy, restrict trade deficits; Sixthly, SI development can raise competitiveness 12 and added values for the main industrial products and the entire economy 2.2 Analysis frame of the impacts of supporting industry development on economic growth in the case of electronics and methods to evaluate the impacts 2.2.1 Analysis frame  Firstly, the development of SI for electronics plays an important role in raising productivity and efficiency of the economy  Secondly, the development of SI for electronics plays the role of attracting, orienting and maintaining investment capital, especially FDI  Thirdly, the development of SI for electronics can promote exports  Fourthly, the development of SI for electronics has spillover effects and linkages with other industries in the economy  Fifthly, the development of SI can restrict trade deficit while an underdeveloped SI may make imports increase  Sixthly, the development of SI can improve the competitiveness and added values for the main ES and the entire economy 2.2.2 Methods to evaluate the contributions of supporting industry to economic growth Qualitative methods such as descriptive statistical, comparative and contrast, etc are used to analyse the situation of supporting industry development, on that basis, it is possible to evaluate the impacts of the industry on productivity increase via technological renovation, organizational reforms, FDI attraction and export promotion Quantitative methods: the input-output model and econometrics model 2.2.2.1 Input-output model (I/O) 13 Basic relations: ( A d  A m ) X  Y d  Y m  M  X  A d X  Y d  A m X  Y m  M  X (1) Where: Ad.X is the vector of intermediate costs of domestically-produced products; Am.X is the vector of intermediate costs of imported products; Yd is the vector of final demand for domestically-produced products; Ym the vector of final demand for imported products (including the final individual consumption, final state consumption, accumulated assets and exports) Import demand is divided into objectives: demand for production (Am.X) and demand for final consumption (Ym) or: A m X  Y m  M , in that case, equation Khi đó, equation (1) can be reformulated as: A d X  Y d  X  X  ( I  A d ) 1 Y d (2) Applying input-output model to analyze spillover effects: calculating coefficients of impacts of SI on production value; coefficients of impacts on added value, and calculating backward linkages and forward linkages, spillover effects on imports, spillover effects on income of employees 2.2.2.2 Econometrics method The overall equation to evaluate the impacts of SI on the development of electronic industry is as follows: log( YCNDT )  log( A)   log( K )   (log L)   log( YCNLKDT )   log( YCNHTK )  Xi Where: YCNĐT: revenue of the electronic industry; A: other factors affecting the revenue of the electronic industry; K: total capital; L: 14 number of laborers; YCNLKĐT: revenue of electronic components production industry; YCNHTK: revenue of other SI; Xi: Control variables added to the model such as market size; labor quality; factors related to infrastructure, institution, policies; variables of enterprise characteristics (enterprise scale, export/not export); etc 2.3 Affecting factors to the promotion of economic growth of electronic supporting industry development Firstly, market volume; Secondly, quality of industrial hr; Thirdly, infrastructure; Fourthly, policy system; Fifth, information system; Sixthly, the nation's advantage in the EI Value Chain; Seventhly, issues related to competitiveness and business management 2.4 Experience in electronic supporting industry development in some countries and lessons for Vietnam 2.4.1 Experience of some countries in the world 2.4.1.1 Experience from Thailand 2.4.1.2 Experience from Malaysia 2.4.1.3 Experience from China 2.4.2 Some lessons for Vietnam (i) Developing SI in close connection with small and medium enterprises; (ii) developing SI together with measures to attract investment, especially FDI, to SI; (iii) paying attention to supporting policies on technological innovation; (iv) prioritizing the improvement of industrial human resources; (v) identifying groups of main prioritized industries; (vi) increasing the linkages between relevant parties; (vii) caring about trade promotion programs; building up information system, etc 15 CHAPTER IMPACTS OF SUPPORTING INDUSTRY DEVELOPMENT ON VIETNAM’S ECONOMIC GROWTH: A CASE OF ELECTRONIC SECTOR 3.1 Overview of the development of manufacturing industry and Vietnam’s economic growth In the past 10 years, Vietnam’s EG has leveled off and tended to decrease, especially in the period from 2005 to 2012 Since 2013, GDP growth rate tends to recover compared to previous period but the growth tendency has not been really stable In terms of contribution structure, in the 2011 – 2016 period, processing-manufacturing industry accounted for 13.5% of GDP, lower than that in the 2005 – 2010 period (which made up for 17.9%) However, in terms of growth rate of industries, process – manufacturing remains the leading industry Regarding the contributions of processing-manufacturing industry to economic growth quality: processing-manufacturing industry attracts most of the FDI and contributes largely to Vietnam’s export growth In the past years, processing-manufacturing industry is regarded as gaining good growth in both quality and quantity, therefore it has made considerable contributions to the rate and quality of the growth of the economy However, Vietnam’s processing-manufacturing industry still reveals many limitations: it is inclined to exploiting natural resources to get raw materials, so it does not bring high added values to the economy and restricts the economic growth quality 3.2 Situation of the development of supporting industry for Vietnam’s electronic sector 3.2.1 Overview of the development of Vietnam’s electronic sector Vietnam’s electronic industry has developed rapidly since 2010 By the end of 2016, the number of enterprises in the industry was 1145, attracting 497,037 laborers Most electronic enterprises are small and 16 medium sized, causing lots of difficulties to the innovation and advancement of technology In terms of imports-exports: Exports of electronic products of Vietnam have experienced quite strong growth Particularly, importexport turnover of Vietnam’s electronic sector accounts for a quite high proportion in the total import-export of the country In terms of FDI attraction, Vietnam’s ES plays an important role in attracting FDI capital However, most of the investment in electronic industry is in the form of 100% foreign capital while jointventure, especially partnership contract, account for a very low percentage This reflects the linkages between FDI enterprises and domestic enterprises 3.2.2 Situation of the development of supporting industry for electronic sector 3.2.2.1 Changes in the quantity and output scale of supporting industry About the number of enterprises: the percentage of enterprises producing components/the total number of electronic enterprises is 53.28% This percentage indicates that Vietnam’s ES is not well developed About the scale of electronic SI enterprises: most of SI enterprises are small and medium sized in lack of capital, technology and high-quality human resources 3.2.2.2 Changes in the structure of supporting industry The ratio of domestic supplies to assembly companies is low, mostly done by foreign-invested enterprises Domestic enterprises only supply simple components with low technological content and added values such as packaging; material, plastic and metal, etc 3.2.2.3 Advancement in the production capacities of supporting industry enterprises 17 As for innovating technology in SI production, generally, supporting industry enterprises have made efforts to renew technology, but as most of them are small and medium sized with serious lack of capital, technological innovation of enterprises is faced with many difficulties As for renewing production, according to the assessment of SIDEC (2017), Vietnam’s SI enterprises have been active in applying modern management criteria and tools in their production activities However, most Vietnam-invested SI enterprises are facing difficulties in renewing their organization, organizing, re-arranging production due to problems in human resource quality and capital sources As for attracting investment capital: FDI capital mostly focuses on assembly area while investment capital (both domestic and foreign) on production area of supporting industry remains low As for the linkage between electronic SI enterprises and customers and suppliers: Generally, the linkages in industrial zones and clusters and between enterprises are limited 3.3 Impacts of the development of supporting industry for electronic sector to Vietnam’s economic growth 3.3.1 Analyzing the impacts of supporting industry development on Vietnam’s economic growth using input-output method 3.3.1.1 Description of the applied method and data Applying the meaning of Leontief matrix, the PhD learner investigates the impacts of SI on the production of other industries in the economy and impacts on total production values, added values, linkages of the economy About the data: the learner uses non-competitive I/O table of Vietnam in periods of 2007, 2012, 2016 3.3.1.2 Results and evaluation 18 Analyzing the impacts via closed I-O model Impacts of SI on production values and added values: The trend is SI production makes production values increase, added values decrease (the coefficient of impacts of supporting industry on added values decreases from 0.53 to 0.38 and 0.41) As for linkage impacts: the coefficient of backward linkages of SI is quite low (