INNOVATION AND CATCH UP FOR VIET NAM

Taiwan and South Korea also have sufficiently high income and industrial capability.. However, Malaysia and Thailand remain at middle income although they started industrialization at ab

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2015 GDLN Distance Learning Seminar Series:

Human Capital and Innovation Policies

INNOVATION AND CATCH UP FOR VIET NAM

Dr Pham Dang Quyet

Vietnam has experienced 40 years since reunification in 1975, and nearly 30 years since the

renovation from 1986 The renovation has integrated Vietnam to the regional industrial surge in

Asia, but due to its historical condition, Vietnam has lost several decades of development and lagged behind its neighbors How is Vietnam positioned now and what is the prerequisite for it to shorten the distance between it and neighboring countries?

In fact, over the past five decades, East Asia has emerged as a region breeding economies with spectacular growth performance The World Bank (1993) identified the nine high-performing

Asian economies, which includes Japan, the “Four Tigers” (Hong Kong, Singapore, South Korea,

and Taiwan), and the three newly industrialized economies (NIEs) – Indonesia, Malaysia, and

Thailand Japan began to industrialize very early Taiwan and South Korea also have sufficiently high income and industrial capability However, Malaysia and Thailand remain at middle income although they started industrialization at about the same time as Taiwan and South Korea, namely

in the 1960s Indonesia and the Philippines have not made any visible catching up relative to the

US income [3]

Source: http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG/countries

-20

-10

0

10

20

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Figure 1: GDP growth (annual %)

Japan South Korea China Singapore Malaysia Thailand Indonesia Philippines Vietnam

Vietnam’s growth pattern basically follows the past experiences of East Asian neighbors

whose features include openness and regional integration as an initiator of growth; deepening intra-regional trade and FDI; high savings and investment; dynamic transformation of industrial structure; urbanization and rural-urban migration; and growth-generated problems such as income and wealth gaps, congestion, pollution, financial bubbles, and so on Figure 1, which plots GDP growth rate of the nine East Asian economies, shows that Vietnam has followed very similar growth patterns

In 1990, Vietnam was among the world’s poorest countries with GDP per capita of $98 (WB

data) In 2008, with the GDP per capita of $1,164.6, Vietnam has already attained the status of a lower middle income country by the World Bank classification method* Vietnam’s GDP per capita growth path appears to follow Indonesia’s and Thailand’s patterns (Figure 2)

Source: http://data.worldbank.org/indicator/NY.GDP.PCAP.CD/countries

However, Vietnam’s achievements up to now have been driven mainly by one-time

liberalization effects and external forces associated with global integration rather than internal strengths Despite impressive growth records and reform efforts in the last one-and-half decades, local firms remain generally uncompetitive, and policies and institutions remain very weak by

* Based on the World Bank’s 2008 GNI per capita data, the current classification is as follows: low income countries ($975 or less); lower middle income countries ($976-$3,855), upper middle income countries ($3,856-$11,905); and high income countries ($11,906 or more) Due to inflation and overvaluation, Vietnam is likely to become a “middle income country” sooner than expected, in 2008

0.00

2,000.00

6,000.00

10,000.00

14,000.00

18,000.00

22,000.00

26,000.00

30,000.00

34,000.00

38,000.00

42,000.00

46,000.00

50,000.00

54,000.00

58,000.00

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Figure 2: GDP per capita (current US$)

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East Asian standards Where is Vietnam now in the development stage, compared to the neighboring countries?

Kenichi Ohno (2010) identified five stages of catching-up (Figure 3) From the East Asian

perspective, economic take-off starts with the arrival of a sufficient mass of manufacturing FDI firms that perform simple assembly or processing of light industry products for export such as garment, footwear, and foodstuff Electronic devices and components may also be produced this way In this early stage (stage one), design, technology, production and marketing are all directed

by foreigners, key materials and parts are imported, and the country contributes only unskilled labor and industrial land While this generates jobs and income for the poor, internal value remains small and value created by foreigners dominates Vietnam’s industrialization up to now is

basically characterized by this situation [1]

In the second stage, as FDI accumulates and production expands, the domestic supply of parts and components begins to increase This is realized partly by the inflow of FDI suppliers and partly by the emergence of local suppliers As this occurs, assembly firms become more competitive and a virtuous circle between assemblers and suppliers sets in The industry grows quantitatively through the internal supply of physical inputs Internal value creation rises moderately, but production basically remains under foreign management and guidance Obviously, local wage and income cannot rise very much if all important tasks continue to be performed by foreign hands Thailand and Malaysia have already reached this stage

The next challenge is to internalize skill and knowledge by accumulating industrial human capital Locals must replace foreigners in all areas of production including management, technology, design, factory operation, logistics, quality control, and marketing As foreign dependence is reduced, internal value rises dramatically The country emerges as a dynamic exporter of high-quality manufactured products challenging more advanced competitors and re-shaping the global industrial landscape Korea and Taiwan are such producers

In the final stage, the country acquires the capability to create new products and lead global market trends Japan, the United States, and some members of the European Union are such industrial innovators

Starting from a very low level, Vietnam is currently in the first stage of industrialization trying

to reach the second as shown in Figure 3

Figure 3 Stages of Catching-up Industrialization

It is also necessary to clarify that whether Vietnam can catch up with other industrialized countries in a reasonable timeframe To catch up with some regional countries it will take us rather

a long time For example, the current per capita income of Thailand and China is nearly three to four times larger than Vietnam, but their rate of income increase is approximately or even higher

than Vietnam’s If Vietnam can retain its current development rate, we still cannot catch up with

them in 20-25 years in term of per capita income This shows that it is not feasible to catch up with these two countries in the medium term The analyses broadly suggest that Vietnam is about 30-35 years behind South Korea, about 25 years behind Malaysia, about 20 years behind Thailand, about 5-7 years behind Indonesia and Philippines

However, this does not mean that Vietnam needs that amount of time to reach the current level of development of Thailand In development economics there is a famous thesis of the

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benefits of latecomers (advantages of backwardness) and a related hypothesis of shortening, narrowing the industrial development process (compressed industrial development) The core of this thesis is that the latecomers have the advantages of being able to utilize technology, business knowledge, and management experience from advanced countries and should be able to shorten the development process, the process of industrialization

KeunLee (2001) gave three patterns of catching-up based on Korean experience They are

path-following catching-up, stage-skipping catching-up and path-creating catching-up Path-following means that the companies in developing countries will follow what the innovative companies did before in the successive stages but in a more efficient way In stage-skipping way, the companies in the developing countries can skip some stages to the next stage in a parallel way with innovative companies in the developed countries Path creating will break the way the innovative companies did before and developed their own technology to narrow the gap with the leading companies in the industries Both stage-skipping and path creating are the way of leapfrogging [5]

Entering the new century, given the comparative advantages in human resource development and being the latecomer in a dynamic region in terms of technology, capital and business skill development, Vietnam is fully capable of shortening the development gap between itself and its

neighboring countries However, that only represents Vietnam’s potential and opportunity To

avoid lagging behind and catch up with the industrialized neighboring countries, the Vietnam’s

path of catching-up should be the way of leapfrogging

The sufficient conditions should be a commitment to avoiding the danger of lagging behind, taking bolder steps in reform, creating a competitive environment among different economic players, and actively attracting FDI Those are the key factors for fast capital accumulation and efficient economic development; two prerequisites for high and sustainable growth, which makes

it possible for Vietnam to catch up with neighboring countries

References

1 Kenichi Ohno (2010), Avoiding the Middle Income Trap: Renovating Industrial Policy Formulation in Vietnam, National Graduate Institute for Policy Studies (GRIPS), Tokyo

2 Lee, Keun, Lim, C (2001), Technological regimes, catching up and leapfrogging: finding from the Korean industries, Research Policy 30, 459-483

3 Vu Minh Khuong (2008), Economic Reform and Growth Performance: China and Vietnam in

4 World Bank (1993), The East Asian Miracle: Economic Growth and Public Policy, A Policy

Research Report Washington, D.C

5 Xielin Liu (2006), Path-following or Leapfrogging in Catching-up: the Case of Chinese