Technology and Competitiveness in Vietnam

Technology and Competitiveness in Vietnam General Statistics Office, Hanoi, Vietnam July 3 rd, 2014 Prof. Carol Newman, Trinity College Dublin Prof. Finn Tarp, University of Copenhagen and UNU-WIDER 1

Introduction Global financial crisis (the great recession) has changed the international landscape for doing business The pace of economic transformation has quickened in emerging economies Economies will in future stand or fall on their ability to compete in global markets Competitiveness a key factor But, increasingly economies will be distinguished by their ability to create new value added products One key determinant will be technology adoption and innovation 2

Introduction Vietnam s economy has grown rapidly - between 2000 and 2013 growth was at a rate of 6% per annum on average This has changed the nature of economic activity Domestically, the quality of goods and services has increased and the range of choices available to consumers has expanded Internationally, exports are expanding and foreign direct investment (FDI) into Vietnam is growing at a fast pace The way in which output is produced (=the production function) is changing The future success of the Vietnamese economy will depend on its ability to continue the remarkable growth and economic transformation 3

Introduction What determines the growth rate? Quantity: tangible capital and labour (and land) Total factor productivity: more intangible ranging from technology to knowledge of labour (human capital), and includes the way that capital interacts with labour (= a measure of an economy s long-term technological change or technological dynamism) Vietnam has a large labour force and has experienced significant increases in the capital stock There are high levels of domestic savings but also large inflows of FDI Up to now factor accumulation has played key role in Vietnam s growth 4

Introduction To further the transition from relying on factor-accumulation to a TFP driven economy increasing focus needs to be placed on productivity and technology This is a necessary next step in the development process Understanding the relationship between technology and productivity is crucial in designing policies that improve the technological readiness of firms Illustrative estimates of macro-economic developments available, but developing a deep policy-relevant understanding of the productivity-technology relationship requires firm-level data over time that allows the complexities of the interplay to be uncovered 5

Introduction We aim to demonstrate the value of a unique source of data collected by the GSO in collaboration with the University of Copenhagen and CIEM (funded by Danida) Technology and Competitiveness Survey (TCS) 2010-2013 Note: survey also has material and data about corporate social responsibility (focus here is on technology and competitiveness) Roadmap: International perspective on technology and competitiveness Overview of the TCS Key trends emerging from the TCS Examples of in-depth studies using the TCS Recommendations for the future 6

Technology and Competitiveness: An International Perspective 7

Global Competitiveness Rankings World Economic Forum, Global Competitiveness Report, 2013-2014 Vietnam ranked 70 th in the world on the Global Competitiveness Index (which is rather low) What is this index made up of? 8

Competitiveness defined Key reference: World Economic Forum. Annual Competitiveness Reports Pillars of Competitiveness Institutions Infrastructure Macroeconomic environment Health and primary education Higher education and training Goods market efficiency Labor market efficiency Financial market development Market size Technological readiness Business sophistication Innovation Basic requirements for factor-driven economies (shifting through factor accumulation) Efficiency enhancers for efficiency-driven economies (relative to potential) Innovation and sophistication factors for innovation-driven economies 9

Global Competitiveness Rankings Vietnam ranks highest on efficiency-enhancers overall Market size (36 th ), labor market efficiency (56 th ) and goods market efficiency (74 th ) But ranks particularly poorly on technological readiness (102 nd ) Vietnam also ranks comparatively well on innovation and sophistication factors suggesting promising potential for the future Ranks 76 th on innovation However, it is still one of the poorest ranking on most measures in the ASEAN region where most competitors are located, so beware 10

What is missing from this analysis? This analysis is informative but it is limited These are very broad categories and the indicators are based on administrative data - no new data is collected Tells us nothing about the underlying mechanisms why Vietnam does well in some areas and not in others To really understand the drivers of technology adoption and innovation and their impacts more information is required More detail on firm behavior Track the same firms over time so underlying mechanisms can be identified The Vietnamese TCS is the only example that we know of that collects detailed panel data on technology and competitiveness This is a very valuable resource which we will now demonstrate 11

Vietnam Technology and Competitiveness Surveys 2010-2013 12

Overview The TCS 2010-2013 was developed in collaboration between GSO, CIEM and UoC Aim: to give researchers and policymakers a detailed understanding of the dynamics of technology, productivity and profitability of Vietnam s growing private sector It is a detailed firm-level survey on a sub-sample of some 7,500 manufacturing enterprises that was implemented by the GSO as part of the annual Vietnam Enterprise Survey To ensure that high quality data are collected each round involved extensive discussions between collaborating institutions on the questionnaire content and the sampling The results are reported through annual statistical reports and a range of in-depth studies that are presented to partners and key stakeholders at drafting and final report stages 13

Structure of the Survey Section Description Taking stock of technologies and technological basis Input and supplier relations Output and customer relations Innovation and technology capacities Competitors Corporate Social Responsibility (CSR) Capturing the status-quo of the firm s level of technological investment and sophistication through questions about the age, cost, and type of current production technologies. The details of major suppliers locations and the value of inputs obtained, differentiated across domestic and international suppliers. The details of major customers locations and value of outputs sold, differentiated between domestic and international customers. Diagnostic questions targeting the constraints affecting technology adaptation and level of the firms investment in technology transfers or research and development. Number and location of competitors, and dimensions (cost / quality) along which competition occurs. Questions relating to formal and informal commitment to CSR practices. 14

Manufacturing Sectors Covered (2012) 18.00% 16.00% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% N=7,467 15

Types and Sizes of Firms Legal structure Description State-owned Wholly state-owned or joint stock firm with state involvement Private Ent. Domestically-owned private firms or cooperatives FDI Wholly foreign-owned or joint stock firms with majority FDI ownership Size category Micro 0 10 Number of employees Small 10 50 Medium 50 300 Large 300 or more 16

Ownership of Firms 7000 Ownership 6000 5000 4000 3000 2000 1000 0 2009 2010 2011 2012 State Private Foreign Note: very few state left in 2012 17

Size of Firms 3500 Size 3000 2500 2000 1500 1000 500 0 2009 2010 2011 2012 Micro Small Medium Large 18

TCS Key Trends 2010-2013 19

Trends in competition 45 Number of Competitors 40 35 30 25 20 15 10 5 0 Total State Private Foreign Micro Small Medium Large 2010 2011 2012 20

Trends in competition Locality of Competition Private domestic Foreign Distribution of competitors (in 2010 2012 2010 2012 Within same province 65.8 62.1 29.7 36.8 Different province 31.1 34.2 41.6 36.2 Foreign 3.1 3.6 28.7 27.0 21

Trends in technology sophistication Sophistication of in-house technology machinery (latest machine purchased) Total Private Foreign 2009 2012 2009 2012 2009 2012 Mechanical hand tools 1.6 0.8 1.8 0.9 1.2 0.4 Power driven hand tools 7.5 5.6 8.9 6.1 4.6 4.0 Human op. machines 81.5 84.6 82.4 86.1 78.5 79.8 Computer op. machines 8.3 8.3 5.7 6.1 14.9 15.0 22

Trends in international engagement Engagement with international markets 90 80 70 60 50 40 30 20 10 0 % Exporters 2009 2010 2011 2012 23

Trends in international engagement Destination of exports Total Private Foreign % of exporting firms exporting to: 2009 2012 2009 2012 2009 2012 China 6.1 15.4 7.0 15.1 5.2 15.8 Other Asia 100 90.2 100 87.3 100 92.8 US/Canada 18.1 30.0 19.9 31.5 17.1 28.8 Europe 16.3 28.0 25.5 35.4 8.2 21.3 Note: Increasing diversification of export markets 24

Trends in international engagement Engagement with international markets (note: less sourcing via imports) 90 80 70 60 50 40 30 20 10 0 % Import Inputs Total State Private Foreign Micro Small Medium Large 2009 2010 2011 2012 25

Trends in engagement with FDI firms Engagement with FDI firms (selling to FDI firms downstream) 60 % FDI Customers 50 40 30 20 10 0 Total State Private Foreign Micro Small Medium Large 2010 2011 2012 26

Trends in engagement with FDI firms Engagement with FDI firms (procuring inputs from foreign firms upstream) 70 % FDI Suppliers 60 50 40 30 20 10 0 Total State Private Foreign Micro Small Medium Large 2010 2011 27

Trends in Technology Transfers % of firms Transfer from Supplier Transfer from Customer 2009 2012 2009 2012 Total 10.7 11.9 8.6 12.1 State 19.6 27.9 10.8 18.6 Private 9.6 11.0 6.8 11.6 Foreign 15.8 14.5 9.9 13.6 Micro 5.2 5.1 4.7 6.3 Small 7.7 9.0 5.6 9.6 Medium 12.0 14.1 8.6 13.7 Large 16.5 18.2 10.9 18.2 28

Source of Technology Transfers (2012) Total % Vietnamese firm, same sector 1,640 20.3 Vietnamese firm, other sector 3,885 48.0 Foreign firm, same sector 1,487 18.4 Foreign firm, other sector 875 10.8 Technology from foreign firms is important but less important than local firms 29

Innovation Trends All firms Private Domestic Firms % 2010 2011 2012 2010 2011 2012 Process 59.9 62.6 66.8 59.1 62.5 67.2 Quality 76.5 79.0 80.0 76.3 79.5 81.2 Variety 42.6 43.6 42.5 41.6 42.7 42.4 Expand sector 14.4 13.4 12.5 14.6 13.8 13.6 Change sector 2.7 3.2 3.4 2.9 3.5 3.6 Tech Adapt 8.0 6.4 4.8 7.8 6.0 4.9 R&D 11.3 10.5 6.6 10.5 9.5 6.9

Trends in constraints to doing business (average on scale 1-10) 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 Constraints 2009 2010 2011 2012 31

Which firms are more constrained? 38 Total Constraints Score in 2012 37 36 35 34 33 32 Private Foreign Micro Small Medium Large 32

TCS Indepth Studies (from correlation to causation using GSO VES) 33

Technology Transfer 34

Technology transfer Firms use capital (machinery, finance) and labour They also need technology: the quality of machinery and the organisation of machinery and labour For emerging economies such as Vietnam technology transfer is key Vietnam is below the technology frontier but can catch up by learning from others Studying technology transfer is a core feature of TCS The interplay between technology transfer, FDI, trade and innovation is of particular importance 35

Technology transfer through spillovers Type of spillover Forward Backward Description Technology is transferred from foreign-owned input suppliers based in Vietnam to Vietnamese domestic producers Technology is transferred from foreign-owned customers based in Vietnam to Vietnamese domestic input producers Horizontal Technology is transferred from foreign-owned competitors based in Vietnam to Vietnamese domestic producers 36

How Do These Happen? Inputs supplied by foreign firms use a new technology Foreign input suppliers provide training on how to use the new technology Foreign customers provide domestic input suppliers with technological know-how about how to produce new inputs Domestic firms could purchase new technology from foreign firms or have it transferred through some contractual relationship New employees could bring with them skills acquired while working at a foreign firm 37

In-depth evidence on FDI spillovers Evidence suggests that productivity gains from FDI firms are not through direct linkages between domestic and FDI firms We find evidence for positive forward spillovers from foreign inputs suppliers to domestic producers but these are not due to direct linkages or contractual technology transfers but are due to some other productivity channel Moreover, direct linkages with downstream FDI firms have a negative impact on firm productivity for some firms, but firms that adapt by investing or adjusting their labour inputs can benefit from such relationships 38

Learning by exporting 39

Learning by exporting An important advantage of the TCS data is as noted that it can be linked to the main VES allowing for detailed in-depth analysis of important topics of policy relevance. Together with CIEM we have analyzed the impact of entering export markets on the productivity performance of private Vietnamese firms This is possible because of the long panel data tracking the same firms over time Linking the VES with the TCS allows the mechanisms driving the productivity impact of exports to be explored. 40

Do firms learn by exporting? Productivity (1) 2006-2011 VES Lag Export 0.028** (0.013) (6) 2009-2011 TCS 0.032* (0.019) R 2 0.826 0.733 Firms 5,210 5,210 Observations 31,260 15,630 Strong evidence that there are learning effects associated with exporting for private domestic firms in Vietnam

What are the underlying mechanisms? Productivity (1) (2) L.Export 0.023 0.003 Process Innovation -0.029** L.Export x Process Innovation 0.071** Quality Innovation 0.008 L.Export x Quality Innovation 0.076* R 2 0.686 0.686 Learning effects are significantly higher for forms that innovate. Process and quality innovations are particularly important

Lessons form learning by exporting Facilitating the entry of Vietnamese firms into export markets will help enhance the productivity of the domestic manufacturing sector Small and medium sized domestic firms are less likely to export than large firms and foreign-owned enterprises Investigating the constraints to entry to export markets by these firms requires future research For firms that successfully enter export markets facilitating firm-specific innovations is likely to enhance the magnitude of the productivity gains

Conclusions and recommendations 44

Conclusion and recommendations for the future (1) Technology adoption critical in promoting competitiveness at firm and economy level in the next stage of Vietnam s development (not sufficient just to accumulate capital and labour) Proper analysis of technology-productivity links require data firm level panel data to uncover causal links and underlying mechanisms (indispensable for formulating policy) TCS provides insights on key firm-level trends and differences among types of firms Competition increasing Exporting increasing Diversification of export markets taking place Decline in reliance on imported inputs Gradually things are changing but significant differences between foreign and Vietnamese firms and between large and small firms 45

Conclusion and recommendations for the future (2) Technology & innovation Sophistication of technology use increasing Technology transfers among firms increasing Process and quality innovations increasing But: technology adaptation and R&D in decline In-depth studies FDI spillovers: FDI suppliers of inputs help productivity spillovers but technology transfer not the channel Exporting associated with learning effects 46

Conclusion and recommendations for the future (3) Lessons for policy some examples: Lesson 1: firms continue to be constrained, especially private and small: reform job not yet done (alleviate financial constraints, education, access to high tech machinery and equipment) Lesson 2: limited frontier innovations support for R&D (patents law and subsidies/tax breaks) Lesson 3: FDI spillovers do not work through typical channels investment promotion agencies should focus on targeting FDI into upstream sectors where spillovers the greatest; and types of contracts needs to be investigated further Lesson 4: finding ways to help firms export promotes productivity 47

Conclusion and recommendations for the future (4) Technology adoption and innovation are gradual time-consuming processes: a few years of data give good basis to start understanding process but needs to be followed up for time-series to build up Tracking the same firms critical to identifying transmission mechanisms and productivity impacts of technology adoption and innovation Continuing TCS will provide unique inputs for policy making in next phase of Vietnam s economic development and reform process 48