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USAID LINKAGES FOR SMALL AND MEDIUM ENTERPRISES ( LinkSME )

Photo: East West Industries. USAID LINKAGES FOR SMALL AND MEDIUM ENTERPRISES ( LinkSME ). THE IMPORTANCE OF GLOBAL VALUE CHAINS IN VIETNAM’S ECONOMIC DEVELOPMENT Ron Ashkin, LinkSME Project Director Vietnam Investment Promotion Conference, Hanoi April, 2019. Headlines in the News.

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USAID LINKAGES FOR SMALL AND MEDIUM ENTERPRISES ( LinkSME )

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  1. Photo: East West Industries USAIDLINKAGES FOR SMALL AND MEDIUM ENTERPRISES(LinkSME) THE IMPORTANCE OF GLOBAL VALUE CHAINS IN VIETNAM’S ECONOMIC DEVELOPMENT Ron Ashkin, LinkSME Project Director Vietnam Investment Promotion Conference, Hanoi April, 2019 USAID Linkages for Small and Medium Enterprises

  2. Headlines in the News • “Vietnam exporters too dependent on imported materials” • Vietnamnet, February 11, 2019 • “Vietnamese firms struggle to join FDI supply chain” • VN Express International, November 28, 2018 • “Vietnam needs stronger links with global supply chains” • Vietnam Economic News, October 7, 2018 • “Only 21% of local SMEs involved in global supply chains” • Vietnamnet, August 23, 2018 • “Vietnamese labor productivity among lowest in Asia” • VN Express International, May 10, 2018 • “Vietnam still struggling to develop supporting industries” • Vietnamnet, April 18, 2018 • “Vietnam’s electronics industry struggles with low local content”– Thoi Dai Vietnam Times, November 30, 2017

  3. Vietnam’s Challenge – Connecting SMEs to the Global Value Chain • 98 percent of total enterprises • 63 percent of employment • 45 percent of GDP • Foreign direct investment (FDI) in 2018: $35 billion • FDI firms represent 70 percent of Vietnam’s 2018 exports of $244 billion • Key investors: South Korea, Japan, Singapore, Taiwan, U.S. • Most foreign firms co-locate with their foreign suppliers • Only 21 percent of SMEs engage in foreign firm supply chains • Why? Low technology adoption, low productivity, lack of experience with foreign firms, insufficient standardization, inadequate skilled staff, poor access to finance… Small and Medium Enterprise (SME) Landscape SME Linkages to Foreign Firms Foreign Firms in Vietnam 1 2 3 USAID Linkages for Small and Medium Enterprises Slide No. 3

  4. Significance to Vietnam’s Economic Development • Foreign Direct Investment (FDI) in Vietnam is growing at a record rate1 • 78% of this new investment is in manufacturing • By definition, the benefits of foreign investment largely accrue to foreign firms (i.e., profits go outside Vietnam) • In 2018, FDI firms imported 47.1% of inputs from home country businesses2 • Low local content and low SME participation in global value chains hinder benefits to Vietnam’s economy • Vietnam will only capture the full benefit of the current FDI and export boom if local content increases to global benchmark levels Low local content low SME participation

  5. The Impetus to Move Out of China • 35% of companies surveyed by the American Chamber of Commerce in China in 2018 have moved or considered moving their production bases out of China3 • UBS survey reported by Bloomberg in February 2019 shows more4

  6. The Impetus to Move Out of China – Industry Focus • Study of Trump Administration’s tariffs on China shows that some industries have more incentive to relocate than others2 • Share of some sectors significantly affected by tariffs: • Pharmaceuticals 100% • Basic metals 100% • Electrical equipment 90.6% • Electronics and computers 88.4% • Machinery 66.2% • Transport equipment 62.2% Vietnam’s largest export sectors

  7. SME Participation in Vietnam is Low Source: MPI5

  8. Local Content in Vietnam is Low Source: JETRO6

  9. Local Content in Vietnam is Low • Imports of inputs in selected industries (percent of product value)7 • Pharmaceuticals 85 – 90 % • Smartphones 79 % • Electronics 77 % • Plastics 70 – 80 % • Textiles & garments 67 % • Footwear 47 % Hi-tech Below average local content Only lower-tech industries have above average local content

  10. FDI Case Example – Samsung • Samsung alone accounts for almost a quarter of Vietnam’s total exports8 • But only 35 Vietnamese companies are Tier 1 suppliers to Samsung in 20199 • Not all of these are SMEs • And there are 507,860 SMEs in Vietnam according to the most recently available census data10 • Local content is estimated at 20%11 • This is after years of intensive local supplier development efforts

  11. FDI Case Example – GE • GE’s advanced manufacturing technology facility in Hai Phong, one of only five such “brilliant” factories in the world, achieved $1 billion in exports from Vietnam in 201812 • With expansion, facility aims to increase local content to 20% (i.e. current local content is below 20%)13 Photo: Myanmar Times, January 19, 2019

  12. Manufacturers Come to Vietnam for Low Wages14

  13. But Productivity in Vietnam is also Low • Productivity is simply economic output per employee • Labor productivity in Vietnam is below Japan, South Korea, China, Singapore, Thailand, Malaysia, the Philippines, Indonesia and Cambodia15 • Vietnam's labor productivity is: • 1/18th of Singapore; • 1/16th of Malaysia; and • 1/3 of Thailand and China • 1/3 the productivity at 1/3 the cost means that Vietnam and China are actually at parity in labor cost

  14. Global Firms Look for Total Cost to Market Overall, is Vietnam a lower cost manufacturing location than China? • Low labor cost is only one factor of production • Total cost to market includes all costs: • Labor • Materials • Cost of capital (both investment capital and working capital) • Transport and logistics • Duties, taxes, and fees (both formal and informal), etc. • Inadequate local supply chain raises all costs other than labor, and also minimizes local labor participation • Locating for low labor cost is the wrong reason for Vietnam’s economy – a “race to the bottom”

  15. Employment Effect of Local Content • Why is deepening local supply chain in manufacturing important to Vietnam’s economy? • An employment multiplier is a measure used to determine the impact a new job will have on the overall economy • Employment multipliers are much higher in manufacturing than in other sectors of the economy (USA data)16 • Manufacturing, average: 2.84 • Business services: 1.51 • Retail trade: 0.87

  16. Employment Multipliers17 • Employment multipliers measure the number of direct, indirect and induced jobs created by business investment and growth • Direct jobs are full-time positions created in a business • Indirect jobs are those in the supply chain • Induced jobs are those that are a result of direct/indirect employees spending money in the community • More local content means more of the jobs will be in Vietnam

  17. Employment Multipliers in Manufacturing16 • Durable manufacturing industry group (USA data) • For every direct job created: • 2.33 indirect (supply chain) jobs • 1.30 induced (re-spending) jobs • Employment multiplier: 3.63 • Non-durable manufacturing industry group (USA data) • For every direct job created: • 1.48 indirect (supply chain) jobs • 1.03 induced (re-spending) jobs • Employment multiplier: 2.51

  18. Employment Multipliers in Electronics16 • But some industries are “heavy hitters” • Computer equipment and office machinery industry (USA data – SIC357) • For every direct job created: • 5.73 indirect (supply chain) jobs • 3.08 induced (re-spending) jobs • Employment multiplier 8.81 • Why? Long supply chain • High induced effect is due both to more jobs and to higher value added, higher paying jobs

  19. Huge Potential for Vietnam’s SMEs • Vietnam’s 2018 Exports: $244 billion • 70% of exports come from FDI firms: 70% x $244 billion = $171 billion • Vietnam’s average local content (JETRO): 33% • Current value of local content in exports through global value chains: 33% x $171 billion = $57 billion • China’s average local content (potential for Vietnam): 67% • Potential value of local content in exports through global value chains: 67% x $171 billion = $115 billion • Growth potential for Vietnam through strengthening local supply chain: $115 billion - $57 billion = $58 billion • And exports are growing year-on-year…

  20. A New USAID Project Addresses This Challenge • USAID Linkages for Small and Medium Enterprises (LinkSME) • $22.1 million over five years (2018 – 2023) • Purpose: • Systemic changes in business relationships between Vietnamese small and medium-sized enterprises (SMEs) and foreign firms • Significant increases in the quantity and quality of linkages between Vietnamese SMEs and foreign firms • Objectives: • Strengthen the SME-foreign firm business linkage framework • Enhance Vietnamese SMEs’ capacity to participate in the global value chain in five sectors • I will introduce LinkSME in detail tomorrow (Friday, April 12th) at 10:55 AM at the Vietnam Export Promotion Forum 2019 Slide No. 20

  21. Questions?

  22. References • Vietnam Business https://www.vietnambusiness.tv/en/business/1572/vietnam-s-foreign-direct-investment-grows-at-a-record-rate) accessed April 8, 2019 • Malesky, Edmund et al., The Vietnam Provincial Competitiveness Index 2018, Vietnam Chamber of Commerce and Industry and USAID • Epoch Times, October 19, 2018 https://www.theepochtimes.com/the-global-manufacturing-industry-is-moving-out-of-china_2694398.html accessed March 6, 2019 • Bloomberg, February 13, 2019 https://www.bloomberg.com/news/articles/2019-02-13/as-trade-talks-drag-on-many-u-s-firms-say-tariffs-are-helping accessed March 6, 2019 • VietnamNet, February 12, 2019. https://english.vietnamnet.vn/fms/business/217525/vn-support-industries-striving-to-improve.html accessed March 5, 2019 • Voice of Vietnam, October 24, 2018. https://english.vov.vn/economy/jetro-makes-moves-to-raise-local-content-in-vietnams-manufacturing-385895.vov accessed March 5, 2019 • VietnamNet, February 11, 2019. https://english.vietnamnet.vn/fms/business/217124/vietnam-exporters-too-dependent-on-imported-materials.html accessed March 1, 2019 • The Economist, April 12, 2018 https://www.economist.com/asia/2018/04/12/why-samsung-of-south-korea-is-the-biggest-firm-in-vietnam accessed March 4, 2019 • Viet Nam News, January 21, 2019 https://vietnamnews.vn/economy/484145/opportunities-for-local-support-industry-firms.html accessed March 5, 2019 • Vietnam Briefing, September 28, 2018 https://www.vietnam-briefing.com/news/vietnam-releases-2017-economic-census.html/ accessed March 4, 2019 • Khoo, Boo Teik, Keiichi Tsunekawa, and Motoko Kawano, Southeast Asia beyond Crises and Traps: Economic Growth and Upgrading. Springer, 2017, page 113 • Vietnam Investment Review, December 12, 2018 https://www.vir.com.vn/ges-haiphong-brilliant-factory-drives-transformation-64581.html accessed March 4, 2019 • GE Vietnam Fact Sheet https://www.ge.com/vn/sites/www.ge.com.vn/files/Fact_Sheet_VN_MAY_2016.pdf accessed March 4, 2019 • Hanoi Times, February 22, 2019 http://www.hanoitimes.vn/economy/2019/02/81e0d37e/vietnam-leads-asean-as-the-group-reclaims-competitive-niche-hsbc/ accessed March 5, 2019 • VN Express International, May 10, 2018 https://e.vnexpress.net/news/business/data-speaks/vietnamese-labor-productivity-among-lowest-in-asia-despite-growth-report-3747080.html accessed April 8, 2019 • Bivens, Josh, Economic Policy Institute Working Paper No. 268, Updated Employment Multipliers for the U.S. Economy (2003). https://www.nrc.gov/docs/ML1224/ML12243A398.pdf accessed March 1, 2019 • Triple Pundit, May 4, 2011 https://www.triplepundit.com/story/2011/employment-multiplier-important-tool-promoting-burgeoning-green-economy/77886 accessed March 1, 2019

  23. Register online at http://bit.ly/LinkSME1 VIETNAMFLAVOR.COM USAID Linkages for Small and Medium Enterprises Contact Information: USAID: Thuy Nguyen, Contracting Officer’s Representative (COR) thuynguyen@usaid.gov Michael Trueblood, Director, Office of Economic Growth and Governance mtrueblood@usaid.gov LinkSME: Ron Ashkin, Project Director rashkin@linksme.org Lien Duong, Deputy Project Director/SME Linkages Component Director duonglien@linksme.org Frank Weiand, Foreign Firm Linkages Component Director fweiand@linksme.org

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