Constraints in improving linkages between FDI sector and domestic enterprises
Foreign direct investment, along with international trade, is one of the most important vehicles for the international transfer of technology and knowledge to the local firms.
Multinational enterprises (MNEs) provide proprietary technology and knowledge to affiliates in the host country and enable the latter to compete successfully with local firms. The spillovers from the foreign affiliates can affect the host country’s economy— thus boosting the human capital and productivity of local firms. These spillover effects typically operate through forward and backward linkages that connect local and foreign firms in the supply chain. In Vietnam, there is evidence that these linkages remain underdeveloped due to various constraints associated with the demand and supply side, quality, access to finance and skills.
Foreign direct investment is one of the most important vehicles for the international transfer of technology and knowledge to the local firms.
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Differences between domestic firms which managed to establish FDI backward linkages and those which did not can inform the design of programs aiming to further develop those linkages. Several constraints and weaknesses of the domestic private sector are looked at, including the quality of products, access to finance, innovation, skills, etc. Finally, the main business environment constraints perceived by firms are presented, distinguishing between linked and non-linked firms.
The lack of potential suppliers’ ability to conform to MNEs’ quality, price and reliability standards has been identified as one of the major constraints to backward to linkages in Vietnam. Statistics showed that, while half of foreign-invested firms hold an internationally-recognized quality certification, such as ISO 9001 on quality management systems, less than 10 percent of domestic firms do. However, this proportion increases to almost a quarter for domestic “linked” firms. To the extent that imported inputs have a higher quality/price ratio or embody better technology than domestic ones, linked domestic firms’ heavier reliance than non-linked firms on such imported inputs, in Vietnam like in comparator countries, may also be a source of higher competitiveness.
Access to finance is perceived as one of the top business constraints by firms surveyed in Vietnam, with a significantly higher proportion of firms declaring it as their main constraint than in Malaysia, Thailand and China. However, the fact that there is no large difference between linked and non-linked firms, as well as that the proportion of non-linked firms having a credit/loan or overdraft facility is higher in Vietnam than in comparator countries, suggests lack of access to finance may not be a major obstacle for firms to establish linkages.
Compared to non-linked firms, on average linked firms are found to (i) have a slightly higher proportion of skilled production workers, (ii) provide much more formal training to their employees, and (iii) consider that an insufficient skills and education level of the workforce is a major constraint. Furthermore, while no obvious pattern emerges in terms of the type of skills linked and non-linked firms say are most difficult to find, the primary focus of their training efforts does not seem to be geared towards addressing these needs. For instance, skills such as foreign languages, work ethic, writing, management and leadership are sought after but do not appear to be the object of much of the training provided by firms.
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Vietnam news in brief - August 24
Read The Hanoi Times to stay up to date on developments in Vietnam.
- Growing number of FDI firms moving to Vietnam
- Vietnam Gov’t committed to facilitating Adani Group’s US$2-billion port project
- Vietnam Railway proposes US$87 million for Hanoi–Dong Dang railway upgrade
- Vietnam’s North-South high-speed railway to be designed for 350km/h
- Vietnamese gov’t urged to address impact of global minimum tax
- Samsung plans drastic investment increase in Vietnam over next three years