Harvard’s End of Year Report on Vietnam’s Competitiveness: Must Do Better

Improved training and education are central to Vietnam's continued economic transformation

Michael E. Porter and his Harvard-based Institute for Strategy and Competitiveness visited Hanoi in December to deliver the results of their 2010 Vietnam Competitiveness Report.  It makes interesting reading.  In Professor Porter’s words; “While the country can be proud of what has been achieved (over the last two decades), its performance is showing signs of fragility. Comparison with other countries reveals that Vietnam has not outperformed leading peers in the region.”  And when it comes to the importance of competitiveness, the Professor should know.  In the first half of the 1980s he wrote Competitive Strategy and Competitive Advantage, a couple of tomes that graced every aspiring manager’s bookcase and that confirmed Porter’s status as a management guru.

Harvard comes to Hanoi: Professor Michael Porter and Prime Minister Nguyen Tan Dung

In a nutshell, Vietnam’s impressive growth over the last two decades has been due to considerable improvements in labor productivity, fueled by capital inflows associated with the nation’s structural change from an agricultural to a manufacturing economy.  Foreign investment has played a central role, providing much of the capital and driving up exports.  Imports have also grown, to meet the needs of Vietnam’s new manufacturers and an increasingly prosperous middle class.

Unfortunately, this positive economic base has been undermined by several factors that threaten to stall Vietnam’s growth and neutralize its primary competitive advantage of low labor costs. First, the country’s exports rely heavily on either imported supplies or consist of natural resources and agricultural products. In both cases, very little value is added by Vietnam’s cheap, poorly trained labor.   Second, productivity in non-manufacturing sectors is chronically low.  Third, government investment is often ineffectual, targeted for reasons of fairness at less wealthy regions rather than concentrated where wealth could be multiplied several fold by improved infrastructure and education. Finally, rising local input prices combined with relatively lackluster productivity are eroding Vietnam’s competitive labor cost advantage to the extent that countries like China and Taiwan, with their higher labor costs, are out-competing local producers.  All these micro-economic issues are exacerbated by the nation’s volatile currency, high inflation, troubled banking sector and weak government finances.

Local economists and policy makers recognize that Vietnam’s impressive social and economic transformation has reached a crucial juncture and it is no coincidence that Professor Porter delivered his message to an audience that included Hoang Trung Hai, Vietnam’s Deputy Prime Minister who commissioned the study and Prime Minister Nguyen Tan Dung who has just been re-elected for a second four-year term.

The Guru speaks: Is Vietnam ready for his message?

So, in Professor Porter’s opinion, what must Vietnam do to improve its competitiveness and continue its economic transformation?  Most observant visitors to Vietnam would not be surprised by the Professor’s prescription which he provides in his informative and detailed 68-slide Power Point presentation. Here’s a summary;

Enhance education and workforce skills. It’s no surprise that Vietnam has found it tough to keep up with the educational needs of its growing population, impatient to reap the financial benefits of rapid structural change and even less patient to wait for training and education to catch up.

Improve physical infrastructure. Summer power outages and crumbling, congested roads may be commonplace to the Vietnamese but they worry existing foreign investors and frighten away new ones. Moving people and products around Vietnam is enormously inefficient and efforts to improve the road system seem hampered by poor project management and quality control.

Money wasted: Deteriorating Infrastructure, installed too far in advance of the development it's designed to support

Improve the governance of State-Owned Enterprises (SOEs). Vietnam’s SOEs absorb a considerable share of government investment but fail to deliver acceptable returns.  Vinashin, the national shipbuilding company, has become an albatross roubnd the governments neck, epitomized by its recent failure to meet foreign debt repayment covenants that in turn prompted Standard & Poor’s to lower Vietnam’s debt rating to a point now three levels below investment grade.

Do more to attract deeper rooted Foreign Direct Investment (FDI). Even though Vietnam has been successful in attracting investment from overseas, it’s the quality of this FDI that concerns Professor Porter. First of all, the issuance of licenses to foreign investors appears to be a numbers game, indifferent to whether the investor has the financial capacity to follow through. Consequently, it is not unusual to see delays of several years between investment reporting and realization.  Second, foreign investment often has ‘shallow roots’, with hardly any impact on the local economy other than to create low-paying, low-skilled jobs.

Pursue a cluster-based model. ‘Clustering’ is one of the cornerstones of Michael Porter’s theory of national competitiveness.  By co-locating manufacturers, their suppliers, sub-contractors and investing in social and physical infrastructure like academic institutions and airports, governments can spawn and attract more competitive, innovative and cost-efficient enterprises better able to compete in the international marketplace.

It is this last of Professor Porter’s prescriptions that deserves further exploration. He identifies five locational clusters and specific initiatives that Vietnam should consider when deciding how to allocate precious government investment.  In the Hanoi region, an electronic and engineering cluster would be enhanced and grown by an increase in local supplier capacity.  A tourism cluster in the Central Region would be driven by an overarching marketing vision as well as improved tourist-related services. In the Ho Chi Minh City region, two clusters are proposed.  The first is a garment industry cluster, enhanced by improved workforce skills and the second, a logistics cluster underpinned by improved road, rail, seaport and air access.  The fifth cluster is proposed for Vietnam’s ‘rice basket’, the Mekong Delta, where an agro-processing cluster would be driven by value-added activities.

One can see immediately the importance of provincial ‘buy-in’ to these ideas, as well as clear- sited and realistic regional planning.  Every provincial leader could no doubt identify a unique local cluster deserving of investment but, as Professor Porter implies, Vietnam’s national government must make difficult choices, focus ruthlessly on the potential return on the nation’s investment and provide courageous leadership rather than spread the country’s limited financial resources across 58 provinces and five self-governing cities.

There is daunting work ahead for the newly re-elected Prime Minister.  He faces a raft of macro- and micro-economic problems at a time when the nations that surround Vietnam have solved or side-stepped similar issues and have made the transition to higher levels of social and economic development.  It is time once more for the people of Vietnam – especially its leaders – to face the country’s economic shortcomings with fortitude and the kind of iron will that its regional competitors admire and fear.

Nobody wants to see Vietnam's economy stall because of a lack of competitiveness.