Business strengthening of the Asia Industrial infrastructure in 2018 (【Vietnam】Productivity Improvement Support Survey)
Survey Report
March, Heisei 31 （2019）
Mitsubishi UFJ Research and Consulting Co., Ltd.
Table of Contents
I. Vietnam Productivity Report 1. Background and objective 2 2. Survey process 2 2.1 Survey team and expert committees 2 2.2 Expert committees 3 2.3 Interviews with Vietnamese related parties, and explaining, sharing and exchanging opinion on the Vietnam Productivity Report 3 3. Feedback seminar to relevant organizations 4 4. Structure and summary of Vietnam Productivity Report 5
II. Seminars (food related business) 1. Background and objective 9 2. Seminar contents 9 3. Results of the seminar 10
III. Attachments 1． Attachments related with Vietnam Productivity Report (1) Vietnam Productivity Report (Part 1, Part 2 and Part 3) (2) Materials related with expert committees (draft reports and records omitted) (3) Professor Ohno’s productivity lecture material at the Prime Minister’s Office (4) Professor Ohno’s productivity lecture material at VCCI (5) Materials of the feedback seminar to related organizations 2． Attachments related with carrying out seminars (food related business) Food seminar report
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I. Vietnam Productivity Report
1. Background and objective The Japanese government and the Vietnamese government have agreed on the cooperation to promote industrialization and strengthening industrial competitiveness of Vietnam in the Japan-Vietnam Joint Statement dated June 6, 2017 as well as in a Package of Joint Strategic Cooperation regarding Japan-Vietnam Industrial Cooperation dated September 14, 2017. In particular, the Vietnamese government strongly plans for the development of supporting industries (referring to the parts manufacturing industry that delivers to the assembly industry such as automobiles and electric machines). The demand for parts procurement from within Vietnam is also increasing among Japanese manufacturing companies in Vietnam. In addition, with the progress of economic integration in East Asia, and the division of labor promoted especially by the Japanese companies within the ASEAN region, the level of production technology in Vietnamese manufacturing is not high. It is important to establish a solid foundation for strengthening competitiveness of Vietnamese supporting industries in order to incorporate Vietnamese companies into the supply chain of Japanese companies and to improve overall competitiveness of the supply chain. As a result, it will also help Japanese companies entering Vietnam. In order to form a development base for Vietnamese supporting industries, it is necessary to improve production control and quality control, and to improve technology level accompanied with strengthening of business transactions and cooperation between foreign companies and local companies. In this regard, this project carries out preparation of the “Vietnam Productivity Report” through interactive dialogue among government, industry and academia in Vietnam. The Report consists of definition of productivity, international comparison, policy proposal for industrial development through cooperation with foreign companies while economic integration and technological development progress. The project also conducts seminars, taking food processing industry as an example, which the Vietnamese government has high interests to improve productivity. ※ As regards food processing industry, see “II. Seminars (food related business)” as described later.
2. Survey process Vietnam Productivity Report consists of 3 parts (for details, refer to 4. Structure and summary of Vietnam Productivity Report). As regards Part 1 (Main report) and Part 2 (Productivity enhancing tools), researchers took the lead to draft the report through gathering information and ideas while conducting interviews and exchanging opinions with the government organizations etc. The draft was revised based on the discussions and comments from the expert committee members. As regards Part 3 (Experiences of other countries), Mitsubishi UFJ Research and Consulting (MURC) drafted the report mainly through literature research. At the end of the survey period, a feedback seminar was held in Hanoi, and the results were presented to relevant organizations.
2.1 Survey team and expert committee From the viewpoint of maximizing proactive involvement of the Vietnamese side, preparation of Part 1 (Main report) was carried out by the Vietnam Institute for Economic and Policy Research (VEPR). VEPR is a think tank of the Vietnam National University, carrying out economic and policy research on Vietnam, and in particular, has a wealth of knowledge on industrial policy research in Vietnam. VEPR conducts research activities and policy proposals making full use of its network with high-level officials of Vietnamese government, private companies and research institutes etc. Dr. Nguyen Duc Thanh, President of VEPR, is a leading economist in Vietnam, having strong influence on the government and public media. Professor Kenichi Ohno of National Graduate Institute for Policy Studies was in charge of Part 2 (Productivity enhancing tools). Professor Ohno has been engaged in policy research in Vietnam since 1995, sharing experiences and lessons of Japanese development with the Vietnamese government mainly in the field of industrial policy, and has made a major contribution to Vietnam’s policy making and economic development. He has also been engaged in industrial policy support based on policy dialogue with the Ethiopian government since 2008, and is currently involved in the preparation of the Ethiopia Productivity Report. MURC was in charge of Part 3 (Experiences of other countries). Four members, Professor Kenichi Ohno (National Graduate Institute for Policy Studies), Dr. Nguyen Duc Thanh (President of VEPR), Professor Tran Van Tho (Waseda University), and Professor Vu Minh Khuong (National University of Singapore) attended the expert committees. Survey team and expert committee members are summarized in Table 1.
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Table 1: Survey team and expert committee members Survey team (author of Vietnam Productivity Report) Part 1 Main report VEPR Part 2 Productivity enhancing tools Professor Kenichi Ohno (National Graduate Institute for Policy Studies) Part 3 Experiences of other countries MURC (Kensuke Shimura, Chief Policy Analyst, Masumi Shimamura, Chief Policy Analyst, Shin Egishi, Researcher) Expert committee members Professor Kenichi Ohno National Graduate Institute for Policy Studies President Nguyen Duc Thanh VEPR Professor Tran Van Tho Waseda University Professor Vu Minh Khuong National University of Singapore
2.2 Expert committees On September 28, 2018 (Friday) and on December 26, 2018 (Wednesday), expert committees were held, connecting Tokyo (Ministry of Economy, Trade and Industry, Main Building) – Hanoi – Singapore by teleconference, and discussions were carried out among the expert committee members listed in Table 1 on the draft Vietnam Productivity Report. (Materials related with the expert committees are in the Attachment III. 1. (2).) The third expert committee did not take place by teleconference, and was replaced by email comments from the experts. Table 2 summarizes about the expert committees etc. The major comments from the expert members on Part 1 Main Report were as follows. ・Overall, further revisions are needed as a document for policy makers. For example, present policy issues and conclusions first, and then explain them clearly using supporting data. In doing so, explanation of the detailed data should be minimized, and unnecessary information and data that is not worth digging in should not be included. ・The analysis needs to be reinforced as some important issues are not well explained. For example, why SMEs have higher labor productivity than large and micro enterprises?, Why was labor productivity of the service sector higher than other sectors in the economy in the early 1990s? Why was productivity growth of FDI firms much lower than that of private non-FDI? In this way, it is necessary to explain clearly the issues that policy makers will be interested. ・When analyzing data, there are fluctuations that cannot be explained based on the annual data, so we should look at major trends for 5 to 10 year periods. In addition, when presenting tables and figures, carefully consider what kind of messages are to be conveyed to policy makers, and reflect them in the Report some selected tables and figures.
Table 2: Expert committees and comments from the experts Expert committees Method First expert conference: Telephone conference connecting Tokyo (METI Friday, September 28, 2018 main building)-Hanoi-Singapore Second expert conference: Telephone conference connecting Tokyo (METI Wednesday, December 26, 2018 main building)-Hanoi-Singapore February, 2019 Replaced by email comments from the experts
2.3 Interviews with Vietnamese related parties, and explaining, sharing and exchanging opinion on the Vietnam Productivity Report (1) Interview with relevant organizations and participation in productivity workshops held by VEPR during MURC field survey MURC Chief Policy Analyst, Masumi Shimamura conducted a field survey from September 24 to 27, 2018, and visited Vietnam related organizations with the VEPR researchers to discuss the background and objective of the survey, and the position and outline of the report etc. Although productivity enhancement initiatives require a cross-sectoral effort, it was pointed out as problems that the Vietnamese government does not have an organization to oversee the whole as well as lacks mechanisms to promote coordination and collaboration among related ministries and organizations. In addition, she participated in the productivity workshop organized by the VEPR on Wednesday, September 26, 2018 during her stay in Hanoi. About 100 people from related organizations in Vietnam and 3
researchers attended the workshop, and presentations were made by 8 people including Dr. Nguyen Duc Thanh, the President of VEPR, and questions and answers were actively conducted. The significance of promoting productivity enhancement through continuous policy dialogue with the government was confirmed in the workshop.
(2) Productivity lecture at the Prime Minister’s Office At the request of Mr. Mai Tien Dung, the Minister, Chairman of the Office of the Government, Professor Kenichi Ohno gave a lecture on productivity at the Prime Minister’s office on Friday, November 9, 2018, to about 400 government officials of the Prime Minister’s office and economic ministries. Major participants were Mr. Umeda, Ambassador Extraordinary and Plenipotentiary of Japan to Vietnam, Mr. Dung, the Minister, Chairman of the Office of the Government, Mr. Le Tan Dung, the Vice Minister of Ministry of Labor - Invalids And Social Affairs, as well as officials from the Prime Minister’s Office, the Ministry of Foreign Affairs, the Central Organization Commission, Central Economic Commission, the Ministry of Planning and Investment, the Ministry of Science and Technology, the Ministry of Labor, War Invalids and Social Affairs etc. The concept of productivity, related data, performance of Vietnam, and various tools utilized in Japan were introduced. Dr. Nguyen Duc Thanh, the President of VEPR served as an interpreter. In Professor Ohno’s lecture, the possibility of Japan-Vietnam cooperation for improving productivity in Vietnam was taken up, and in order to realize this cooperation, it was pointed out that the Vietnamese government should set a clear goal and monitor the results, promote self-sustaining cooperation relationships with Japan, not as a recipient, and set up an appropriate organization to effectively promote cooperation between the two countries. In response to the questions from the floor (how should the government officials work to improving productivity), Professor Ohno pointed out that it is important to initiate mindset change (attitude, discipline and thinking). (Professor Ohno’s productivity lecture material is in the Attachment III. 1. (3).)
(3) Productivity lecture at Vietnam Chamber of Commerce and Industry (VCCI) At the request of Mr. Vu Tien Loc, the President of VCCI, Professor Kenichi Ohno gave a lecture on productivity to about 80 participants at the VCCI Conference Hall on Thursday, December 20, 2018. Major participants were Mr. Umeda, Ambassador Extraordinary and Plenipotentiary of Japan to Vietnam, Mr. Le Dang Doanh, Mr. Nguyen Van Thao, the Deputy Head of the Party Central Theory Committee, President Loc of VCCI, Mr. Tuan, the President of Vietnam National Productivity Institute, Mr. Cung, the President of Central Institute for Economic Management. Productivity related data, performance of Vietnam, and various tools utilized in Japan were introduced. In Professor Ohno’s lecture, in order for Vietnam to avoid the middle-income trap, it was suggested that Vietnam should acquire technologies and skills from Japan, and selectively introduce the tools for productivity improvement that Japan has used so far, in a form that is in line with the context of Vietnam. (Professor Ohno’s productivity lecture material is in the Attachment III. 1. (4).)
(4) Interviews with relevant organizations by VEPR Based on the draft Vietnam Productivity Report (Part 1), VEPR discussed and exchanged views with the related organizations in Vietnam. The draft was improved based on the inputs and comments from the relevant organizations. It was pointed out that although the Vietnamese government has recognized the importance of productivity improvement, the current situation has remained in a roar, and it has not reached the implementation stage, and although various policies have been introduced so far to improve productivity, results have not come to fruitation, and has not been linked to the National Movement. These suggest the importance of leadership and strong commitment of top leaders as well as the importance of carrying out large-scale awareness campaign.
3. Feedback seminar to related organizations In this project, a feedback seminar on Vietnam Productivity Report was held at the VCCI Conference Hall on Thursday, March 21, 2019, jointly with the Embassy of Japan in Vietnam and the VCCI. Major participants were Mr. Umeda, Ambassador Extraordinary and Plenipotentiary of Japan to Vietnam, President Loc of VCCI, Mr. Tuan, the President of Vietnam National Productivity Institute, as well as officials from the Ministry of Industry and Trade, staff from aid agencies including UNDP and JICA Vietnam Office, researchers from institutions including National Economics University, secretaries of foreign embassies, staff of Japanese companies etc., totaling more than 100 participants. At the opening remarks, President Loc of VCCI, pointed out that in order for the Vietnamese government to achieve its goal to “becoming an upper-middle-income country by 2035”, it is necessary to work on 4
productivity improvement seriously as a whole nation. He also emphasized that National Movement should be initiated early and expects leadership of Prime Ministry Phuc. Ambassador Umeda proposed that in order to support Vietnam develop its national movement, VCCI selects Vietnamese companies that have been making efforts to improve productivity and have achieved some results and then announced that Japan will continue to support Vietnam’s efforts to enhance productivity in cooperation with Japanese companies in Vietnam, JICA and JETRO. Then, based on the Vietnam Productivity Report, which is the output of this project, presentations were made from Dr. Nguyen Duc Thanh, the President of VEPR (Part 1), Professor Ohno (Part 2), and MURC Chief Policy Analyst Shimamura (Part 3). They actively exchanged opinions with the experts and participants from the floor. Participants supported the contents of the presentation, and pointed out the necessity of solid leadership and commitment of top leaders, strengthening the authority and the role of core organization that promotes productivity improvement, and developing a mechanism for cross-cutting coordination and collaboration among all relevant ministries and agencies in order for steady implementation of National Movement for productivity enhancement, achievement of results, and securing of sustainability. In addition, the importance of learning from good practice cases in other countries and to coming up with concrete measures in line with the Vietnamese context was pointed out. Furthermore, expectations were shown for future JICA support. (Materials of the feedback seminar to related organizations are in the Attachment III. 1. (5).)
4. Structure and summary of Vietnam Productivity Report “Vietnam Productivity Report” was prepared as an output of this project. Its objective is to improve productivity of Vietnamese companies in order to improve competitiveness of Japanese companies’ global supply chains. The Report is structured into three parts as follows. The Report requires further improvement through policy dialogue with the Vietnamese government etc. (The report is included in the Attachment III. 1. (1).)
Table 3: Structure of Vietnam Productivity Report Part 1 Main report (Collection of basic information) Definition and measurement of labor productivity, Sources of Vietnam labor productivity growth, Vietnam labor productivity in the international context, A review of productivity enhancement policy in Vietnam during the Doi Moi period, Conclusions Part 2 Productivity enhancing tools (Introduction of measures and tools to improve productivity based on Japan’s economic development and experience of international cooperation) Mindset change (attitude, discipline, way of thinking), 5S and kaizen, Handholding (Hands-on support), Shindan, TVET-industry linkage, Kosen, Mobilization of gino jisshusei, Kosetsushi, FDI-domestic firm linkage, Revitalizing supporting industry programs Part 3 Experiences of other countries (Introduction of good practices of advanced countries and regions that will serve as a reference for Vietnam) Experiences of Korea, Taiwan and Singapore in improving productivity
The summary of the productivity report is as follows.
Part 1 Main report (Collection of basic information) Definition and measurement of labor productivity: Productivity indicates how well the production factors (resources) were combined and utilized to achieve the desired and expected results. Productivity can be grasped from the viewpoint of each production factor – “labor productivity” from the viewpoint of labor and “capital productivity” from the viewpoint of capital. Furthermore, there is “Total Factor Productivity” (TFP) as an index showing how much production is coming out from all input production factors. Compared with the other two productivity measures, TFP is a better proxy since it reflects the amount of output that is not yet described by labor and capital input in the production function. In addition, international comparisons of TFP may be less distorted by differences from how real output is measured in each country. Estimating TFP, however, is a complex exercise since it cannot be measured directly by inputs, but 5
mainly model-based on different assumptions. There are two methods of productivity measurement: growth accounting method and shift-share analysis method. The Sources of Vietnam labor productivity growth: When looking at Vietnam’s productivity growth from 1991 to 2015, labor productivity in the economy as a whole is on the rise. Growth rates of labor productivity of the industry and construction sectors are the highest, followed by the services sectors and the lowest is the agriculture, forestry and fishing sector. The services sector had the highest growth rate in the early 1990s, but was overtaken by the industry and construction sectors in 1996. While the rate of increase in labor productivity of FDI is on a downward trend, the rate of increase in the domestic sector (the state and non-state sectors) has increased gradually. Labor productivity of important industries has not been significantly improved. While industry and construction sectors contribute nearly 40% to the country’s GDP, no significant growth in labor productivity in manufacturing and construction can be seen. When analyzing by growth accounting method, it can be said that labor productivity growth in Vietnam is largely the influence of capital density (capital growth). In other words, labor productivity has increased not because the efficiency of the economy as a whole has improved, but because figures have been pushed up as a result of increased capital investment. Therefore, in order to grasp the current state of labor productivity in Vietnam, not only labor productivity but also TFP and Incremental Capital Output Ratio (ICOR), which is a measure of capital efficiency, are necessary to be analyzed at the same time. As a result of analysis, it can be said that labor productivity growth in 1991-2000 for the agriculture, forestry, fishing sectors and industry and construction sectors is due to capital increase, and for the services sectors, growth is due to increase of TFP. Since 2000, the contribution of TFP to the growth of labor productivity in all sectors has improved and gradually overwhelmed the influence of capital density. Capital density has a great influence on the growth of labor productivity in the domestic sectors, while the FDI sector is largely based on TFP. In sum, Vietnam’s labor productivity in 1991-2015 increased at a relatively rapid pace. Initially, the increase in labor productivity was due to the increase in capital, but the increase in TFP gradually replaced it. When analyzing by shift-share analysis method, it can be said that labor productivity has increased particularly between 2001-2010 due to labor shift from relatively low productivity sectors (agriculture, forestry and fishing sectors) to relatively high sectors (industry, construction and services sectors). From 2011, the influence of the shift effect was not as clear as in the previous decade. Vietnam labor productivity in the international context: In comparative relation with Japan, South Korea, China and ASEAN countries (Singapore, Thailand, Philippines, Malaysia, Indonesia, and Cambodia), Vietnam has very low labor productivity even though its growth rate remains at considerably high level. In 2015, labor productivity of nine industries of Vietnam was at or just above the lowest level in such international comparison. Specifically, Vietnam’s labor productivity was lowest among the compared countries, including Cambodia, in the following three sectors: manufacturing; construction; and transportation, storage, and communications. Vietnam’s labor productivity ranked the second lowest, only higher than Cambodia in agriculture, hunting, forestry and fishing; electricity, gas and water supply; wholesale and retail trade, repair of vehicles and household goods, hotels and restaurants. In contrast, Vietnam has higher labor productivity than some countries in the three sectors: mining and quarrying; financial intermediation, real estate, renting and business activities; community, social and personal services. In Vietnam and some ASEAN countries, the labor shift effect greatly contributes to the growth of labor productivity, but the shift effect tends to diminish. The improvement of production efficiency (the within effect) in each industrial sector holds the key to the improvement of labor productivity in the future. A review of productivity enhancement policy in Vietnam during the Doi Moi period: Vietnam has been working on productivity enhancement for many decades, but due to following reasons, the productivity enhancement movement has not reached the point of changing the mindset of the whole Vietnamese people, and the expected achievements has not been realized. 1) Lack of continued top-level support and commitment 2) Lack of incentives for firms, workers, enterprises, etc. to participate 3) Lack of effective institutional design, necessary staffing, and budgeting mechanisms 4) Traditional government, ministerial bureaucracy and delays 5) Insufficient international support Conclusions: 6
For Vietnam to achieve further economic development without falling into middle-income trap, it is important to promote efforts to enhance productivity. Vietnam should not lag behind neighboring countries including Cambodia. Therefore, Vietnam needs strong initiatives to enhance labor productivity.
Part 2 Productivity enhancing tools (Introduction of measures and tools to improve productivity based on Japan’s economic development and experience of international cooperation)
subsidizing private effort, are commonly used. Meanwhile, forced linkage against firms’ will usually does not work. Revitalizing supporting industry programs: Integrated support for management, technology and finance should be the ultimate target. In latecomer nations, policy should start with direct technical support and move to indirect private guidance as domestic capacity rises. Transparent and easy-to-use incentives and linkage formation support should also be offered.
Part 3 Experiences of other countries (Introduction of good practices of advanced countries and regions that will serve as a reference for Vietnam) Korea, Taiwan, and Singapore was selected because they have been surveyed and analyzed by the members of the expert committee and are expected to give useful insights to Vietnam. Korea: The efforts by the Korean government to upgrade and expand technical and vocational education and training (TVET) system for productivity enhancement are introduced. The report also takes up Korea’s recent efforts regarding the introduction of the National Competency Standards for 16 industries in high school vocational education courses, and the development of the National Qualifications Framework. Taiwan: The role, accomplishments and current efforts of the “China Productivity Center (CPC),” a foundation established for the purpose of improving productivity and supporting each industry in Taiwan are introduced. CPC has changed its support programs in line with changing social conditions and the needs of the times. Currently, CPC undertakes business management guidance, implementation of government projects, education and training, various publications, and exchanges with overseas productivity organizations. Singapore: The initial stage around the time of independence, the development stage with the government-led efforts to improve productivity, and transition of productivity related organizations are introduced. Then six key factors that contributed to the success of Singapore’s Productivity Improvement Efforts are extracted. The report also notes that the technical cooperation project “Productivity Development Project” to Singapore (1983-1990) by the Japan International Cooperation Agency (JICA) boosted the national efforts. Singapore is aiming to become an innovation-led economy, and has been working to improve productivity. < Six Key Factors that Contributed to the Success of Singapore’s Productivity Improvement Efforts > 1) Strong commitment and effective oversight from the highest level of leadership 2) Linkages to comprehensive and integrated strategies 3) Strong collaboration among government, private sector, unions, industrial associations, and educational and professional institutions 4) Vigorous learning form best practices, especially from Japan, through international cooperation 5) The support of workers who understand the need to change and embrace a productivity culture 6) The idea that an ambitious goal can only be achieved through an effective combination of sound policies and strategic institutional design, emphasizing cross-sectoral collaboration and sustained efforts
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II. Seminars (food related business)
1. Background and objective
In 2017, both leaders of the Japanese and Vietnamese government agreed to promote Vietnam’s industrialization with cooperation from Japan, thereby it is decided to contribute to the enhancement of productivity of Vietnam’s businesses. Vietnam is the leading agricultural country in the ASEAN and the food industry, which brings employment and income to rural areas, is one of the key industries for Vietnam. On the other hand, taking effect of the CPTPP is determined and EU-Vietnam Free Trade Agreement (FTA) will come into force in the future, therefore the Ministry of Industry and Trade (MOIT) of Vietnam regards enhancing the export competitiveness of the food processing industry is one of the most important issues. For this reason, the METI and the MOIT have decided to work on the upgrading food industry in Vietnam. Especially, it is recognized that improving capabilities of food sanitation and quality control and introducing international trustworthy framework to ensure these efforts, and branding for production of high-value-added foods and establishing sales strategies and establishing the supporting measures making these efforts to be possible are important issues to be addressed. Therefore, seminars were held in Can Tho City and Buon Ma Thuot City on December 20 and 21, 2018 with the cooperation of MOIT, in order to provide assistance in solving these issues. In seminars, Japan’s international food safety standards; JFS-C and points related to business with Japanese retailers were introduced as well as report of the survey conducted by the Japanese government in 2017 regarding the development of the Vietnamese food processing industry.
2. Seminar contents
respectively. The JFS-C Standards are newly recognized as a component of the Global Food Safety Initiative (GFSI) standards, which have become de facto global standards in the field of food safety management. (C)10:10-10:25 Coffee Break (B)15:10-15:25 (C)10:25-11:25 Key points for trading with Mr. Katsuki Kishi, Managing Director, (B)15:25-16:25 Japanese-affiliated companies Aeon TopValu (Hong Kong) Co., Ltd （60min） (retailers) *including a Mr. Kishi presented Aeon’s quality 10-minute Q&A control and other criteria required of its session suppliers. Closing Speech (C) Mr. Nguyen Minh Toai, Director, the Trade and Industry Department, Can Tho (C)11:25-11:30 (B)16:25-16:30 City’s People Committee (B) Mr. Vin Dinh Tuan, Deputy Director, （5min） Department of Industry and Trade of Dak Lak Province
3. Results of the seminar
On the days of the seminar, there were many participants in both cities; 80-90% of seats were taken by participants (Can Tho City: 120 seats, Buon Ma Thuot City: 90 seats) . The numbers of answers in questionnaire were 63 in Can Tho City and 45 in Buon Ma Thuot City. The majority types of industry respondents belonged were food manufacturing, wholesale, and civil service in both cities. Regarding questionnaire results, in response to the question “challenges in trading with Japanese-affiliated companies (select all that apply)”, the largest number of participants named “lack of opportunities to come into contact with Japanese-affiliated companies” in both cities, followed by “language barriers”. The third-largest number of answer was “existing products do not meet the needs of Japanese-affiliated companies” in Can Tho City, while “terms and conditions of trade proposed by Japanese-affiliated companies are too stringent and demanding” and “shortage of capable personnel” were cited in Buon Ma Thuot City (the same number). In response to the question “evaluation of the Seminar (did you find the seminar useful for future business operations?)”, all participants (100%) in Can Tho City answered positively that it was “very useful” or “useful”. Almost all participants (98%) in Buon Ma Thuot City answered positively that they were “very helpful” or “helpful”. At Q&A session in both cities, there were some voices by Vietnamese businesses that were interested in obtaining JFS-C certification, in particular, the time and cost it takes to obtain JFS-C certification. In addition, participants had questions regarding specific requirements to do business with Japanese companies.
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III. Attachments
1．Attachments related with Vietnam Productivity Report (1) Vietnam Productivity Report (Part 1, Part 2 and Part 3) (2) Materials related with expert committees (draft reports and minutes omitted) (3) Professor Ohno’s productivity lecture material at the Prime Minister’s Office (4) Professor Ohno’s productivity lecture material at VCCI (5) Materials of the feedback seminar to related organizations
2．Attachments related with carrying out seminars (food related business) Food seminar report
III. Attachments
1. Attachments related with Vietnam Productivity Report (1) Vietnam Productivity Report (Part 1, Part 2 and Part 3)
Vietnam Productivity Report
March 2019
※This Vietnam Productivity Report requires further improvement through policy dialogue with the Vietnamese government etc.
Contents
PARTⅠ Major Characteristics of the Labor Productivity Progress
in Viet Nam
PART Ⅱ Japanese Productivity Enhancing Measures and the
Possibility of their Adoption in Vietnam
PART Ⅲ Experiences of Korea, Taiwan and Singapore
PART Ⅰ
Major Characteristics of the Labor Productivity Progress in Viet Nam
CONTENTS INTRODUCTION...... I-1
CHAPTER I: ...... I-4
DEFINITION AND MEASUREMENT OF LABOR PRODUCTIVITY...... I-4
Labor productivity growth decomposition ...... I-6
Growth accounting method ...... I-6
Shift-share analysis method ...... I-8
CHAPTER II:...... I-12
THE SOURCES OF VIET NAM LABOR PRODUCTIVITY GROWTH ...... I-12
The Progress of Viet Nam's Labor Productivity ...... I-12
Labor productivity process of economic sectors ...... I-13
Sources of labor productivity growth ...... I-42
Conclusion ...... I-52
CHAPTER III: ...... I-53
VIET NAM LABOR PRODUCTIVITY IN THE INTERNATIONAL CONTEXT ...... I-53
Data ...... I-53
Level and growth rate of the economy-wide labor productivity ...... I-54
Labor productivity by sector in Viet Nam and selected countries ...... I-58
Decompositions of labor productivity growth into shift-share effects ...... I-68
Conclusion ...... I-74
CHAPTER IV: ...... I-76
A REVIEW OF PRODUCTIVITY ENHANCEMENT POLICY IN VIETNAM DURING THE ĐỔI MỚI PERIOD ...... I-76
Introduction ...... I-76 The process of awareness on the productivity issues in Viet Nam ...... I-77
Viet Nam’s efforts on improving national productivity ...... I-89
The process of planning and implementing productivity policies in Vietnam ...... I-89
National productivity center: Vietnam National Productivity Institute (VNPI) ...... I-90
National productivity programme: Programme No. 712 ...... I-96
Viet Nam’s efforts on improving enterprises’ productivity ...... I-100
The system of organizations that support enterprise productivity improvement ...... I-100
The system of tools and methods to improve enterprise productivity ...... I-103
Concluding remarks and policy recommendations ...... I-105
Achievements ...... I-105
Limitations ...... I-106
CHAPTER V: ...... I-108
CONCLUSIONS ...... I-108
Conclusions ...... I-108
REFERENCES ...... I-114
APPENDICES ...... I-121
INTRODUCTION
Productivity is a key concept in economic growth and welfare. It measures efficiency between
how much is expended in terms of effort and/or materials and how much is produced in terms of
goods or services as a result. If large output is obtained with small input, productivity is high and
the nation can enjoy a high living standard. If only little value is produced despite large effort
and material input, productivity is low and the nation is likely to be trapped in either low or
middle income. There are some nations richly endowed with natural resources such as oil, gas,
diamond, timber and the like relative to population, which permits high income without making
much human effort. But most other nations devoid of such given advantage, including Viet Nam,
must accumulate knowledge, skills, and technology to climb the industrial ladder, step by step, to
high income. For such nations, attaining high income and improving productivity are essentially
the same thing. That is why productivity enhancement is critical for Viet Nam’s socio-economic development. Viet Nam can attain high income in the future only if it improves productivity significantly from the current level.
Two additional caveats are in order. First, we need to differentiate the level and the growth rate of productivity. Both are important but point to different aspects, and we will study both. Viet Nam is a country of an average growth rate of productivity within ASEAN, but the absolute level of productivity is still low. If this situation continues, it may take a very long time for Viet Nam to rise to high income. Growth must be accelerated from the current low base.
Second, productivity is a quantity-based measure which asks how many goods are produced per unit of input. In addition to quantity, nations must also pursue quality and
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innovation. Productivity, quality and innovation are profoundly different concepts even though there are some overlaps. Original and high-quality products are the hallmark of an advanced economy, and professionally trained and innovative human resources are required to generate them. We equally recognize the importance of productivity, quality and innovation, but their relative weights should shift as the economy moves from an early to late stages of industrialization. Even a nation in an early stage of industrialization producing garment, shoes and electronic devices for export under foreign instruction and management, such as Viet Nam, must attain high efficiency to be integrated into the global value chain. Then, gradually, the nation’s product mix must shift from “cheap, common and standard” to “upmarket, original and high quality.” Finally, the nation should aim to become a creator of new goods and services demanded globally which bring great income and profit to those who invent and commercialize them.
This report will concentrate on productivity. This does not mean quality and innovation are unimportant for Viet Nam, but the current status of Viet Nam as a lower-middle income country with mostly borrowed technology calls for deep analyses and effective policies focusing on productivity instead of a broader and more ambitious research. When most workers remain unskilled and factories are operating inefficiently, it is difficult for Viet Nam to conquer global markets with high quality and innovation. Industrial challenges must be taken up in proper steps without jumping necessary steps. We will examine the basics of productivity improvement such as business management, factory efficiency, workers’ skills and attitudes, administrative and logistic efficiency and the like, which directly impact on productivity but not yet widely
practiced in Viet Nam, rather than frontline technologies such as bio-tech, AI, IoT and Industry
4.0. These things will become critical in the future when Vietnamese factories operate at world-
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class efficiency and Vietnamese workers are well-trained and disciplined, and when Viet Nam is
ready to move up from upper-middle to high income.
Part 1 of the Viet Nam Productivity Report examines the current state of labor
productivity in Vietnam at both the economy level and sector level, then determine Viet Nam's position in comparison with some Northeast Asian countries (Japan, South Korea, China) and selected ASEAN countries (Singapore, Thailand, Philippines, Malaysia, Indonesia, Cambodia) at both levels. In this report, the authors use growth accounting and shift-share analysis methods to process and calculate secondary data from the General Statistics Office, Asian Productivity
Organization and some other sources with different length research period based on the availability of data to determine the sources of Viet Nam’s labor productivity growth. In addition,
Viet Nam’s efforts in improving labor productivity at both the economy and enterprise levels are reconsidered. The assessments of the current state of labor productivity in Viet Nam and the results of policy efforts to improve labor productivity since post-Doi Moi set the basis for the authors to make recommendations to promote labor productivity improvement in Viet Nam during the next time.
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CHAPTER I:
DEFINITION AND MEASUREMENT OF LABOR PRODUCTIVITY
Productivity is a key measurement of economic effectiveness, revealing “how well the resources
combined and utilized to achieve the desired and expected results” (Bain, 1982). Productivity
can be examined at different levels: economy-wide, industry or organization. This reviewing process can be applied to plants, departments, and individuals (Prokopenko, 1987).
One of the most common measurements of productivity is labor productivity. It is the
ratio of the output of goods and services to the labor input to produce such output. The second
method is capital productivity. This is the ratio between the output of goods and products to the
physical capital input. Capital input is usually measured by GDP to a unit of capital. The third
measurement is total factor productivity (TFP). This is the amount of output that is not explained
by the inputs in production. TFP is determined by the effectiveness in the utilization of input in
the production process. Compared with the above two partial productivity measures, TFP is a
better proxy since it reflects the amount of output that is not yet described by labor and capital
input in the production function. In addition, international comparisons of TFP may be less
distorted by differences from how real output is measured in each country. Estimating TFP,
however, is a complex exercise since it cannot be measured directly by inputs, but mainly model-
based on different assumptions.
The usage of which measurement of productivity relies on the purpose of measurement
and/or the availability of data. In the circumstances that there is doubt in underlying growth
process or the data of capital stock is unreliable, the labor productivity is the most suitable
measure to examine the tendency in short and medium-term (equal or less than 10 years). TFP,
Ⅰ-4 otherwise, is more credible when considering long-term trend in economy (Sargent & Rodriguez,
2001). It is should be noted that the two indicators should be considered concurrently to access the short-term and long-term trends of economic growth.
This research focuses on labor productivity, the most common measurement used in several economies in general and in Vietnam in particular.
According to the International Labor Organization (ILO), labor productivity reflects the total amount of output (measured by gross domestic products, GDP) produced by using one unit of labor input (measured by total number of employed person) in a specific reference period.
The Organization of Economic Cooperation and Development (OECD, 2001) defines that labor productivity is the ratio of the output measured by the gross domestic products or total value added to the total input (measured in total hours worked or total number of employed persons).
Thus, labor productivity can be estimated easily with available estimates of output and labor input. In practice, labor productivity often is measured by real gross domestic products
(GDP, in value added concept) either per hour worked or per employee and per capita depending on the purpose of international comparison.
Nonetheless, the level of reflecting the economic performance of the labor productivity indicator may be influenced by the accuracy of the statistics as well as the method of defining input and output. The first limitation relates to the definition of output, including gross output
(measures from all economic activities in the production of new products and services without deducting intermediate costs) and value added (net output – subtracting from gross output the intermediate costs). While it is relatively easy to measure value added in current price, it could
Ⅰ-5
be difficult to measure it in constant price, as separate price indexes should be used to deflate
sales and inputs. The problem in deflating inputs may be more severe due to the considerable
variation in the mix of service inputs used by an economic unit. Gross output, on the other hand,
is fairly easier to measure as it mostly depends on deriving price indexes for observable sales
(Steindel & Stiroh, 2001). Another problem relates to the measurement of labor inputs. Different
concepts and basic statistical sources are used across countries, which can impede international
comparability. In principle, the measurement of labor inputs should take into account differences
in workers’ educational qualifications, skills and experience. But in practice, only number of
hours worked or number of workers are taken into consideration.
In this report labor productivity is calculated with a simple formula as follow.
=
𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛 𝑜𝑜𝑜𝑜 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 The output is measured by GDP at the economy level and by value added at the industry level.
The next part discusses a number of theories in decomposing labor productivity that are often applied, including the growth accounting method and shift-share analysis method
Labor productivity growth decomposition Growth accounting method The neo-classical growth accounting framework was pioneered by Solow (1957) and has been
used extensively ever since. In this framework, labor productivity growth is decomposed into
two main components: capital deepening (the increase in the capital on a labor unit) and total
factor productivity growth (effective improvement, often known as innovation). The Asia
Productivity Organization (APO) in its annual report on productivity also utilizes this framework
with two mentioned components as above. Besides, APO classifies capital input into two sub-
Ⅰ-6
categories, namely information technology capital (IT capital) and non-information technology
capital (non-IT capital).
Using the same framework, Jorgenson and Stiroh (2000, p.7) decomposes labor
productivity growth into three components: capital deepening, labor quality, and growth in TFP.
Jorgenson and Stiroh (2000) considered labor quality as the change in the ratio of number of
hours worked provided by workers who have higher marginal products. As a result, labor quality
helps enhance labor productivity growth via the contribution share of labor compensation. Vu
Minh Khuong (2014) likewise applied the decomposition of three components, in which labor
productivity reflects the improvement in terms of labor’s skills and the associated mechanism
between skills and jobs.
This research, however, uses the common two-component decomposition of labor
productivity growth, including capital deepening and TFP growth (see Box 2.1) due to the
limitation of data availability to measure labor quality such as total hours worked or classification of labor by education level and skills.
Ⅰ-7
Box 1.1. Decomposition of labor productivity using growth accounting method
Production function is assumed as: = . . (1.1) 𝛼𝛼 𝛽𝛽 in which, Y, K, L, A are output,𝑌𝑌 capital,𝐴𝐴 𝐾𝐾 𝐿𝐿number of employed persons, and TFP, respectively.
With the assumption of constant return to scale, we have: + = 1
Dividing both side of (1.1) to L: 𝛼𝛼 𝛽𝛽
. . = = . 𝛼𝛼 𝛽𝛽 (1.2) 𝑌𝑌 𝐴𝐴 𝐾𝐾 𝐿𝐿 𝐾𝐾 𝛼𝛼 𝛼𝛼+𝛽𝛽 Defining𝐿𝐿 𝐿𝐿 = 𝐴𝐴 and�𝐿𝐿� = , then and are labor productivity per worker and capital/labor 𝑌𝑌 𝐾𝐾 ratio (capital𝑦𝑦 equipped𝐿𝐿 𝐿𝐿per worker)𝑦𝑦 . Equation𝑘𝑘 (1.2) becomes: = . (1.3) 𝛼𝛼 𝑦𝑦Taking𝐴𝐴 𝑘𝑘ln and differential both side of equation (1.3), we have: = +
=𝑙𝑙𝑙𝑙𝑙𝑙 𝛼𝛼𝛼𝛼𝛼𝛼𝛼𝛼+ 𝑙𝑙𝑙𝑙𝑙𝑙 (1.4)
Based on equation (1.4), labor∆𝑙𝑙𝑛𝑛 𝑛𝑛productivity𝛼𝛼∆𝑙𝑙𝑙𝑙𝑙𝑙 ∆growth𝑙𝑙𝑙𝑙𝑙𝑙 can be decomposed into capital intensity growth ( ) and TFP growth ( ). Capital intensity makes labor more productive by providing more amount of capital for labor, so that improve the economy- 𝛼𝛼∆𝑙𝑙𝑙𝑙𝑙𝑙 ∆𝑙𝑙𝑙𝑙𝑙𝑙 wide labor productivity via the contribution share of capital in the production function (coefficient ). TFP growth enhances labor productivity growth by ratio 1:1.
𝛼𝛼
Shift-share analysis method Productivity for the entire economy is expressed as the sum of the productivity level of each
sector weighted by the sectoral employment shares. However, labor productivity in each industry
changes over time and the employees also continuously move among sector disaggregation. In
order to reflect such two process, the shift – share analysis method decomposes labor productivity growth into three elements, namely (i) within effect, (ii) shift effect, and (iii) interaction effect.
Ⅰ-8
Specifically, within effect reflects the impact of labor productivity growth within individual sectors on the economy-wide labor productivity. The shift effect measures the impact of reallocation of labor to more productive sectors. It is also known as productivity growth due to labor movement among sectors. The interaction effect captures the impact of labor reallocation on sectors with growing productivity, in other words, productivity growth due to the combined effects of within-sector productivity growth and restructure of labor (Timmer & Adam, 2000;
Alam, Paloma, Khan, Udomsaph, 2008).
Several researches addressed that shift effect is the key driver of labor productivity in developing economies due to the movement of labor from less productive sectors (Agriculture) to more productive ones, such as Manufacturing and service industries so as to enhance the economy-wide labor productivity. However, the advantages of horizontally economic expansion will be no longer available once the labor sizes of less productive sectors decline. Besides, after the shift occurs, although these workers work in Manufacturing or services industries, they mostly do the jobs with low labor productivity due to the lack of knowledge and working skills.
In other words, Manufacturing in developing countries mainly focuses on processing and manufacturing activities that generate low labor productivity, thus, its contribution to economy- wide labor productivity is still insignificant. Therefore, in order to accelerate labor productivity growth, such countries need to focus on improving their intra-sectors’ labor productivity as in the case of developed economies (Timmer & Adam, 2000; Alam et al., 2008).
The within effect depends on the improvement in knowledge and innovation of technology in production. In addition to the enhancement in labor quality via training in knowledge and working skills, within effect requires transfer of technology from foreign countries or purchase of technology (Molnar & Chalaux, 2015).
Ⅰ-9
Box 1.2. Decomposing labor productivity growth using shift-share analysis method
Productivity for the entire economy is expressed as the sum of the productivity level of each sector weighted by the sectoral employment shares, as follows.
= = = (2.1) 𝑌𝑌𝑚𝑚 𝑛𝑛 𝑌𝑌𝑗𝑗 𝐿𝐿𝑗𝑗 𝑛𝑛 𝑚𝑚 𝑚𝑚 𝑗𝑗=1 𝑗𝑗 𝑚𝑚 𝑗𝑗=1 𝑗𝑗 𝑗𝑗 where Y, L, P (=Y/L)𝑃𝑃 are𝐿𝐿 output,∑ number�𝐿𝐿 ∗ 𝐿𝐿 of� employed∑ �𝑃𝑃 persons∗ 𝑆𝑆 � and labor productivity of sector j (j = 1, …, n) correspondingly and of the economy (m). is the labor share of sector j in the total number of employed persons of the economy. 𝑆𝑆𝑗𝑗 Labor productivity in year t:
= (2.2) 𝑡𝑡 𝑛𝑛 𝑡𝑡 𝑡𝑡 The absolute increase of economy𝑃𝑃𝑚𝑚-wide∑𝑗𝑗 labor=1�𝑃𝑃𝑗𝑗 productivity∗ 𝑆𝑆𝑗𝑗 � for a year t to a base year 0:
= (2.3) 𝑡𝑡 0 𝑛𝑛 𝑡𝑡 𝑡𝑡 𝑛𝑛 0 0 Add and 𝑃𝑃𝑚𝑚minus− 𝑃𝑃𝑚𝑚 both∑ 𝑗𝑗=sides1�𝑃𝑃𝑗𝑗 ∗of𝑆𝑆 𝑗𝑗 equation� − ∑𝑗𝑗= 1�(2.3)𝑃𝑃𝑗𝑗 ∗ 𝑆𝑆by𝑗𝑗 � , , and 𝑛𝑛0 𝑡𝑡 0 𝑛𝑛 0 𝑡𝑡 . Then rearrange, divide both sides by ∑𝑗𝑗=, 1we�𝑃𝑃𝑗𝑗 have∗ 𝑆𝑆𝑗𝑗 � the∑ equation𝑗𝑗=1�𝑃𝑃𝑗𝑗 ∗ 𝑆𝑆(2.4)𝑗𝑗 � that computes𝑛𝑛 0 economy0 -wide labor productivity growth in year t to base year 0 as follow: ∑𝑗𝑗=1�𝑃𝑃𝑗𝑗 ∗ 𝑆𝑆𝑗𝑗 � 𝑃𝑃𝑚𝑚 ( ) = + + 𝑡𝑡 0 𝑛𝑛 𝑡𝑡 0 0 𝑛𝑛 0 𝑡𝑡 0 𝑛𝑛 𝑡𝑡 0 𝑡𝑡 0 (2.4) 𝑃𝑃𝑚𝑚−𝑃𝑃𝑚𝑚 ∑𝑗𝑗=1��𝑃𝑃𝑗𝑗 −𝑃𝑃𝑗𝑗 �∗𝑆𝑆𝑗𝑗 � ∑𝑗𝑗=1�𝑃𝑃𝑗𝑗 ∗�𝑆𝑆𝑗𝑗 −𝑆𝑆𝑗𝑗 �� ∑𝑗𝑗=1��𝑃𝑃𝑗𝑗 −𝑃𝑃𝑗𝑗 �∗ 𝑆𝑆𝑗𝑗 −𝑆𝑆𝑗𝑗 � 0 0 0 0 In the right𝑃𝑃 𝑚𝑚side of equation𝑃𝑃𝑚𝑚 (2.4), the first𝑃𝑃𝑚𝑚 component is the 𝑃𝑃within𝑚𝑚 effect, reflecting the contribution of sectoral labor productivity growth to the economy-wide labor productivity, assuming that labor share remains unchanged. Increase in sectoral labor productivity will lead to increase in economy-wide labor productivity. Within effect has a positive impact on labor productivity when there is knowledge development or technology improvement in the industries, reflecting the vertical economic development. The second component is shift effect, which measures the effect of labor reallocations across sectors in the economy, assuming that each sectoral labor productivity remains unchanged. The aggregate labor productivity increases thanks to the shift of labor from low labor productivity sectors to higher labor productivity sectors, reflecting the horizontal development of the economy. The third component is the interaction effect, which captures the change in both labor share and labor productivity in each sector, reflecting the reallocation of labor among sectors simultaneously with the change in labor productivity. The positive sign of interaction effect
Ⅰ-10 means within effect and shift effect are complementary, that is, sectors with an increase in labor productivity expand and vice versa. If the interaction effect is negative, within effect and shift effect are substitutes, that is, labor productivity growth is positive in narrowing sectors and negative in expanding sectors. In other words, this term reflects labor movement to fast-growing sectors (not necessarily high-level sectors).
Ⅰ-11
CHAPTER II: THE SOURCES OF VIET NAM LABOR PRODUCTIVITY GROWTH
In chapter 2, Viet Nam's labor productivity is calculated and assessed at both the national and sector level based on secondary data from the General Statistics Office (GSO) (see also
Appendix 1). For each level, the main trends in the level and growth rate of labor productivity in
Viet Nam over time are clarified, at the same time, the growth rate of labor productivity will be decomposed by appropriate methods.
The Progress of Viet Nam's Labor Productivity Figure 2.1. shows the level and growth rate of productivity in Viet Nam from 1991 to 2015. In general, the value of labor productivity in the economy has tended to increase over the years.
Specifically, labor productivity increased from 18.886 million VND per worker (1991) to 54.427 million VND per worker (2015). In the 1991-1995 period, the growth rate of labor productivity of the entire economy remained at a high level, peaking in 1995 at 7.13%. After that, labor productivity increased slowly and fluctuated between 2.7 and 4.9% in the period of 1999 - 2012.
In particular, Vietnam's labor productivity only increased at a relatively small rate in 1999
(3.54%). , 2002 (2.12%), 2008 (2.81%) and 2009 (2.57%). These are also the years of the Asian financial crisis (1998) and the global financial crisis (2008). The growth rate of labor productivity began to increase again in 2013, when the Vietnamese economy also gradually recovered, near equal to the rate of labor productivity growth in the mid-1990s (6.49% in 2015).
Ⅰ-12
Figure 2.1. Level and growth rate of Vietnam labor productivity,
1991-2015 (constant 2010 price)
60.00 8.00 7.00 50.00 6.00 40.00 5.00 30.00 4.00 3.00 20.00 2.00 10.00 1.00 - 0.00 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Labor productivity for the entire economy (million VND per worker, left) Growth rate of labor productivity (%, right)
Source: Authors’ calculation from the statistics of GSO Labor productivity process of economic sectors
Labor productivity of sectors contributes to labor productivity of the economy through the proportion of labor in each sector. In this section, labor productivity will be examined with three groups of industries (including Agriculture, Forestry, Fishing; Industry and Construction;
Services) and three sectors (State Sector, Non-State Sector, FDI sector). Labor productivity of sectors will be examined in 2-digit Industry and Construction sectors as well as the Service sector1
1 According to the classification of GSO, the Industry and Construction sector consists of 5 two-digit industries: Mining; Manufactures; Electricity, gas, steam, and air conditioning supply; Water supply, sewerage, waste management; Construction. Service sector includes 14 two-digit industries: Wholesale and retail trade; repair of motor vehicles and motorcycles; Transportation and storage; Accommodation and food service activities; Information and Communication; Financial, Banking and Insurance activities; Real estate business activities; Professional, scientific and technical activities; Administrative activities and support services; Activities of Communist Party, socio-political organizations; public administration and defence; compulsory security; Education and training; Health and social assistance activities; Arts, entertainment and entertainment; Other service activities; Activities of households as employers; undifferentiated goods and services producing activities of households for own use.
Ⅰ-13
Labor productivity of sectors base on economic activities
In general, labor productivity of the three economic sectors has improved significantly over the years (see Figure 2.2). The agriculture, Forestry and Fishing sector had the lowest labor productivity, at 23.74 million VND per worker in 2015. The Industry and Construction sector had the highest labor productivity in the economy, reaching 96.13 million VND per worker in
2015, given that this sector includes economic activities with the highest level of labor productivity like Mining, Manufacture. Labor productivity of the service sector reached 69.27 million per worker (2015). The average labor productivity of the Industry and Construction sector was 1.3 times higher than that of the service sector and 4.3 times higher than that of the
Agriculture, Forestry and Fisheries sectors.
However, in the early 90s, the labor productivity of the service sector was the highest in the economy. Vietnam started using SNA instead of Material Product System (MPS) from 1992 but the used dataset applied the SNA for the whole period 1991-2015. Therefore, the highest level of Service sector in this period might not be result of the influence of MPS. After that, the labor productivity of Industry and Construction gradually caught up and outstripped that of the
Service sector in 1996. In a quarter of the last decade (1991-2015), labor productivity of the service sector increased by 1.38 times, the labor productivity of Industry and Construction sector increased by 2.18 times, while that of Agriculture, Forestry and Fishing sector increased the most
2.96 times. Overall, the labor productivity of the entire economy increased by 2.88 times after 25 years.
Ⅰ-14
Figure 2.2. Labor productivity of economic sectors (million VND per worker, 1991-2015, constant 2010 price)
100
90
80
70
60 The economy
50 Agriculture, Forestry, Fisheries Industry and Construction 40 Services 30
20
10
0 1991 2000 2010 2015
Source: Authors’ calculation from the statistics of GSO The Agriculture, Forestry and Fishing sector, with the lowest labor productivity in the
economy despite the highest growth rate, showed a steady increase in this period (Figure 2.3). In
the 1990s, the growth rate fluctuated around 5%. In the next ten years, the growth rate of labor
productivity fell into a period of strong fluctuations. In 2005, the growth rate of labor
productivity in this sector reached a peak of over 16%. Meanwhile, there were years when this
speed hit the bottom at 0-1% (2006 and 2009). It can be seen clearly the trend of declining
growth rate in the years of 2006 - 2010, despite a slight recovery in 2007, when Vietnam joined
the World Trade Organization - WTO facilitating the export of agricultural and aquatic products to foreign countries.
Ⅰ-15
Figure 2.3. Level and growth rate of labor productivity in Agriculture, forestry, and fishing, 1991-2015 (constant 2010 price)
25 18 16 20 14 12 15 10 8 10 6
5 4 2 - 0 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 2015 Labor productivity (million VND per worker, left) Growth rate of labor productivity (%, right)
Source: Authors’ calculation from the statistics of GSO The Service sector had relatively stable labor productivity in the period 1991 - 2015,
around VND 60 million per worker (Figure 2.4). The growth rate of labor productivity has
increased over the years with small margins, except for the period 2002 - 2005 and 2012. In some years, there were "negative" growth, the lowest in 2002 was at -7%. Meanwhile, the highest growth rate in the period 1991 - 2015 was at only 8% (2006).
Ⅰ-16
Figure 2.4: Level and growth rate of labor productivity in Service sector, 1991-2015
(constant 2010 price)
80 10
70 8
60 6 4 50 2 40 0 30 -2 20 -4 10 -6 - -8 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Labor productivity (million VND per worker, left) Growth rate of labor productivity (%, right)
Source: Authors’ calculation from the statistics of GSO The Industry and Construction sector, with the highest labor productivity in the economy,
its labor productivity growth increased at a high level (about 10%) in the early 1990s. After that,
the growth rate of labor productivity began declining since 1997, even "negative" growth, around
0-1% in the period of 2002 - 2010. This means that in the first ten years of the 20th century, the labor productivity of Industry and Construction sectors not only did not increase but also decrease.
Ⅰ-17
Figure 2.5. Level and growth rate of labor productivity in Industry and Construction sector, 1991-2015 (constant 2010 price)
100 15 90 80 10 70 60 5 50 40 0 30 20 -5 10 - -10 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 2015 Labor productivity for the entire economy (million VND per worker, left) Growth rate of labor productivity (%, right)
Source: Authors’ calculation from the statistics of GSO Meanwhile, these ten years was also a critical period when Vietnam actively joined the world trade and received huge FDI inflows. In 2002, the number of FDI projects increased by half, compared to the previous year, when Vietnam signed a bilateral trade agreement with the US
(from 555 to 808 projects, according to the Ministry of Planning and Investment). Similarly, after 2007 (the year of WTO accession, the number of FDI projects always maintained at over one thousand. Especially, the huge amount of registered FDI in 2008 (71,726.8 million USD), nearly 24 times higher than the number of 2002. Notably, most of these FDI projects focus on the Industry and Construction sectors (about 70.52% of total registered capital, according to
GSO2). This resulted that a large amount of agricultural land has converted into industrial land.
Accompanied by this urbanization process, rural workers moved to urban areas to find jobs, usually working in industrial zones. Figure 2.6 shows that the proportion of urban workers has increased relative, compared to rural areas during this period. However, perhaps this labor
2 For valid projects until December 31, 2017 Ⅰ-18 movement speed was faster than the growth rate of added value that the Industry and
Construction sector generated. That led to a decrease in labor productivity. In addition, it seems to take a certain amount of time for the labor force to convert their job from rural to urban areas, adapt to new jobs and improve their own labor productivity.
Figure 2.6. Ratio of workers over 15 years old in urban areas to rural areas (%), 2005 - 20173
50
45
40
35
30
25 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Sơ bộ 2017
Source: Authors’ calculation from the statistics of GSO In terms of the contribution of the above three sectors to GDP, the Agricultural, Forestry and
Fishing sector had the lowest contribution to GDP (from 1995 onwards, Figure 2.7) and this contribution rate decreased over years (around 20%). Labor productivity of the service sector was smaller than the Industry and Construction sector, but the contribution rate of these two sectors was nearly equal (around 40% from the year 2000 onwards).
3 Due to data limitations, we only found data from 2005 onwards Ⅰ-19
Figure 2.7. The proportion of value-added contributions of sectors to GDP (%), 1991 – 2015 (constant 2010 price)
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 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 2015
Agriculture, Forestry, and Fishing Industry and Construction Services
Source: Authors’ calculation from the statistics of GSO Labor productivity of industries
This section will analyze in detail the labor productivity of industries in the three aforementioned major sectors to explain the structure of the contribution of specific industries in the labor productivity of the entire economy.
Agriculture, forestry, and fishing sector
First, in this sector, it is clear that Agriculture was the main contributor to the added value of the economy (about 76%), Forestry and Fisheries only contributed about 4% and 20% respectively in the period 1991- 2015. Hence, the labor productivity of the Agriculture sector will have the most impact on labor productivity of the whole sector.
Ⅰ-20
Figure 2.8. The contribution shares of industries’ value-added to Agriculture, Forestry and Fishing sector’s value-added, 1991-2015 (constant 2010 price)
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1990199219941996199820002002200420062008201020122014
Agriculture Forestry Fishing
Source: Authors’ calculation from the statistics of GSO The trend of agricultural labor productivity was generally similar to that of large industries, steadily increasing in the whole period despite some negative years of growth and close to 0% (2000, 2006, 2009, 2011, and 2013).
Figure 2.9. Level and growth rate of labor productivity in Agriculture, 1991-2015 (constant 2010 price)
25 20
20 15
15 10
10 5
5 0
- -5 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Labor productivity for the entire economy (million VND per worker, left) Growth rate of labor productivity (%, right)
Source: Authors’ calculation from the statistics of GSO
Ⅰ-21
The forestry, with an insignificant contribution to the value-added structure of the whole sector,
showed a declined trend in productivity in 2008-2012 when the economy was affected by the
global financial crisis.
Figure 2.10. Level and growth rate of labor productivity in Forestry, 1991-2015 (constant 2010 price)
18 40 16 30 14 20 12 10 10 0 8 -10 6 4 -20 2 -30 - -40 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Labor productivity for the entire economy (million VND per worker, left) Growth rate of labor productivity (%, right)
Source: Authors’ calculation from the statistics of GSO Similarly, the Fishing sector had the highest labor productivity (2.1 times higher than that of the
Forestry, 1.5 times higher than that of the Agriculture in 2015) and inevitably negative growth in
the period 2007-2010. However, the positive sign was that industries with high levels and growth rates of labor productivity like the Fishing tended to contribute more and more to the value- added structure of the whole sector.
Ⅰ-22
Figure 2.11. Level and growth rate of labor productivity in Fishing, 1991-2015 (constant 2010 price)
40 60
35 50 40 30 30 25 20 20 10
15 0 -10 10 -20 5 -30 - -40 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Labor productivity for the entire economy (million VND per worker, left) Growth rate of labor productivity (%, right)
Source: Authors’ calculation from the statistics of GSO Industry and Construction sector The industries which had the largest contribution to value-added Industry and Construction sector, were Manufacture (about 50%), Mining (30%) and Construction (nearly 18%) respectively (data in 2015). Thus the following analysis will mainly focus on them.
Ⅰ-23
Figure 2.12. The contribution shares of industries’ value-added to Industry and Construction sector’s value-added , 1991-2015 (constant 2010 price)
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0% 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 2015
Construction Water supply, waste management,and remediation activities electricity production and distribution Manufactures Mining
Source: Authors’ calculation from the statistics of GSO Mining
Mining was the industry with the highest labor productivity in the Vietnamese economy during the study period. Labor productivity of this industry was unique given that it is calculated including the value of natural resources (VNPI, 2016). In 2015, the labor productivity of the
Mining reached 1,397.3 million VND per worker, an increase of 14% compared to 2014 (1,225.9 million VND per worker) (see Figure 2.13). On average, the annual growth rate of labor productivity in this sector reached 15.6% in the period of 2010-2015. In 2010, the labor
Ⅰ-24
productivity of the Mining industry increased by 32% compared to 2009, achieving the highest
growth rate from the 1990s to the present. This surge in labor productivity came from changes in
both the number of employees working in the industry and the added value generated by these
workers. Specifically, the number of workers in the mining decreased from 291.5 thousand (2009)
to 275.6 thousand (2010). By 2015, there were only 237.6 thousand people working in this
industry. The proportion of workers in the mining industry also tended to decrease, from 0.6% in
2010 to 0.4% in 2015. On the other hand, the added value of this sector increased sharply from
172.982 billion VND (2009). to 215.851 billion VND (2010), up 24%. After 2010, the value-
added of Mining industry grew at an average annual rate of 6.4% (except for 2012, the industry's
value-added growth rate reached 20%).
Not only was the value of labor productivity very high, but the contribution of Mining to the
value-added structure of the whole sector also increased over time. Starting in 2009, this trend was shown more clearly (from 21% to 30% in 2015).
Figure 2.13. Level and growth rate of labor productivity in Mining, 1991-2015 (constant 2010 price)
1,600 35 1,400 30 1,200 25 20 1,000 15 800 10 600 5 400 0 200 -5 - -10 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Labor productivity for the entire economy (million VND per worker, left) Growth rate of labor productivity (%, right)
Source: Authors’ calculation from the statistics of GSO
Ⅰ-25
Construction The construction had quite low labor productivity. In 2015, its labor productivity reached 45.03
million VND per work, only equal to 0.83 labor productivity of the entire economy in the same
year. This industry had the lowest labor productivity in the Industry and Construction sector. By
2000, the average growth rate of labor productivity reached 7.71%. In the next decade (2000-
2010), it decreased with an average annual rate of -3.62%. This was because the number of
employees working in the industry increased much faster than the added value of the industry.
Specifically, the number of employees working in the industry increased at an average annual
rate of 14.03% while the added value of the industry only increased at an average annual rate of
8.7%. In the next stage (2010-2015), the labor productivity of the industry reached an average
annual growth rate of -1.4%.
Figure 2.14. Level and growth rate of labor productivity in Construction, 1991-2015 (constant 2010 price)
70 15
60 10
50 5 40 0 30 -5 20
10 -10
- -15 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 2015 Labor productivity for the entire economy (million VND per worker, left) Growth rate of labor productivity (%, right)
Source: Authors’ calculation from the statistics of GSO Not only low levels of labor productivity and decreasing, but the Mining also tended to decrease
in the contribution rate of the value-added in the whole sector. In fact, the amount of domestic Ⅰ-26 investment for the Mining decreased, instead of outward investment of Vietnamese enterprises for it increased sharply, accounting for 40% of the total registered investment capital4.
Manufacturing
The Manufacturing industry had the labor productivity of 92.13 million VND per worker in 2015,
1.7 times higher than the average level of the entire economy in the same year. It's Labor productivity decreased from 93.20 million VND per worker in 2001 to 86.30 million VND per worker in 2002. This was result in the increased rapidly in the number of workers far more than the added value of the industry. From 2001 to 2002, the number of employees working in the
Manufacture increased sharply by 20% from 3,259.4 thousand people (2001) to 3,919.8 thousand people (2002). Meanwhile, the industry's value added only increased by 9.48%, from 220.54 billion VND (2001) to 241.44 billion VND (2002). This was a period of time when FDI inflows focused heavily on manufacturing industries in Vietnam, making this sector size expanded. Then, it's labor productivity recovered and grew but at a lower rate before.
Figure 2.15. Level and growth rate of labor productivity in Manufacturing, 1991-2015 (constant 2010 price)
80 15 70 10 60 50 5 40 30 0 20 -5 10 - -10 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Labor productivity for the entire economy (million VND per worker, left) Growth rate of labor productivity (%, right) Source: Authors’ calculation from the statistics of GSO
4 According to the authors' calculations on valid investment projects up to December 31, 2017 from GSO Ⅰ-27
The Manufacture is also the industry attracting the concentration of FDI, especially from 2007 until now. However, labor productivity did not increase as expected. In addition, its value-added contribution rate in the whole industry tended to narrow down (from about 50% in 2007 to over
40% in 2015). This was clearly a negative trend for the economy.
Other industries: Electricity, gas, steam, and air conditioning supply; Water supply, sewerage, waste management
Electricity, gas, steam, and air conditioning supply was an industry with the highest labor productivity of the entire economy. It labor productivity increased from 467.97 million VND per worker (2010) to 685.58 million per worker (2015), about 12.60 times higher than the labor productivity of the entire economy in 2015. There were witnessed a strong growth rate in the labor productivity surged at 19.23% and 26.23% in 2009 and 2013, respectively. In both years, the added value of this industry increased at a high rate of 18.24% (2009) and 30.32% (2013) while the number of labor had a growth rate of -0.83% (2013) and 3.24% (2015), respectively.
Labor productivity in Water supply, Sewerage, Waste management activities reached
124.55 million VND per worker in 2015, 2.3 times higher than labor productivity of the entire economy. The growth rate of labor productivity of these activities has changed significantly over the years.
Ⅰ-28
Figure 2.16. Level and growth rate of Figure 2.17: Level and growth rate of labor productivity in Electricity, gas, labor productivity in Water supply, steam, and air conditioning supply, 1991- sewerage, waste management, 1991-2015 2015 (constant 2010 price) (constant 2010 price)
800 30 140 50
25 700 120 40 20 600 30 100 15 500 20 10 80 400 10 5 60 300 0 0 200 40 -5 -10
100 -10 20 -20
- -15 - -30 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Labor productivity for the entire economy (million Labor productivity for the entire economy VND per worker, left) (million VND per worker, left) Growth rate of labor productivity (%, right) Growth rate of labor productivity (%, right)
Source: Authors’ calculation from the statistics of Source: Authors’ calculation from the statistics of GSO GSO
Service sector Wholesale, Retail and Repair activities had the highest contribution to value-added, outstripping other activities, accounting for about 35% of the entire Service sector in the period 1991-2015
(figure 2.18). The other activities account for 5 - 10% of the whole industry's VAT structure.
Ⅰ-29
Figure 2.18. The contribution share of industries’ value-added to Service sector’s value added, 1991-2015 (constant 2010 price)
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 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 2015
Wholesale, retail trade and repair Transportation and storage Accommodation and food service activities Real estate activities Education and training Other service activities
Source: Authors’ calculation from the statistics of GSO Wholesale, Retail and Repair
In general, the Wholesale, Retail and Repair activities had lower labor productivity than the average level of the Service sector. In the period of 2002 - 2006 and 2013 - 2015, its labor productivity was only around 50 million VND per worker per year. Even in 2013, the labor productivity growth was at -15%. This is also the period of strong purification process of
Vietnamese enterprises, 70,500 enterprises were dissolved and temporarily suspended, up 10% compared to 2012, while this figure was only 3-4% compared to years ago. In particular, nearly
40% of these businesses operated in the wholesale and Retail activities 5 . In this year, the
5 We calculate from the data of the annual business registration situation of the Ministry of Planning and Investment. Ⅰ-30
contribution to the value-added structure of the Service sector suddenly reduced by more than
30%, after years of maintaining at nearly 40%.
Figure 2.19. Level and growth rate of labor productivity in Wholesale, Retail and Repair, 1991-2015 (constant 2010 price)
70 10
60 5
50 0 40 -5 30 -10 20
10 -15
- -20
Labor productivity for the entire economy (million VND per worker, left) Growth rate of labor productivity (%, right)
Source: Authors’ calculation from the statistics of GSO The other industries: Transportation and storage; Accommodation and food service activities;
Information and Communication; Financial, Banking and Insurance activities; Real estate
business activities; Professional, scientific and technical activities.
Transportation and storage had labor productivity ranged from 32 to 58 million VND per worker
in the period of 1990-2015. In terms of labor productivity growth, the lowest growth rate was at -
10% in 2012 and the highest growth rate was at over 10% in 2006.
The Accommodation and food service activities had the highest labor productivity in the period of 2004-2008, reaching over 60 million VND per worker and had the lowest labor productivity in the period of 2013-2015. In the period of 2008-2015, labor productivity has
Ⅰ-31
decreased nearly 30 million VND per worker. The growth rate of labor productivity was the
highest in 2005 at 7% and the lowest in 2013 at -15%.
In the Information and Communication activities, the growth rate of labor productivity increased in the period of 1990 - 1998 and decreased in the period of 2006-2015. The highest
labor productivity reached at over 100 million VND per worker in the period of 1997 - 2001. The
growth rate of labor productivity in 2003 and 2013 had a negative growth rate (-15%). In addtion,
the growth rate of labor productivity was also continuously negative in the period of 2007 - 2014.
Labor productivity of Financial, Banking and Insurance activities was higher labor
productivity than that of the entire economy. This figure rose continuously over the years in the
period of 1990 - 2000. However, there was low labor productivity in the period of 2000 - 2012.
After 2012, its labor productivity had increased sharply from over 150 million VND per worker
to over 400 million VND per worker.
Real estate business activities were at higher labor productivity than the entire economy.
The lowest labor productivity was 400 million VND per worker in 2001 and the highest labor
productivity was 1.9 billion VND per worker in 2004. In the period from 1990 to 2001, its labor
productivity decreased over the years, changed significantly in the years of 2003-2005, gradually
declined until 2013 and then gradually increased again.
Labor productivity of Professional, scientific and technical activities increased in the
period of 1990 - 2001 and decreased sharply in the period of 2002 - 2012. The highest labor
productivity in 2001 was at 240 million VND per worker, the lowest was at 60 million VVD per
worker in 2009. The growth rate of labor productivity in the period 1991 - 2001 was at
approximately 0%. Meanwhile, the growth of labor productivity was almost negative from 2002
- 2012, the lowest in 2002 (- 40%), the highest growth in 2013 (100%).
Ⅰ-32
Figure 2.20. Level and growth rate of labor productivity in the other services, 1991-2015 (constant 2010 price), 1991-2015
Transportation and storage Information and Communication 70 15 140 25 20 60 10 120 15 50 100 5 10 40 80 5 0 30 60 0 -5 -5 20 40 -10 10 -10 20 -15 - -15 - -20 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Labor productivity for the entire economy Labor productivity for the entire economy (million VND per worker, left) (million VND per worker, left) Growth rate of labor productivity (%, right) Growth rate of labor productivity (%, right)
Accommodation and food Financial, Banking and Insurance activities service activities 450 200 80 10 400 70 5 350 150 60 0 300 50 100 250 40 -5 200 30 50 -10 150 20 100 -15 0 10 50 - -20 - -50 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Labor productivity for the entire economy Labor productivity for the entire economy (million VND per worker, left) (million VND per worker, left) Growth rate of labor productivity (%, right) Growth rate of labor productivity (%, right)
Ⅰ-33
Real estate business activities Professional, scientific and 2,000 140 technical activities 250 120 1,800 120 100 1,600 100 1,400 200 80 80 1,200 60 60 150 1,000 40 40 800 20 20 600 100 0 400 0 -20 200 -20 50 - -40 -40 - -60 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Labor productivity for the entire economy 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 (million VND per worker, left) Labor productivity for the entire economy Growth rate of labor productivity (%, right) (million VND per worker, left) Growth rate of labor productivity (%, right)
Source: Authors’ calculation from the statistics of GSO
Labor productivity of economic sectors based on types of economic ownership From 1991 to 2001, labor productivity of all economic sectors increased gradually (Figure 2.21). In which, labor productivity of the FDI sector was the highest, almost double the labor productivity of the two remaining sectors. After 2002, this trend has reversed, the labor productivity of the FDI has gradually decreased, and that of the state sector has caught up and surpassed in 2015. The contribution of the state sector, the non-state sector and the FDI sector to GDP was 35.8%, 49.5%
and 14.7% relatively.
Ⅰ-34
Figure 2.21. Labor productivity by economic sector (million VND, 1991 – 2015, constant 2010 price)
450
400
350
300
250 State
200 Non-state FDI 150
100
50
0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: Authors’ calculation from the statistics of GSO After 25 years from 1991 to 2015, labor productivity of the FDI sector increased 1.257 times, that of the non-state sector increased 2.478 times and that of the state sector increased 3.76 times.
Figure 2.22. Level and growth rate of labor productivity in State sector, 1991-2015 (constant 2010 price) 250 20 18 200 16 14 150 12 10 100 8 6 50 4 2 - 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Labor productivity for the entire economy (million VND per worker, left) Growth rate of labor productivity (%, right) Source: Authors’ calculation from the statistics of GSO
Ⅰ-35
In general, labor productivity of the state sector was higher than the labor productivity of the entire
economy and increased gradually over the years. In 1997, this growth rate increased the fastest with
over 15%. In 1999 and 2002, the growth rate of labor productivity was the lowest in the year in the
state sector.
Figure 2.23. Level and growth rate of labor productivity in Non-state sector, 1991-2015 (constant 2010 price)
35 12
10 30 8 25 6
20 4
15 2 0 10 -2 5 -4
- -6 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Labor productivity for the entire economy (million VND per worker, left) Growth rate of labor productivity (%, right)
Source: Authors’ calculation from the statistics of GSO The FDI sector had the highest average labor productivity among the three regions, higher than the
labor productivity of the entire economy. In 2001, labor productivity was the highest in the research
period, reached nearly 400 million VND per worker. However, this figure experienced the most
changes, increased in the period of 2001 - 2001, declined in the period of 2002 - 2008, and fluctuated in other years. The growth rate of labor productivity was also greatly changed, the lowest of -35% in 2003 and the highest of 22% in 2000
Ⅰ-36
Figure 2.24. Level and growth rate of labor productivity in FDI sector, 1991-2015 (constant 2010 price)
450 30
400 20 350 10 300 0 250 -10 200 -20 150 -30 100
50 -40
- -50 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Labor productivity for the entire economy (million VND per worker, left) Growth rate of labor productivity (%, right)
Source: Authors’ calculation from the statistics of GSO In general, labor productivity in the domestic sectors had a similar growth trend while the labor productivity in FDI sector had fluctuated significantly over the years. However, the labor productivity of the domestic sector was still improving faster than that of the FDI sector. In particular, the labor productivity of the FDI sector had an average annual growth rate of only -2.5% in the 2001-2010 period and 1.25% in the 2011-2015 period.
Studying the characteristics of FDI in Vietnam, Truong Quang Hung (2012) pointed out that
FDI mainly flowed into the mining industry and import substitution industry in the 1990s. However, since 2000, FDI has tended to increase strongly in the manufacture and export-oriented industries. In particular, up to 65% of FDI enterprises operating in the manufacturing industries, mainly textile, footwear, electronics, food processing. These industries attracted a large number of workers involved in production lines. According to data from GSO, the number of employees working in the
FDI sector had doubled, from 339.1 thousand workers (2001) to 770.9 thousand workers (2003). In
Ⅰ-37 meanwhile, the added value of this sector increased only 1.2 times from 129.3 billion VND (2001) to
153.2 billion VND (2003). This led to a sharp decline in labor productivity of the FDI sector in 2003
(Figure 2.24). Since 2006, FDI has focused on service sectors and some industries experienced high growth.
Contrast to the growing trend of labor productivity, the rate of contribution to GDP increased gradually in the FDI sector and decreased in the domestic sectors (see Figure 2.25). However, this fluctuation is not large. By 2015, the FDI sector had maintained the contribution around the threshold of 15%. That of the non-state sector was 50% and that of the state sector was 35%. This implies that labor improvement policies should focus on the domestic sector to have a greater impact on GDP growth.
Figure 2.25. The proportion of value-added contributions by economic sectors to GDP (%), 1991 – 2015 (constant 2010 price)
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 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 2015
State Sector Non-State Sector FDI sector
Source: Authors’ calculation from the statistics of GSO
According to research by Nguyen Tien Dung, Futoshi Yamauchi, Nguyen Duc Thanh, Pham
Thi Tuyet Trinh, Nguyen Thanh Tung (2017) using data from the Vietnam Enterprise Census (VEC)
Ⅰ-38 showed a similar trend in labor productivity of the FDI sector. To be more specific, In FDI enterprises, value added per workers increased only at the rate of 0.7% between 2004 and 2015.
Meanwhile, value added per worker increased at the annual rate of 8.5% and 9.7% in the private and state sector during the same period. The low productivity growth in the FDI sector was largely attributed to the sharp contraction in the mining industry, especially crude oil production. Viet
Nam’s crude oil production has declined sharply from its peak in 2004. The decline in output and the sharply declining oil prices have severely affected oil-producing enterprises and FDI enterprises in particular. Their decomposition analysis shows that the productivity gain from the manufacturing industry is largely offset by the loss in the mining industry. Besides that, the shift toward more labor- intensive activities has negatively affected the labor productivity in other services and telecommunications despite the rapid growth in output.
Another hypothesis is that even in manufacturing and processing industries, productivity growth is not commensurate with expectations and there are some suspicious points. Firstly, simple decomposition shows that in the period that labor productivity of the FDI sector goes down (after
2000), value added (VA) increases very slowly compared to the growth rate of the labor force, leading to labor productivity. Slow increase even decreased in some years. It seems that the value added that FDI enterprises publicly reflect does not reflect reality when the revenue is much larger
(revenue includes the cost of intermediate and value-added production). This is a typical basis for doubts about the "price transfer" phenomenon. Transfer is the phenomenon of foreign enterprises declaring an increase in the value of intermediary costs compared to the actual market value
(actually this intermediate input is bought from the parent group) and found any way to reduce the value-added (mainly to reduce profits) thereby reducing the tax payable to the host country.
Ⅰ-39
Value added = Revenue - Total value of intermediate goods = Income (wages, salaries) + Rent + Interest + Profit Source: Robert Hall, Marc Lieberman (2012)
In fact, these doubts are evident when Vietnamese authorities have discovered many such cases. Reports of the tax authorities show that FDI businesses are losing their business, often concentrating in the field of garment and shoe leather processing; tea production and trading; processing industry…. In TP. In Ho Chi Minh City, up to 90% of FDI enterprises operating in the garment sector have lost business results while most domestic enterprises in the same industry are profitable. Since then, the Tax Department of Ho Chi Minh City, in 2012, has inspected and discovered VND 2,688.5 billion of false declarations; reduction of deduction of VND 86.8 billion; retrospective collection, refund and the fine of VND 2,611 billion. Particularly, inspecting 16 textile and garment enterprises with signs of transfer pricing, the City Tax Department has reduced the loss of VND 367.8 billion and collected VND 11.3 billion (Nguyen Thi Thu Hoai and Duong Van An,
2015). Initial observations showed that the transfer pricing phenomenon appeared in many areas of labor-intensive, which showed that the "price transfer" theory price distorted the value of labor productivity recorded in FDI enterprises, although still further research is needed on this issue.
Labor structure
The labor structure of Vietnam has been strongly shifted from 1991 to present (see Table 2.1). Viet
Nam's labor tends to shift from Agriculture, Forestry and Fishing to higher labor productivity areas such as Industry and Construction as well as Services. Labor share decreased from 67.8% in 2000 to
44% in Agriculture, Forestry and Fishing; while expanding from 12% to 22.7% for Industry and
Construction, increasing from 20.2% to 33.2% for the Service sector in the same period. The
Ⅰ-40
Manufacturing industry that accounts for the largest share of labor in the Industry and Construction sector, has the proportion of labor increased from 8.6% (2000) to 15.3% (2015). By type of ownership, the proportion of employees working in the state sector decreased gradually from 11.7% in 2000 to 9.8% in 2015, while increasing from 1% in 2000 to 4.2% in FDI sector. The proportion of workers working in the non-state sector is not significantly changed, reaching 86% in 2015. Thus, in
Viet Nam, the reallocation of labor between sectors or industries may be the main cause of labor productivity improvement for the whole economy. The shift-share analysis method in the next section will provide further evidence of this conclusion.
Table 2.1: Labor share by sector, 1991-2015
1991 2000 2010 2015 By economic activities 100% 100% 100% 100% 1. Agriculture, Forestry and Fishing 72.3% 67.8% 49.5% 44.0% 2. Industry and Construction 11.2% 12.0% 21.0% 22.7% 2.1. Mining 0.9% 0.6% 0.6% 0.4% 2.2. Manufacturing 7.7% 8.6% 13.5% 15.3% 2.3. Electricity, gas, steam and air conditioning supply 0.2% 0.2% 0.3% 0.3% 2.4. Water supply, sewerage, waste management and remediation activities 0.1% 0.1% 0.2% 0.2% 2.5. Construction 2.3% 2.5% 6.3% 6.5% 3. Service 16.5% 20.2% 29.5% 33.2% By type of ownership 100% 100% 100% 100% State sector 12.9% 11.7% 10.4% 9.8% Non-state sector 86.3% 87.3% 86.1% 86.0% FDI sector 0.8% 1.0% 3.5% 4.2% Source: Authors’ calculation from the statistics of GSO
Ⅰ-41
Sources of labor productivity growth
Growth accounting method According to growth accounting method mentioned above, the variation in Vietnam's labor productivity growth can be explained by the change in capital intensity growth and TFP growth
(Figure 2.30 and 2.31).
In the period 1991-2000, increasing capital density was the main driving force for Vietnam's labor productivity growth while TFP even reduced labor productivity growth. The contribution share of capital intensity to labor productivity growth was very high, about over 80%. In the next decade
(2001-2010), the influence of capital intensity decreases with the contribution share to annual labor productivity growth reduced to 70%, and TFP also has a positive influence on labor productivity growth. From 2011 to 2015, TFP replaced the role of capital intensity in leading labor productivity growth. While TFP contributed nearly 90% to annual growth in labor productivity, this rate in capital intensity was only about 10% in this period.
Figure 2.30: Contribution of capital density and TFP to labor productivity growth in Viet Nam, (1991-2015, % point)
15
10
5
0
-5
-10 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 TFP Capital density Labor productivity growth rate
Source: Authors’ calculation from the statistics of GSO
Ⅰ-42
Figure 2.31: Contribution share of capital density and TFP to labor productivity (1991- 2015, %)
100%
80%
60%
40%
20%
0%
-20%
-40% 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Capital density TFP
Source: Authors’ calculation from the statistics of GSO Table 2.2 provides more insights on the decomposition of labor productivity in five sub- periods. To start with, an increasing period of labor productivity in Viet Nam starting with the open of several markets in Viet Nam from in 1991. In the sub-period 1991-1995, the investment created a great impact on the labor productivity growth, reflecting in the overwhelming impact of capital density while TFP’s contribution was negative. The next four years (1996-1999) witnessed Viet
Nam's great effort to reintegrate into the world. It was in the middle of the new era of Viet Nam’s international integration when we entered into a number of international organizations such as the
Asian Development Bank (ADB), the World Monetary Fund, etc. and especially normalizing diplomatic relations with the United States. Labor productivity grew with slower pace (at nearly 4% per year) and capital density still had contributed significantly to labor productivity growth during this sub-period. Since 2000, a large foreign capital volume had flowing into Viet Nam. The source of
Ⅰ-43
labor productivity growth in the period of 2000-2007 mainly came from capital density but the
contribution of TFP increased significantly. In the sub-period 2008-2012 when the global crisis happened, labor productivity in Viet Nam only grew 3.18% per year. However, this sub-period
marked the dominant role of TFP in contributing to labor productivity growth, accounting for 77.03%
of annual labor productivity growth rate. In recent year, from 2013-2015, TFP continued play a more
important role in leading the labor productivity in Viet Nam.
Table 2.2: Labor productivity growth decomposition
Contribution Contribution shares Period Labor productivity growth Capital density TFP Capital density TFP 1991-2015 4.51% 4.23% 0.28% 93.89% 6.11% 1991-1995 6.32% 11.05% -4.73% 174.90% -74.90% 1996-1999 3.99% 6.35% -2.36% 159.02% -59.02% 2000-2007 4.10% 3.02% 1.08% 73.64% 26.36% 2008-2012 3.18% 0.73% 2.45% 22.97% 77.03% 2013-2015 5.69% 2.03% 3.66% 35.73% 64.27% Source: Authors’ calculation from the statistics of GSO Jorgenson and Vu Minh Khuong (2013) estimated that TFP contributed 50.8% to total labor
productivity growth in the period of 1990-2000. However, this proportion dropped to 3.6% in the
period 2000-2012 due to the impact of investment expansion to boost economic growth in Vietnam.
APO (2015) estimated that TFP contributed about 26% to Vietnam's annual labor productivity
growth in 2010-2013. In this report, authors estimated that TFP still maintains a high proportion in
contributing to labor productivity growth in the period 2000-2012, reaching 41% per year on average,
much higher than mentioned studies. This difference may be the result of using various assumptions
or utilizing different dataset in estimation (see more in Appendix 1).
The growth of labor productivity in Vietnam largely comes from the growth of capital
density. In other words, the increase in labor productivity does not reflect an improvement in the
Ⅰ-44
overall efficiency of the economy but as a result of increasing capital investment (Ohno, 2016). We
will consider the TFP at the same time with the efficiency index – Incremental Capital Output Ratio
(ICOR), the measure of capital’s efficiency. The ICOR is calculated by the ratio between the
investment ratio (calculated as a percentage of GDP) and the growth rate, indicating that with the
assumption that other factors remain constant, how much capital should be increased to create more
one percent growth. In other words, ICOR indicates how much capital is produced by the amount of
capital. The higher ICOR indicates that the period of using capital is less efficient. The calculation of
TFP and ICOR may be different due to heterogeneous use of the database or assumptions in the
estimates among researchers, but the overall trend of the two indices is still relatively major.
Figure 2.32 shows the fluctuation of TFP growth in the period of 1991-2015 in relation to the
ICOR in Viet Nam. Until the mid-1990s, although Vietnam developed from a low base with a centrally planned economy, low ICOR came together with high TFP growth shows that labor productivity growth comes mainly from increased efficiency, not investment growth. However, in the second half of the 1990s, the ICOR increased and the contribution of TFP decreased due to the significant increase in capital contribution. From 2000 to 2008, the ICOR was low and the contribution of TFP increased insignificantly. Since 2009, TFP and ICOR have been improved to show the important role of TFP in labor productivity growth.
Ⅰ-45
Figure 2.32: ICOR and TFP growth in Viet Nam, 1991-2015
8 8 6 6 4 4 2 2 0 0 -2 -2 -4 -4 -6 -6 -8 -8 -10 -10 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
ICOR TFP growth (%)
Source: Authors’ calculation from the statistics of GSO, IMF In terms of economic activities, the capital density has mainly contributed to the growth of labor productivity of the Agriculture, Forestry and Fishing as well as the Industry and Construction sectors in the period 1991-2000 (Figure 2.33). In other words, just increase a small amount of capital for these sectors, the labor productivity of them can be significantly improved in this period while the Service sector’s labor productivity depends largely on TFP. Since 2000, the contribution of TFP to the growth of labor productivity in all sectors has improved and gradually overwhelmed the influence of capital density.
In terms of type of ownership, capital density has a great influence on the growth of labor productivity in the domestic sectors, while the FDI sector is largely based on TFP (Figure 2.34). In general, TFP had also gradually become a decisive factor in the growth of labor productivity of these sectors.
Ⅰ-46
Figure 2.33: Contribution shares of capital density and TFP to labor productivity of selected industries, 1991-2015
Capital density TFP
Agriculture Forestry Fishing 100% 100% 100% 80% 60% 40% 50% 50% 20% 0% 0% 0% -20% -40% -60% -50% -50% 1991 1994 1997 2000 2003 2006 2009 2012 2015 1991 1994 1997 2000 2003 2006 2009 2012 2015 1991 1994 1997 2000 2003 2006 2009 2012 2015
Manufacturing Construction Mining 100% 100% 100% 80% 50% 50% 60% 40% 20% 0% 0% 0% -20% -50% -50% -40% 1991 1995 1999 2003 2007 2011 2015 1991 1995 1999 2003 2007 2011 2015
1991 1995 1999 2003 2007 2011 2015
Electricity, gas, steam and Water supply, sewerage, air conditioning supply waste management and remediation activities 100% 100% 50% 50%
0% 0%
-50% -50% 1991 1995 1999 2003 2007 2011 2015 1991 1995 1999 2003 2007 2011 2015
Ⅰ-47
Wholesale and retail trade; Transportation and Information and repair of motor vehicles and storage communications motorcycles 100% 100% 100% 50% 50% 50% 0% 0% 0% -50% -50% -50% 1991 1995 1999 2003 2007 2011 2015 1991 1995 1999 2003 2007 2011 2015 1991 1995 1999 2003 2007 2011 2015 Accommodation and food Financial, banking and Real estate activities service activities insurance activities 100% 100% 100% 50% 50% 50% 0% 0% 0% -50% -50% -50% 1991 1995 1999 2003 2007 2011 2015 1991 1995 1999 2003 2007 2011 2015 1991 1995 1999 2003 2007 2011 2015
Source: Authors’ calculation from the statistics of GSO Figure 2.34: Contribution shares of capital density and TFP to labor productivity of sectors by type of ownership, 1991-2015
Capital density TFP
State sector Non-state sector FDI sector 100% 100% 100% 80% 60% 40% 50% 50% 20% 0% 0% 0% -20% -40% -60% -50% -50% 1991 1995 1999 2003 2007 2011 2015 1991 1995 1999 2003 2007 2011 2015 1991 1995 1999 2003 2007 2011 2015
Source: Authors’ calculation from the statistics of GSO
Ⅰ-48
In brief, Viet Nam’s labor productivity had an upward trend in the period 1991-2015 at a relatively fast pace. TFP gradually replaces the role of capital density in driving the labor productivity growth in Viet Nam. In the next section, the shift-share analysis method is applied to decomposing labor productivity growth in Viet Nam in the period 1991-2015.
Shift-share analysis method
The average annual labor productivity growth rate of Vietnam was 4,241% per year in the period of
1991-2015. During this period, the within effect plays a key role in the growth of labor productivity of the whole economy (see Figure 2.35 and 2.36)
In the period 1991-2000, the within effect contributed about 1.5 to 6 % points (equivalent to
57-94%) in the annual labor productivity growth rate. The shift effect was from 0.88 to 1.36%, contributing from 14 to 52% for annual labor productivity growth. At this stage, the interaction effect also showed negative signs that there is a shift in labor from industries with increasing labor productivity to industries with declining labor productivity, but not significantly.
In the next decade (2001-2010), the shift effect overwhelmed the within effect in driving labor productivity growth. In which, this effects contributed up to 243% (in 2002) into labor productivity growth while the remaining two effects with negative signs. In this period, the shift effect contributed 65.86% on average in labor productivity growth. This reflects the actual movement of workers from sectors with low labor productivity (Agriculture, Forestry and Fishing) to other sectors with higher labor productivity (such as Industry and Construction, Services).
Specifically, if the proportion of workers working in the Agriculture, Forestry and Fishing sector decreases from 67.8% (2000) to 49.5% (2010), the proportion of workers in the Industry and
Construction sectors construction increased nearly 2 times, from 12% (2000) to 21% (2010) and the
Services sector increased from 20.2% (2000) to 29.5% (2010). The contribution share of the within
Ⅰ-49 effect decreased from 94.68% in 2000 to the lowest level (- 69%) in 2002. Meanwhile, the interaction effect at this stage brought a negative sign to show the massive labor transfer from low labor productivity sectors to high labor productivity sectors has partly reduced labor productivity in sectors with high labor productivity or slowed down the labor productivity of these sectors.
From 2011 to 2015, the influence of the shift effect was not as clear as in the previous decade but dropped to only 20.95% in 2015. The within effect regained its leading position to labor productivity growth with the contribution share to labor productivity growth was up to 84% in 2015.
This corresponds to the improvement of labor productivity of each industry due to the efforts to apply science and technology to improve the added value of sectors. The interaction effect was still negative but has a smaller value (in 2015 is -0.62%), halving the absolute value compared to 2011 (-
0.31 points%), expressing the added value of industries with shifting labor still increased more slowly than the growth of labor in those industries.
In the period 1988-1991, a series of policies based on the supply-side theory was implemented, contributing to the economic achievements of Viet Nam in the "Doi Moi". These policies can help to liberate the production capacity of the economy at this stage such as removing internal trade barriers, allowing the establishment of private companies, contracting 10, dissolving and merging weak state-owned enterprises, opening up to attract foreign investment (Pham The Anh and Nguyen Tuan Minh, 2013). This may be the reason for the dramatic improvement of within- sector labor productivity in the 1990s. Since 2000, policy to promote domestic economic development was the promulgation of the Enterprise Law 2000 to creating a favorable environment for the establishment of businesses and accelerating the process of equitizing state-owned enterprises.
Viet Nam also signed a bilateral trade agreement with the US and reforming a series of laws to join the Trade Organization World WTO. These policies contribute to creating favorable conditions for
Ⅰ-50 the formation and development of domestic enterprises and FDI enterprises, which may be the cause of the strong shift of labor from sectors with low labor productivity to industries with high labor productivity in the period 2001-2010, reflected by the overwhelming effect of the displacement effect.
Figure 2.35: Contribution to average annual labor productivity (% point), 1991-2015
10 8 6 4 2 0 -2 -4 -6 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Within effect Shift effect Interaction effect Labor productivity growth rate
Source: Authors’ calculation from the statistics of GSO
Figure 2.36: Contribution shares to annual labor productivity growth (%), 1991-2015
100%
80%
60%
40%
20%
0%
-20%
-40% 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Within effect Shift effect Interaction effect
Source: Authors’ calculation from the statistics of GSO
Ⅰ-51
Conclusion Firstly, Viet Nam’s labor productivity at economy level tends to increase, but the growth rate is
unstable over the years. Labor productivity of the Industry and Construction sector is the highest,
followed by the Services sector and the lowest is the Agriculture, Forestry and Fishing sector.
However, while the labor productivity of the Industry and Construction sector tends to increase
rapidly over the years, the Services sector increased slowly and decreased in some periods. In
terms of type of ownership, labor productivity of FDI has tended to decrease, the state and non-
state sectors have increased gradually. The labor productivity level of the state sector is the
highest, followed by FDI sector, and the last one is the non-state sector (as of 2015).
Secondly, labor productivity of important industries has not been significantly improved.
While Industry and Construction sector contributes nearly 40% to the country's GDP, labor
productivity of industries that account for a large proportion in the sector such as Manufacturing
and Construction (accounting for about 50% and 18%, respectively of this sector’s added value)
did not increase, even regressed in recent years. Mining still accounts for nearly a third of the
value of this sector; however, its labor productivity growth is not much, largely based on capital
growth. In the long term, labor productivity of Manufacturing and Construction industries need
to be strongly improved to create breakthroughs in Viet Nam’s economic growth.
Thirdly, TFP gradually replaces the capital density in leading labor productivity growth
at both the economy and sector/industry levels. The motivation for the growth of labor productivity in the period 1991 - 2015 mainly came from the within effect even though there was
also a period of overwhelming by shift effect (2001-2010).
Ⅰ-52
CHAPTER III: VIET NAM LABOR PRODUCTIVITY IN THE INTERNATIONAL CONTEXT
In this section, Viet Nam’s labor productivity is compared with that of some selected countries, including Northeast Asian countries ( South Japan, South Korea, China), and ASEAN countries
(Singapore, Thailand, Philippines, Malaysia, Indonesia, and Cambodia) at both economy level
and industry level to identify Viet Nam’s position in relative relation with these countries, and
examine the impact of industry’s labor productivity enhancement, labor reallocation,
expansion/narrowing of sectors on Vietnamese economy as well as assess whether it follows the
common international trend or not.
Data
To make international comparison, authors utilize APO dataset 2017 with data updated up to
2015. GDP and sectoral value added are measured at constant 2011 price using power parity
purchasing (PPP) and at basic price.
The advantage of using APO dataset is that GDP and total employed persons of listed
countries are both divided into nine identical categories, namely Agriculture,hunting,forestry,
and fishing; Mining and quarrying; Manufacturing; Electricity, gas and water supply;
Construction; Wholesale and retail trade, repair of vehicles and household goods, hotels and
restaurants; Transport, storage and communications; Financial intermediation, real estate, renting
and business activities; Community, social and personal services. Since GDP and labor input are
categorized into corresponding groups, economy-wide labor productivity calculated in per-
Ⅰ-53 worker GDP and industries’ labor productivity weighted by their employment shares generate the same result.
However, as APO’s statistics are collected from national accounts of studied countries, there may be differences in the definition and classification of the sectors or the way in which the value added and employment should be calculated, thus, labor productivity of some groups can not reflect the real situation. This is a limitation on the statistics that most researchers encounter in their attempt of carrying out the international comparison. However, the APO database is still a useful data source for cross-country comparisons.
In the following part, labor productivity growth level and growth rate of Viet Nam and other selected countries are calculated at both economy and industry level. From that, the labor productivity growth of the economy will be decomposed into different effects to determine the source of growth in these countries.
Level and growth rate of the economy-wide labor productivity
Figure 3.1 displays the change in labor productivity of Viet Nam and selected countries from
1991 to 2015. In 1991, per-worker labor productivity of Viet Nam was only 3,219 USD/worker, nearly equivalent to China’s level (3,264 USD/worker) (Cambodia’s statistic is not available in this year). In the same year, Japan’s and South Korea’s level was 20.8 times and 8.8 times higher than that of Viet Nam. ASEAN-5 countries all had a higher level of labor productivity compared to Viet Nam. In details, Singapore’s and Malaysia’s labor productivity was 21.1 times and 10.9 times higher than Viet Nam's, respectively; this ratio for Thailand, Philippines, and Indonesia correspondingly was 4.4 times, 3.5 times and 4.1 times.
In general, the labor productivity of all these economies follows the upward trend.
However, by 2015, Viet Nam’s labor productivity had not experienced any significant increase Ⅰ-54 while the relative ranks of labor productivity within compared countries had changed considerably. Viet Nam’s labor productivity reached 9,208 USD/worker in 2015, increasing only
2.8 times after 22 years, while China's labor productivity went up 7.83 times and surpassed the
Philippines’. Singapore, starting at a lower level of labor productivity compared to Japan in 1991, had a strong improvement and reached a level of that 1.6 times higher than Japan in 2015.
Figure 3.1. Labor productivity of Viet Nam and selected countries, 1991-2015
140
120
100
80
60
40
20
0
Japan South Korea China Singapore Thailand Philippines Malaysia Indonesia Cambodia Viet Nam
Note: Unit: thousand USD/worker, constant 2011 PPP
Source: Author’s calculation based on the statistics from APO The economy-wide labor productivity of Viet Nam does not rise as fast as that of China but at a faster rate than that of Japan and was nearly equivalent to South Korea's labor productivity in the period 1991-2015 (see Figure 3.2 and Table 3.1). In the period of 1991-2000,
Ⅰ-55 labor productivity of Viet Nam grew at an average rate of 5.48% per year, a rapid growth in labor productivity among selected countries. In the same period, China’s labor productivity had the fastest rise with the average annual growth rate of 8.75% per year. In the next decade (2001-
2010), Viet Nam witnessed modest growth in labor productivity while China maintained a higher growth rate of labor productivity than the previous period, reaching 10.19% per year. From 2011 to 2015, despite a slowdown in growth, China still achieved a growth rate of labor productivity of over 7% per year. Viet Nam's labor productivity had recovered its upward trend, reaching
4.79% per year while South Korea's labor productivity growth had slowed significantly. In general, Viet Nam's labor productivity grew faster than most ASEAN countries compared.
Figure 3.2. The growth rate of labor productivity in Viet Nam and selected countries,
1991-2015 (%)
20
15
10
5
0
-5
-10
-15
Japan South Korea China Singapore Thailand Philippines Malaysia Indonesia Cambodia Viet Nam
Note: Cambodia’s growth rate is displayed from 1994.
Source: Authors’ calculation based on statistics from APO
Ⅰ-56
Viet Nam’s average annual growth rate reached 4.67% over the period 1991-2015 (see
Table 3.1). Although Viet Nam remains a relatively high average annual growth rate, this figure
tends to decrease over the studied period while Cambodia’s follows an opposite trend.
Table 3.1. The average annual growth rate of Viet Nam and selected countries,
1991-2015 (%)
Country 1991-2000 2001-2010 2011-2015 1991-2015 Japan 0.91 -0.32 2.18 0.46 South Korea 4.74 3.40 1.15 3.41 China 8.75 10.19 7.13 8.96 Singapore 4.12 3.20 0.96 2.70 Thailand 2.92 3.26 3.97 3.02 Philippines 1.35 2.55 5.38 2.22 Malaysia 2.65 1.93 1.78 2.04 Indonesia 1.56 3.29 3.94 2.80 Cambodia 2.64 3.50 4.46 3.39 Viet Nam 5.48 3.54 4.79 4.67 Source: Authors’ calculation based on statistics from APO
Ⅰ-57
Labor productivity by sector in Viet Nam and selected countries
In this section, Viet Nam’s labor productivity is compared to other selected countries within nine
industries, including Agriculture, hunting, forestry, and fishing; Mining and quarrying;
Manufacturing; Electricity, gas, and water supply; Construction; Wholesale and retail trade,
repair of vehicles and household goods, hotels and restaurants; Transport, storage and
communications; Financial intermediation, real estate, renting and business activities;
Community, social and personal services. Labor productivity in each industry is calculated by
the ratio between its value added to a number of employed persons working in that industry.
The calculated results show that in 2015, the labor productivity of Viet Nam within almost all of these industries was at the lowest level in comparison with other selected Northeast and
ASEAN countries. Viet Nam's labor productivity was the lowest, ranking behind Cambodia in three industries, namely Manufacturing; Construction; Transport, storage and communications.
Viet Nam's labor productivity was the second lowest, only higher than that of Cambodia in
Agriculture, hunting, forestry, and fishing; Electricity, gas, and water supply; Wholesale and retail trade, repair of vehicles and household goods, hotels and restaurants. In contrast, Viet Nam had higher labor productivity than some other countries in three industries, including Mining and quarrying; Financial intermediation, real estate, renting and business activities; Community, social and personal services. The comparison in each industry is described in details in the following part.
Ⅰ-58
Agriculture, hunting, forestry, and fishing
In 2015, Viet Nam’s labor productivity in Agriculture was approximately 4,115 USD/worker, only higher than that of Cambodia (3,913 USD) and equal to 52% of that of China (7,886 USD).
Malaysia’s labor productivity in this industry is even nearly 12 times higher than that of Viet
Nam in the same year. Despite the relatively high average growth rate in the period from 1991 to
2015, Viet Nam's agricultural productivity nearly remained at the lowest level compared to other countries in the region.
Figure 3.3. Labor productivity in Agriculture, hunting, forestry, and fishing of Viet Nam and selected countries, 1991-2015
80
70
60
50
40
30
20
10
0
Japan South Korea China Singapore Thailand Philippines Malaysia Indonesia Cambodia Viet Nam
Note: Unit: thousand USD/worker, constant 2011 PPP; Cambodia’s data is from 1993
Source: Author’s calculation based on the statistics from APO
Ⅰ-59
Mining and quarrying Labor productivity in Mining and quarrying industry depends largely on the characteristics of each country. In 2015, Viet Nam's labor productivity in this industry is higher than that of
Cambodia (11.5 times), Philippines (4.3 times), Japan (2.5 times), and China (2 times).
Figure 3.4. Labor productivity in Mining and quarrying of Viet Nam and selected countries, 1991-2015
3000
2500
2000
1500
1000
500
0
Japan South Korea China Thailand Philippines Malaysia Indonesia Cambodia Viet Nam
Note: Unit: thousand USD/worker, constant 2011 PPP; Cambodia’s data is from 1993
Source: Author’s calculation based on the statistics from APO
Manufacturing
Viet Nam’s labor productivity in Manufacturing increased from 3,108 USD/worker (1991) to
10,032 USD (2015) with an average annual growth rate at 5% per year over the whole period.
China had labor productivity in this industry 4.4 times higher than that of Viet Nam in 2015 and grew annually at 9.68% per year in the same period. In 2015, other countries were more
Ⅰ-60 productive than Viet Nam in this industry, such as Japan (11 times), South Korea (11.5 times),
Singapore (15.8 times), and Malaysia (8.2 times). Cambodia attained a higher level of per- worker labor productivity by 290 USD but grew at a slower growth rate in the whole period
(3.65% per year).
Figure 3.5. Labor productivity in Manufacturing of Viet Nam and selected countries,
1991-2015 180
160
140
120
100
80
60
40
20
0
Japan South Korea China Singapore Thailand Philippines Malaysia Indonesia Cambodia Viet Nam
Note: Unit: thousand USD/worker, constant 2011 PPP; Cambodia’s data is from 1993
Source: Author’s calculation based on the statistics from APO
Electricity, gas and water supply
In 2015, labor productivity in Electricity, gas and water supply industry of Viet Nam reached
72,195 USD/worker with an average growth rate of 6.44% per year in the period 1991-2015 and
Ⅰ-61
8.82% per year in the period 2011-2015. Labor productivity in this industry of Japan, South
Korea, and China was 3.4 times, 4.9 times, and 1.6 times more productive than that of Viet Nam,
respectively. China experienced the most impressive average growth rate among compared
countries, at 11.75% per year in the period 1991-2015, but grew at a lower growth rate compared to Viet Nam in the period 2011-2015 (7.34% per year). China’s labor productivity was 117,560
USD/worker in 2015.
Figure 3.6. Labor productivity in Electricity, gas and water supply of Viet Nam and selected countries, 1991-2015 700
600
500
400
300
200
100
0
Japan South Korea China Singapore Thailand Philippines Malaysia Indonesia Cambodia Viet Nam
Note: Unit: thousand USD/worker, constant 2011 PPP; Cambodia’s data is from 1993
Source: Author’s calculation based on the statistics from APO
Ⅰ-62
Construction
Similar to that in the Manufacturing industry, in 2015, Viet Nam’s labor productivity in
Construction was 9,299 USD/worker which was lower than that of Cambodia, 9,623
USD/worker. However, this may be due to the fact that Cambodia had a higher level of labor
productivity in 1993 than Viet Nam (15,638 USD/worker and 5,722 USD/worker, respectively).
The average growth rate of labor productivity in Viet Nam was 2.92% per year in the period
1991-2015 and 5.29% per year in the period 2011-2015. In this industry, China had the highest
growth rate of labor productivity in comparison with other selected countries, reaching 6.55% per year in the period 1991-2015 and 7.34% per year in 2011-2015.
Figure 3.7. Labor productivity in Construction of Viet Nam and selected countries, 1991- 2015 80
70
60
50
40
30
20
10
0
Japan South Korea China Singapore Thailand Philippines Malaysia Indonesia Cambodia Viet Nam
Note: Unit: thousand USD/worker, constant 2011 PPP; Cambodia’s data is from 1993
Source: Author’s calculation based on the statistics from APO
Ⅰ-63
Wholesale and retail trade, repair of vehicles and household goods, hotels and restaurants
Labor productivity of this industry in Viet Nam reached 7,839/worker (2015), growing at an average rate of 2.12% per year in the period 1991-2015 and 3.9% per year in the period 2011-
2015. Singapore's labor productivity is 18.7 times higher than that of Viet Nam. This ratio to
Viet Nam is 10 times for Japan, 5 times for Malaysia, four times for Korea, and nearly three times for China in 2015. Viet Nam is among the countries which had a medium average growth rate of labor productivity in this industry. China is the country with the highest growth rate of labor productivity among the compared countries, reaching 5.82% per year in the period 1991-
2015 and 3.78% per year in the period 2011-2015.
Figure 3.8. Labor productivity of Wholesale, retail, repair in Viet Nam and selected countries, 1991-2015
160
140
120
100
80
60
40
20
0
Japan South Korea China Singapore Thailand Philippines Malaysia Indonesia Cambodia Viet Nam
Note: Unit: thousand USD/worker, constant 2011 PPP; Cambodia’s data is from 1993
Source: Author’s calculation based on the statistics from APO
Ⅰ-64
Transport, storage and communications
Labor productivity in Viet Nam's Transport, storage and communication industry is the lowest in comparison with other selected countries. In 2015, Singapore’s labor productivity in this industry was 13 times higher than that of Viet Nam; Japan and Malaysia were about nine times more productive than Viet Nam. In the overall period of 1991-2015, Viet Nam had the fourth highest growth rate in labor productivity in Transport, storage and communication, reaching 4.69% per year, falling behind China (7.56% per year), Indonesia (6.1% per year), and South Korea (4.76% per year).
Figure 20. Labor productivity in Transport, storage, and communications of Viet Nam and selected countries, 1991-2015
160
140
120
100
80
60
40
20
0
Japan South Korea China Singapore Thailand Philippines Malaysia Indonesia Cambodia Viet Nam
Note: Unit: thousand USD/worker, constant 2011 PPP; Cambodia’s data is from 1993
Source: Author’s calculation based on the statistics from APO
Ⅰ-65
Financial intermediation, real estate, renting and business activities
Calculated results show that labor productivity in this industry of Viet Nam is higher than that of some other countries, such as South Korea, Malaysia, and Cambodia. In 2015, the labor productivity of this industry in Viet Nam was 1.25 times higher than South Korea, 1.9 times higher than Malaysia and Philippines, 2.5 times higher than Cambodia. These figures may take us aback as Viet Nam's labor productivity even surpasses that of countries with developed finance and real estate industries such as Korea.
Figure 3.10. Labor productivity Financial intermediation, real estate, renting and business activities in Viet Nam and selected countries, 1991-2015
700
600
500
400
300
200
100
0
Japan South Korea China Singapore Thailand Philippines Malaysia Indonesia Cambodia Viet Nam
Note: Unit: thousand USD/worker, constant 2011 PPP; Cambodia’s data is from 1993
Source: Author’s calculation based on the statistics from APO However, the reason for this surpass needs to be carefully considered to determine whether it is because of the difference in either the classification of economic activities by
Ⅰ-66
industries or data collection and added value/sectoral labor input measurement among these
countries. We can evaluate this industry more accurately once we examine the disaggregated
economic activities in each industry. However, this is not possible based on the limited available data sources that the authors accessed.
Community, social and personal services
In 2015, labor productivity in Community, social and personal services of Viet Nam was only
higher than that of Cambodia, reaching 8,745 USD/worker. Labor productivity of South Korea
was 5.5 times higher than that of Viet Nam. Singapore’s and Japan’s labor productivity in this
industry was respectively 4.6 times and 4.4 times more productive than Viet Nam’s in 2015. The
average growth rate of labor productivity in Viet Nam was 2.4% per year (1993-2015) and
3.43% per year (2011-2015), ranking third after China and Malaysia during these periods.
Figure 22. Labor productivity of Community, social, personal services in Viet Nam and selected countries, 1991-2015 60
50
40
30
20
10
0
Japan South Korea China Singapore Thailand Philippines Malaysia Indonesia Cambodia Viet Nam
Note: Unit: thousand USD/worker, constant 2011 PPP; Cambodia’s data is from 1993
Source: Author’s calculation based on the statistics from APO
Ⅰ-67
In conclusion, the labor productivity of Viet Nam in almost all industries is at the lowest
level in comparison with that of other selected countries. In the Agriculture, hunting, forestry and
fishing industry, despite the fact of remaining a relatively high growth rate, Viet Nam's labor
productivity level was only higher than that of Cambodia. In terms of the Manufacturing industry,
there is a huge gap between Viet Nam’s level of labor productivity and that of not only Northeast
Asian countries but also other ASEAN ones. In Service sector, Viet Nam's labor productivity is
higher than that of Cambodia but still falls behind the rest.
Decompositions of labor productivity growth into shift-share effects
Japan, South Korea, China, and Vietnam
Labor productivity of Japan, South Korea, and China in years of high growth is largely based on
the contribution of within effect (see Figure 3.12).
In Japan, from 1971 to 1991, the within effect was always positive and contributed to the
growth of the country's labor productivity with an average annual contribution share of nearly
86.9%. Shift effect and interaction effect contribute about 13% and 0.1% each year to labor productivity growth during this period. After 1991, the within effect remains largely positive and
has the greatest impact on the growth of labor productivity in this country. Meanwhile, the shift
effect has a negative impact on labor productivity growth in some years.
In Korea, within effect gradually dominates the impact on labor productivity growth.
Since 1980, the labor productivity of sectors had improved over the years and contributed 78.6%
to the country's annual labor productivity growth. The shift effect continued to contribute
positively to the growth of annual labor productivity at a rate of 26% while the interaction effect
is mostly negative with an annual contribution rate of -4.6%.
Ⅰ-68
China is a special case when maintaining a positive interaction effect, showing an
expansion for industries with high labor productivity. This observation needs more insight into
China's changes in labor productivity and labor structure over time. Can be taken for example in
the Manufacturing. If the expansion of this sector in Vietnam lead to a decline in labor
productivity, China could guarantee the growth of labor productivity in this sector at the same
time with the expansion of the industry (interaction effects are positive except for 1998, 1999,
2000, 2001, 2002).
Thus, for Northeast Asian countries, the within effect is the driving factor of labor
productivity growth when the contribution rate of this effect to the growth rate of labor
productivity is about 80% in each country. In South Korea and China, the small contribution of
shift effect to labor productivity growth is observed. However, while the economic sectors with
faster growth rates of labor productivity are narrowed in South Korea, labor is shifting to
industries with faster labor productivity growth in China.
In Vietnam, in the post-Doi Moi period, the Vietnamese economy has made significant
changes. The annual growth of labor productivity in this period came mainly from the within
effect with a contribution share of 94% while the shift effect and interaction effect had a rate of
8% and -2% respectively. In the next period, 2001-2010, a strong labor movement due to the restructuring of the economic sector as well as the formation and operation of FDI enterprises in the field of manufacturing and processing industry had led to the dominance of the shift effect.
During this period, the shift effect contributed about 89% to the annual growth of labor productivity while the within effect contributed only about 17.8%. Since 2010, the within effect had gradually overwhelmed the shift effect, accounting for 78% and 32% to annual labor productivity growth, respectively. The interaction effect still has a significant impact on
Ⅰ-69
Vietnam's labor productivity growth, but in a negative direction. This result is quite similar to the decomposition of the growth rate of labor productivity in Vietnam according to GSO’s statistics in Chapter II, except in 2013, the contribution of shift effect to labor productivity growth in Viet
Nam was negative. The potential reason for this year may be due to the effect of the finance crisis in 2008 that lead to issue of labor leaving from the former high labor productivity sectors as finance and real estate. The data from APO shows that, the number of employees working in
Finance intermediation, real estate, renting and business activities fell sharply from 1,799 thousand persons (2012) to 1,681 thousand persons (2013), corresponding with a decrease in labor share of this sector from 1.38% (2012) to 1.01% (2013). This phenomenon is not shown by the data from the GSO. In contrast, the statistics from GSO still presents an increase in the number of employees working in this areas. In details, number of employees working in Finance, banking, and insurance went from 312.5 thousand persons (2012) to 335.1 thousand persons
(2013) while the figure for Real estate activities are 148.1 thousand persons (2012) and 150 thousand person (2013), respectively. Although there are a signs that the within effect is leading the growth of labor productivity in Vietnam, however, whether this trend can be maintained in the long term or not is still not confirmed at the present.
Ⅰ-70
Figure 3.12: Labor productivity growth and contribution of within effect, shift effect, and interaction effect to it in Japan, South Korea, China and Viet Nam
Interaction effect Shift effect Within effect Labor productivity growth rate
Japan South Korea 15% 15%
10% 10%
5% 5%
0% 0%
-5% -5%
-10% -10% 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 China Viet Nam 15% 15%
10% 10%
5% 5%
0% 0%
-5% -5%
-10% -10% 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: Author’s calculation based on the statistics from APO
Ⅰ-71
Selected ASEAN countries
In general, the within effect were positive in most economies during the period of 1991-
2015 (Figure 3.13). The shift effect mostly increased the growth rate of labor productivity of both developing countries (such as Thailand, Cambodia, Philippines) and developed countries like Singapore. The interaction effect was mostly considered negative for all ASEAN countries.
The general model of the contribution shares of such components is clearly seen among the selected countries. In the ASEAN, and Singapore is the country that has a very high rate of within effect’s contribution to annual labor productivity growth, mostly reaching over 80% each year since 1998. This rate is also quite high for Thailand, Indonesia, Malaysia, and relatively stable in the case of the Philippines. In general, the shift effect still plays a significant role in the growth of labor productivity of Thailand, the Philippines and Malaysia. In the period of 1994-
2015, Cambodia had a structure of contribution shares of these effects to labor productivity growth quite similar to Vietnam.
Ⅰ-72
Interaction effect Figure 3.13: Labor productivity growth rate (%) of selected ASEAN Shift effect Within effect countries, 1991-2015 Labor productivity growth rate Singapore Thailand Philippines 20% 20% 20% 15% 15% 15% 10% 10% 10% 5% 5% 5% 0% 0% 0% -5% -5% -5% -10% -10% -10% -15% -15% -15% 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Malaysia Indonesia Cambodia 20% 20% 20% 15% 15% 15% 10% 10% 10% 5% 5% 5% 0% 0% 0% -5% -5% -5% -10% -10% -10% -15% -15% -15% 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Note: Cambodia’s data is from 1994; Source: Author’s calculation based on the statistics from APO
Ⅰ-73
Conclusion In comparative relation with some Northeast Asian (Japan, South Korea, China) and ASEAN
countries (Singapore, Thailand, Philippines, Malaysia, Indonesia, and Cambodia), Viet Nam
has very low labor productivity even though its growth rate remains at considerably high
level.
In 2015, labor productivity of nine industries of Viet Nam was at or just above the
lowest level in such international comparison. Viet Nam's labor productivity was lowest
among the compared countries, including Cambodia, in the following three sectors:
Manufacturing; Construction; and Transportation, storage, and communications. Viet Nam's
labor productivity ranked the second lowest, only higher than Cambodia in Agriculture,
hunting, forestry and fishing; Electricity, gas and water supply; Wholesale and retail trade,
repair of vehicles and household goods, hotels and restaurants. In contrast, Viet Nam has
higher labor productivity than some countries in the three sectors: Mining and quarrying;
Financial intermediation, real estate, renting and business activities; Community, social and
personal services.
When decomposing the growth of labor productivity in Viet Nam and selected countries shift-share analysis method, the general model of the contribution shares of these
effects on labor productivity growth is quite clear in some countries. For Northeast Asian and
countries and Singapore, the within effect is the driving factor for labor productivity growth
with the contribution share of this effect to the growth rate of labor productivity is about 80%
in each country. In South Korea and China, the small contribution of shift effect to labor productivity growth is observed. However, while the economic sectors with faster growth rates of labor productivity are narrowed in South Korea, labor is shifting to industries with faster labor productivity growth in China. With Viet Nam and selected ASEAN countries, the shift effect has a leading role in the growth of labor productivity in the process of economic
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restructuring, but after that, the contribution share of this effect tends to decline. Instead, the
upward trend in the contribution of the within effect is a positive signal in the growth of labor
productivity in Viet Nam and these countries.
In international comparison, we must recognize countries are at different development
stages. For income convergence, Viet Nam need negative correlation between productivity
level and growth. China is still middle income but grew fast. Korea is already high but also
grew fast. But Viet Nam is only lower-middle income and growing average. It seems to be a reason for Viet Nam facing middle-income trap as addressed by some current studies.
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CHAPTER IV:
A REVIEW OF PRODUCTIVITY ENHANCEMENT POLICY 6 IN VIETNAM DURING THE ĐỔI MỚI PERIOD
Introduction
Stemming from its comprehensive impacts on GDP growth and close relationship on economic development, accordingly, productivity is a critical indicator exhibiting the picture of economic efficiency of a country. Stemming from its comprehensive impacts on GDP growth and close relationship on economic development, accordingly, productivity is a critical indicator exhibiting the picture of economic efficiency of a country. Thereby, enhancing productivity is a key mission with regard to developing countries, including
Vietnam. However, productivity, itself, has long been posing headaching question, especially under the context that Vietnam is shouldering the pressure to overcome middle-income trap while productivity is still low, innovation is modest and Vietnamese enterprises have not created the necessary comparative advantage.
Therefore, a comprehensive study is essential to assess whether Vietnam has been doing or has not been doing anything in its productivity-related policy system envisioning a far-reaching national productivity movement. A productivity movement can tackle the above- mentioned problem for Vietnamese economy: to overcome the middle-income trap.
This report is divided into three main parts. The first part will provide an overview of the Vietnamese authority’s perspective on the role of productivity. The following part will serve the purpose of re-systemizing Viet Nam’s efforts to improve productivity under both macro level (national productivity) and micro level (enterprise productivity). Lastly, we will
6 The authors would like to express our gratitude to Ms. Nguyen Thi Le Hoa, Mr. Nguyen Dang Minh and Ms. Nguyen Thi Tue Anfor their valuable comments in the process of completing this study. Ⅰ-76
summarize the achievements and limitations on the government’s efforts, and proposes some
policy recommendations.
The process of awareness on the productivity issues in Viet Nam
In general, the awareness of productivity in Viet Nam moves behind other countries in the
world, even those in the Southeast Asia region. Obviously, it was not until 1986 that Viet
Nam carried out economic reformation and adopted market mechanisms instead of central
planning. Thereafter, the vital role of productivity and its improvement were increasingly
recognized from this stage.
In the early years of Doi Moi, the term "productivity" has not been mentioned much,
but instead revamped the current production models such as “Khoán 10”. “Khoán 10”,
commonly known as Resolution 10-NQ / TW 1988 on the reformation of agricultural
economic management, directly transferred production materials to farmers. Only two years
after the implementation of “Khoán 107”, Vietnam from whose starting point had been being
a food-shortage country became the second largest rice exporter in the world. Furthermore,
changes in management mechanisms also indirectly increased Viet Nam's productivity and
production capacity. The nature of such innovation is increasing productivity in Agriculture.
Productivity, in practice, during the 1990s, was the main motivation of economic growth.
Nearly 40-60 percent of growth was due to an increase in productivity and the rest thanks to the accumulation of production materials (according to the Vietnam Development Report
2012 of the World Bank).
During the transitional stage of Viet Nam’s economy (transitional economy), the
productivity-related activities, followed by a myriad number of events and activities to attract
7 Before 1988, after many years of cooperating, agricultural production was increasingly stagnant; food production declined; hunger happened persistently; every year Vietnam had to import millions of tons of food to meet the basic demand. By the time of the Resolution No. 10 (April 1988) on the Renovation of Agricultural Economic Management, immediate production was liberated;on that year Viet Nam did not have to import food, even Vietnam gradually became the world's leading rice exporter. Ⅰ-77
the attention of the business world as well as related subjects, have been initiated since 1995.
For example, the first Vietnam Quality Conference held by the Directorate for Standards and
Quality in 1995; The round-table meeting on productivity with the participation of Asian
Productivity Organization (APO) or ISO 9000 Forum organized in 1996 in Hanoi.
The starting point for Vietnam's productivity movement began in 1996 when Vietnam joined APO Asia Productivity Organization. This is the first outstanding event in “The First
Quality Decade” (1996 - 2005) launched by former Vice President Nguyen Thi Binh. The
First Decade of Vietnam Quality set the goal of encouraging organizations/enterprises to apply management system and productivity and quality improvement tools to enhance productivity, quality, and enterprises’ competitiveness.
The main reason to choose the theme for the first ten years of a quality-oriented movement was based on APO's perspective and spirit: productivity and quality always come together. This orientation also aimed to upset traditional perspective ingrained in the mindset of policymaker during the central planning period that "quality must be sacrificed to improve productivity and vice versa". Consequently, quality was chosen as the top priority to improve in the productivity movement in Viet Nam.
In addition, participating in APO was in the middle of the new era of Viet Nam’s international integration when we entered into a number of international organizations such as the Asian Development Bank (ADB), the World Monetary Fund, etc. and especially normalizing diplomatic relations with the United States. The period of 1995-1996 witnessed
Viet Nam's great effort to reintegrate into the world. The integration with the world in productivity issues has created a premise for Viet Nam to form its first specialized organization for productivity. Viet Nam Productivity Center (VPC) established on September
26, 1997, currently also known as Viet Nam National Productivity Institute (VNPI), under the
Directorate for Standards, Metrology and Quality - Ministry of Science and Technology, has
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been regarding as the nucleus of the National Quality and Productivity Movement and the permanent representative of Vietnam at the APO.
Different from countries that stand out in the world productivity movement like Japan and Singapore, the formation of a productivity-specialized agency in Vietnam is relatively special and spontaneously. When Vietnam first joined APO, former Minister of Science and
Technology, Mr. Nguyen Quan, attended an APO summit and realized that the productivity improvement tools presented at the conference were really necessary for Vietnam, and especially the essentiality of a productivity-specialized agency to undertake these things.
Therefore, the VNPI was formed under the management of the Directorate for Standards,
Metrology, and Quality, belonging to the Ministry of Science and Technology. This structure imposed multiple layers of management over activities of VNPI, which was significantly different from the managerial mechanism in other countries such as Japan Productivity
Center (JPC), a similar productivity agency of Japan, is directly under the Government of
Japan; or Malaysia Productivity Corporation (MPC) is established under the management and financial support of the Ministry of Commerce and Industry of Malaysia. Placing a national productivity agency under the multiple levels of management may cause certain obstacles relating to functions of the agency itself and the effectiveness of the national productivity movement in general. This issue is going to be elaborated in the following section.
Another noteworthy activity in "The First Quality Decade” (1996 - 2005) is the establishment of the Vietnam Quality Award by the Directorate for Standards, Metrology, and Quality, which annually reviews, evaluates and bestow enterprises who outstandingly improved their quality and operating performance. Vietnam Quality Award intended to encourage Vietnamese manufacturing, business and service enterprises regardless of economic sectors to improve their quality of operations, create many products and goods with high quality and strong competitiveness.
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After ten years of implementing the quality decade, the remarkable results were adopting a quality management system such as ISO 9000, ISO 14000 and bringing some productivity enhancement tools to support enterprises like Kaizen, 5s into reality. This is a success in introducing Vietnamese enterprises with international standards in the quality management system, environment, safety, and social responsibility - common and basic standards that can be applied for many types of business. However, recently, enterprises often do not have data on their productivity and the uneconomical, thereby, making it difficult for managers to understand the current business activity to take measurements, if necessary, to alleviate the situation. The slow application of new systems and management tools to improve quality and productivity has made enterprises obsolete compared with other companies in the same industry in the region and the world (The First Quality Decade
Report).
This explains why in the period of 2000 - 2006, Vietnam witnessed an outstanding of economic growth, however, productivity factors contributed only 15% to the average growth rate up to 7-8% per year, meanwhile, capital growth served as the engine of economic growth during this period.
Acknowledging this limitation, for the first time, the issue of productivity improvement was formally included in the Resolution of the 10th Party Congress (2006), becoming one of the important goals in the direction and tasks of the five-year plan 2006 -
2010. Productivity’s targets are integrated into the industrial and sectoral orientation, almost every sector requires "sustainable rapid development, quality productivity".
“The Second Quality Decade” (2006 – 2015) was launched with the theme "Quality
Productivity - Key and Integration" at the 6th Viet Nam Quality Conference (2005) (Ngu Hiep
& Van Nguyen, 2015). With a clear slogan, the goal of The Second Quality Decade was no longer about the introduction of productivity enhancement tools to Vietnamese enterprises
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but required that such application must improve the competitiveness of “domestically manufactured” products and goods with international ones.
Another important difference is that if in the previous decade, the perception of the society was mainly concerned with the "quality" and "productivity" factor was somewhat overlooked, The Second Quality Decade had brought them together.
From awareness to direction, the Prime Minister officially approved the National
Program on "Improving productivity and quality of goods and commodities of Vietnamese enterprises by 2020" on May 21, 2010 (Program 712 for short). In order to organize the implementation and administer the Program's activities, the Ministry of Science and
Technology established the Program Executive Board whose responsibility is organizing the implementation of the Program, running the Program's activities and carrying out the assigned projects. Thus, it marked the first time that productivity issues were introduced as a key mission under a national action program.
At the 11th Party Congress (2011), improving Total Factor Productivity (TFP) was considered a central issue. It was obvious that there had been a fundamental change in the
Vietnamese Government’s perspective about the productivity issue during this period. The goal of "improving productivity, quality" converted into a specific target. Viet Nam's socio- economic development strategy for the period 2011 - 2020 set a target for economic growth, which identified "total productivity factor contributing to the growth of about 35%".
The Second Quality Decade carried out a series of activities to achieve the movement’s goals and the specific objectives of the Government:
- Raising awareness of society about productivity: Intensifying the appearance of productivity-related topics on the mean of communication; organizing conferences, seminars, forums on productivity and quality.
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- Completing the legal framework on Quality Measurement Standards; mechanisms and policies to encourage and support improvement on quality and productivity: The National
Assembly adopted the Law on Standards and Technical Regulations, and Measurement Law to meet the requirements of socio-economic development and international economic integration, ensuring the enforcement for all aspects of socio-economic activities; the
Government, Ministries, People's Committees of provinces and cities issued related documents to guide the implementation; various strategies, planning, and plans are integrated into the goals of productivity and quality.
- Guiding and supporting enterprises to improve productivity, quality, and facilitate trade in commodities: (i) Support enterprises to apply quality management systems, models and tools (ii) Certifying of conformity with technical standards and technical regulations; (iii)
Operation of Quality Awards; (iv) Application of barcodes and codes; (v) Application of scientific advancement and technological innovation; (vi) Brand development and protection of intellectual property rights; (vii) Implementing the Agreement on Technical Barriers to
Trade; (viii) Implementing mutual agreements / recognition conventions on conformity assessment results.
- Strengthening technical infrastructure for productivity and quality improvement activities: (i) Developing national standards and technical regulations; (ii) Developing a network of conformity assessment organizations; (iii) Developing human resources for activities of productivity and quality; (iv) Developing information resources on Quality
Measurement Standards; (v) Investing and strengthening the capacity of testing product and commodities’ quality.
Based on the proposed activities, it seems that the productivity and quality movement has been implemented widely and quite comprehensively. However, in fact, many activities
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have not achieved as planned. The movement’s summary report itself acknowledges the limitations:
- Propaganda activities were disruptively carried out and lack of national wide coverage, therefore, quality culture could not well disseminated as expected.
- There is still a lack of specific and synchronous policies on investment, finance, tax and banking to practically motivate and encourage enterprises to invest in expanding production and innovating technologies toward productivity and quality enhancement.
- The legal documents’ system in the field of standards of quality measurement in some sectors has been being still unstable and requiring more study to meet the requirements of state management.
- The number of enterprises participating in the programs of supporting to improve productivity and quality still account for a minor proportion among the total of enterprises operating. Therefore, the results of improving productivity and quality of enterprises were not enough to bring about a significant change in productivity and quality on the national scale.
While the domestic movement on productivity and quality had not achieved the expected success, the World Labor Organization published a report on the ASEAN
Community 2015, named “ASEAN Community 2015: Managing Integration for Better Jobs and Shared Prosperity”, in which addressed that labor productivity in Vietnam was the lowest in Asia – Pacific, 15 times lower than Singapore, 11 times lower than Japan, and 10 times lower than the Republic of Korea. Since then, a lot of Vietnamese mass media have entered, several comments and evaluations made and most of them aired a disappointment. It shocked the country in the final year of The Second Quality Decade, clearly that Vietnam needs a strategic shift and more drastic action. In fact, no Third Quality Decade movement was launched. Since 2015, Vietnam's productivity movement has entered a new phase, the period
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of self-shaping and exploring its own model of productivity improvement in Vietnam (Made in Vietnam).
In the 12th National Congress of the Communist Party of Vietnam (January 2016), productivity issues continued to be a top priority. A part of the key mission in the next five- year plan clearly states "focusing on implementing solutions to improve the quality of growth, labor productivity, and competitiveness of the economy". Thus, after two decades Vietnam began to launch the movement of early productivity, interest has been diverted from
"productivity and quality" to "productivity". Additionally, under the era of the fourth industrialization, innovation is required along with the goal of improving productivity.
Under this context, Resolution 05-NQ / TW issued by the Central Executive
Committee on November 1, 2016, set out some major guidelines and policies to continue the renovation of the growth model, improvement of the quality of growth and labor productivity, competitiveness of the economy. The growth model in the coming years needs to be designed based on productivity, quality, and efficiency along with innovation, towards fast and sustainable development. This is also the first legal document that directly addresses productivity improvement.
This resolution also set out a series of specific productivity targets for the 2016-2020 period: (i) Annual average productivity growth rate will be higher than 5.5%; (ii) The growth rate of intra-industry productivity will contribute more than 60% to the increase in labor productivity in 2020; (iii) TFP will contribute to the average growth in the period of 2016 -
2020 about 30 - 35%; (iv) Narrowing the national competitiveness gap with ASEAN - 4.
To concretize the policies proposed under Resolution 05-NQ / TW, Resolution No.
27 / NQ-CP dated 21/02/2017 by the Government issued Action Program of the Government for policy innovation growth model, improving labor quality and competitiveness for the
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economy. In Resolution 27, responsibilities and tasks for relevant ministries were clearly defined: Assigning 16 major tasks and policies to be implemented to ministries, sectors, and localities, with 120 specific tasks aiming to boost economic restructuring and renew growth models.
In Resolution No. 27, the Ministry of Planning and Investment (MPI) is the lead agency cooperating with ministries, agencies, and localities to monitor and facilitate the implementation of this Action Program; periodically report to the Government necessary measures to ensure a consistent and effective implementation of the Action Program; keep abreast of relevant contents in the working program of the Party Central Committee, the
Politburo, the Secretariat, the National Assembly and the Standing Committee of the National
Assembly to make reports according to regulations.
Regarding to productivity issues, in addition to the function of presiding over the entire program, the Ministry of Planning and Investment is also responsible for guiding the content, methods, identifies macro-economic indicators of the whole country and transfers to localities as a basis to compare and report on the results of implementation of the Resolutions, including: labor productivity, productivity of general factors, the rate of increase in intra- industry productivity contributing to increase labor productivity, etc. Previously, these works were carried out by the Vietnam Productivity Institute under the Ministry of Science and
Technology. On the other hand, the Ministry of Science and Technology undertook the task of building and operating the system database benchmarks and best practices in productivity for enterprises. Currently, this state-level project is carried out by VNPI and Engineering Ho
Vinh Loc is the Lead Researcher.
According to Vietnam's legislative and administrative procedures, the relevant ministries and departments will then issue decisions and circulars to guide smaller levels to carry out their tasks. However, in the Action Plan of the Ministry of Planning and Investment
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- the leading agency of the whole program in accordance with Decision 27, there is no specific content regarding productivity issues.
After Resolution 05 had been issued, there seemed to be no new developments or specific activities given in the state apparatus. In addition to the assigned task of developing a database of benchmarking performance for enterprises that are still in the process of implementation, VNPI also provides informal support for a number of local statistical offices in calculating labor productivity, given that the Ministry of Planning and Investment has not yet adapted to the newly assigned task8.
The years 2017 and 2018 witnessed a strong promotion by the Government of
Vietnam and related agencies in finding a new direction on the path of improving productivity, especially labor productivity. Many workshops, researches, and seminars on productivity had taken place during this time. And Central Institute for Economic
Management (CIEM) under the Ministry of Planning and Investment is the research unit assigned to preside over many state-level projects on productivity, including project
“Evaluating the contribution of industries and structural shift to labor productivity growth in
Viet Nam” chaired by Dr. Nguyen Thi Tue Anh, and project: “Viet Nam’s agricultural labor
productivity growth: Current situation and Solutions” chaired by Msc. Dinh Xuan Nghiem.
Productivity issues had also become a burning topic discussed in the 2018
parliamentary sessions (Bao Yen, 2018). The fuss and not yet definitive in choosing to follow
a suitable model for the national productivity movement can continue to pull Vietnam back in
the APO’s productivity report in the following years.
In fact, the Advisory Group of Prime Minister Nguyen Xuan Phuc recommended that
the Government should establish a National Productivity Council to lead the new productivity
8 This is the view of VNPI. Research team will continue verify it by interviewing representatives of related agencies. Ⅰ-86
movement (Le Nguyen, 2018). This option is expected to be implemented immediately in
2019.
Summarizing the process of productivity awareness in Vietnam, especially over the twenty years since joining APO, the current Vietnamese productivity movement could not be considered a real national productivity movement. However, it is undeniable that the
Government has also made great efforts to build Vietnam's own productivity movement. At least with the existing foundations in Vietnam, it is possible to be prepared for a boom of the future national productivity movement.
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Figure 4.1: Evolution of Vietnam’s productivity movement, 6th Viet Nam Quality Conference (2005)
The First Quality Decade (1996 – 2005) The Second Quality Decade (2006 – 2015) ? (2016 – …) Context Asian Financial Deep The economy Joining Global European public Industry 4.0 Crisis integration continues to WTO Financial debt; Domestic with achieve high Crisis economy recovered international growth slowly organizations Oriented Resolution No. 05-NQ / documents/events 1th Viet Nam Quality Conference (1995) 6th Viet Nam Quality Conference (2005) TW, Resolution No. 27 / NQ-CP Leading and Minister of Science and Minister of Science and Ministry of Planning implementing Technology (leading) Technology (leading) & Investment agencies Minister of Science and Technology
Goal To promote and motivate organizations / enterprises To create quality reputation, improve the To innovate growth model, to apply management systems and productivity competitiveness of "manufactured in Vietnam" improve labor productivity goods and the economy’s improvement tools competitiveness Main activities - Establishment of VNPI under Ministry of - VNPI: continuing to guide productivity -VNPI: continuing tasks Science and Technology improvement tools for enterprises and starting as in the previous period - - VNPI plays role in supporting and guiding conducting research on productivity - MPI is responsible for productivity improvement tools for - Continuing to maintain the Vietnam Quality calculating and enterprises Award researching labor - - Establishment of Vietnam Quality Award - Launching Program 712 (Phase 1) productivity -Program 712 (Phase 2)
Source: Illustrations by the authors
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Viet Nam’s efforts on improving national productivity
The process of planning and implementing productivity policies in Vietnam Before the Resolution 05-NQ / TW was approved (November 1, 2016), Vietnam's productivity movement with specific policies and programs had been presided over by the
Ministry of Science & Technology. Then, under the context that the productivity of social labor was very low, the National Assembly and the Party Central Committee has raised the issue of productivity improvement to the guidelines and policies basing on recommendations and proposals from the Ministry of Science & Technology and the Ministry of Planning &
Investment (namely VNPI and CIEM).
Afterward, the government introduced Action Plan to implement the Resolution No.
27 / NQ-CP dated 21/2/2017, which assigned responsibilities with specific tasks to the ministries concerned. Basing on this framework, the designated ministries were in charge of elaborating a working plan for each agency under their authorities (Ministry of Planning and
Investment and Ministry of Science and Technology all issued the Action Plan on March 31,
2017). Once receiving the mandate from higher tier authorities, responsibility to formulate an annual working plan to achieve assigned goals lies on each agency. This procedure took about
5 months for a policy to be disseminated to the direct executives.
During the implementing process, the relevant ministries will have to report the results to the Ministry of Planning and Investment, from which the Ministry will report to the
Government. In fact, according to the report of the Minister of Planning and Investment
Nguyen Chi Dung in October 2018, after nearly two years of carrying out 16 major tasks and policies with 120 specific tasks of the new Resolution, there were 25.8% of the tasks have been implemented and the results were clear, 57.5% of the tasks are being implemented and demonstrated initial results, and 16.7% of the tasks have been being implemented but have not met the time. In particular, the Ministry of Education and Training has not yet issued a
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Program of Action for the Implementation of the Resolution 27. The Ministry of Foreign
Affairs and the Ministry of Health were slow to issue it (both are issued in November 2017 with implementation documents), in comparison with other ministries issued plans in March of the same year.
On the other hand, the collaboration among ministries in implementing shared goals was still lax. While agencies that directly carry out tasks under different ministries, they must contact each other quite roundly if following the official process. For example, when the
General Statistics Office prepared for a policy proposal or published a report and need to consult other agencies working on productivity, it would have to send an official letter to MPI,
MPI transferred to the Ministry of Science and Technology, Ministry of Science and
Technology to the General Department of Standards and Quality, then this Department transferred to the Vietnam Productivity Institute. This process made many tasks slow and ineffective. The reason for this was because, in Viet Nam, the state agencies followed the peer rules and through the higher authorities.
National productivity center: Vietnam National Productivity Institute (VNPI) Vietnam Productivity Institute VNPI was established in 1997 with the support of APO, especially, Japanese experts from JPC and JICA. After twelve years of development, at the moment, VNPI is efficiently operating and having an organizational structure including the president, vice president, 7 departments and 2 divisions located in Ho Chi
Minh and Da Nang (see Figure 4.2).
With the current organizational structure, VNPI is undertaking three key missions:
(i) Conducting research to propose policies and solution to bolster up national
productivity.
(ii) Providing consulting services and organizing workshops focusing on
managerial skills and business development
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(iii) Fostering the transforment of up-to-date methods and international
experience to improving productivity
At first, VNPI set gravity on providing consultant service, organizing a training course to enhance corporate productivity. It was only after 2010 that VNPI’s activities included researching projects and conducting macroeconomic reports. Afterward, since
2014, VNPI has been annually publishing Vietnam Productivity Report, which is resembled to one prepared by APO (see Figure 4.3).
Figure 4.2: VNPI’s organizational structure diagram
President
Vice President
Researc Improvi Develo- Enviro- -hing, -ng ping ment Service Interna- Solutio- Traini-- Product Adminis PERFE- and Develo tional Accoun n g -ivity -trative Ho Chi Da CT Develo p-ment Cooper- -ting Develo- Depart- Consult Depart- Minh Nang Model p-ment Depart- ation Depart- ping ment -ing ment Office Office depart- Depart- ment Depart- ment Depart- Depart- ment ment ment ment ment
Source: VNPI
The Annual Vietnam Productivity Report is a comprehensive document providing information and in-depth analysis of Vietnam’s productivity. In order to reinforce the reliability and meaning of their calculation, Vietnam Productivity Report applied methodology and framework suggested by APO. Complying with international standards, this report generated decent and objective information about the picture of productivity in
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Vietnam via indicators as Labor Productivity and Total Factors Productivity (TFP), etc.
Moreover, the report also illustrates the situation of the current state of productivity of the economy as a whole, economic sectors, industries, and analyzes factors affecting productivity and makes a comparison with some Asian countries.
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Figure 4.3: Summary of VNPI’s functions and activities
Conducting reseach to propose policies and solution to bolster up national productivity
• Researching and proposing strategies, policies, mechanisms to promote naitonal productivity • Researching, calculating and publishing periodic report about productivity • Researching and building model for systematic methods and solution to promote productivity and quality • Developing human resource and constructing scholar network • Disseminating information and knowledge related to productivity
Providing consulting services and organizing workshops focusing on managerial skills and business development
• Training courses: Applying solution to improve productivity; Developing the quality of experts and productivity enhancing personnel; Improving managerial skills for senior managers. • Consulting services: Building managing system following international standards; Applying models and solutions to improving productivity; Providing a managing system integrated with indicators and solutions; Calculating, evaluating productivity; Providing excellent operating models. • Assessing and issuing certificates: Assessing and issuing certificate for Good Executive Plan of 5S, Lean, TPM in order to encourage companies to sustaint and regularly innovate these methods.
Engaging in inernational cooperation to resaerch and apply solution to improve productivity and sustainable development
• Incoporating with APO and other national productivity organizations in order to perform research, develop experts in productivity improment and building models to promote productivity. • Participating in resaerching, calculating and making comparison on national productivity indicators • Organizing international conference, conducting field trips, publishing productivity ehancement materials, so that, VNPI is able to facilitate knowledge transferment and accumulating experience
Source: VNPI
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With those activities listed above, VNPI attainted achievements and made a great contribution to the productivity improving cause in Vietnam.
From researching and managing perspectives, VNPI implemented major projects as:
- Completing research and setting up indicators system and method to measure
productivity.
- Carrying out projects to calculate the productivity of provinces in Vietnam such as
Soc Trang, Tra Vinh, Binh Dinh.
- Proposing scientific-based and technological solutions to improve competitiveness
and productivity in manufacturing and service sectors.
- Measuring labor productivity and total factor productivity (TFP) of industrial
sectors.
- Designing measures to address productivity problems of business, economic
sectors and nation.
- Developing “Typical model of quality productivity” (For example, “One Village,
One Product” programme, etc.)
From the perspective as a provider of services as consulting, training, etc. (key mission of VNPI since it was founded in 1997). At the end of 2018, VNPI:
- Provided consulting programmers and instruction for over 5,000 organizations in
order to shorten their manufacturing and delivery time, minimizing the rate of
defect products, increasing productivity and efficiency of machines, etc.
- Initiated hundred national key projects to promote productivity and protect the
environment;
- Had over 100,000 participants in both domestic and international workshops,
conferences, field trips which were organized by VNPI
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- Produced over 200,000 news bulletins in Forum of Productivity and Quality and
printed 90,000 books and hundreds of posters, videos, CDs to disseminate and
raise community awareness about the role of productivity.
Many activities of VNPI receive active support from Japanese organizations. At the first stage, experts from JPC directly trained and transferred knowledge to VNPI personnel.
Since then these people have been specialists in productivity and retraining for local businesses. At a later stage, this direct support turns to collaborative work in joint projects.
- 2012, 2013: “Internship program for young managers from Japanese enterprises”
(VNPI in collaboration with JPC). These Japanese businesses appointed young
managers (at least 5 years of experience) in a specific field, to practice at a
Vietnamese enterprise. And Vietnamese businesses received interns for a certain
period of time (3-6 months) with a specific task for them, such as helping to tackle
a business problem or simply facilitating Our employees get to know and study
with a Japanese manager.
- 6/2015 – 1/2016: "Productivity Consultancy Trainers Training in Mekong with
Socio-Economic Focus (PCTT)" (JPC organized), aiming to develop the human
resources who can assist the improvement of productivity among Cambodia, Laos,
Myanmar and Vietnam (CLMV). Contributions of this training course are, 191
trainees were trained (including 167 trainees by PCTT participants), 21 sets of
training documents were developed (including 20 sets by PCTT participants), 53
companies were improved (including 45 companies by PCTT participants),
according to the JPC.
- 5/2016 - 4/2018: Project "Workplace Improvement and Satisfaction of Employees
(WISE)" (cooperation JPC-JICA-VNPI). Up to 4/2017, the project trained 21
business management specialists and property managers; Directly diagnosed and
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solve difficulties for 12 Vietnamese enterprises registering to join the project,
Increase productivity; increased revenue and profit for businesses and at the same
time ensured the rights and satisfaction of employees, according to the VNPI. The
goal of the project is implemented for 16 small and medium-sized companies of
Vietnam.
In particular, the cooperation between VNPI and JICA is also through JICA volunteer programs. In the period of 2000 - 2015, about 10 JICA volunteers worked at VNPI to support productivity improvement programs for Vietnamese enterprises. The number of experts of
VNPI by the end of 2018 is 25 people, of which 15 people have learned from JPC through the
2-year training program of JPC in Vietnam. In addition, most experts at VNPI participated in short-term training courses in Japan through the annual APO program.
With the mission set out at the beginning of VNPI's establishment as a national productivity agency, VNPI holds a huge expectation to be the leader of the nationwide productivity movement. However, with the current position in the system of agencies related to productivity, it seems that VNPI has not yet fully played its role.
National productivity programme: Programme No. 712 Throughout Vietnam’s government assiduous efforts to develop the national productivity,
VNPI played an integral part in the success of them. However, it was difficult for VNPI only to exert a well-round impact on a national scale. Thereby, the government introduced
Programme No. 712, which was also called The National Programme "Improving productivity and quality of products and goods of Vietnam's enterprises by 2020". This is the first national productivity programme to encourage the community and business world to join hand into Vietnam’s productivity improvement cause.
Programme No. 712 is a part of the Second Decade of Quality which was approved under Decision No. 712/Qd-TTg issued on 21st of May 2010 in order to raise awareness about
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productivity and products’ quality. By virtue of government efforts, productivity and quality of products in Vietnam turned into a new leaf with a remarkable increase in its competitiveness.
This programme is a collection of synchronized missions and solution to reform policy mechanisms, organizations, human resource, especially, technological elements and legal framework so that it can facilitate the improvement of the productivity of business.
To coordinate activities under the framework of Programme No.712, Ministry of
Science and Technology (MOST) formed an executive board which was chaired by the
Minister and the Deputy of Ministry of Science and Technology, Director of Directorate for
Standards, Metrology, and Quality were vice chairmen. Other 10 members of the board were representatives of different Ministries in Vietnam and Vietnam Chamber of Commerce and
Industry.
With this organizational structure, Programme No. 712 carried out in a total of 9 projects. Among these projects, 8 of them were under the management of Ministry of Science and Technology and other 6 Ministries and the last one was directed by People’s Committee of each province and first-tier cities in Vietnam (see Figure 4.4).
After the first phase (2010 – 2015), generally speaking, the programme numerically met general objectives, however, the quality of those results was under concerns. As it was indicated in the programme’s summarizing reports, the sum of national standard exceed the target number about 12%, others goals were virtually completed.
This report also addressed several drawbacks after finishing the first phase of the programme. Firstly, the construction progress and projects’ approval was postponed. After the first phase, only 3 sector level productivity improvement projects and 10 regional projects were approved yet. Secondly, each competent authorities and provinces undertook different
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approaching methods, thereby, it posed a major obstacle to have an effective inter-cooperation.
Thirdly, many companies and designated attendants participated in the programme without enthusiasm. Fourthly, the network of consultants, managers, who supported the implementation of productivity improvement, was not sufficient enough. Fifthly, there was a great deficit of capital to allocate into these projects. And lastly, the issuing of commands, regulatory framework from the Programme executive board to supervise the implementation of these projects were disruptive and ineffectively disseminated.
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Figure 4.4: Summary of National Programme “Improving productivity and quality of products and goods of Vietnam's enterprises by 2020”
General objectives - Building and applying technical standards, managerial systems and tools to improve productivity - Creating a significant change in productivity and quality of core products.
Specific objectives
Newly introducing 6,000 standards Forming teams of expertise and consultants
Applying national standards with 100% 60.000 companies will be guided to of products can latently violate code of apply technological advancement, sanitization and adulterate the habitat managing system, tools to enhance productivity. và chất lượng Establishing network of organization to test the compliance of core products 40% enterprises who produce core with national standard product will have and execute a plan to boost productivity.
Creating productivity and quality Increasing the contribution of TFP into movement at cities and provinces GDP to 35% in 2020.
Working Framework Directorate for Standards, Metrology Introduce the programme and Quality (initiate standards)
MOST and 6 Minitries People's Committees (supervie 8 projects) (supervise 1 project)
1. Setting and applying standards 2. Promoting productivity and quality activities 9. Promoting quality of goods 3. Increasing the productivity of Industrial products produced by SMEs at region 4. Increasing the productivity of Agricultural products 5. Increasing the productivity of Communication and Information products 6. Increasing the productivity of Construction sector 7. Increasing the productivity of Heath care products and services 8. Increasing the productivity of Transporting
Source: Collected by authors from Decision No.1385/QĐ–BKHCN in 06/10/2014
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Viet Nam’s efforts on improving enterprises’ productivity
In order to improve national productivity, enterprise productivity is always the first thing to be concerned about. Indeed, in Vietnam, policies to support enterprises to improve productivity & quality have been widely implemented. In order to have a comprehensive overview, this section will systematize institutes, centers, and businesses that support and train enterprises to improve productivity, as well as models and tools that they utilize.
The system of organizations that support enterprise productivity improvement As mentioned earlier, part of Program 712 is aimed at supporting Vietnamese enterprises to improve productivity and quality (the goal of 60,000 enterprises guided to apply scientific and technical advancement, management systems, models, and tools for productivity improvement). To achieve this goal, Ministries and People's Committees of provinces and cities set up a yearly (or for a 2 or 3-year period) action program for their agencies. Basing on these plans, they have to divide it into specific tasks based on criteria and determine the implementation time.
For example, in order to fulfill the objectives of the project "Improving the productivity and quality of industrial products", Ministry of Industry and Trade (MoIT) developed a "Business Support Program" for the period of 2017 - 2018, including 7 tasks for
7 targets. For the task "Support training and transforming the environmental management system to the new version of ISO 14001: 2015 for industrial enterprises", the MoIT conducts three activities: (i) Organizing five training courses to update changes and guiding the application of conversion to the new environmental management system (ISO 14001: 2015 standard); (ii) Training, consulting, guiding the conversion of the ISO 14001: 2004 environmental management system to the new version of ISO 14001: 2015 for 22 enterprises;
(iii) and finally issuing certificates for enterprises applying the environmental management system ISO 14001: 2015 (Figure 4.5).
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Training courses on productivity improvement tools are widely announced to business world. And the organizations also invite lecturers to teach with the requirements set by each ministry and local government. Training programs and lecturers may come from agencies of the Directorate for Standards, Metrology and Quality (usually VNPI), and private or foreign consulting organizations. Enterprises participating in the training courses will receive financial support (at most 70% of course fee in the case of the MoIT).
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Figure 4.5: The deployment process of support for enterprises to improve productivity & quality
Project to improve productivity & quality of goods in industry A/ province X
Ministry A People's Committee in X
Business support program of Ministry A/ province X during period..../year...
Task 1: Support businesses to meet Task 2 Task... standards....
Organize training courses and consultancy
Support conversion to standard system ...
Assess to issue certificate of standard application...
Source: The authors’ compilation; Illustration based on the deployment progress of the project: “Improving productivity and quality of the Industrial products” chaired by the Ministry of Industry and Trade
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The organizations that support enterprises in improving their productivity are established in both public sector and private sector (Figure 4.6).
Figure 4.6: Organizations supporting, training and consulting businesses to improve
Public sector9 Private sector
QUATEST QUATET Masypic GKM Vietnam Productivity & 2 3 P & Q Solutions Company Quality Consulting JSC
Qpc Productivity HwC VNPI SMEDEC M-Talent Human & Quality EPRO 2 Resources Consulting Management JSC Consulting JSC Limited Company
QTC SMEDEC 1 Nawasa ... academy
QUACERT
productivity & quality
Source: Compilation from the Report of Activities supporting enterprises to apply the management system, models, and tools to improve the productivity & quality within the framework of the National Productivity and Quality Program of VNPI
The system of tools and methods to improve enterprise productivity Enterprise productivity is influenced by many different factors. Of which, three factors are considered to be the most fundamental in productivity improvement: (i) Workers are the source of improvement; (ii) Leaders orient towards improvement activities; (iii) Technology and process management play an important role (Nguyen Anh Tuan & Le Hoa, 2013). Based on these three factors, productivity improvement methods and models are introduced to solve one of the three factors above or all three simultaneously.
9 QUATEST: Quality Assurance and Testing Center; SMEDEC: SME Development Support Center; QTC: Quality Training Centre; QUACERT: Vietnam Certification Centre; HwC: Vietnam-Germany Technology Training and Transfer Centre Ⅰ-103
Due to historical characteristics, Vietnam is a latecomer in the adoption of market economic model (only after Doi Moi in 1986) and is behind many countries in implementing models and solutions to improve enterprise productivity. Therefore, most of the models and tools for enterprise productivity improvement today are learned from foreign countries, especially those that were famous for their productivity movements such as Japan and
Singapore.
The following are basic tools that have been researched and applied to bring success to organizations and businesses in productivity improvement.
Figure 4.7: System of tools and methods to improve productivity for enterprises
International Organization for •Standard management system Standardization (ISO)
•Recommendation system Western countries •Standard benchmark and learning from the best method
•Total Quality Management (TQM) •5S •Just In Time - JIT •Kaizen Japan •Lean production system •Seven Tools of Quality Control (SPC) •Total Productive Maintenance •Lean Six Sigma
Source: The Authors’ compilation
Among the above tools, ISO management system, along with 5S and TPM, is the most commonly used tools in Vietnam. The ISO management system is the first tool that every
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enterprise applies (with different levels). In addition, if enterprises meet the requirements of
5S, Lean or TPM, they will be granted a certificate of good practice.
Concluding remarks and policy recommendations
Achievements Although the awareness process of productivity in Vietnam is slower than other countries in the region. But with the support of Japanese experts and APO in the early stages of establishing the VNPI, Vietnam basically outlined the framework of a national productivity movement.
The first and the most pressing problem that needs to be resolved after the period of centrally planned is the relationship between "productivity" and "quality". The mechanics of a centrally planned economy often generate conflicts between these two categories. Chasing after productivity often results in a drop in quality, thus a trade-off relationship between quantity and quality is recognized. Bearing them in mind, the First Decade of Quality (1996 -
2005) partly solved the problem when a number of methods and tools were introduced to
Vietnamese enterprises, with the aim of increasing productivity while also ensuring quality.
The Second Quality Decade (2006 - 2015) expanded and prototyped various models and methods to improve productivity for businesses. Especially, the Productive Nation
Programme has been implemented with the basic goal that by 2020, TFP's contribution to
GDP will be increased to 35%. In fact, this goal has been achieved for a long time. The contribution of TFP in 2018 to GDP was 43.5% (according to the GSO).
After two decades of the productivity movement, the policy planning, and enforcement framework has been generally shaped. Relevant agencies have also accumulated considerable experience in productivity, along with a large number of well-trained workers and technological transfer. It builds up a solid foundation for Vietnam to implement new
Ⅰ-105
productivity policies in the future, aiming at a true national productivity movement which is able to introduce a substantial impact on a national scale.
Limitations In summary of the productivity policies that have been introduced so far, the productivity movement is lacking in generality and comprehensiveness. To begin with, new policies only focused on improving productivity associated with the business sector, while the problem of productivity improvement is the problem of the nation, businesses, and households altogether.
Additionally, because the productivity movement favored the quality factor, some other aspects of productivity have not been given as much attention as labor productivity. As a result, the 2015 ILO showed that Vietnamese labor productivity is the lowest in the Asia-
Pacific region, and is far behind other countries in the region. Besides that, the awareness of productivity issues in Vietnam seems to follow traditional planning thinking (the top-down planning) and less coming from the practices of individuals and units.
In terms of the planning process and policies implementing, because the agencies that are related to productivity are scattered in different ministries, the communication process between parties is often hampered and delayed. Therefore, it is necessary to have an independent or direct agency under the Government to preside and be the first to link activities between agencies. Vu Minh Khuong (Associated Professor at Lee Kuan Yew
School of Public Policy) proposed to establish a National Productivity Council to carefully identify and propose development strategies for each industry (Bich Ngoc, 2018).
Regarding the methods and models to improve productivity for enterprises, most
Vietnamese enterprises are currently consulted to foster technological transfer from various countries, mostly Japan. This, basically and initially, produces an acceptable result, in the long term, businesses will be prone to the "Glass Ceiling Effect". According to the
Ⅰ-106
explanation of Dr. Nguyen Dang Minh - Hanoi National University, the problem of productivity needs to be solved from both technical and administrative perspectives. Applying a successful model from another country only solves the technical problem, and the administrative method needs to be modified to suit the circumstances in Vietnamese.
Otherwise, most tools will only work to a certain level (congestion point) and then stops.
Obviously, businesses need a model of productivity improvement that is truly "Made in
Vietnam".
It can be seen that Vietnam has been working on productivity for many decades and there have been high-level resolutions, interests at Party congresses and government policies, but they remained ineffective because of (i) lack of continued top-level support & commitment; (ii) lack of incentives for firms, workers, enterprises, etc. to participate; (iii) lack of effective detail design (only broad directions) and necessary staffing, budgeting and mechanisms; (iv) traditional government & ministerial bureaucracy & delays; and (v) insufficient international support. As a result, productivity movement so far has been too small, scattered and only partially implemented, and did not reach the critical point to change the national mindset and produce visible results.
Ⅰ-107
CHAPTER V: CONCLUSIONS
Conclusions Productivity is an important indicator reflecting the economic efficiency of countries, having a close relationship with growth and economic development through a link to GDP growth.
Viet Nam's productivity issue is considered in the context that the economy is under pressure to overcome the middle income trap, while the labor productivity is low, innovation is not high and Vietnamese enterprises have not created necessary comparative advantage. In Part 1 of Viet Nam Productivity Report, the authors insightfully analyze the tendency of labor productivity growth process in Viet Nam in the period of further integrating into regional and international economy, so as to identify whether to assess the nature of productivity growth process horizontally or vertically, and make comparisons of that in an international context.
The new findings are as follow.
Viet Nam’s labor productivity at economy level tends to increase, but the growth rate is unstable over the years. Labor productivity of the Industry and Construction sector is the highest, followed by the Services sector and the lowest is the Agriculture, Forestry and
Fishery sector. However, while the labor productivity of the Industry and Construction sector tends to increase rapidly over the years, the Services sector increased slowly and decreased in some periods. In terms of type of ownership, labor productivity of FDI has tended to decrease, the state and non-state sectors have increased gradually. The labor productivity level of the state sector is the highest, followed by FDI sector, and the last one is the non-state sector (as of 2015).
Labor productivity of important industries has not been significantly improved. While
Industry and Construction sector contributes nearly 40% to the country's GDP, labor
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productivity of industries that account for a large proportion in the sector such as
Manufacturing and Construction (accounting for about 50% and 18%, respectively of this sector’s added value) did not increase, even regressed in recent years. Mining still accounts for nearly a third of the value of this sector; however, its labor productivity growth is not much, largely based on capital growth. In the long term, labor productivity of Manufacturing and Construction industries need to be strongly improved to create breakthroughs in Viet
Nam’s economic growth.
In Viet Nam, TFP gradually replaces the capital density in leading labor productivity growth at both the economy and sector/industry levels. The contribution share of TFP to annual growth rate of labor productivity in the period 2011-2015 reached 89%. The motivation for growth of labor productivity in the period 1991 - 2015 mainly came from the within effect, although there was also a period of overwhelming in shift effect (2001-2010).
The interaction effect had a negative sign, indicating the shift of labor from sectors with increasing labor productivity to the sectors with declining labor productivity. The within effect overcomes the shift effect to lead Viet Nam's labor productivity growth is a positive trend and should be maintained to ensure the growth of labor productivity in the long term after Vietnam takes full advantage of the shift effect.
In comparative relation with some Northeast Asian and ASEAN countries, Vietnam has very low labor productivity even though its growth rate remains at a considerably high level.
In 2015, labor productivity of nine industries of Viet Nam was at or just above the lowest level in such international comparison. Viet Nam's labor productivity was lowest among the compared countries, including Cambodia, in the following three sectors:
Manufacturing; Construction; and Transportation, storage, and communications. Viet Nam's labor productivity ranked the second lowest, only higher than Cambodia in Agriculture,
Ⅰ-109
hunting, forestry and fishing; Electricity, gas and water supply; Wholesale and retail trade, repair of vehicles and household goods, hotels and restaurants. In contrast, Viet Nam has higher labor productivity than some countries in the three sectors: Mining and quarrying;
Financial intermediation, real estate, renting and business activities; Community, social and personal services.
The shift-share analysis shows that within effect plays a key role in labor productivity growth in Northeast Asian countries and Singapore, while shift effect still contributes a large part to the growth of labor productivity in ASEAN developing countries, including Viet Nam.
However, the contribution of within effect in Viet Nam is following an upward trend.
Labor productivity enhancement requires a holistic and comprehensive reform process of institution, technology and enterprise systems. This report reconsidered the awareness process and policy efforts in improving labor productivity in Viet Nam since Doi Moi.
Although the awareness process of productivity in Vietnam is slower than other countries in the region. But with the support of Japanese experts and APO in the early stages of establishing the VNPI, Vietnam basically outlined the framework of a national productivity movement.
The first and the most pressing problem that needs to be resolved after the period of centrally planned is the relationship between "productivity" and "quality". The mechanics of a centrally planned economy often generate conflicts between these two categories. Chasing after productivity often results in a drop in quality, thus a trade-off relationship between quantity and quality is recognized. Bearing them in mind, the First Decade of Quality (1996 -
2005) partly solved the problem when a number of methods and tools were introduced to
Vietnamese enterprises, with the aim of increasing productivity while also ensuring quality.
After that, The Second Quality Decade (2006 - 2015) expanded and prototyped various
Ⅰ-110
models and methods to improve productivity for businesses. Especially, the Productive
Nation Programme has been implemented with the basic goal that by 2020, TFP's contribution to GDP will be increased to 35%. In fact, this goal has been achieved for a long time. The contribution of TFP in 2018 to GDP was 43.5% (according to the GSO).
After two decades of the productivity movement, the policy planning, and enforcement framework has been generally shaped. Relevant agencies have also accumulated considerable experience in productivity, along with a large number of well-trained workers and technological transfer. It builds up a solid foundation for Vietnam to implement new productivity policies in the future, aiming at a true national productivity movement which is able to introduce a substantial impact on a national scale.
Despite the fact of gaining above-mentioned achievements, in summary of the productivity policies that have been introduced so far, there are some limitations still existing.
In general, the productivity movement in Viet Nam is lacking in generality and comprehensiveness. To begin with, new policies only focused on improving productivity associated with the business sector, while the problem of productivity improvement is the problem of the nation, businesses, and households altogether. Additionally, because the productivity movement favored the quality factor, some other aspects of productivity have not been given as much attention as labor productivity. As a result, the 2015 ILO showed that
Vietnamese labor productivity is the lowest in the Asia-Pacific region, and is far behind other countries in the region. Besides that, the awareness of productivity issues in Vietnam seems to follow traditional planning thinking (the top-down planning) and less coming from the practices of individuals and units.
In terms of the planning process and policies implementing, because the agencies that are related to productivity are scattered in different ministries, the communication process
Ⅰ-111
between parties is often hampered and delayed. Therefore, it is necessary to have an independent or direct agency under the Government to preside and be the first to link activities between agencies. Economist Vu Minh Khuong 10 has currently proposed to establish a National Productivity Council to carefully identify and propose development strategies for each industry (Bich Ngoc, 2018).
Regarding the methods and models to improve productivity for enterprises, most
Vietnamese enterprises are currently consulted to foster technological transfer from various countries, mostly Japan. This, basically and initially, produces an acceptable result, in the long term, businesses will be prone to the "Glass Ceiling Effect". According to the explanation of Dr. Nguyen Dang Minh - Hanoi National University, the problem of productivity needs to be solved from both technical and administrative perspectives. Applying a successful model from another country only solves the technical problem, and the administrative method needs to be modified to suit the circumstances in Vietnamese.
Otherwise, most tools will only work to a certain level (congestion point) and then stops.
Obviously, businesses need a model of productivity improvement that is truly "Made in
Vietnam".
It can be seen that Vietnam has been working on productivity for many decades and there have been high-level resolutions, interests at Party congresses and government policies, but they remained ineffective because of (i) lack of continued top-level support & commitment; (ii) lack of incentives for firms, workers, enterprises, etc. to participate; (iii) lack of effective detail design (only broad directions) and necessary staffing, budgeting and mechanisms; (iv) traditional government & ministerial bureaucracy & delays; and (v) insufficient international support. As a result, productivity movement so far has been too
10 Member of the Vietnamese Prime Minister’s Macroeconomic Advisory Group and Associate Professor at Lee Kuan Yew School of Public Policy. Ⅰ-112
small, scattered and only partially implemented, and did not reach the critical point to change the national mindset and produce visible results.
Ⅰ-113
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APPENDICES
Appendix 1: Data and estimations of coefficients in TFP model of Viet Nam, 1991-2015 Data Data on value added, capital and labor of the entire economy and 2-digit industries were collected from the General Statistics Office for the period 1991-2015. At the economy level, the data are classified into three economic sectors (including Agriculture, Forestry and
Fishing; Industry and Construction; Services) and by type of ownership (including the State sector, non-state sector and FDI sector). Specifically, the output of the entire economy (Y) is calculated by GDP in Vietnam dong at the constant 2010 price. Labor is reflected by the number of person employed (L) in a year.
The data provided by Capital Department of GSO, are available for both capital
(Gross capital formation) and labor that were used directly in calculation of growth accounting method. The capital data is adjusted based on constant 2010 price for the whole period 1991-2015 by GSO. Such time series is considered more accurate than the data available on GSO’s website. Therefore, the authors did not need to set any assumption for capital in based year or depreciation rate of asset.
The difference in the TFP’s estimated results between this report and Prof. Vu Minh
Khuong’s study may come from two following reasons.
• Lack of data on capital stock due to the definition of capital using in Viet Nam’s
statistics: GSO defines Investment capital as Investment capital is measured by
Social development investment capital, is the entire amount of money spent to
increase or maintain production capacity and resources to improve the material
and spiritual living standards of the whole society in a certain period of time,
including: Investment capital to create fixed assets, investment capital to increase
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mobile assets, capital to buy rare and precious assets, reserve gold in the form of
goods and reserve goods in the population and other development investment
capital to improve people's intellectual standards, enhance social welfare, improve
the ecological environment, support people, etc. This measure of Investment
capital is used to calculate Gross capital formation instead of capital stock. In other
words, GSO cannot separate capital stock in the measurement of capital input.
It is worth noting that in this dataset, after the finance crisis in 2008, Viet Nam’s
Government set up stimulus packages that might be calculated in the capital data
of the whole economy that lead to the increase of capital in 2009 and 2010. These
packages were ended in 2011, resulting in a sharp fall of capital in Viet Nam.
Figure A1.1: Gross capital formation (trillion VND by constant 2010 price), 1991-2015
4,000,000
3,500,000
3,000,000
2,500,000
2,000,000
1,500,000
1,000,000
500,000
0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: GSO
• The income share of capital: Prof. Vu Minh Khuong estimated this ratio
around 0.50 that we think is a much higher ratio than the income share of capital
in a developing country as Vietnam. In VEPR’s report, authors applied a lower
ratio of income share, just nearly 0.3. This income share of capital is calculated
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by the regression from GDP, capital and labor for the period 1990-2015 based on
the data from GSO. A lower income share of capital applied, the higher
contribution share of TFP to labor productivity growth as this report presented. If
we change this ratio to 0.5, the contribution share of TFP is much lower and very
close to the result suggested by Prof. Vu Minh Khuong.
Table A1.1: Estimate of income share of capital ( )
𝜶𝜶 Entire economy 0.∝28
By economic activities
Agriculture, Forestry and Fishing 0.25
Industry and Construction 0.26
Services 0.07
By type of ownership
State sector 0.34
Non-state sector 0.20
FDI sector 0.30
Source: Estimation of authors from GSO’s statistics for the period 1990-2015
Appendix 2: GDP growth decomposition using growth accounting method
Contribution by Input Period GDP growth TFP Capital Labor
1991-2015 7.0% 5.0% 2.1% -0.1%
1991-1995 8.8% 12.0% 1.7% -4.8% 1996-1999 6.2% 7.1% 1.5% -2.4% 2000-2007 7.3% 4.0% 2.2% 1.1%
2008-2012 5.8% 1.5% 1.8% 2.5% 2013-2015 6.3% 2.2% 0.4% 3.7%
Source: Authors’ calculation from the statistics of GSO
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Appendix 3: Labor productivity from enterprises’ perspectives
This content is cited from the findings of the project "Wages and labor productivity in Vietnam" conducted by the Institute of Economic and Policy Research (VEPR) in 2017, with funding from Japan International Cooperation Agency in Vietnam.
Introduction In the empirical literature, labor productivity is commonly defined as output per worker, and output is measured by value added or revenue. Using revenue as a measure of output has one disadvantage that it is affected by the use of intermediate inputs (Biesebroeck, 2014). For example, if the intensity of intermediate inputs increases over time, the use of revenue will lead to the over estimation of productivity growth.
This chapter use data from enterprise surveys to estimate labor productivity and compare the growth of labor productivity with the growth of wages. Labor productivity is defined as value added per worker. The value added in each industry and economic sector is calculated using the information from the enterprise surveys.
More specifically, we approximated the value added using the following formula:
= + + +
𝑉𝑉𝑉𝑉 𝑌𝑌𝑌𝑌 𝐼𝐼𝐼𝐼𝐼𝐼 𝑃𝑃𝑃𝑃𝑃𝑃 𝐷𝐷𝐷𝐷𝐷𝐷1 − 𝐷𝐷𝐷𝐷𝐷𝐷0 Here VA is value added; YL is the labor income, consisting of salary, bonus, and subsidies; is the payments on social and health insurance, and unemployment insurance;
is the𝐼𝐼𝐼𝐼 𝐼𝐼firms’ profits; and and are the values of accumulated capital
1 0 𝑃𝑃𝑃𝑃𝑃𝑃depreciation at the end of the period𝐷𝐷𝐷𝐷 and𝐷𝐷 at the𝐷𝐷𝐷𝐷 beginning𝐷𝐷 of the period respectively. It should be noted that other production taxes such as license taxes, taxes on the use of natural resources and other business fees are not included in the calculation of value added because the information on these taxes and fees are not available from the enterprises surveys.
However, because these taxes and fees are relatively small, their omission may not affect our analysis in any significant ways.
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This chapter computes two measures of value added using different definitions of profits. The first measure is the sum of wage income, insurance payments, capital depreciation, and the net profits from the sale of goods and services. The second measure is defined in broader terms, consisting of wages income, insurance payments, capital depreciation, and total pre-tax operating profits. The total profits cover not only the profits from sales of goods and services but also the profits from financial activities and other profits.
The financial costs and revenues consist of the receipts and payments of dividends, interests, and the losses and gains resulting from the changes in assets prices and exchange rates. The other profits consist the gains and losses arising from the sales or liquidation of assets, and the revaluation of assets, goods and production materials, asset losses, and tax exemption, etc. It should be noted that financial profits or losses resulting from financial activities may not be linked directly linked the worker's efforts or productivities. The second measure of value added and labor productivity is only used for the purpose of references.
The study in this chapter takes the sum of value added and employment over firms.
For each economic sector and industry, the labor productivity is equal to the total value added divided by total employment. This method of calculating labor productivity is equivalent to taking the weighted averages of firms’ labor productivity with the firms’ employment size being used as weights. Labor productivity is the average labor productivity per workers in each industry or economic sectors. The real values of labor productivity are obtained using the industrial GDP deflators.
Labor productivity by firm size Table A3.1 reports the growth rates of labor productivity in nominal and real terms for the period between 2004 and 2015, break down by firm size. With regards to the size of firms, there are small differences in the productivity growth between different types of firms. Small
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and medium enterprises experienced a relatively high productivity growth, whereas productivity growth is found lower in large and micro enterprises.
Table A3.1. Labor Productivity Growth by By firm size, 2004-15 (Average rates per annum, %)
Labor productivity Indicators Nominal Real Total 14.52 4.96 By firm size Micro 15.43 5.41 Small 15.60 6.64 Medium 15.71 6.52 Large 14.93 5.20
Source: Nguyen Tien Dung, Futoshi Yamauchi, Nguyen Duc Thanh, Pham Thi Tuyet Trinh, Nguyen Thanh Tung (2017)
Labor productivity by type of firm ownership Table A3.2 reports the average growth rates of per-worker value added during the period between 2004 and 2015, breakdown by industries and economic sectors. Using the first measure of value added with financial and other profits excluded, value added per workers grew by 4.9% a year between 2004 and 2015. This growth rate of labor productivity is around 0.5 percentage points higher than the growth rate of labor productivity estimated using the national account statistics. As can be expected, the labor productivity growth was high in the latter half of the
2000s but significantly slowed down in recent years. The average rate of productivity growth reached 7.2% a year during the period from 2004 to 2010 and dropped to 2.3% a year between
2010 and 2015.
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Table A3.2. Labor Productivity Growth by type of firm ownership, 2004-15 (%)
Nominal Growth Rate Real Growth Rate Indicators Labor Labor Labor Labor Productivity Productivity Productivity I II I Productivity II Period 2004-15 Total 14.52 12.52 4.96 2.84 FDI 10.12 7.66 0.71 -2.04 Private 17.63 16.60 8.50 7.49 State 19.96 17.61 9.74 7.56 Period 2004-10 Total 19.43 14.97 7.22 2.68 FDI 8.93 3.94 -3.13 -8.42 Private 25.30 20.78 14.07 9.90 State 29.72 26.94 16.72 14.07 Period 2010-15 Total 8.89 9.65 2.32 3.04 FDI 11.56 12.30 5.51 6.21 Private 9.05 11.78 2.17 4.68 State 9.21 7.32 1.91 0.24 Notes: Financial profits and other profits are not included in the calculation of the labor productivity I, but are included in the calculation of value added. Source: Nguyen Tien Dung, Futoshi Yamauchi, Nguyen Duc Thanh, Pham Thi Tuyet Trinh, Nguyen Thanh Tung (2017)
The second measure of value added, which takes into account financial profits and all other firms’ profits indicated a similar trend in labor productivity growth. However, the broader measure of value added tends to give lower estimates of labor productivity growth.
For most industries and economic sectors, the growth of labor productivity decreased by one to two percentage points when the broad measure of value added is used, indicating that financial profits and other profits grew less than wages and net profits from sales.
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There are significant differences in the growth of labor productivity among economic sectors. Again, the data from enterprise surveys suggest that labor productivity growth was slower in the FDI sector compared to the growth of labor productivity in private and state enterprises. In FDI enterprises, value added per workers increased only at the rate of 0.7% between 2004 and 2015. Meanwhile, value added per worker increased at the annual rate of
8.5% and 9.7% in the private and state sector during the same period. State and private enterprises experienced a large productivity gain between 2004 and 2010, but the productivity growth dropped sharply in the period between 2010 and 2015.
The low productivity growth in the FDI sector was largely attributed to the sharp contraction in the mining industry, especially crude oil production. Viet Nam’s crude oil production has declined sharply from its peak in 2004. The decline in output and the sharply declining oil prices have severely affected oil-producing enterprises and FDI enterprises in particular. Our decomposition analysis shows that the productivity gain from the manufacturing industry is largely offset by the loss in the mining industry. Besides that, the shift toward more labor-intensive activities has negatively affected the labor productivity in other services and telecommunications despite the rapid growth in output. As seen below, FDI enterprises performed well in manufacturing industries. Furthermore, despite the productivity loss in the period between 2004 and 2010, the FDI sector experienced a relatively high productivity growth in recent years.
In the state sector, the high productivity growth was largely driven by investment. Between
2004 and 2015, the capital-to-labor ratio increased at the annual rate of 15.8% a year, which is considerably higher than the annual rate of productivity growth of 9.7%. Investment also played an important role in boosting productivity in private enterprises. In the private sector, the capital-to- labor ratios increased at the annual rate of 9.9% during the period between 2004 and 2015. By
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contrast, the capital-to-labor ratio increased much slower in the FDI sector, averaging only 0.4% a year during the same period.
Labor productivity by industries Table A3.3. Labor Productivity Growth by Industries, 2004-15 (Average rates per annum, %)
Labor productivity Indicators Nominal Real Total 14.52 4.96 By economic sectors FDI 10.12 0.71 Private 17.63 8.50 State 19.96 9.74 By firm size Micro 15.43 5.41 Small 15.60 6.64 Medium 15.71 6.52 Large 14.93 5.20 By industries Agriculture 8.73 -2.33 Mining 6.58 -7.62 Manufactures 16.36 9.43 Public utilities 20.11 9.43 Construction 15.51 6.44 Trade 15.87 5.04 Hotel 11.39 0.99 Posts & telecommunications 3.61 -0.67 Transportation 12.08 3.98 Other services 12.07 -0.63
Chemical, Rubber, Plastics 17.87 10.85 Electronics 15.89 8.99 Food Processing 17.35 10.36 Footwear 15.82 8.92 Garment 16.52 9.58 Machinery 16.69 9.75 Metals 13.97 7.18 Transportation means 14.92 8.08 Woods and Furniture 15.70 8.82 Other manufacturers 15.79 8.90 Notes: (a) Total labor income, or labor income II, consist of all wage income, subsidies, bonus as well as payments on social and health insurances and unemployment insurance.
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(b) Financial profits and other profits are not included in the calculation of labor productivity
Source: Nguyen Tien Dung, Futoshi Yamauchi, Nguyen Duc Thanh, Pham Thi Tuyet Trinh, Nguyen Thanh Tung (2017) Among industries, manufactures, water and electricity, and construction experienced the highest productivity growth. Value added per worker increased at the annual rate of 9.4% in manufacturing enterprises and public utilities, and 6.7% in construction. The labor productivity falls in mining, agriculture, and post and telecommunication, and other services.
Hotels and restaurants and transportation exhibited low productivity growth.
Most manufacturing industries experienced significant improvements in labor productivity. Food processing, garment, footwear, machinery and equipment, and chemicals exhibited high productivity growth, averaging between 9% and 10% a year. Meanwhile, metals and transportation means have relatively low productivity growth. A more detailed analysis of labor productivity in the Manufacturing industry is shown in the table below.
Table A3.4. Labor Productivity Growth in Manufacturing Industries, 2004-15 (%)
Labor productivity I Indicators Nominal Real FDI SECTOR Total 13.99 7.21 Chemical, Rubber, Plastics 14.01 7.23 Electronics 14.47 7.66 Food Processing 15.45 8.58 Footwear 14.42 7.61 Garment 15.72 8.83 Machinery 11.02 4.41 Metals 10.04 3.49 Transportation means 10.58 3.99 Woods and Furniture 15.43 8.56 Other manufactures 13.37 6.63
PRIVATE SECTOR Total 18.29 11.24 Chemical, Rubber, Plastics 20.21 13.05 Electronics 19.36 12.26 Food Processing 19.04 11.96 Footwear 17.21 10.24 Garment 17.78 10.77
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Machinery 18.35 11.30 Metals 16.70 9.76 Transportation means 19.68 12.56 Woods and Furniture 19.69 12.56 Other manufactures 17.89 10.87
STATE SECTOR Total 20.51 13.34 Chemical, Rubber, Plastics 23.51 16.16 Electronics 13.79 7.01 Food Processing 21.21 14.00 Footwear 20.21 13.06 Garment 16.61 9.67 Machinery 15.16 8.31 Metals 15.86 8.96 Transportation means 13.64 6.87 Woods and Furniture 16.24 9.32 Other manufactures 20.51 13.33 Notes: (a) Total labor income, or labor income II consist of wage income, bonus, subsidies as well as payments on social and health insurances and unemployment insurance. (b) Financial profits and other profits are not included in the calculation of labor productivity.
Source: Nguyen Tien Dung, Futoshi Yamauchi, Nguyen Duc Thanh, Pham Thi Tuyet Trinh, Nguyen Thanh Tung (2017)
Table A3.4 shows the relationship between wage growth and labor productivity growth by economic sectors and manufacturing industries. Although rapid labor productivity growth took place in all economic sectors, there remain considerable differences between economic sectors. In general, productivity growth tends to be higher in the state and private manufacturing enterprises than in FDI enterprises.
In the FDI sector, high productivity growth is observed in Electronics, Processed foods, Garment, Chemicals, but Metals, Machinery and Transportation means experienced a low productivity growth.
In the private sector, high labor productivity growth is observed in Chemical, Rubber,
Plastics; Machinery; Transportation means; Woods and Furniture. Similar to the FDI sector, low labor productivity is also found in Metals.
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In the public sector, high labor productivity growth is observed in the Chemical,
Rubber, Plastics and Processed foods. Meanwhile, electronics was the lowest labor productivity.
In summary, there are still some specific industries with low labor productivity in all three economic sectors (Metals) but there are also particular sectors with high labor productivity in this sector but low productivity in the other sector, such as the Machinery and the Transportation means
Conclusion In general, the labor productivity growth rate computed by the enterprise survey dataset in this appendix is about 0.5 percentage points higher than the previous chapters (Chapters II and III use national account statistics). However, the fluctuation trend of economic sectors is quite similar.
On the other hand, this chapter also provides more information about the labor productivity of enterprises size. In particular, small and medium enterprises had relatively high productivity growth, while it was found lower in large and micro enterprises.
Finally, labor productivity by industries is also decomposed at a smaller level than the previous chapter, especially focusing on manufacturing industries attracting the largest amount of FDI but slowing labor productivity growth (chapter II). In these industries, FDI enterprises was significantly lower labor productivity than that of the other sectors, while private enterprises showed a relatively high labor productivity level and relatively equal among manufacturing industries (although it's average was still lower than the average of the state sector, not too much inferior compared to the results of the entire economy).
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PART II
Japanese Productivity Enhancing Measures
and the Possibility of their Adoption in Vietnam
Japan has developed many productivity enhancing methods for domestic adoption and dissemination abroad. Ten such methods for strengthening domestic enterprises and human resource are explained: mindset, five S and kaizen, handholding, shindan, TVET-industry linkage, kosen, technical interns, kosetsushi, FDI-local firm linkage and supporting industry promotion. Vietnam and Japan have had close economic relations for a quarter century, yet Vietnam has not embraced any of the Japanese productivity methods deeply or systematically. Vietnam should introduce some of them in proper speed and sequence as part of a national productivity movement. In adopting a foreign model, careful selection and adjustments must be made to fit domestic reality. The process should start with a pilot project and proceed to building a national model and institution, training, nationwide implementation and finally to devolution to the private sector. Issues in policy organization, features of national productivity movements and distinction between direct and indirect policy support are also discussed.
CONTENTS
INTRODUCTION II-1
1．Mindset change II-4
2．5S and kaizen II-7
3. Handholding II-12
4. Shindan II-15
5. TVET-industry linkage II-19
6. Kosen II-23
7. Mobilization of technical interns dispatched to Japan (gino jisshusei) II-26
8. Kosetsushi II-29
9. FDI-domestic firm linkage II-31
10. Supporting industry promotion policy II-35
11. Additional discussion II-38
REFERENCES II-44
INTRODUCTION
Japan’s catchup process began in the late nineteenth century when the Tokugawa samurai government opened up to the powerful and advanced West. Since then, Japan has developed many productivity tools for industrialization which are unique to Japan. Some of them go back more than a century, many were created in the post-WW2 high growth era of the 1950s and 60s, and still others were introduced recently. By now, many of these productivity tools have been taught and emulated in the rest of the world, especially in Asia where Japanese FDI has a large presence, but also in Europe, North America, Latin America and Africa with the assistance of Japanese firms, government, NPOs as well as private consultants. Basic tools such as 5S and kaizen have become a standard learning package in many countries. Some countries have graduated from Japanese assistance and carry out productivity actions by themselves. There are even countries, such as Singapore and India, that have mastered Japanese productivity tools in their own ways and started to teach other countries. In the process of global dissemination, Japanese productivity tools have been proved effective in all societies and cultures, not just in countries which share the same national features as Japanese such as teamwork, long-term orientation and manufacturing dexterity. In fact, there are very few people in the world who resemble Japanese in their life and work style. Even so, kaizen works effectively in India and Argentina where popular culture and attitude are very different from Japanese. Basic work disciplines such as keeping the factory neat and clean, reducing muda (waste) and reporting problems immediately are culture-free advice which can improve productivity in any country. Another important point is that, in importing Japanese productivity tools, each country must select and modify the original model to suit domestic society. Mindless copying and pasting is unadvisable. Because each society is different, foreign ideas and systems must be adjusted to fit the reality of the home country without losing the intended core function. When Maruti Suzuki taught efficiency to Indian automotive engineers, the latter spontaneously created an inter-firm network of kaizen experts to exchange information and teach and help new recruits, a phenomenon unseen in Japan. When Thailand introduced shindan, training curriculum was simplified, and official certification was not adopted unlike the Japanese original model. Ethiopia learned 5S from JICA, but it created a standard dissemination procedure unique to Ethiopia for speed and volume, and began to coach entire cities consisting of many public and private entities and schools, which is very different from the Japanese way of customizing guidance to each individual firm. Vietnam opened up to the Western world more than a quarter century ago, and since then has received many Japanese business investments and cooperation projects. But Vietnam has not embraced any of the Japanese productivity tools in a deep way. Individual Japanese firms, JICA experts and senior volunteers, the Japan Productivity Center and other institutions have implemented many productivity programs in Vietnam, but these were random and mutually unrelated, and the scale was usually too small. These have not been integrated into Vietnam’s own national productivity
Ⅱ-1 movement for internalization, scale-up and sustainability. Productivity programs conducted by the Japanese side alone are insufficient, and impact often evaporates when the program ends. In principle, any industrial project in any country should proceed in the following sequence to maximize national impact (overlapping of these action stages is possible and even advisable): (i) A pilot project (usually with international support) (ii) Establishment of a national model with proper local adjustments (iii) Training of domestic experts and consultants (iv) Creation of a national institutional mechanism with sufficient mandate, staffing and budget (v) Full nationwide implementation (vi) Privatization, where government recedes and the private sector takes over the movement Vietnam’s industrial programs often end in small-scale pilot projects supported by donors (stage (i)) without internalization, institutionalization or nationwide implementation. In order to promote productivity in greater scale for visible results, Vietnam should launch a national productivity movement under close cooperation among the Party, the government and the business community (the meaning and components of a national productivity movement are explained in the last section). This report proposes that Vietnam should adopt Japanese productivity tools intensely and consistently, with appropriate selectivity and adjustments, to overcome a middle income trap and continue to climb to the high-income status. In so doing, Vietnam should exercise strong ownership and commitment instead of being a passive receiver of international support. In this Part II, standard Japanese productivity programs which are practiced in Japan and taught in many countries are explained. They can also be introduced to Vietnam if both countries have strong commitments. The actual speed and depth of learning depends on the will and capacity on the Vietnamese side as well as the amount of resources Japan can mobilize in both financial and human terms. Needless to say, foreign models do not have to be confined to Japanese. Vietnam is free to choose any foreign models for productivity enhancement. But Japan is the leading source of concrete productivity measures in the world and there are already thousands of Japanese firms operating in Vietnam. Moreover, Japanese firms and government are generally willing to cooperate with Vietnam. For these reasons, we recommend that Vietnam start with Japanese productivity tools. Table 2-1 summarizes ten Japanese productivity tools discussed in this section.
Table 2-1. Japanese Productivity Enhancing Tools for Domestic Adoption and Dissemination Abroad Tool Key feature Existing or related programs 1 Mindset change Proper mindset must be inculcated Some nations adopted national before productivity enhancement is productivity movements with attempted. Some countries have varying degrees of success. transformed national mindset fully or Singapore and Ethiopia partially. A national productivity launched such national movement requires mobilization of campaigns with Japanese help. multiple tools and actions for at least In Vietnam, no systematic
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several years under the top leaders’ national effort has been strong commitment. introduced. 2 5S and kaizen Kaizen is a philosophy with a set of Japanese FDI, JICA, Japan concrete tools for eliminating muda Productivity Center and private (any wasteful action or thing) from consultants have taught 5S and the workplace. 5S is the most basic kaizen in many countries with practice for implementing kaizen. visible improvements. In The teaching method is standardized Vietnam, efforts exist but they but variation exists depending on are not yet widespread or individual firms and experts. integrated. 3 Handholding A customized and comprehensive In Japan, JETRO and local support for selected SMEs for 2-3 governments routinely provide years with a clear target, covering handholding support to SMEs. management, marketing, technology, Similar support is also available product development, finance and so in Taiwan, Korea, Malaysia, etc. on as needed (not just kaizen). Not yet practiced in Vietnam. 4 Shindan A state-certified SME consultant Japan has 26,000 shindanshi system with standardized training, who work at home and abroad. tests and renewal. Shindan experts JICA has introduced shindan in (shindanshi) can be officials or many Southeast Asian nations private citizens. They actively assist including Thailand, Indonesia SMEs often with relatively low fees. and Malaysia, with some difficulties. 5 TVET-industry TVET institutions in Japan not only This linkage formation is a linkage teach skills to students but work standard content in Japanese closely and constantly with hiring cooperation for TVET firms to improve programs and institutions. JICA assisted Hanoi facilitate internship and job University of Industry, placement of students. Graduating Industrial University of HCM students are highly demanded by and other schools for linkage industry. formation (see also Kosen below) 6 Kosen Kosen is a Japanese education JICA Kosen Project system for producing engineers with (2013-2018) created the pilot practical skills and attitudes. The kosen model in Industrial Vietnamese kosen model is defined University of HCM, Cao Thang as those institutions teaching Technical College (HCMC), technical knowledge and skills, Hue Industrial College and Phuc proper mindset and creativity as well Yen College of Industry (Vinh as supporting students for internship Phuc, now renamed to the and employment. College of Industry and Trade). Kosen Kiko will continue support. 7 Mobilization of Gino jisshusei are foreign workers Vietnam sends the largest gino jisshusei learning technical skills at specific number of gino jisshusei to (technical interns firms in Japan for three years. Japan Japan. Japanese SMEs are in Japan) is revising this system to receive generally impressed with their more workers in broader sectors and attitude and skill learning. Japan for longer periods. Returning and Vietnam are working to
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workers should be actively mobilized eliminate improper receiving for fatherland’s industrialization, but firms and labor brokers. this is often not happening. 8 Kosetsushi Kosetsushi are local technical centers Japan has a long history of (technical support with official technical experts and kosetsushi with at least one centers for SMEs) analytical equipment and provide located in every prefecture. various technical service such as Some nations has similar testing, analysis, certification, technical centers, but often only product development, processing, at central level. Vietnamese problem finding, etc. to SMEs at MOIT is studying the possibility subsidized cost. of setting up kosetsushi with Korean help, visits to Japan, etc. 9 FDI-domestic firm A support program for FDI to find Thai BUILD/BOI conducts linkage local firms for part procurement or matching services. Malaysia long-term partnership. Direct official tried VDP and ILP in the past. support such as trade fairs, matching Vietnam has trade fairs, events, database and individual firm databases and matching events assistance, as well as subsidizing but produced little result due to private effort, are commonly used. the scattered nature of these Meanwhile, forced linkage against activities and the lack of local firms’ will usually does not work. firm capacity. 10 Revitalizing Integrated support for management, Japan, Thailand and Malaysia supporting industry technology and finance should be the promoted supporting industries programs ultimate target. In latecomer nations, each in its own way. Vietnam’s policy should start with direct current system is primitive, technical support and move to cumbersome and highly limited indirect private guidance as domestic in scope. For broader impact, it capacity rises. Transparent and should be significantly reformed easy-to-use incentives and linkage by selective adoption of formation support should also be international best practices. offered.
The rest of Part II explains these Japanese productivity methods in detail, with some overlaps in content, as well as how other countries learned them and how Japan teaches them abroad. Vietnamese leaders and policy makers should study these methods for possible adoption in Vietnam with proper selectivity and modification. The last section discusses additional issues in policy organization, features and instruments of a national productivity movement, and distinction between direct and indirect policy support.
1. Mindset change
It is observed in many developing countries that, even when productivity tools such as 5S, kaizen and shindan (see below) are introduced, impact is small and short-lived. If workers, engineers, managers and responsible government officials do not possess the right attitude and dedication to absorb new knowledge and work hard for improving efficiency, any productivity tool will prove
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useless because it is learned only superficially and soon forgotten. Learners must have a strong internal urge to adopt new tools. Japanese experts can teach productivity tools to anyone, but they cannot transform the mindset of Vietnamese people because mindset is deeper than techniques. Vietnamese and Japanese working cultures are different. Japanese experts must fully understand Vietnam’s culture and social structure before asking workers and managers to change their behaviors. Mindset change is hardly possible if Japanese experts know little about Vietnam and must speak through interpreters. Mindset change should properly be initiated and carried out by the Vietnamese people themselves. National features unfit for economic growth include short-termism, selfishness, excessive bureaucracy, inattention to details, lack of persistence and resolution, lack of upward mobility, materialism, corruption, extreme individualism which rejects teamwork, and disregard of laws, rules and contracts. Vietnamese people and government currently exhibit these symptoms in varying degrees. Vietnam as a nation must transform its mindset greatly before learning productivity tools listed in the remainder of Part II. This is why productivity enhancement must begin with a national awareness campaign. Weak mindset is a problem not unique to Vietnam. In his book The Malay Dilemma (1970), Malaysian Prime Minister Mahatir bin Mohammad lamented that indigenous Malays were burdened with fatalism, formality and lack of interest in material excellence, which was unfit for industrialization unlike economically very active Chinese Malays. Since then, Malaysia has introduced various affirmative actions for ethnic Malays and encouraged them to be more dynamic, yet their relative lack of energy still remains. In Sri Lanka, the apparel industry emerged in the late 1970s and young rural labor was recruited to work in Katunayake EPZ near Colombo. Young female workers then knew nothing about money, work ethic or city life and some of them, dubbed “JUKI girls,” lost decency and caused social problems. Subsequently, EPZs were built across the country so rural workers no longer had to migrate to cities to work. More importantly, leading Sri Lankan garment firms such as MAS and Brandix systematically trained and transformed rural Sri Lankans to become one of the most productive garment workers in the world. However, great achievement in labor attitude and efficiency in Sri Lankan apparel did not spread to other industrial sectors. In Ethiopia, Prime Minister Meles Zenawi asked the Japanese policy dialogue mission, “I have studied East Asian policies and our industrial policy has improved in the last several years. Why do my people continue to pour money into property speculation and not manufacturing? Why do they not build more factories? Please tell us how East Asian governments transformed people’s mindset to invest and learn more.” In response, the Japanese delegate suggested initiation of a national kaizen movement. Compared with these countries, the mindsets of Japanese, Korean and Chinese (including overseas Chinese) are quite different. These peoples are naturally dynamic in both commerce and manufacturing. They can learn, produce, invest and innovate even without official assistance, and
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can do these things more effectively if proper official support is rendered. They do not have to be told to be active by the government. Japan, Korea and overseas Chinese states already belong to the high income group, and China is catching up rapidly since the 1990s. This points to intrinsic differences in national character which were the results of diverse history as well as domestic and external conditions. We must start with the premise that different people are good at different things, and some people must start industrialization with mindset change while others don’t. Changing national mindset is far more difficult than introducing a new machine or technology, but there are countries that attempted—and even succeeded in—this feat. Singapore is a prime example. In 1980, Prime Minister Lee Kuan Yew requested Japan to teach productivity, and this became JICA’s first comprehensive productivity support to any foreign country. Cooperation was conducted throughout the 1980s in three phases. Phase I (awareness, 1981-85) implemented a series of national campaigns to hammer the importance of productivity into the minds of all citizens until even taxi drivers became aware. This was the most difficult phase in which Singaporeans had to be convinced, Japanese had to adjust, and trust had to be built before any action could be introduced. In Phase II (action, 1986-88), a number of Singaporean firms were improved on site using the Japanese method. Japanese experts coached firms and Singaporeans learned how to do this. In Phase III (ownership, 1989 onward), Singaporeans became able to continue the productivity movement without Japanese assistance, and they even started teaching other countries (with Japanese intermediation). These three phases are standard phases for executing a national productivity movement with Japanese cooperation. One may argue that Singapore is an exception because it is a small city state with dominant Chinese population. It is no wonder that it learned productivity relatively easily and fast. But many other countries with a large rural population also tried national productivity movements, with or without Japanese assistance, with varying degree of success1. The list of students is a long one that includes Korea, Thailand, India, Hungary, Brazil, Argentina, Paraguay, El Salvador, Costa Rica, Tunisia, Egypt, Ethiopia, Tanzania, Zambia, Ghana, Botswana, Mauritius and Burkina Faso. Ethiopia, a poor African nation, asked Japan to teach kaizen in 2008. A JICA kaizen project, now in its third phase, has been implemented since 2009. Prime Minister Meles Zenawi (in office 1995-2012) and Prime Minister Hailemariam Desalegn (in office 2012-2018) were both personally and strongly committed to application of kaizen in Ethiopia, not just as a set of convenient tools but more importantly as a life and work philosophy to transform the national mindset. Industrial policy dialogue with Japan was conducted regularly2, the Ethiopian Kaizen Institute was established with
1 Apart from JICA cooperation, Japanese-style productivity tools and movement can be learned via the Ministry of Economy, Trade and Industry (METI), the Asia Productivity Organization (APO), the Japan Productivity Center (JPC), the Kaizen Institute (private consultant group), Japanese private consultants and retired engineers, as well as World Bank and AsDB projects funded by Japan. Moreover, many countries which mastered kaizen, such as Singapore, India and Thailand, can also teach Japanese-style productivity methods to others. 2 GRIPS was designated by Prime Minister Meles as the Japanese counterpart of this industrial policy dialogue, and Prof. Kenichi Ohno has served as the policy dialogue leader on the Japanese side since 2008.
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sufficient budget and staff, kaizen awards were created, September was designated as the Kaizen Month, citywide kaizen movements were launched, and Ethiopia began to teach kaizen to other African nations and the African Union. Taxi drivers in Addis Ababa now know kaizen. In Vietnam, mindset change has been tried in scattered occasions including in-house training at Japanese FDI3, Keiei Juku (business executive courses at Foreign Trade University supported by JICA), and training programs at some labor exporting companies for Vietnamese workers before dispatching them to Japan (gino Jisshusei—see below). But these remain small and local in scope. There has been no systematic effort to change the mindset of an entire nation in Vietnam unlike Singapore or Ethiopia. Outside government, an interesting mindset-change program for Vietnamese people is being developed by GKM Lean Management Institute, a private consultant firm, in Hanoi. Dr. Nguyen Dang Minh, its executive, is an automotive engineer who used to work at the Production Technology Department of Toyota Headquarters in Aichi, Japan for seven years before returning to Vietnam. He not only argues the importance of mindset (TÂM THẾ, in his own terminology) but also teaches individual firms with a practical and concrete program for transforming the company-wide mindset. His method consists of securing full mandate and commitment from the general director, intensive discussion with the heads of all departments, drafting of standard operation manuals by all departments, and isolation of workers who do not cooperate. Details are a business secret of GKM Lean Management Institute. Since 2015, Dr. Minh has successfully transformed the mindsets of several Vietnamese firms including Truong Hai Auto.
2. Five S and kaizen
Kaizen is a Japanese word for improvement. In Japanese management, kaizen means continuous and participatory improvement in quality and productivity involving the entire company from top management to middle managers and production line workers. It aims to install a permanent process of eliminating muda (waste)4 and maximizing the use of existing human and nonhuman resources within a firm. It is a continuous bottom-up effort for improving efficiency without requiring additional investment, in sharp contrast to other methods that involve purchase of new machinery or adoption of frontline technology with a considerable expenditure (GRIPS Development Forum, 2009). The origin of Japan’s kaizen movement was the statistical control method imported from the
3 All Japanese firms, especially large ones like Toyota, Honda, Denso, Yamaha, Canon, Kyocera, Daikin, Komatsu, etc., have internal programs to train and re-train their new and existing workers for safety, efficiency, technology, customer service and proper work ethic in Japan and abroad. 4 According to Toyota Production System, muda—defined as any thing or action that does not add to value—is classified into seven types: (i) waste of processing, (ii) waste of inventory, (iii) waste of over-production, (iv) waste of waiting, (v) waste of motion, (vi) waste of transportation, and (vii) waste of making defects. Kaizen may be construed as an endless effort to identify and eliminate these muda.
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United States in the late 1950s. Japanese firms—especially SMEs—at that time did not have sufficient funds and was seeking methods to improve operation without large investment5. The management theories and lectures of Professors W.E. Deming and J.M. Juran were particularly influential. Japan quickly absorbed this imported technique and modified it to its own management practice which became uniquely Japanese. The result was remarkable efficiency improvement which even surpassed the performance of American manufacturers. Compared with the original US model which was top-down, theoretical and highly statistical, the modified Japanese method emphasized process orientation, bottom-up worker participation and hands-on pragmatism. This method, which came to be known as kaizen, spread rapidly among Japanese firms, both large and small, to form the core of Japanese monozukuri (manufacturing) spirit. This was a private sector-led effort assisted by three non-profit organizations—the Union of Japan Scientists and Engineers, the Japan Productivity Center and the Japan Management Association—which sponsored lectures, seminars, foreign missions, productivity and quality awards, and other supporting mechanisms (Kikuchi 2014). From the 1980s, kaizen spread abroad as Japanese manufacturing firms expanded their production bases to the rest of the world. The introduction of basic kaizen tools became a standard package of Japanese technical cooperation in developing countries. Such a package (normally called the “quality and productivity enhancement project”) is implemented by both private and public hands. Many Japanese firms teach their own workers at overseas plants and partner supplier firms through classroom and on-site training, dispatch of Japanese technicians, training at the mother factory in Japan and organizing skills competition among engineers and workers. There is also fee-based kaizen instruction by private consulting firms such as the Kaizen Institute. Kaizen is also promoted strongly by official agencies such as the Japan International Cooperation Agency (JICA), the Overseas Human Resources and Industry Development Association (HIDA) 6 , and the Asian Productivity Organization (APO) in addition to the three NPOs mentioned above. While kaizen is most popular in Southeast Asia where Japanese manufacturing firms have a strong presence, it is also taught and practiced in other regions including South Asia, Europe, North America, Latin America and Africa.
5 Another method used by Japanese firms from the late 1950s onwards, with official promotion, was rationalization, or replacing outdated machines and processes with latest ones to improve productivity. Large manufacturing firms in steel, chemicals and other industrial inputs embraced this method to achieve competitiveness. However, such investments were costly and only those firms which had accumulated sufficient funds during the Korean War boom (1950-55) could afford this strategy. Most manufacturing SMEs had to resort to other methods which required less money. 6 HIDA was created in 2012 by merging the Japan Overseas Development Corporation (JODC), which dispatches Japanese experts abroad, and the Association for Overseas Technical Scholarship (AOTS), which receives foreign managers, engineers and workers to Japan for training.
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Table 2-2. JICA’s Productivity Cooperation (Relatively large projects with institution-building content)
Duration JICA support component
Country Project name Counterpart organization Start Local Other Expert abroad Training provision dispatch expenses Equipment Completion Planned until
Singapore Productivity Development Project 1983 1987 National Productivity Board ● ● Foundation of Thailand Productivity Thailand Productivity Development Project 1994 2001 Institute, Ministry of Industry ● ● ● ● Brazilian Service for the Support of Micro Brazil Brazilian Institute of Quality and Productivity Project 1995 2003 and Small Enterprises; Brazilian Institute of ● ● ● Quality and Productivity Technical Instructor and Personnel Training Costa Rica Productivity Improvement for Enterprises 2001 2006 Center ● ● ● ●
Tunisia The Study on Master plan of Quality/Productivity Improvement 2005 2008 Ministry of Industry, Energy and SMEs ● Productivity and Quality Improvement Egypt Productivity and Quality Improvement Center 2007 2011 Center, Ministry of Trade and Industry ● ● ● The study on quality and productivity improvement (KAIZEN) in the Federal Ethiopia 2009 2011 Ministry of Trade and Industry Democratic Republic of Ethiopia ● ● ● Center for Quality and Productivity, Capacity Building of Facilitators on Improving Productivity and Quality for Costa Rica 2009 2013 National Technology University (UTN- Small and Medium Enterprise in Central America and Caribbean Region ● ● ● ● CEFOF ) Tunisia Quality/Productivity Improvement 2009 2012 Unite de gestion programme qualite ● ● ● ● Dissemination of Quality/Productivity Improvement (Kaizen) Practices for Jordan Enterprise Development Jordan 2010 2013 Small and Medium Enterprises Corporation(JEDCO) ● Capacity Building for Dissemination of Quality and Productivity Ethiopian KAIZEN Institute, Ministry of Ethiopia 2011 2014 Improvement (KAIZEN) Industry ● ● ● ● Formulating a Strategic Model for Quality/Productivity Improvement Ghana 2012 2015 National Board for Small Scale Industries through Strengthening BDS for MSEs ● ● ● ● National Productivity and Competitiveness Kenya Productivity Improvement in the Republic of Kenya 2012 2014 Center ● ● ● ● ● Strengthening Manufacturing Enterprises through Quality and Productivity Ministry of Industry and Trade Tanzania 2013 2016 Improvement (KAIZEN） ● ● ● ● ● Zambia Development Agency; KAIZEN Zambia National KAIZEN Project 2014 2016 Institute of Zambia ● ● ● Capacity Development for KAIZEN Implementation for Quality and Ethiopia 2015 2020 Ethiopian KAIZEN Institute Productivity Improvement and Competitiveness Enhancement ● ● ● ●
Ghana National KAIZEN Project 2015 2018 National Board for Small Scale Industries ● ● ● ● SME Promotion Agency, Ministry of Small Cameroon Quality and Productivity Improvement（KAIZEN）for SMEs 2015 2017 and Medium-sized Enterprises, Social ● ● Economy and Handicraft Capacity Strengthening of Support Personnel for Micro, Small and Medium National Commission of Micro and Small El Salvador Enterprises focusing on the Improvement of Enterprise Administration, 2016 2019 Enterprises ● ● ● Quality and Productivity Unit of Management of National Program of Tunisia Quality/Productivity Improvement Phase 2 2015 2019 the Quality Promotion ● ● ● ● Dominican National Institute of Technical and Improvement of Quality and Productivity of SMEs 2016 2019 Republic Vocational Training ● ● ● Malaysia Productivity Improvement 2016 2018 Malaysia Productivity Corporation ● Enhancement of Productivity and Competitiveness through TQM and Malaysia 2016 2018 Malaysia Productivity Corporation KAIZEN Approach for African Countries ● KAIZEN Technical Assistance Network for Global Opportunities (KAIZEN Argentina 2017 2022 National Institute of Industrial Technology TANGO) ● ● ●
Zambia National KAIZEN Project Phase2 2017 2020 KAIZEN Institute of Zambia, Limited ● ● ● Strengthening Manufacturing Enterprises through Quality and Ministry of Industry and Trade Tanzania 2017 2020 ProductivityImprovement (The KAIZEN Project Phase Two) ● ● ● ● ● National System of Quality, Technical Assistance for Capacity Developing of Facilitators on Improving Honduras 2018 2022 Secretariat of Planning and External Productivity and Quality for Small and Medium Enterprise in Honduras ● ● Cooperation Source: Selected by author from JICA Knowledge Site (gwweb.jica.go.jp/km/km_frame.nsf), accessed on November 22, 2018. Note: This table shows JICA’s selected projects for introducing kaizen and strengthening its executing agency which are relatively large, long in duration and containing institution-building components. JICA additionally provides numerous kaizen services in other projects without institutionalization.
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Kaizen is a philosophy and it is also equipped with concrete tools to realize it. The kaizen philosophy inculcates a proactive mindset to endlessly pursue efficiency and improve one’s life and work with creativity and ownership. A large number of tools are available in the kaizen toolkit including 5S, quality control circles (QCC), mieruka (visualization), efficient equipment layout, heijunka (leveled production), jidoka (automation with human intelligence), kanban, Just-in-Time (JIT), suggestion system, total quality control (TQC), total quality management (TQM), Toyota Production System (TPS), and so on. The precise definition and boundary of kaizen is somewhat vague. Different experts and organizations use the term kaizen with different scopes and nuances, which sometimes causes confusion. Nevertheless, in any firm or country, the adoption of kaizen must begin with 5S which is made up of five “S” words: Seiri, Seiton, Seiso, Seiketsu, and Shitsuke (translated imperfectly as Sort, Straighten, Shine, Systematize, and Standardize; other English renditions also exist)7. These are practical actions to enhance order, efficiency and discipline in the workplace, which are considered so fundamental that all firms must practice them as the first step toward improvement. Seiri means removing all unnecessary things from the workplace. Seiton means placing remaining things in marked positions for easy pickup. Seiso means sweeping and cleaning. Seiketsu means maintenance of cleanliness. Shitsuke means spontaneous implementation of these good practices (ownership rather than coercion). These ideas may seem simple and mundane, and they require no high academic degrees to understand, but are very difficult to actually sustain daily and forever. Kohei Goshi, former chairman of the Japan Productivity Center, said that kaizen “is like a marathon with no finish line.” Even Toyota, the leader of Japanese productivity, tries to perfect kaizen daily and forever. Factories and offices that implement kaizen look very neat and orderly. Japanese firms do not consider doing business with local supplier firms unless they introduce 5S (or at least the first two or three S even in a crude form). In many cases, workers in developing countries must begin with even more basic things than 5S such as punctuality, smile, morning greetings, clear voice, proper queuing and Ho-Ren-So (Report, Communicate and Consult which means don’t ignore problems when you see them but report to your boss immediately). Safety education, in which workers experience artificially created dangerous situations to understand the importance of safety rules, is another essential ingredient of worker training. In developing countries, kaizen is normally taught by an experienced expert who makes frequent visits to the factory in a cycle of three to six months. Initially, classroom courses are usually organized to give basic information and screen candidate firms with proper mindset and potentiality. The general director is interviewed for his or her business vision and willingness to learn. Then an internal team is formed at each targeted firm to implement kaizen in one or two production lines which will later be rolled out to the entire factory. Japanese experts do not offer answers and
7 In Vietnam, they are often translated as Sàng lọc, Sắp xếp, Sạch sẽ, Săn sóc and Sẵn sang.
Ⅱ-10 solutions. The team is asked to think, identify problems and suggest solutions with hints provided by the kaizen expert. Weekly homework is given for this purpose. In training of trainers, local officials should accompany the Japanese expert to learn how kaizen is taught on the ground. Kaizen is considered successful if the firm internalizes the process and can sustain kaizen activities permanently after the expert leaves. Two questions commonly raised about kaizen are transferability across cultures and complementarity with Western methods. Some question the validity of kaizen in countries where low literacy, short-term orientation, top-down management and inattention to details prevail. If strong hierarchical structure is dominant, workers may hesitate to express their ideas to supervisors. While these arguments are theoretically plausible, experience of numerous kaizen teachings around the world shows that there is no society in which kaizen fails to improve quality and productivity. Improvements are immediate and clearly visible in profit and cost reduction even though the number of best performers may vary across countries. As to the compatibility between kaizen and other methods such as benchmarking and business process re-engineering, the two should in principle be complementary. The Japanese method internalizes gradual improvement while the Western method engineers a jump in performance. However, it is not clear whether bottom-up processes required by the former can co-exist with top-down decisions assumed by the latter. Another practical concern is over-burdening of managers and workers when two methods are introduced simultaneously in a company. Most Japanese manufacturers operating abroad teach and enforce kaizen in their own overseas factories and their local suppliers. This is also true in Vietnam. Visiting any Japanese factory in Vietnam, one can see how workplace is organized and how workers are continuously trained for discipline and efficiency. Kaizen is implemented not only at Toyota, Denso, Honda, Yamaha, Panasonic, Canon, Kyocera, Fujitsu, Lixil and Daikin but also at virtually all Japanese manufacturing SMEs in Vietnam. From 2012 to 2015, JICA mobilized “senior volunteers” (experienced industrial experts) to improve more than 100 Vietnamese supporting industry firms (component suppliers) by 5S and kaizen method. Firms achieving good results were listed in JETRO’s supporting industry database. However, this project was implemented by Japanese experts only with no participation or learning by Vietnamese officials or experts. The activities ended when senior volunteers returned to Japan. It is odd that Vietnam, which has received a large amount of Japanese FDI in the last quarter century, has not established a national kaizen agency or launched a nationwide productivity movement. VNPI’s productivity promotion is still very small in scale. As a consequence, kaizen practice in Vietnam remains random, scattered and spontaneous. By contrast, many nations try to internalize and institutionalize kaizen (or kaizen-equivalent by any other name) by creating a national productivity agency and training domestic productivity experts (JICA and GDF, 2011). Taiwan, Korea, China and India have learned kaizen mainly through private channels. Meanwhile, systematic JICA support was offered to Singapore in the 1980s. These
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countries no longer need Japanese help to sustain kaizen. Most ASEAN countries, including Thailand and Malaysia, were also assisted by JICA. In Africa, JICA supports kaizen in Tunisia, Ethiopia, Kenya, Tanzania, Zambia, Ghana, Egypt and Cameroon as well as the African Union and the New Partnership for Africa’s Development (NEPAD). Mauritius, Botswana and Burkina Faso studied kaizen from other (non-JICA) sources. Among African countries, Ethiopia is most active and serious in learning and internalizing kaizen. The Ethiopian Kaizen Institute provides kaizen instructions to firms, offices, public services and even an entire city. September is designated as Ethiopia’s Kaizen Month when many awards and events are held and the kaizen song and dance are presented. Also, Ethiopia is beginning to teach kaizen to other African countries.
3. Handholding
Kaizen, when properly implemented, greatly improves efficiency in any workplace. But the firm’s competitiveness depends on many other factors than efficiency. A firm may weaken if management lacks vision, if marketing is ineffective, if technology is outdated, if worker promotion policy is defective, and for many other reasons. Handholding (also known as hands-on or yorisoi support) is an assistance program which is customized and multi-dimensional for a handful of firms that show willingness and potentiality to face challenge and produce excellence. SME assistance is divided into (i) general support open to any firm on request basis and (ii) specialized by-invitation-only support in which chosen firms are given necessary assistance by an expert team until a pre-set goal is attained. Handholding is of the second type. It is widely practiced in East Asia, as explained below, but some Western economists criticize it as too selective and benefiting only a few. More precisely, handholding is an official program in which SMEs are supported with low or no cost. It is not high fee-based advice by MBA-holding consultants. For handholding, there must be a screening process to identify eligible firms 8 . For each selected firm, the general director is interviewed for proper mindset and capability; the firm is diagnosed managerially, technically and financially; one business goal is set9; then a multiple assistance package is executed to achieve the goal. An expert team is organized for each firm, usually consisting of a government official, a private business consultant, and technical or other expert(s) as required. Customized and intensive support is offered to each firm for two to three years with an expectation of a high success rate. Handholding support is usually non-renewable. It is a very labor-intensive and costly program that requires mobilization of many experts as well as good rapport between the firm and the government. In Japan, JETRO assists approximately 150-200 Japanese SMEs to export every year.
8 In most Japanese prefectures and cities, local government officials in charge of SME support know the features of individual firms they regularly visit, consult and support in their jurisdiction. They can readily produce a list of firms with good management and high potential without conducting any additional survey. In such a case, selection of candidate firms for handholding is easy and requires no formal process. 9 For handholding, only one goal is set for each firm. It may be a goal related to product development, commercialization of R&D, improving product quality, penetration of a foreign market, or investing abroad.
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Manufacturing SMEs wanting to export directly (not through a trading house) to a new market are supported. Eligible sectors include machinery and components, environment and energy-related industries, agricultural and fishery products, traditional items, household goods and fashion, and so on. Firms with “Only One” (unique and excellent) technology or products are prioritized. Firm selection is conducted by (i) informal screening based on daily contacts, expert views, visits and reports from other organizations; (ii) filing of an application form by the firm; (iii) interview with the general director; and (iv) evaluation and approval by the JETRO headquarters selection committee. The support team consists of one to a few experts who have special knowledge required for handholding and one JETRO official who provides JETRO-related services and monitors and coordinates expert activities. Depending on the firm, a support package may include export strategy formulation, gathering of market information as well as guidance in trade fair participation, business negotiation, signing contracts, account settlement, etc. After a certain preparation period, assistance is provided for two years which is non-renewable. An export goal is considered as attained when the firm exports to the same foreign buyer three times or more, or sells to a foreign agent with payments received. If the firm develops two new markets successfully, support is terminated even before two years. About 30 percent of supported firms “succeed” three years after the end of support. Even without “success,” most firms make progress. Since 2012, JETRO has also supported Japanese SMEs to invest abroad. This has become a very important function of JETRO (as well as JICA) because the Japanese government nowadays strongly promotes overseas expansion of SMEs. Thousands of SMEs have been assisted to go abroad. Chuken (medium-sized) firms as well as SMEs seriously interested in investing abroad are targeted. For destination, developing countries (recipients of Japanese ODA) are preferred. One JETRO official and a few external experts (a business consultant and an expert with knowledge of the industry or the targeted foreign market, for example) make a team to coach a firm. Duration of support is negotiated with the firm but should not exceed two years. The firm is asked to appoint one key person, pay the cost of their own foreign travel and establishing a company abroad, submit progress reports, etc. JETRO pays all expert fees and their travel costs and provides necessary information and coordination. In some cases, the expert team may even suggest the firm to stay in Japan instead of going abroad. JETRO argues that joint support by a JETRO official who has a broad network and information and external experts who have specialized knowledge is crucial. Japanese local governments—prefectures and cities—are also very active in supporting SMEs as one of their key mandates. For instance, Kobe, a port city with a population of 1.45 million, began to strongly support overseas investment of SMEs from 2011. The Kobe Asian Business Support Center was established. Guided by a professor who had previously worked at Panasonic, the city conducted surveys to find that Kobe SMEs were increasingly eager to go abroad, and the most popular destinations were Vietnam, Thailand and Indonesia. Information on these three countries was collected, and study trips were organized to them. Four full-time city officials and 95 registered external experts were assigned at the Center to offer yorisoi (handholding) support. A group of
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experts, accompanied by a city official, are dispatched to each firm. Consultation is free of charge up to 10 times per year. Seminars and study meetings are held, overseas missions are organized, and cooperation with other support organizations is activated. The reason why JETRO and other Japanese public agencies and local governments can provide large-scale handholding support is because Japan has a large pool of active or retired business and industrial experts willing to work for public purposes at relatively low fees. Some are shindanshi and others are former managers or engineers at large manufacturing firms. Moreover, JETRO has a branch in every prefecture in Japan and can serve SMEs in any location. Handholding is also practiced in other Asian countries. The Korea Trade-Investment Promotion Agency (KOTRA) offers multiple services to SMEs planning to export. Its services are broader and more generous than JETRO’s. The screening process includes (i) application filed by firms, (ii) evaluation and selection by KOTRA’s overseas offices, (iii) service fee payment by the firm and signing of contract agreement, (iv) service provision by KOTRA overseas offices, and (v) evaluation and follow-up by KOTRA overseas offices. KOTRA’s overseas branches act as local sales representatives of individual Korean SMEs by giving advice, collecting market information, identifying potential buyers, business matchmaking, etc. Duration of support is one year which is renewable up to three years (for firms unable to obtain results quickly). Service fees differ depending on the destination country. In the case of exporting to Japan, firms must pay about $2,500-3,500. Roughly 50-60 firms are supported annually by the KOTRA office in Japan alone. At extra cost, firms can also receive additional marketing support, recruitment of local sales staff and office space rental service. In Malaysia, MATRADE provides handholding to SMEs new to exporting, though at a much smaller scale10. Eligibility is limited to women, youth and Bumiputra (ethnic Malay) entrepreneurs only. This program has a social aim of advancing disadvantaged groups with currently low levels of foreign market penetration. Support lasts for three years, which is non-renewable, and covers (i) customized and intensive coaching by one experienced expert and a MATRADE official, (ii) export skills seminars, workshops and symposiums organized by MATRADE on a quarterly basis, (iii) participation in international trade fairs and export missions for selected SMEs, (iv) allocation of exhibition space for 12 months at the Malaysia Export Exhibition Centre inside the MATRADE headquarters, (v) networking and mentoring sessions between SMEs and large companies, and (vi) leadership and entrepreneurship training. MATRADE provides all these services free of charge, including the cost of foreign travel, unlike the cases of JETRO or KOTRA. The firm screening process uses both internal information (MATRADE SME database and SME Corp information) as well as actual visits to companies. In Taiwan, the SME Administration (SMEA) has since 1989 operated the One Town One Product project (Taiwan OTOP), copied from Japan’s One Village One Product program, which creates
10 24 SMEs were chosen annually for support at the time of our Malaysia policy mission in June 2013.
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high-value, high-image local cultural products for tourist and export markets. This can be regarded as collective handholding for SMEs in one particular community. SMEA dispatches a group of experts for three years to (i) identify local needs and missing factors, (ii) build communal consensus, (iii) conduct training, (iv) strengthen business capacity and develop new products, and (v) sustain growth under community ownership. Support includes R&D, re-making of traditional products, workflow re-engineering, branding, packaging, store display, linkage creation with tourism and marketing through OTOP shops, website, media, ads and trade shows. Hundreds of towns have been successfully coached to develop high-quality local products. Vietnam has no systematic nationwide handholding mechanism for SMEs. It should build necessary conditions for effective handholding in appropriate speed and scope. As is clear from the cases in Japan, Korea, Malaysia and Taiwan, the success of handholding depends much on the availability of a large supply of experienced business and industrial experts as well as highly dedicated SME promotion officials. Vietnam must foster such human resources step by step. When a sufficient number of experts and officials are trained, handholding in a simple form may be started, for example, with a limited focus on management strategy, technology and kaizen only. Japanese firms and government can assist in this process.
4. Shindan
In Japanese, shindan means diagnosis and shindanshi is a certified person who practices this. Japan’s shindan system (SME enterprise management consultant system) dates back to the late 1940s after the defeat in World War II. Under US occupation (1945-1952), devastated Japan tried to boost production and rebuild industries. Realizing the importance of SMEs in this process, the SME Agency was established in 1948 to promote finance, re-organization and diagnosis of SMEs. For diagnosis, the government drafted basic diagnostic manuals and tried to mobilize existing industrial experts with deep knowledge and experience. In 1952, the Ministry of International Trade and Industry (MITI) began to certify outstanding experts and actively use them in policy implementation. These experts were given state recognition and registration numbers. In 1954, the Japan SME Management Consultants Association (J-SMECA) was founded as a nationwide association of shindanshi. Headquartered in Tokyo, it had a branch in every prefecture to promote awareness, use, research, quality improvement and international cooperation in shindan services. Over time, shindan became quite effective in upgrading SMEs and was highly appreciated. From the outset, government supported shindan through legislation, facilitation and supporting organizations, but operation gradually shifted from the public realm to the hands of the private sector and NPOs. Administrative and financial support by the government was limited from the beginning. The SME Basic Act, first issued in 1963, was amended in 1999 and a new law, the SME Support Act, was enacted in 2000. These new laws increased private sector involvement, enhanced the role of
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J-SMECA in shindanshi training, exams and certification, and expanded the scope of shindan to include business re-engineering and credit assessment. In 2004, through merger, activities of the Japan SME Corporation were transferred to the Organization for SME and Regional Innovation, Japan (SMRJ), which now is the nationwide apex agency responsible for SME policy implementation. In 2006, further revisions were made in exams and registration, which emphasized actual practice of shindan as the requirement for certificate renewal. The number of registered shindanshi is steadily increasing and stands at 26,000 in 2017. There are primary and secondary shindanshi exams (Figure 2-1). There are two tracks for becoming shindanshi. The first is to pass both primary and secondary exams and the second is to pass the primary exam then successfully complete all courses at the SME University. Each year, roughly 20,000 apply for the primary exam and about 900 pass both exams. Besides this, a few hundred applicants pass the primary exam and graduate from the SME University. Shindanshi certificate must be renewed every five years. At least five training sessions must be attended to update knowledge and at least 30 days of actual SME shindan consultation must be practiced before each renewal.
Figure 2-1. Shindanshi Exam and Registration Scheme
Primary exam Secondary exam Consulting practice at SME for 15 days or more in an internship A. Economics and economic Written examination (case program policy method on diagnosis and Shindanshi advice) B. Finance and accounting registration Oral presentation Actual business consulting at C. Corporate management SME for 15 days or more (certified by and D. Corporate operations registered with E. Management law the Minister of F. Management information Economy, Trade systems and Industry) G. SME management and Practical training programs hosted by SMRJ (SME Universities) or government policy other designated organizations
Source: J-SMECA.
The SME University under SMRJ is the most important institute for training shindanshi. It educates candidates as well as updates knowledge for registered shindanshi and the staff of shindan support organizations. Tokyo SME University, its flagship campus, was founded in 1962 and eight more regional campuses were created in the 1980s and 90s. The SME University, which disseminates practical knowledge needed in actual business operations, does not confer academic degrees. Students must study a wide range of subjects instead of specializing in one or a few business areas. As mentioned above, all applicants seeking shindanshi certification must pass the primary exam, then choose to either take the secondary exam or study at the SME University. The six-month course at SME University is divided into two parts (Table 2-3). In the first part (Business Consulting I), students learn specific management subjects. In the second part (Business Consulting II), practical diagnostic and advisory skills over companywide issues are obtained.
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Table 2-3. Curriculum for Shindanshi Training at Tokyo SME University < Business Consulting I > Theory Management To acquire diagnostic and advisory skills in drawing up management strategy strategies and plans, and executing these strategies and plans. Marketing and sales To acquire diagnostic and advisory skills in marketing and sales management management and realizing such strategies and plans. Human resources To acquire skills for identifying problems pertaining to human resources management management, together with diagnostic and advisory skills on solving them, in order to realize the business strategy. Advice theory To acquire diagnostic and advisory skills by participating in the corporate problem identifying and solving process, and earning trust from assisted companies, in order for them to achieve their organizational objectives and goals. Finance and To acquire diagnostic and advisory skills with regard to corporate financial accounting positions through analysis and assessment of current conditions of assisted companies, and evaluation of their future plans from a financial perspective. Information To acquire diagnostic and advisory skills centering on IT planning, by technology understanding key steps toward introduction of IT systems and adopting IT systems consistent with the management strategy. Production To acquire the skills for identifying problems pertaining to production management management, together with guidance and advisory skills for solving them in order to realize the management strategy. Retail shop To acquire diagnostic and advisory skills with regard to retail shop and store management management through an efficient floor and shelf layout in accordance with the management strategy. Practice Manufacturing To develop the ability for identifying management problems by industry business comprehensively understanding the circumstances surrounding the operations consulting practice of small and medium-sized manufacturers, and to acquire the skills for drawing up management improvement plans to solve these problems. Trade and To develop the ability for identifying management problems by distribution comprehensively understanding circumstances surrounding the operations of business consulting small and medium-sized traders and distributors, and to acquire the skills for practice drawing up management improvement plans to solve these problems.
< Business Consulting II > Theory Integrated To acquire necessary perspective for solving companywide management management problems in order to formulate corporate strategies. To develop comprehensive strategic thinking through discussion-centered training. Integrated trade and To conduct various business analyses of small and medium-sized traders and distribution distributors for proposing overall business strategies, and to acquire business diagnostic and advisory skills with regard to fully utilizing management resources and proposing implementation measures. Integrated To conduct various business analyses of small and medium-sized manufacturing manufacturers for proposing overall business strategies, and to acquire industry diagnostic and advisory skills with regard to fully utilizing management resources and proposing implementation measures.
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Business start-ups Support of business model building: To acquire diagnostic and advisory skills and venture tailored to assisted companies through training centering on discussions on business problems and success factors pertaining to the establishment of business models. Management Development of advisory skills: To acquire comprehensive diagnostic and innovation advisory skills by proposing support measures for a large number of actual cases brought to SME consultation organizations. Corporate To acquire diagnostic and advisory skills with regard to corporate rehabilitation rehabilitation through training centering on discussions on corporate rehabilitation laws and the design process of rehabilitation plans. Business alliance To propose strategies to corporations endeavoring to form business alliances across sectors and regions, and to acquire diagnostic and advisory skills with regard to fully utilizing management resources and proposing implementation measures. Internationalization To acquire diagnostic and advisory skills with regard to full utilization of strategy management resources through training centering on discussions on case studies in which corporations expanded into or withdrew from overseas markets. Practice Management To acquire skills for clarifying management strategies for SME operations, strategy and and formulating concrete and practical execution programs to realize strategic strategic plan design management. practice Management strategy and strategic plan design practice II Seminar Seminars To acquire practical skills through on-site, small-group theoretical training and practice, with the aim of deepening the knowledge and skills in areas of specialization of individual students. Source: Business Support Department, SMRJ.
Business Clinic, a website managed by J-SMECA which boasts 9,000 shindanshi members, provides matching service between J-SMECA member consultants and SMEs free of charge. Fees arising from individual consultation contracts must separately be agreed and settled by the two parties. Shindanshi usually work closely with financial institutions that consider lending to SMEs. The diagnosis and advice offered by shindanshi is extremely useful information for financial institutions to evaluate loan applications of SMEs. The Japan Finance Corporation (JFC), a large state-run financial institution with 152 branches nationwide, plays a vital role in providing loans to SMEs, micro enterprises and individual proprietors. Shindanshi reports on the business plan and expected profitability of SMEs are an important consideration for JFC and other financial institutions in approving SME loans. The Japanese shindan system is highly sophisticated and difficult to transfer in its entirety to other developing countries. Its features include (i) long history with constant evolution in response to changing social needs; (ii) adequate official involvement and support especially in early years; (iii) standardized training curriculum and state-authorized exams, registration and renewal processes; (iv)
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existence of a wide variety of competent public and private support organizations including METI, SME Agency, SMRJ, SME University, JFC and J-SMECA; and (v) diverse and effective activities by shindanshi as government officials, experts at firms and banks, individual consultants, consultant firm professionals and JICA experts abroad. There are developing countries that try to import a Japanese-style SME support system in a simplified or modified way for the purpose of strengthening domestic SMEs in general and supporting industries in particular. In ASEAN, all such policy efforts were assisted by Japanese official cooperation. Some countries succeeded in creating a system similar to shindan through trial-and-error, but others failed. In 1999, JICA implemented a five-year program to introduce a shindan system in Thailand and produced about 450 Thai shindanshi. Since then, the Thai private sector and universities have taken over the role of providing various training programs for shindanshi. In Indonesia, Japan’s industrial support program was initiated in 2003 which included an introduction of a shindan system. Consultants were trained, and a study was conducted for institutionalizing a training program and a state certification scheme, and responsible offices at local levels were also founded. The Indonesian Shindan System was inaugurated in 2006 and about 300 shindanshi were certified. However, the system evaporated due to the lack of political will and appropriate incentive. In Malaysia, as part of technical cooperation following the Japan-Malaysia Economic Partnership Agreement in 2005, Japanese experts conducted training courses for Malaysian officials for two-and-half years and produced 68 “SME counselors.” Similarly, when the Japan-Philippines Economic Partnership Agreement was signed in 2006, Japan agreed to help the Philippines to develop a shindan system and pilot projects were launched in five provinces. In Vietnam, no serious policy effort has been made to date to transplant the shindan system from Japan with appropriate simplification and adjustments. Shindanshi, or competent Vietnamese experts by any other name who can diagnose and advice SMEs on broad issues, are needed in large number to develop SMEs and supporting industries in Vietnam. The Vietnamese government should formulate a concrete plan to educate, incentivize and fully mobilize Vietnamese shindanshi as soon as possible.
5. TVET-industry linkage11
Skilled workforce is produced not only by internal training of firms but also by education and training institutions. Universities, colleges and TVET institutions can develop strong linkage with targeted industries, first by keeping abreast with the current and future skill demand of firms and updating curricula accordingly, and second by assisting their students to obtain jobs with which they can fully utilize acquired skills and earn adequate income. Japan has an education system to do these
11 This section is based on JICA (2014) and Mori, Nguyen, Vu & Vu (2013).
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things. Public polytechnic universities, colleges and centers under the Ministry of Health, Labor and Welfare have systems of training process management and employment support that can effectively incorporate skill needs of the industry into their training programs and ensure appropriate job placement of their students. More specifically, Japanese polytechnic universities provide four-year bachelor courses, two-year master courses and various short-term courses to train TVET instructors. Japanese polytechnic colleges provide two-year diploma courses for high school graduates to produce competent technicians and engineers. Polytechnic centers provide a wide range of short-term courses for job seekers (Ministry of Health Labor and Welfare, 2018). In the following section, kosen, a five-year technical education program under the Ministry of Education, Culture, Sports, Science and Technology, will be separately discussed. Training process management, featuring the PDCA (Plan, Do, Check, Action) cycle, enables TVET institutions to understand and analyze industry skill needs in seven steps: (i) research of industry skill needs; (ii) selection of training fields; (iii) curriculum development; (iv) preparation for training program implementation; (v) implementation; (vi) evaluation; and (vii) formulation and implementation of action plans (Figure 2-2).
Figure 2-2. Training Process Management
Source: Inagawa (2013) and Mori et al. (2013)
Execution of this cycle requires direct and constant interaction with industry. By visiting firms that have employed their graduates or firms that may recruit their students in the future, TVET institutions can collect information on current and future skill needs to design optimal curricula. This also generates mutual trust between two parties, which makes employers more willing to provide information. Furthermore, proactive approaches by TVET institutions encourage firms to think ahead
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and anticipate future or latent skill needs. Finally, feedback from employers on the institute’s courses and graduates is a valuable input to the evaluation of training courses and the development of action plans. Close contact with industry is also essential in developing an effective employment support system. Students are provided with information on broad business trends as well as specific firms and skill needs. Meanwhile, recruiting firms are able to identify appropriate candidates. This system is composed of (i) internship; (ii) company study tours; (iii) lectures by TVET graduates; (iv) job fairs; (v) collection and circulation of job opportunity information; and (vi) career counseling (Figure 2-3). All of these activities must be conducted in an integrated and complementary way because implementing just one or a few of them is not effective. Internship is very useful to students in enhancing their practical skills and working attitudes as well as learning about firms. Company study tours and lectures by TVET graduates provide students with valuable information for choosing firms for internship or job application. Lectures by TVET graduates are often organized at job fairs, where TVET institutions can also collect job opportunity information which is essential for conducting effective career counseling for students. With information obtained from these various activities, lecturers can guide students to select most suitable firms for internship or recruitment.
Figure 2-3. Employment Support System
Internship Program
Career Company Counseling Study Tour
Suitable Job Job Lecture by Opportunity Gradates Information
Job Fair
Source: Mori et al. (2013)
The employment support system additionally informs TVET institutions about students’ interests in skills learning and future careers. By comparing students’ interests and industry needs, TVET institutions must come up with realistic organizational strategies. In reality, students’ interests often do not match employers’ skill expectations, partly because students lack sufficient information but also because students look to long-term career development while firms focus on immediate needs to
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fill vacancies or carry out a short-term business plan. Training programs must balance these two different needs. In Vietnam, a pilot project was conducted at the Hanoi University of Industry (HaUI), which runs both higher education and TVET courses, with the technical assistance of JICA. HaUI installed the two critical systems of training process management and employment support, and successfully strengthened relations with hiring firms. From 2010 to 2013, HaUI lecturers and staff visited a total of 233 enterprises to find out employers’ skill needs. Firms in Vietnam are often reluctant to receive visitors from TVET institutions, not so much because of their insufficient technical knowledge but mostly because of their unprofessional behavior. Firms complain that the purpose of visit is unclear, that appointment request is made at a very short notice, and that TVET people sometimes arrive in inappropriate attire. With JICA support, HaUI lecturers and staff learned the proper way to contact firms and convince them of benefits of meeting them. HaUI also invited firms to visit the campus, which helped to develop mutual understanding. HaUI lecturers learned much from on-site advice by company experts, while employers could better understand HaUI’s training programs and facilities. During the JICA’s project period, two-way visits between HaUI and industry gradually developed, and a total of 175 enterprises came to observe the HaUI campus. HaUI used information from firms to create new courses or improve existing ones. The PDCA cycle of training process management enabled it to design a short-term course on machinery maintenance. New curriculum and training materials were developed through discussions with the focused company group. In 2012, HaUI organized four rounds of courses in mechanical maintenance and electric system maintenance which attracted 76 external participants from 17 firms, both Japanese and Vietnamese. After these courses, an evaluation survey was conducted and action plans to improve the courses were drafted. Besides this, HaUI developed a new short-term course in quality control, and improved existing courses in mechanical drawing, programmable logic control, and micro controllers. With JICA technical assistance, HaUI also improved its employment support system. The Vietnam-Japan Center (VJC) within HaUI developed an internship program which combined classroom lectures with structured on-the-job training in partnership with several Japanese mold and die manufacturers. VJC selected students and provided them with prior briefing, and closely monitored their internship performance in cooperation with receiving firms. Additionally, HaUI overhauled its company study tour program which now runs as follows: (i) a proposal clearly stating objectives and expected outputs with inputs from hosting enterprises; (ii) a briefing for students on the firm profile, instructions for dress code, expected behavior and study points; (iii) obligation for each student to ask at least one question following the tour; (iv) a follow-up workshop where students summarize their findings through group work and presentation; (v) a report submitted by each student; and (vi) sharing of the collective report with the enterprise. After this program was introduced, many firms became willing to host a comprehensive student tour which included company overview, factory visit, and Q&A session with the participation of company
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management and HaUI graduates. During the JICA project period of 2010-2013, HaUI managed to organize 17 study tours in which a total of 273 students and 82 lecturers participated. To maintain strong linkage with industry, the organizational and operational mechanism of TVET institutions must also be renovated. In 2014, HaUI established the Center for Enterprise Partnership and Vocational Skill Assessment to assist all faculties and centers of the university to continue to identify and develop partnership with firms and organize various employment support activities even after JICA left. Support by provincial governments is also important. Considering regional diversity in industrial structure and skill needs, local initiative may produce better outcome than top-down central instruction. In Japan, for example, the Monozukuri Business Center Osaka (MOBIO) promotes partnership between manufacturing SMEs and TVET and higher education institutions in a way most suitable for the Osaka region (MOBIO 2018). In Vietnam, the Dong Nai Industrial Zone Authority (DIZA) hosts a consortium of Lac Hong University, Dong Nai Vocational College of High Technology and Japanese component suppliers to improve courses on 5S and occupational health and safety with technical assistance from JICA, METI, and various organizations from Osaka Prefecture (PREX 2016, also see next section).
6. Kosen
Koto Senmon Gakko (kosen) is a technical and vocational higher education system in Japan, at the level of college, which was approved and legalized in 1961. It aims to produce practical and creative engineers in industrial and technology sectors. It offers a five-year program to post-middle school students aged around 15 to 19, combining general education and specialized courses with the latter’s weight rising as curriculum progresses12. TVET-industry linkage formation (section 5 above) is one of the core functions of kosen. At present, Japan has 57 kosen of which 51 are state-run, 3 are operated by local governments and the remaining 3 are private. All prefectures in Japan (there are 47 of them) have at least one kosen or kosen-equivalent (some kosen have been converted to universities). In kosen education, theory and practice are integrated. Moreover, kosen not only teaches theories and technical skills but also inculcates proper mindset, creativity, problem-solving attitude and communication skills. Factory visits, firm internship and graduation studies are essential parts of kosen education. Roughly 10,000 students enter and graduate from kosen each year with a total student body of about 50,000 at any time. About 500 of them are foreign students. JICA implemented a pilot project to introduce kosen to Vietnam from 2013 to 2018, not as a formal education system but as a model that could be applied to any existing universities, colleges and TVET centers. The project was first implemented at the Industrial University of HCMC (IUH)
12 General education covers math, physics, chemistry, Japanese, English, geography, politics and economics, history, art and music, and gymnastics. Specialized courses include mechanical engineering, materials, electrical and electronics, IT, bio-chemistry, construction, architecture, commercial navigation, and others, from which each student chooses one.
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and later rolled out to three other institutions (see below). Because kosen was a new concept in Vietnam and also because initial conditions in Vietnam were quite different from Japan, the Japanese kosen model had to be adjusted to fit the reality of Vietnam without losing the main thrusts of kosen education. Specifically, the kosen model in Vietnam established through the JICA project consists of five essential components: (i) technical education in knowledge and skills; (ii) teaching proper attitude and mindset; (iii) teaching creativity (just doing what is told is not acceptable); (iv) comprehensive assistance in students’ job search and placement; and (v) the college’s own capacity building to offer the services above13. Vietnamese Kosen is defined as any education system that satisfies all of these components. They are regularly practiced by all kosen in Japan. In Vietnam, technical colleges teach knowledge and skills in component (i), but do not carry out components (ii) to (v). These must be added for Vietnamese technical colleges to become kosen. Proper mindset such as 5S and kaizen philosophy must be taught explicitly. Students must be encouraged to identify problems and work on solutions themselves rather than passively waiting for a teacher’s instruction. The college must actively contact firms for curriculum setting, arranging factory visits and internship, receiving job opening information and requesting student interviews with firms. Based on industry needs, the college must improve its programs, staff and organization so graduating students are equipped with skills truly demanded by businesses. These are the missing elements in Vietnam’s current education system that must be newly supplied. Japanese firms at home and abroad teach firm-specific knowledge and skills to new employees through on-the-job training after they are recruited. Therefore, they do not want universities and colleges to teach specific technical skills, but need students with proper attitude, basic knowledge and communication skills. Because Vietnamese universities and colleges teach specialized theories and techniques but not such common basics, there is a mismatch between what Japanese FDI wants and what technical institutions in Vietnam teach. Introduction of kosen is one way to fill this gap. In Japan, kosen is a legally defined system based on law. In Vietnam, kosen is an institutional concept which can be adopted at different levels of education including universities, colleges and TVET centers, provided that the five kosen components above are ensured. We do not advise creating a new and separate legal school entity in Vietnam. Instead, Vietnam should view kosen as a functional model to be adopted by any educational institute regardless of its legal status. As long as the five components are properly executed, Vietnam can achieve the same positive effects in practical and creative engineering education as Japanese kosen. The JICA project at IUH was successfully concluded and highly evaluated. Its results began to be rolled out to other institutions from 2015, to Cao Thang Technical College (HCMC), Hue Industrial College (Thua Thien-Hue) and Phuc Yen College of Industry (Vinh Phuc, now renamed to the
13 The JICA project also produced a long list of sub-items and concrete actions that need to be implemented in Vietnam under each of these five components.
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College of Industry and Trade). These three colleges, all under MOIT, are enthusiastic about introducing kosen and exchanging information with one another. One teacher each from Cao Thang and Phuc Yen was dispatched to Ube Kosen and Tokuyama Kosen, respectively, in Japan for further learning and establishing relation with Japanese kosen for future cooperation. Due to the recent administrative reform of the Vietnamese government, responsibility for kosen was transferred from MOIT to MOLISA. On the Japanese side, the JICA project is over but Kosen Kiko (National Institute of Technology), a summit organization for Japanese kosen, will take over the role to assist Vietnam, Thailand and Mongolia. It is hoped that Kosen Kiko will help with technical details such as curricula, textbooks, course materials and staff training within the kosen framework created by JICA cooperation. In the near future, it is essential for the Vietnamese government to establish a national policy and mechanism for disseminating the Vietnamese kosen model to technical and vocational training institutions all over Vietnam at all levels, with necessary adjustments to each local context. MOLISA and MOIT need to cooperate effectively to realize this objective. One serious issue that needs to be coped with is a general decline of interest among young Vietnamese in technical college education14. This trend must be reversed if Vietnam is to achieve manufacturing excellence. Another bilateral TVET cooperation worthy of mention is found in Dong Nai, in a project conducted by the Pacific Resource Exchange Center (PREX), an Osaka NPO that trains middle-managers in developing countries. From 2014 to 2017, with the funding of JICA and later by METI and AOTS, the project installed new courses on 3S and workplace safety (section 2) at Lac Hong University and Dong Nai Vocational College of High Technology (formerly Long Thanh-Nhon Trach Vocational College) with the guidance of industrial experts from the Kansai area of Japan. Detailed curriculums and textbooks suitable for Vietnam were produced by Vietnamese lecturers, which were not mere translation of Japanese manuals15. Japanese firms and experts were impressed with the newly created Vietnamese teaching materials. With an upgraded program, the two model schools began to approach Japanese firms in Vietnam and send their graduating students to them. Some Japanese firms in Vietnam also want to send their staff to these schools for training. In the second phase, from 2018 to 2020, PREX and DIZA plan to establish the Dong Nai Monozukuri Core Human Resources Development Instructor Training Academy (DoMOTA for short), a school for Vietnamese teachers at the model schools to teach other teachers. This is to expand the good results obtained in the two model schools to other schools. An excellent program such as this, which promotes linkage between FDI firms and Vietnamese students, should be rolled out not just in Dong Nai but to the entire country.
14 In Northern Vietnam, around 2015, the number of young people applying to technical colleges declined suddenly and significantly. This was due to an acute labor shortage and the desire by factories to hire as many new workers as possible. High school graduates decided to go to work immediately to make money instead of going to college to acquire technical skills. This does not bode well for Vietnam’s future. 15 In Japan, 3S and safety are widely taught to TVET students and new factory recruits, but they are so common and routine they require no detailed textbooks. Dong Nai lecturers have created such textbooks to teach Vietnamese students.
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7. Mobilization of technical interns dispatched to Japan (gino jisshusei)
Gino jisshusei (technical intern) is a system of inviting young foreign workers, mainly from Asia, to Japan to work at Japanese firms and learn suitable mindset and skills through on-the-job training before returning to their homeland. Acceptance of foreign trainees into Japan began in the 1960s and the program was legalized in the 1980s under the Immigration Control and Refugee Recognition Act. In 1991, the Japan International Training Cooperation Organization (JITCO) was created to provide support to stakeholders as well as monitor their performance. In 1997, the staying period of three years was stipulated for technical interns. As of 2018, sectors designated for technical internship include agriculture, fishery, construction, food processing, garment production, mechanical and metal processing, and others (which include many supporting industries). When properly managed, this program greatly enhances the technical capacity of young workers of each sending country. On the Japanese side, this program provides relatively cheap temporary labor to SMEs that face an acute shortage of manufacturing labor. Many positive cases are reported in which Japanese SMEs are so impressed with the working attitude and skill learning of technical interns that they decide to hire them permanently or invest in their homeland by appointing former technical interns as production managers. But this system also generates problems as explained below. The gino jisshusei system is particularly important for Japan and Vietnam because the number of Vietnamese technical interns is rising sharply in recent years, from 6,114 persons in 2013 to 20,811 persons in 2016. Vietnam has overtaken China as the top sending country to Japan (Figure 2-4). In the departure lounge of Noi Bai Airport, one can often see new Vietnamese technical interns bound for Japan wearing the same uniform.
Figure 2-4. Country Origin of Gino Jisshusei in Japan
Source: Japan International Training Cooperation Organization, Annual Operations Report, 2017.
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The increasing number of Vietnamese technical interns in Japan is a great opportunity for deepening human ties and industrial cooperation between our two countries. For Japanese SMEs, Vietnam is the most popular country for hiring foreign workers as well as for investing abroad. Japanese firms that receive Vietnamese technical interns are generally satisfied with their quality, attitude and perseverance. One plant equipment manufacturing and installation company in Amagasaki built a new factory in Dong Nai in 2010 because Vietnamese workers it hired were excellent. Another precision metal working company in Higashiosaka invested in Ho Chi Minh City in 2017 after receiving Vietnamese technical interns who turned out to be very skillful and diligent. The technical intern system not only supplies temporary labor for three years in Japan but also facilitates Japanese SMEs to invest in Vietnam. According to the JICA survey conducted by the Vietnam Institute for Economic and Policy Research (JICA 2017), a research institute at the Vietnam National University, the general profile of Vietnamese technical interns in Japan is as follows. They are from country side and recruited by brokers or word-of-mouth. They must study Japanese language and culture for six months before going to Japan (the quality of such courses varies greatly depending on the sending company). Dispatching organizations in Vietnam and supervisory organizations in Japan take care of them. On average, a technical intern pays $5,300 to a broker and/or dispatching organization in Vietnam and carries debt of $4,700 upon arrival in Japan. He or she earns $44,500 over three years (if successful) and brings home $23,000 after deducting living cost and debt repayment. Vietnamese technical interns feel the initial cost is too high, but they do not know Japanese firms also incur high cost to hire them. However, this system also has problems. First, Vietnamese workers wanting to go to Japan as technical intern do not have sufficient or accurate information which leads to the choice of wrong brokers and misunderstanding of rules, costs and risks. Second, there are low-quality intermediary organizations on both sides, in Vietnam and Japan, that exploit workers without adequate training or support. Third, some Japanese firms regard technical interns as just cheap labor and do not train them or assign workers to meaningful tasks, and sometimes even underpay them. Fourth, faced with such problems, some technical interns disappear from the workplace or commit crime in Japan. These have become one of the largest bilateral problems between Vietnam and Japan. In response, the two governments have started to correct the situation. Main responsible organizations are JITCO on the Japanese side and DOLAB/MOLISA on the Vietnamese side. A ranking system of Vietnamese sending companies has been introduced by the Vietnamese Association of Manpower Supply (VAMAS) and best ones are officially recognized and promoted (see below). Guiding and monitoring of Japanese firms and receiving organizations has been strengthened under the new Gino Jisshu Act of 2017. The impact of these policies will decide whether this system will continue to receive popular support in both countries. The Japanese government under Prime Minister Abe has another agenda regarding this system.
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Faced with severe and structural labor shortage, it has decided to rapidly expand the scope, sectors and duration of gino jisshusei and also to introduce new labor importing mechanisms. The Immigration Control Act was revised in December 2018 and to be enacted in April 2019, The staying period of gino jisshusei will be extended from three to five years, new sectors such as old age care, shipbuilding and hostelry will be added, and skilled foreign workers will be granted a longer stay in Japan under certain conditions. This new policy may partially solve the problem of labor shortage in Japan. However, its consequence on Vietnam is uncertain because more Vietnamese workers may remain in Japan rather than coming back to Vietnam. The rights, living conditions and social and health insurance for foreign workers and their families must also be secured before inviting them under the new rule. For Vietnam’s industrialization, the most serious issue regarding gino jisshusei is the lack of proper mindset and job opportunities of trained Vietnamese workers after they return to Vietnam. Many workers regard going to Japan merely as a chance to earn money and do not think deeply about using acquired skills for their future career or national development. After returning, they often go back to the village or take up jobs unrelated to learned skills which is a great loss to the country. This is partly a mindset problem of the workers and partly due to insufficient information and matching service for linking these workers to suitable jobs at Japanese FDI and other workplaces in Vietnam. To make the best of the gino jisshusei system, the two governments should not only cope with the problem of improper brokers and host firms in the short run but also promote effective utilization of returnees for Vietnam’s industrialization in the medium to long run. One of the things that can be done for this purpose is to strongly support excellent sending companies in Vietnam while eliminating eliminate low-quality brokers, and supply information on the quality and ranking of various sending companies to all workers considering going to Japan. This is already started by VAMAS. Two labor sending companies below have been recognized as excellent and supported by the Japanese embassy and JICA. Esuhai Company in Ho Chi Minh City is founded by Mr. Lê Long Sơn who studied engineering in Japan. Based on his strong belief, he trains gino jisshusei applicants with great discipline before dispatching them to Japan. They are taught on manners, attitudes, Japanese thinking, 5S and Japanese language. They are carefully monitored during and after their stay in Japan. Workers are encouraged to use acquired skills for future. Esuhai also does matching between returning workers and Japanese FDI in Vietnam. Hai Phong JSC, a Hanoi labor exporting firm, was established by Mr. Nguyễn Xuân Tuyến who was himself a gino jisshusei in Shizuoka Prefecture. Like Esuhai, his company teaches attitudes, 5S, skills and Japanese language. Hard physical exercise, military style discipline, and declaration of purpose in front of many people before going to Japan are part of the pre-dispatch training. Hai Phong’s “Dong Du Moi” (New Eastern Study) program encourages technical interns to go to Japan not for quick money but for realizing a great life dream. Strong will, long-term thinking, skill development and business startup support after returning to Vietnam are emphasized. As outstanding
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sending companies, both Esuhai and Hai Phong cooperate with MOLISA to improve Vietnam’s labor exporting policy.
8. Kosetsushi
Kosetsushi is short for Kosetsu Shiken Kenkyu Kikan (Public Testing and Research Organizations) which are technical support centers for SMEs and venture companies operated or supervised by local governments. It performs testing, research, training, technological support and advice for enterprises based in each targeted prefecture or city. Historically, there were initially different types of kosetsushi such as industrial centers, handicraft centers, agricultural centers, dairy farming centers, fishery centers and forestry centers. There are different organizational forms and backgrounds. Many kosetsushi date back to a century ago or more. Some were originally established by central or local governments and were later transferred to NPOs or the private sector, while others were set up by various NPOs under the supervision and support by local governments. Because Japan is a manufacturing country, most kosetsushi targets the manufacturing sector. Under recent administrative reform in Japan, some centers were integrated, and some became more independent from governments. There is at least one industrial kosetsushi in each prefecture (Japan consists of 47 prefectures), and some prefectures have two or three industrial kosetsushi. In addition, some large cities also operate industrial kosetsushi. Besides these, there are a large number of specialized kosetsushi set up by industrial and business NPOs all over Japan. This is counting industrial kosetsushi only. There are also agricultural, fishery and other kosetsushi. Kosetsushi provides services in response to demands of the private sector. Local governments usually subsidize kosetsushi operation, and SMEs are charged low prices for most services. Some services, such as initial consultation, are free of charge. Some kosetsushi can self-finance the purchase of latest equipment but others face financial constraints as collected fees are not enough to upgrade machines. At most kosetsushi, technical staff are highly competent but receive the salary based on local government pay schedules. They are happy to help enterprises in their hometowns with relatively low salaries. Because demand for technical support by SMEs is high and the number of technical staff at kosetsushi is limited, kosetsushi technical staff are usually very busy in providing various services daily16. Kosetsushi provides technical service to SMEs which plan to develop new products, must submit technical certificates to customers, need special treatment for certain components or want to investigate the cause of product failure, but cannot afford expensive equipment for just one or a few uses. At kosetsushi, they can rent equipment and technical expertise of the staff relatively cheaply.
16 As of June 2018, the Saitama Industrial Technology Center (SAITEC), one of the two kosetsushi in Saitama Prefecture (population 7.3 million), had 100 technical experts whose legal status was regular prefectural officials. Annually, they execute 48,500 requested events (consultations, tests, projects, equipment uses, etc.) plus ten SAITEC-initiated R&D projects and 30 externally commissioned projects. At the Technical Support Center of Higashiosaka City, which is a smaller center at the municipal level (population 240,000), five senior technical staff execute about 4,000 requested technical events per year (no R&D is conducted due to small budget). These five technical staff are all retired industrial officials from the Osaka Research Institute of Industrial Science and Technology (ORIST), a prefecture (higher) level kosetsushi.
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Available services differ from kosetsushi to kosetsushi but normally include the following. (i) Commissioned or joint research—commissioned research is done by kosetsushi at the request of an SME for technical innovation, trouble-shooting or commercialization of new technology. Joint research is done by kosetsushi and an SME together. (ii) Testing and analysis—various tests, analyses, measurements and special treatment of materials and components are performed in response to SMEs’ requests, and test results are certified in official documents. (iii) Use of machinery and equipment—SMEs can rent machinery and equipment at kosetsushi for the purpose of product development or overcoming technical difficulties. Each kosetsushi publicizes available equipment in the website. Libraries are also open to SME users for reviewing Japanese Industrial Standards (JIS), past research results and results in other prefectures. (iv) Technical consultation and advice—SMEs can consult with kosetsushi experts regarding any technical problem in products, production process or product development. (v) Technical training and seminars—in order to enhance the capability of engineers engaged in R&D at SMEs, training and seminars are offered using kosetsushi’s classrooms and equipment. Details of programs can be viewed in each website. (vi) Dissemination of technological information—seminars on latest technology, information useful for overcoming technical problems or developing new products, and free discussion are offered at technology workshops. Some kosetsushi send e-newsletters to interested SMEs. Kosetsushi specializes in technical support only and does not offer consultation in management, marketing, accounting, finance or other non-technical aspects of enterprises. Technical centers similar to kosetsushi are also found in other countries. Taiwan has 19 state-supported research institutes including the Industrial Technology Research Institute, the Institute for Information Industry and sectoral institutes for metal, automobile, bicycle, precision machinery, etc. whose role is to help firms innovate and/or commercialize innovations through both official and privately commissioned projects. Thailand has about ten specialized institutes in textile, food processing, automobile, electronics, sugar, steel as well as in SME development, technical training and management certification. Among these, the Thai-German Institute has a large number of modern equipment for training and processing; the Thailand Automotive Institute works on policy formulation, supporting industries, standards and certification and training; and the Electrical and Electronics Institute offer product testing, measurement equipment calibration and factory quality inspection. In Africa, the Kenya Industrial Research and Development Institute (KIRDI) has supported SMEs since 1914 with currently over 100 technical staff at the Nairobi headquarters, the Kisumu regional office and many satellite offices across Kenya. It supports food, leather, textile, bio-fuels, cosmetics and other natural material-based production. KIRDI offers customized testing, training, product development and production services for a subsidized fee. It is very popular with SMEs. KIRDI targets to support 500 firms per year. All of these institutes in Taiwan, Thailand and Kenya are national centers serving the entire nation, not centers under local governments as in the case of Japanese kosetsushi. In Vietnam at present, there is no technical support center that offers open, broad and competent services to SMEs at reasonable cost in each province or even at the national level. Some specialized analysis and treatment are unavailable in Vietnam and have to be conducted abroad. Manufacturing
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firms, universities and research institutions may have standard production equipment such as lathe, machining, CNC, pressing and stamping, casting, forging, heat treatment, etc. as well as some basic testing devices, but few have a large collection of specialized testing and analyzing equipment in one place17. To establish a network of kosetsushi in all provinces and major cities in Vietnam will be very costly and take much time. Moreover, unlike Japan, there is not a large pool of competent technical experts who are willing to work at low salaries in all cities and provinces in Vietnam. Good engineers often prefer to work for top companies in or around Hanoi or HCMC, or migrate abroad for high salary. Given this reality, technical support centers in Vietnam should first be established in Hanoi and HCMC, to be expanded to other areas as more human and financial resources become available. Even though the initial line-up of testing equipment may be limited, these two centers should complement and cooperate with each other, and they should also make arrangements with private firms, universities and research institutes that have special equipment which can be made available to SMEs. It is reported that MOIT is studying the possibility of introducing kosetsushi in Vietnam with Korean support as well as by sending study missions to a number of kosetsushi in Japan.
9. FDI-domestic firm linkage
In Japan, creation of business linkage between FDI and Japanese firms has never been an issue because Japan did not actively invite FDI at any time in its history. Japanese industrialization was achieved by domestic firms with little FDI linkage or support. Outside Japan, on the other hand, this linkage is critical for Japanese manufacturing FDI, especially in Southeast Asia. Japanese firms generally seek long-term trust and relationship with local partners, so the choice of the right local partner is very important. Moreover, international competitiveness requires parts procurement in the host country with high quality, low cost and quick delivery (the QCD requirement) instead of importing them with long lead-time and added transport (and tariff) cost. For survival and competitiveness, Japanese manufacturing firms seriously look for competent local component suppliers. If local suppliers are not strong enough, Japanese firms often coach them until they become more effective (see next section for supporting industry promotion). For these reasons, Japanese firms have an incentive to identify and foster competent local suppliers for their own benefit, and many local suppliers also want to work with Japanese firms for upgrading technology and joining global value chains. However, in a world with imperfect information, finding the right partner is not easy on either side, and requires much time, energy and cost as well as many trials and failures—as in the case of human marriage matching. Because effective industrial linkage is important but difficult to realize, government is justified to intervene and facilitate matching activities. There are two types of FDI-local firm matching. The first is procurement of materials and components between two independent firms (a buyer and a supplier). The second is finding an
17 At SAITEC, more than 120 types of analysis are available with specialized equipment in general analysis, material testing, precision measurement, non-destructive testing, vibration, microbe, preparation and so forth.
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appropriate long-term business partner for joint venture, production cooperation and long-term contract that go beyond simple component procurement. Needless to say, the second matching is deeper, more difficult and more time-consuming than the first. Government can promote matching in three ways. First, it can guide (or require) FDI firms to find, support and transfer technology to local partners as a condition for granting an investment license or an incentive. Second, it can provide official matching services through trade fairs, reverse trade fairs, matching events and seminars, maintenance of a supplier database, responding to individual inquiries, and so on. Third, it can subsidize, reduce tax or otherwise incentivize FDI firms that train and work substantively with local firms. The first method is sometimes used, for example in China18 and past Malaysia (see below), but forcing foreign firms to work with local firms (especially when the latter’s capacity is low) generates discontent and refusal from FDI and usually fails. Thus, official matching should be done in the second (direct support) or third (indirect support) way so linkage occurs willingly rather than coercively. Among ASEAN members, Thailand offers the most advanced (though not perfect) form of official linkage promotion. Figure 2-5 illustrates the policy network for linking Thai and Japanese firms. The Board of Investment (BOI, an investment agency under the Prime Minister) and the Ministry of Industry (MOI) are the key official actors. They flexibly coordinate activities of their affiliated agencies as well as private bodies such as the Alliance for Supporting Industries Association (A.S.I.A.) which represents 12 Thai industrial associations. This network is a loose one without formal instruction or explicit rules. Each member organization performs its tasks separately, and refers client companies to other organizations for services not rendered by itself. Personal relations among officials and experts at various organizations ensure the quality and speed of collective services19. Loose working style such as this is typical of the Thai government which is not confined to linkage promotion.
18 China has been able force FDI to transfer technology because foreign investors often accept undesirable conditions for the privilege of entering China’s huge market. This advantage is unique to China, and a country with an “average” market size, including Vietnam, cannot avail itself of this bargaining strategy. The US government is severely criticizing this Chinese practice. 19 Such mutual referral among official bodies is called taraimawashi in Japanese, often with a negative connotation of bureaucratic delay and irresponsibility. But when this is done speedily and properly, customers are well served even without a focal point or formal procedure.
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Figure 2-5. Thailand: Network for Linking Thai and Japanese Firms
Source: Thai BOI presentation(presented in May 2013. Note: This policy network was created when the BOI was placed under the MOI at the time of Prime Minister Yingluck Shinawatra.
Within BOI, the BOI Unit for Industrial Linkage Development (BUILD) specializes in matching between FDI and Thai firms. This unit, created in 1992, provides one-stop services for FDI firms with local procuring needs or in search of local partners. Main activities of BUILD are as follows: (i) Sourcing service―BUILD provides free service to help both Thai and foreign buyers locate parts and components in Thailand. When an inquiry is received from a buyer, BUILD announces required product specification and volume in its website and solicits application from Thai suppliers. One-on-one meetings can also be arranged. Inquiries from buyers are received via email and phone as well as through other Thai bodies working with foreign buyers including BOI’s Tokyo and Osaka offices. (ii) SUBCON Thailand―this is a large regional subcontracting exhibition for industrial components and business matchmaking. It is organized in Bangkok jointly by BOI, the Thai Subcontracting Promoting Association, and UBM Asia (trade fair organizing firm) in May every year around the same time as Intermach, a large machinery exhibition. (iii) ASEAN Supporting Industry Database—this is an e-service that lists manufacturers of parts and components in the ASEAN member countries on the internet for global access. BUILD is responsible for maintaining this regional database in Thailand which has largest entries among ASEAN members. Information includes company profile, investment profile, employment, customers, products, capacity, processes, raw materials, and machinery and equipment. (iv) Vendors-Meet-Customers Roadshow―this program assists Thai part suppliers to participate
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in overseas trade fairs for widening their vision, knowledge and linkage. BUILD has one director and about ten staff members, with each staff assuming responsibility for supporting assigned buyers. According to the BUILD Director, business matching is not an easy task, and partner search is more difficult than finding local inputs. It sometimes takes more than a year to locate suitable partner candidates. BUILD arranges many types of bilateral business partnership including JV, OEM, patent use and production contract. BUILD does not have precise information on the number of procurement inquiries received or successful cases among them. However, about half of the FDI firms that make inquiries subsequently send a thank-you email and report the progress to BUILD. In Malaysia, the Vendor Development Program (VDP), started in 1988, designated Proton, a state-owned national car company, to be an “anchor firm” which was obliged to purchase as many components as possible from local (Bumiputra) suppliers, offer technical assistance, and introduce government loans to them. By 2002, anchor firms were expanded in number to 85 firms including Malaysian, Japanese and American companies, and 296 vendors (local suppliers) were registered. However, foreign assemblers were not enthusiastic about being required to buy from local vendors which lacked sufficient technology. Their participation was in response to the request by the Malaysian government and not voluntary. VDP was partially successful in the automotive sector (thanks to the existence of Proton and Produa, another state-owned car maker) but much less successful in the electronics sector. FDI firms do not like forced localization effort. Malaysia renewed the policy by introducing the Industrial Linkage Program (ILP) in 1995. The Small and Medium Industrial Development Corporation (SMIDEC) provided (i) “pioneer status” (standard investment incentive in Malaysia) with 5-year corporate income tax exemption or 60% investment tax allowance, (ii) business matching using the National SME Database, the SMEinfo Portal and the SME Competitiveness Rating for Enhancement (SCORE), and (iii) a support package consisting of factory site provision, R&D, technology upgrading and export market development. However, Malaysia subsequently abandoned linkage promotion and began to support value-creating Malaysian SMEs which are independent from FDI or large domestic firms. In Vietnam, annually in Hanoi or HCMC, various trade fairs are organized to match buyers and suppliers. Reverse trade fairs, where FDI firms exhibit components they want to procure domestically, are also held. JETRO has a list of Vietnamese component suppliers that possess adequate technology or have been improved through Japanese cooperation. JICA and the World Bank are about to separately launch new projects for upgrading Vietnamese suppliers and linking them with foreign buyers. Samsung and the Korean government, also separately, assist supporting industry development20. A pilot project of sophisticated matching between Japanese and Vietnamese SMEs before a head-to-head meeting was also tried21. Overall, however, Vietnam’s linkage policy
20 Korean organizations, including KOTRA, KOICA and chaebols (large private business groups) such as Samsung and LG, tend to work independently from each other rather than “ALL KOREA.” 21 A Japanese prefecture sent a list of SMEs with detailed information on what type of partnership each desired. For each, a list of potential firms was prepared on the Vietnamese side. Emails were exchanged between candidate partners in Japan and Vietnam, with a Japanese-Vietnamese translator translating each email both ways. By the time Japanese SMEs visited HCMC, sufficient information had already been gathered and firms could enter concrete negotiations for partnership. This pilot case proved that good preparation could produce effective matching. However, the method was very costly, labor-intensive and time-consuming.
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remains fragmented and less systematic than in Thailand or past Malaysia. Matching events usually ends with business card exchange and without producing new deals. Vietnam must not only strengthen its linkage policy but enhance it by building the capacity of Vietnamese SMEs so they will acquire skills and technology demanded by FDI.
10. Supporting industry promotion policy
Susono sangyo (supporting industries) is a Japanese term that refers to part and component suppliers in the home country (not imported parts and components) that support production of large assembly firms in automotive, electronics and other mechanical sectors. Historically, the most important laws for Japanese supporting industry development were the Provisional Act to Promote Machinery Industry (Kishin-ho, for short) in 1956 and the Provisional Act to Promote Electronics Industry (Denshin-ho, for short) in 1957. As the names indicate, these were time-bound laws for five years and each was renewed two times until 1971. The Japanese government made it clear that these measures were only for limited time during which Japanese supporting industries were expected to grow and achieve global competitiveness, after which support would be withdrawn. The years in which these laws were in effect, from 1956/57 to 1971, coincided with Japan’s post-WW2 high growth era with rapid industrialization. Kishin-ho and Denshin-ho had almost identical contents. The basic thrust of these laws was combining technology support by the Ministry of International Trade and Industry (MITI) with management support and investment loan provision by the Ministry of Finance (MoF) and the Japan Development Bank (JDB, under MoF). By integrating technical, managerial and financial support under one mechanism, eligible SMEs could receive comprehensive support for investing in new technology and attaining excellence (Figure 2-6). The typical implementation sequence ran as follows. (i) MITI’s Machine Industry Deliberation Council identifies key components and revises promotion programs annually. (ii) MITI invites and screens applications from SMEs. (iii) MITI coaches SMEs on production plan, equipment choice, purchase negotiation with equipment producers and other technical matters so applications are improved. (iv) MITI sends selected applications to JDB or the Japan Finance Corporation for SME (JASME) for additional scrutiny, after which the financial institution provides management advice and investment loans to eligible SMEs. (v) Private commercial banks also lend willingly to SMEs which receive advice and loans from these public banks.
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Figure 2-6. Integrated SME Support under Kishin-ho and Denshin-ho
Source: Prof. Akira Suehiro’s 2006 lecture in Hanoi, redrawn by author.
A few remarks are in order. First, MITI and MoF were not neutral referees but friendly coaches offering hands-on advice to aspiring SMEs throughout the application and implementation stages. Firms rejected in the first round could apply again after improving their documents following official instructions22. Second, unlike Southeast Asia today, Japan’s supporting industries were made up of domestic firms alone and did not include FDI component suppliers. As a result, purchase of equipment embodying new technology was the core policy objective around which technical, managerial and financial supports were arranged rather than providing tax incentives to attract new investors or linkage promotion with FDI. Third, these laws had powerful effects on modernizing Japanese supporting industries which were initially regarded as weak and outdated. This in turn bolstered the competitiveness of large automotive and electronic assemblers which procured components from domestic suppliers. This was also a period of general trade liberalization under the GATT Kennedy Round, which exerted external pressure, especially in the 1960s, to produce better and cheaper components. In Thailand, on the other hand, supporting industry promotion has been closely related to FDI attraction and linkage. The need for this policy was keenly felt in the late 1980s with the arrival of a large number of Japanese manufacturing firms. Absence of Thai component suppliers with high quality, low cost and on-time delivery (QCD) was considered detrimental to Thailand’s industrialization. Japanese firms, MITI and JICA began to teach Thai workers and Thai supplier companies. Meanwhile, the Thai Ministry of Industry (MOI) adopted a step-by-step approach to the capacity building of Thai supporting industries. When private firms were weak and small in number, the government directly intervened to guide them and create new support systems such as 5S, kaizen and shindan. As private capacity gradually rose, official hands were withdrawn, and private agents
22 A similar coaching approach is taken in Taiwan’s Industrial Projects, a competitive program by the Ministry of Economic Affairs (MoEA) to subsidize commercialization of R&D. Sectoral technical institutes under MoEA help Taiwanese SMEs from project formulation to subsidy application and implementation, with assigned officials working closely with targeted SMEs for years until satisfactory results are obtained.
Ⅱ-36 took over. Specifically, Thai policy development went as follows. In 1988, Thailand established the Metal-working and Machinery Industries Development Institute (MIDI) with JICA technical cooperation, and MOI officials began to teach SMEs through MIDI. In 1996, MIDI was upgraded to the Bureau of Supporting Industry Development (BSID) with a higher organizational status and broader mandate including plastic and packaging sectors as well as industrial linkage. This was a good example of scaling up and institutionalizing the pilot project (supported by JICA cooperation) by the ownership of the Thai government. Several more industrial institutes were established under MOI including the Thai-German Institute (1992), the Thailand Automotive Institute (1998), the Electrical and Electronics Institute (1998) and the Iron and Steel Institute (2000), which were initially funded by government budget or foreign aid, but currently operate as autonomous and financially self-supporting NPOs. In 1999, JICA began a five-year program to create a shindan system in Thailand and produced 450 Thai shindanshi as new experts to support SMEs (section 4). Since then, Thai universities and private sector have taken over the role of training shindanshi whose current number is uncertain but surely in thousands. In early days, BSID staff directly provided technical and managerial support to individual companies. When the number of Thai supporting industry firms grew to about 1,000, BSID created and managed several thematic “forums” (design, metal, machinery, foundry, etc.) with BSID serving as their coach as well as secretariat. Over time, these forums grew to become truly privately-run industrial associations. There were twelve such industrial associations created by BSID, now providing technical support and training to member firms without BSID’s help. In 2008, the Alliance for Supporting Industries Association (A.S.I.A.) was established, again with the guidance of BSID, as an apex organization to coordinate among existing supporting industry associations, which now boast a total of over 15,000 member firms. In Malaysia, supporting industry promotion in the past focused on providing tax incentives for eligible manufacturing projects and facilitation of FDI-local firm linkage. For tax incentives, the main instruments were pioneer status (time-bound corporate income tax reduction) and investment tax allowance (offsetting taxable income by eligible capital expenditure) as well as exemption from import duty, sales tax and excise duty. The Malaysian Investment Development Authority (MIDA) publishes a continuously updated list of promoted activities and products which include supporting industry products. Application and approval processes are standardized, transparent and relatively quick. MIDA’s relevant industrial division first reviews the application, whose result is sent to the MIDA’s weekly Action Committee on Industry for deliberation and decision. To receive any incentive, the project must be truly manufacturing (not just trading), value-adding, technology upgrading and/or linkage forming. Malaysia in the 1990s also made much effort to foster linkage between local component suppliers (“vendors”) with FDI or large state-run assemblers. The principle programs were the Vendor Development Program (VDP) introduced in 1988 and the Industrial Linkage Program introduced in 1995-96 (see section 9). VDP started as a development program for Bumiputra (native Malay) suppliers to Proton, a national car company. The “anchor firm” was obliged to provide technical assistance and introduce government loans to vendors and procure as many parts as possible from them. Targeted anchor firms and sectors were later expanded to include FDI firms as well as electronics, shipbuilding, construction materials and furniture. As of 2002, there were 85 anchor firms and 296 vendors. However, participation of FDI anchor firms was mainly due to the request of
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the Malaysian government, and they were not keen to support many local vendors or attain high localization. Private firms do not like forced localization when local suppliers are not globally competitive. Other than Proton and Produa (another state-run automotive firm), the impact of VDP was limited. On the other hand, ILP was a policy instrument to carry out the Second Industrial Master Plan 1996-2005 with the establishment of the Small and Medium Industries Development Corporation (SMIDEC, now renamed to SME Corp. Malaysia). ILP provided financial incentives (pioneer status for vendors, and subsidies for anchor firms), business matching and a technical support package. Firms eligible for ILP were expanded to non-Bumiputra SMEs so long as their Malay capital was 60% or greater. Subsequently, however, Malaysia abandoned linkage policy and replaced it with the promotion of autonomous and globally competitive SMEs without ties with FDI or large state-owned corporations. These reviews show that each country adopts different methods of fostering supporting industries according to initial capacity as well as social and historical circumstances. Vietnam is a late starter in supporting industry promotion, and the Vietnamese term “công nghiệp hỗ trợ” and its meaning were popularized only in the early 2000s. Since then, the term has been frequently talked about in media, trade fairs and symposiums but there has been little effective policy action to promote it. Laws and regulations were issued and revised, MOIT was designated as a responsible ministry, and assistance has been offered by Japan, Korea, the World Bank and many FDI firms. However, Vietnam’s effort to develop supporting industries has been limited and scattered without a clear target or an integrated framework, and therefore has not reached all manufacturers in the country. Globally competitive Vietnamese suppliers are relatively rare even after a quarter century of vigorous globalization and industrialization. Thailand had 1,000 FDI-linked suppliers when the initial policy phase was completed, and currently has about 2,300 competitive suppliers. Vietnam’s supporting industry programs need a serious revitalization. Supporting industry promotion must mobilize many productivity enhancing tools explained in Part II. Because of latecomer advantage, Vietnam can learn from past successes and failures of other nations and create a mechanism most suitable for its own conditions. Experiences of Japan, Thailand and Malaysia cannot be copied directly to Vietnam due to different circumstances, but many hints are available for building the Vietnamese system. The Japanese case suggests that the ultimate goal should be an integrated support in management, technology and finance under close cooperation of relevant ministries and agencies. It also points to the usefulness of having a temporary law to execute this task. Thailand teaches the importance of phasing policies from direct official guidance to private initiative as domestic capacity rises. Malaysia shows that transparent and easy-to-use incentives are essential. Vietnam can selectively combine relevant aspects of these policy lessons, and also incorporate several productivity tools discussed above (5S and kaizen, handholding, shindan, kosetsushi, linkage and others) to create a truly effective national system for promoting supporting industries. The current system is too narrow in scope and cumbersome in procedure for broad impact.
11. Additional discussion
In this final section, three additional issues that may be useful in introducing productivity methods from Japan and elsewhere are presented: (i) policy organization, (ii) features and instruments of a
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national productivity movement, and (iii) distinction between direct policy support and indirect guidance and incentives.
(i) Issues in policy organization
If productivity is to become a top national goal, a proper policy mechanism must be established to conduct a comprehensive national productivity movement. How this mechanism should be best arranged depends on the nature of politics, administrative capacity, private dynamism, social structure, popular mindset and other unique features of each nation. In some countries, national productivity movements are driven by the private sector. In other countries, they were launched and carried out by government. Japan’s productivity movement which started in the late 1950s was driven by the business community although public policy also played a supportive role. Three NPOs—the Japan Productivity Center (JPC), the Union of Japanese Scientists and Engineers (JUSE), and the Japan Management Association (JMA)—facilitated learning from the US and Europe, adjusting foreign models to Japanese reality, and disseminating the modified model to all firms (Kikuchi 2014). In contrast, national productivity movements in Singapore in the 1980s and Ethiopia in the 2010s were executed as top-down policy with the Prime Minister as the principal initiator and promoter. Initial results were extended to a wide range of workplaces through official agencies in each country. Given the present circumstances of Vietnam, where the private sector as a whole is not strongly pursuing or requesting productivity actions, the Vietnamese government must be the initiator of a national productivity movement. Institution-wise, during the long process of industrialization, Japan has developed a thick layer of enterprise supporting organizations. The current situation is as follows. At the policy level, the Ministry of Economy, Trade and Industry (METI) is the responsible ministry and the SME Agency under METI is in charge of national policy formulation. For implementation, the SME Support, JAPAN (SMRJ) under METI is the key executing agency at the national level. There are also many local support mechanisms at prefectures and municipalities which coordinate with national agencies. Moreover, there are numerous non-government players that help SMEs and supporting industries such as local banks, credit unions, industrial associations, business NPOs, universities and research institutions. Japan also has many experienced (but aging) industrial experts willing to work for public purpose at low fees. It is difficult for Vietnam to build a full policy mechanism like Japan’s in the short run. It should create a simpler mechanism at first and gradually introduce additional functions as experience is gained and budget becomes available. At the very minimum, a high-level policy organization that directs and monitors productivity enhancing policies must be created. An early establishment of the National Productivity Council (or a mechanism by any other name), with strong chairmanship and personal commitment of the top leader of the Government and/or the Party, should be seriously considered. On the implementation side, there are different options. The first is to strengthen and upgrade the existing Vietnam Productivity Institute (VNPI), currently under the Ministry of Science and Technology, to be the executing agency of the national productivity movement. The second is to create a new agency directly under the Prime Minister to replace (and absorb the current functions of) VNPI. The third is to create a new agency or center under a ministry (which ministry is suitable for this purpose needs to be carefully examined) but having sufficient authority to execute a
Ⅱ-39 nationwide movement and coordinate relevant ministries and agencies, with a strong backing of the top leader of the Party or the Government. Another important task is to train and produce competent Vietnamese industrial experts who have deep knowledge of international best practices as well as Vietnam’s reality, and who can effectively teach Vietnamese firms, workers and new experts on the ground. For creating these necessary institutions and human resource, cooperation of Japanese organizations such as JICA, JPC and J-SMECA, as well as a study of existing productivity models in Singapore, Taiwan, Korea, Malaysia, Thailand and other Asian economies will be highly useful.
(ii) Features and instruments of a national productivity movement
Over the years, the GRIPS Development Forum has gathered past experiences of national productivity (and quality) movements in various countries. Singapore, Ethiopia, Botswana, India and Mauritius were actually visited for interviews with core organizations and individuals. Japan, Korea, Tunisia, Argentina and other countries were studied through records, documents and hearings with responsible experts. Some countries brilliantly succeeded in achieving national productivity goals while others produced less remarkable results or could not sustain the movement for long. Some movements were driven by private initiative while many others were carried out by government order or demand from FDI firms. Some countries selected focus areas such as manufacturing or the automotive sector while others targeted more broadly to cover factories, offices, services, agriculture and government. Despite these differences, there are certain general lessons to be had as well as common methods and instruments for success (JICA & GRIPS Development Forum 2011). General lessons include the following. First, a national productivity movement is not just one or two projects that last for a few years. It must be a comprehensive program package with many components that require consistent effort for several years or more. The movement must start with awareness raising and mindset change, which is the first and usually the most difficult stage. This aims to elevate popular mindset toward efficiency, planning and discipline, and convince managers, workers and public servants of the crucial importance of productivity for themselves as well as for the nation. This stage is followed by on-site productivity improvement actions at factories and other workplaces by international experts and learning of this practical skill by domestic experts. When the number of domestic practitioners of productivity improvement increases greatly to cover all sectors and regions, when the nation can sustain the movement without foreign help, and when it even starts to teach other nations, the national productivity movement can come to a successful completion. Second, the top national leader’s strong commitment and involvement, usually at the level of the president or the prime minister, is essential. Singapore’s movement was driven by Prime Minister Lee Kuan Yew. Ethiopia’s movement was personally commanded and supervised by Prime Minister Meles Zenawi. A national productivity movement is a highly complex policy mix which inevitably encounters many political, administrative, financial and technical problems along the way. These cannot be solved unless the top leader personally oversees the progress. Leaders at the ministerial or lower level are unable to overcome such difficulties. Third, in addition to the top leader’s commitment, universal national passion for excellence which engulfs government officials, entrepreneurs, engineers, workers and ordinary citizens is critical for
Ⅱ-40 propelling productivity broadly and ceaselessly to achieve a national goal, as well as for forging a social compact in which everyone actively participates in and benefits from the movement with no one left behind. Fourth, proper economic incentives are crucial to broaden the base of productivity movements. Some people work very hard for psychological satisfaction but most others need higher salaries, bonuses, promise of promotion and other material paybacks to sustain the movement for a long time. This applies to all stakeholders including public servants, experts, teachers, managers, engineers and workers. Without such incentives, the national movement will be reduced to a small-scale affair driven by a few passionate patriots. Fifth, a few to several core organizations for both policy design and implementation must be created and granted with sufficient mandate, staff and budget to guide and execute the national movement in all stages and functions. They must be responsible for the creation of a national model and standards, a massive mindset campaign, worker and teacher training, outreach to all sectors and regions, inter-agency coordination, receiving international cooperation and developing the capacity of the private sector. Sixth, a large number of practical instruments and materials must be created. This is to be done by learning and comparing various international best practices, then producing new models most suitable for domestic reality by selecting, adjusting and combining foreign components. Commonly used instruments and materials include the following. - Slogans, symbols, mascots, posters, etc. for popular awareness-raising. Singapore adopted a bee as a visual symbol of productivity and teamwork, and “Together We Work Better” as a national slogan. The idea that productivity benefits everyone—firms, workers and government—was repeatedly broadcast. In Mauritius, “Make Mauritius Work Together” was propagated. In Ethiopia, kaizen songs and dances were created. - Creation of standardized teaching materials which cover curriculum, courses, textbooks, manuals, visual aids, e-contents, TV programs, movies and stories describing successful nations, firms and individuals. These can be translated from foreign sources or newly created by national experts, and made available to public through various media, publications or a web portal site. - An education and training system at central and local levels which teach both theory and practice to managers, workers, students, etc. and a higher training system for their trainers. - Seminars, lectures, symposiums, ceremonies and other publicity events conducted by national and regional leaders as well as productivity experts. - Competition for productivity awards at the national, regional, sectoral and even firm level to recognize and promote excellent people and actions. How to organize such competition can be learned from Japan and other nations which regularly hold such events. - Creation of the Productivity Month in which productivity-related events such as the prime minister’s address to the nation, kaizen rallies, productivity award-giving ceremonies, seminar series, TV and radio programs, etc. are organized. November was the Productivity Month in Japan and Singapore, and September is the Kaizen Month in Ethiopia. - Mobilization of experienced foreign advisers through international cooperation or national budget. They can assist with the detailed design of a national productivity movement as well as its execution.
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(iii) Direct policy involvement versus indirect guidance and incentives
For any industrial policy, government can support the private sector either directly, by providing various services by government officials and facilities, or indirectly, by setting goals, directions, rules, etc. and guiding firms through incentives and subsidies. A country with limited private capacity and dynamism normally starts with direct support measures, and gradually replace them with indirect ones as the private sector expands and becomes more competitive. However, it is common that government itself often lacks capacity, and therefore must seriously learn policy methods before it can assist the private sector. This is a two-step strengthening of domestic capacity, and whether and how effectively the government learns determines how fast and far the nation rises in industrialization. Meiji Japan began industrialization by importing and installing the exact replicas of western machines and plants through official turnkey projects commissioned to British, French and other foreign teams. Japan’s first railroad, national mint, steel mills, shipyards, lighthouses, modern mines, technical university, etc. were built this way mostly in the 1870s. But in 1880, government decided to privatize these projects (except military and public utility facilities) to emerging zaibatsu such as Mitsui and Mitsubishi through competitive bidding. These zaibatsu quickly transformed former loss-making projects into profitable businesses. Japan’s transition from official involvement to private action was very quick, and the Japanese government has ever since supported the private sector mainly through indirect means. As noted in section 10, since the late 1980s, supporting industry promotion in Thailand moved from direct support to indirect support. At first, the Thai government created the Machinery Industries Development Institute (MIDI) with JICA technical cooperation, and MIDI officials visited firms for managerial and technical guidance. Then the Bureau of Supporting Industry Development (BSID), upgraded from MIDI, coached firms to form industrial associations for mutual help and receiving policy support. Now industrial policy and cooperation are implemented through these private associations and their summit organization. Similarly, a shindan system introduced from Japan was gradually privatized so Thai shindan support is now conducted mostly by private shindanshi (experts and consultants). Even at a high income level, government should play an important role in encouraging, assisting and coordinating private activities. This is done indirectly by policy guidance (direction setting) as well as incentives and subsidies (financial privileges). It should be pointed out that, in most countries, providing these privileges generates an internal fight between the Ministry of Industry, which wants to promote industry, and the Ministry of Finance, which opposes generosity for budgetary reasons. Clear leadership and a sense of proper balance and prioritization are needed to solve this perpetual conundrum. A strong national leader who can rule over different ministerial interests can be a solution. Otherwise, an inter-ministerial mechanism must be established to decide on the position between industrial promotion and fiscal soundness. The art of offering incentives and subsidies must be learned by comparing international best practices. The standard methods include reduction and/or (temporary) exemption of corporate income tax, import duties, (special) sales tax and other tax obligations as well as provision of soft loans and direct subsidies, provided that firms satisfy certain conditions such as investment, training, technology transfer, export or introduction of ICT. Some privileges are administered professionally
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and carefully to produce great outcomes while others are given incompetently with no results, so policy details must also be learned well. In Malaysia, the Small and Medium Industry Development Corporation (SMIDEC) during its operating years of 1995-2007 offered various grants, soft loans and incentives to manufacturing SMEs which cleared preset conditions in ownership, size, value-added or rural contribution. “Concept Papers” clearly specified eligible actions for support such as strengthening industrial linkage, logistic services, overseas marketing, business planning, product and process improvement, obtaining quality certification, etc. The list of eligible actions was very long. Firm actions were monitored after three, six and twelve months and benefits were withdrawn if non-implementation was detected. This was an example of a well-designed SME support incentive policy with transparent and concrete conditions. In some cases, financial privileges can be offered without any loss of fiscal revenue. In Singapore, the Skills Development Fund was founded in 1978 as an employer-based mechanism to provide incentives for staff training. Under this system, all employers must pay a Skills Development Levy for each worker they employ for up to the first S$4,500 of gross monthly remuneration at the levy rate of 0.25 percent, or S$2 per worker, whichever is higher. The government then provides subsidies to employers who invest in upgrading the skills of their employees. Employers can receive course fee subsidies of up to 90 percent with the amount of subsidies varying with course type and content.
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REFERENCES
Dong, D. T., and Huyen, P. T. (2010), “Shindanshi: The Japanese Business Management Consultant System,” Vietnam Development Forum (English and Vietnamese). GRIPS Development Forum (2009), Introducing Kaizen in Africa, a document compiled for Ethiopia-Japan Industrial Policy Dialogue. Inagawa, F. (2013), Hanoi Kogyo Daigaku niokeru Sangaku renkei niyoru Ginousha Ikusei Shien Project no Gaiyou (Overview of the technician training project through industry-university partnerships at Hanoi University of Industry), Shiryo Series No. 127 Vietnam niokeru Kougakukei Gakusei no Shokugyou heno Ikou to Sangaku Renkei nikansuru Chousa Kenkyuu (Research on Engineering Students' Transition to Work and Partnerships between Industry and Educational and Training Institutions), pp. 72-98, Tokyo: The Japan Institute of Labour Policy and Training (JILPT). Japan Small and Medium Enterprise Consultants Association (2008), A Guide to J-SMECA (English and Japanese). Japan International Cooperation Agency (2014), Promoting Tripartite Partnerships to Tackle Skills Mismatch: Innovative Skills Development Strategies to Accelerate Vietnam's Industrialization. Retrieved from: www.jica.go.jp/vietnam/english/office/others/c8h0vm00008ze15n-att/policy_paper.pdf Japan International Cooperation Agency (2017), “Data Collection Survey for Strengthening of Japan-Vietnam Human Exchanges Applied with Return Trainees of Technical Intern Training Program” conducted by the Vietnam Economic Policy Research Institute, Vietnam National University. Japan International Cooperation Agency and GRIPS Development Forum (2011), Kaizen National Movement: A Study of Quality and Productivity Improvement in Asia and Africa, a document compiled for Ethiopia-Japan Industrial Policy Dialogue. Kikuchi, Tsuyoshi (2014), “A Study on ‘Intermediary’ Technology Transfer: Creation and Application of the Three-stage Model,” Takushoku University doctoral dissertation. Kinki DETI (2008), Introduction to Kosetsushi and Sansoken (Japanese). Ministry of Health Labour and Welfare (2018), Koteki Shokugyo Kunren ni Tsuite (Public Vocational Education and Training). Retrieved from www.mhlw.go.jp/seisaku/2013/11/01.html Monozukuri Business Information-center Osaka (MOBIO) (2018). About MOBIO. Retrieved from www.m-osaka.com/jp/service/ Mori, J., Nguyen, V. T., Vu, D. T., & Vu, T. K. (2013), Final Project Report on the Project for Human Resource Development of Technicians at Hanoi University of Industry (HaUI), Hanoi. Pacific Resource Exchange Center (PREX) (2016), The Manufacturing Human Resource Development Project in Dong Nai Province, Vietnam. Retrieved from www.prex-hrd.or.jp/seminar/download.php?id=22&no=1
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Vietnam Development Forum and Goodwill Consultant JSC (2011), Survey on Comparison of Backgrounds, Policy Measures and Outcomes for Development of Supporting Industries in ASEAN: Malaysia and Thailand in Comparison with Vietnam, Publishing House of Communication and Transport (English and Vietnamese).
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PART III
Experiences of Korea, Taiwan and Singapore
Part III of the report looks into concrete experiences of Korea, Taiwan and Singapore in undertaking their Productivity Improvement Initiatives. These countries/economy provide examples of good practices and useful insights which Vietnam can refer to in promoting its own efforts for productivity improvement. As regards Korea, efforts by the Korean government to upgrade and expand technical and vocational education and training (TVET) system are taken up. For Taiwan, role, accomplishments and current efforts of the China Productivity Center (CPC) is introduced. The case of Singapore is drawn from the analysis of existing studies on the country’s productivity development as well as updates its recent initiatives.
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CONTENTS I. TECHNICAL AND VOCATIONAL EDUCATION AND TRAINING IN KOREA III-1 1. Overview III-1
2. Administrative and legislative setup III-2
3. Current development III-3
II. ROLE OF THE CHINA PRODUCTIVITY CENTER (CPC) IN TAIWAN III-5 1. Overview of the macro-economic trends in the late 20th in Taiwan III-5
2. The CPC’s historical role and past accomplishments III-6
3. Current efforts of the CPC III-7
III. PRODUCTIVITY IMPROVEMENT INITIATIEVES IN SINGAPORE III-9 1. Introduction III-9
2. Background of Singapore’s productivity improvement efforts III-9
3. Productivity Movement in Singapore (1981-1990s) III-11
4. Singapore’s recent initiatives on productivity improvement III-14
5. The direction Singapore is trying to advance III-16
REFERENCES III-17
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I. TECHNICAL AND VOCATIONAL EDUCATION AND TRAINING IN KOREA1
1. Overview
Technical and vocational education and training (TVET) in the Republic of Korea is widely known as it has effectively supported the rapid economic growth in the last 40 years. In 1960s and 1970s, TVET provided initial training for large populations to meet rising labor demands, then it was upgraded to raise the skills levels of workers and expanded in the 1980s and 1990s. In Korea, vocational education and vocational training are distinguished and implemented by different institutions. Vocational education is generally provided by schools (upper secondary and tertiary education), and vocational training is provided by various programs offered through the employment insurance fund and public or private training institutes. Figure 1: TVET in the South Korean Education System
Source: UNESCO-UNEVOT, TVET Country Profile: Republic of Korea, November 2018.
1 This part is based on the following two documents: UNESCO-UNEVOT, TVET Country Profile: Republic of Korea, November 2018; National Center on Education and Economy, “South Korea: Career and Technical Education” (http://ncee.org/what-we-do/center-on-international-education-benchmarking/top-performing-countries/so uth-korea-overview/south-korea-school-to-work-transition/)
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2. Administrative and legislative setup
In terms of government responsibility, vocational education is governed by the Ministry of Education, and the Korean Council for University College Education (KCCE) in charge of coordinating and managing of vocational colleges and research. On the other hand, vocational training is governed by the Ministry of Employment and Labor through implementing skills development policies. The Korea Research Institute for Vocational Education and Training (KRIVET) and the Korea Labor Institute (KLI) are responsible for conducting research related to vocational education and training. In terms of legal system, the following two laws have played a key role in the development TVET, vocational training in particular:
Workers Vocational Skills Development Act (Act. No.5474, Dec.34, 1997)2 The purpose of this Act is to secure the employment of workers, raise their social and economic status, and improve the productivity of enterprises, thus contributing to social and economic development by promoting and supporting employee skills development throughout their lives. The Act stipulates that the Ministry of Labor shall establish and implement a basic plan on vocational skill development, vocational skills development training network, standards for the techniques, resources, operation, etc., of vocational skills and development training. The Act also provides local government, as well as the State government, the responsibility to conduct vocational skills development training to promote and secure the employment of various types of persons.
Framework Act on Qualifications (Act. No.9190, Dec.26, 2008)3 The purpose of this Act is to systemize the management and operation of the qualification system and to promote the development of lifelong job abilities by providing for the basic matters concerning qualification and to elevate the socio-economic position of the people and realization of the ability-based society. The Act sets out the roles and responsibilities of the government in the establishment of national job ability standards and a qualifications structure, and also establishes a Qualifications Policy Council, under the Ministry of Education, Science and Technology.
2 http://www.moleg.go.kr/english/korLawEng?pstSeq=52976. 3 http://www.moleg.go.kr/english/korLawEng?pstSeq=52173.
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3. Current development
However, mainly due to the expansion of higher education, enrollment in TVET has declined from approximately half of upper secondary students in the 1970s and 1980s to approximately 20 percent today. With this situation as a backdrop, the Korean government has made various efforts to raise student interest in TVET and better align TVET programs and labor market needs with a series of reforms of the system. For example, National Competency Standards (NCS) in 16 broad industry areas has been developed and National Qualifications Framework (NQF) for all secondary and post-secondary vocational programs is presently under development. In an effort to restructure upper secondary vocational schools to focus on specific industries, Meister secondary schools, which are modelled on the Germany Dual System have been introduced. Meister schools focus on specific industries, such as banking, shipbuilding or semiconductor manufacturing and develop their own curriculum with industry partners. It has competitive entrance requirements, waive tuition fees for students, and guarantee employment to their graduates.
BOX 1: National Competency Standards (NSC) and National Qualifications Framework (NQF) National Competency Standards (NCS) Over 331 NCS currently exist. These standards are developed and maintained by the Ministry of Employment and Labor (through Human Resource Development Service of Korea (HRD-Korea) and the Ministry of Education (through KRIVET). The Ministry of Employment is responsible for the majority of these standards (288), together with the Ministry of Education (22) and Ministry of Land, Infrastructure and Transport (12). National Qualifications Framework (NQF) There is a Technical Qualifications Framework that is divided in national and private qualifications. The framework has five levels: craftsman, industrial engineer, engineer, master craftsman and professional engineer. As of June 2017, there are around 23,500 private qualifications registered, and 99 private qualifications officially recognized and accredited by the ministries as nationally recognized qualifications. Source: UNESCO-UNEVOT, TVET Country Profile: Republic of Korea, November 2018.
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With these, but not limited to, continuous efforts by the Korean government to upgrade and expand the TVET system to increase the employment rates of vocational education students, the number of students who chose to gain work experience before going to further education almost doubled from 2013 to 2016. The government has set a goal of increasing the percent of students in vocational schools to 29 percent by 2022.
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II. ROLE OF THE CHINA PRODUCTIVITY CENTER (CPC) IN TAIWAN
1. Overview of the macro-economic trends in the late 20th in Taiwan
In the 20th century, Taiwan’s economic growth had accelerated significantly since the period of export-oriented industrialization4 (1961-1972), after the period of recovery from social turmoil (1945-1952) and the period of import substitution industrialization5 (1953-1960).
Figure 1: History of the Economic Growth Rate in the late 20th Century in Taiwan
(%)
Source: Yukito Sato (2001), Report of Policy Research Institute, Ministry of Finance, JAPAN, Chapter 10: Taiwan6
In Taiwan, the economic growth had been mainly driven by industrialization until the middle of the 1980s and designated as one of the Newly Industrializing Economies (NIES) by the OECD report in 1979, because of the high economic performance. During the period, there were government-led economic policies in order to grow productivity and sophistication of industrial structures. In that time, as shown below, the China Productivity Center (CPC) played an important role to boost those efforts.
4 Export-oriented industrialization (EOI) is a trade and economic policy aiming to promote the industrialization process of a country by exporting goods for which the nation has a comparative advantage. 5 Import substitution industrialization (ISI) is a trade and economic policy which advocates replacing foreign imports with domestic production. 6 https://www.mof.go.jp/pri/research/conference/zk051/zk051k.pdf
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2. The CPC’s historical role and past accomplishments
The China Productivity Center (CPC) is one of Taiwan’s earliest management advisory organizations established by both public and private funds in 1955 with its headquarters in Taipei and several regional offices around the island. Primary objective of the organization was to enhance productivity of industries at the beginning of 1950s, when a wide number of industries found themselves in the early stages of development in Taiwan. In the process of Taiwan's economic and industrial development and transformation, most techniques for business and industrial productivity and quality improvement had been passed to industry via the CPC. Also, the CPC served a function as a bridge between the government and the private sectors. The CPC specializes in this field and provides training classes for workers, supervisors, managers, and top executives. It provides comprehensive training programs to boost innovation and technology in most of Taiwan’s industrial sectors. The CPC has developed innovative training modules that have helped Taiwan's creative industry to grow, connect innovative products to the market, promote marketing, and develop new business opportunities and profitable operations [Khuong 2014]. The following table shows past notable accomplishments of the CPC.
Table 1: Notable accomplishments of the CPC Past Accomplishments Establishment of the Strategy Productivity Magazine, which features productivity and quality issues and disseminates techniques to local industry Establishment of the Enterprise Management Development Association, which provides business and industrial management strategies to Taiwan’s industries Important role in establishing the Industrial Engineering Department at Tung Hai University, which houses the earliest fully developed industrial engineering academic programs in Taiwan Launch a five-year National Productivity Enhancement Program under the auspices of Ministry of Economic Affairs (MOEA) in 1984 Implementation of a three-year Medium and Small Enterprise Technology Acquisition Program in 1989 Source: Vu Minh Khuong (2014), Boosting Vietnam’s Productivity as a Strategic Approach to Deepening Economic Reforms Urgency, International Experience, and Policy Recommendations
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3. Current efforts of the CPC
The supporting programs offered by the CPC have changed in accordance with social conditions and necessities in the ages, to be the most valuable Chinese consulting institute. The following box shows the latest supporting menu offered by the CPC.
BOX 1: Current main supporting programs of the CPC
1. Integrated Business and Training Services Division Co-organize China Productivity Center’s major projects and the development of new innovative products Arrange Cross-Strait observational study missions, formulate and perform related tasks on the development of training and consulting services Prepare and implement open training courses across all levels of industry sectors Execute and expand above business scopes and related fields including public sector programs
2. Manufacturing Division Precision Production and Corporate Reform Counseling Corporate management system integration counseling Comprehensive corporate quality management system counseling Comprehensive security management system counseling certification Service industry quality control system counseling Production manufacturing technology planning and design Corporate business management professional staff training
3. Agriculture and Service Business Division This team bases on the agriculture and service industry’s innovative and value-added counseling platform to provide the local cultural industry deepening, commerce, circulation, food and service innovation, and brand and marketing development professional services, to integrate related resources. This team applies management methodologies and tools to assist agriculture and service industry and local cultural industry developing and expanding business and market.
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4. Creative Industries Division Design and innovation staff incubation and training Development and introduction of knowledge management platform for design industry Planning and implementation of large exhibition activities Diagnosis and counseling for design management Provide CBIS (CPC Business Innovation System) consulting service Product design / Industrial design Package design Graphic design CIS design Website multimedia application design
5. Technical Service Division Technical Service Division Team promote full range of information communications technology and research development of business counseling, leads to government R & D resources, patent portfolio, R & D promotion, transfer production Restoration, knowledge management, project management to assist, to provide one-stop business research and innovation service. Also provide the training course, counseling and information services to help the enterprises establish a full range of integrated services and knowledge management systems through information services. We robust business development environment, and counseling to assist the enterprises grant government resources. Except private sector we also corporate public sector to establish civil engineering management system, Our Pcals Public Domain cals, information system for CALS, to share with the joint project database and Internet, to improve the efficiency and quality of service aims. Creating a plant project to provide project management solutions, to Integrate administrative operations and investment professionals, to create a plant costs, to improve management efficiency and information exchange standard, cloud Service, etc. Source: Website of the China Productivity Center (CPC)7
7 https://www.cpc.org.tw/en-us
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III. PRODUCTIVITY IMPROVEMENT INITIATIEVES IN SINGAPORE
1. Introduction
Singapore’s productivity improvement efforts are driven by government-led initiatives. With the aim to become a business hub for innovation, the country has been focusing on the development of human resources. As a small island country with no other resources, then Prime Minister Lee Kuan Yew learned from Japan the necessity of developing human resources. Even after completion of the Productivity Development Project (PDP) assisted by Japan (1983-1990), Singapore has been continuing its own efforts to improve productivity and also has provided international cooperation to countries in Asia and Africa in productivity development, jointly with JICA. As regards recent situation, for the sixth straight year up to 2019 rankings, Singapore ranked first in the Asia-Pacific and second worldwide (next to Switzerland) for attracting and developing talent, in the annual Global Talent Competitiveness Index (GTCI).8 This section introduces: (1) Background of Singapore’s productivity improvement efforts, (2) Productivity Movement in Singapore (1981-1990s), and (3) Singapore’s recent initiatives on productivity improvement.
2. Background of Singapore’s productivity improvement efforts
In Singapore, the idea of productivity had already existed around the time of independence in 1965. In the 1960s, Singapore adopted industrial policy that is labor-intensive in order to promote the entry of foreign companies and to facilitate export. To advance these strategies, the country has laid a certain foundation for policy making and institutions on productivity development. In fact, in 1964, the Productivity Unit was created within the Economic Development Board (EDB), an organization
8 Source: Economic Development Board (EDB) https://www.edb.gov.sg/en/news-and-resources/insights/talent/singapore-tops-asia-pacific-in-talent-compe titiveness.html (Accessed on February 22, 2019) Global Talent Competitiveness Index (GTCI), which launched in 2013, is an annual benchmarking report that measures the ability of countries to compete for talent. The report, covering 125 economies and 114 cities, is based on research carried out by INSEAD in partnership with the Adecco Group and Tata Communications. Japan and Vietnam rank 22nd and 92nd, respectively, among 125 economies in the 2019 GTCI report. The six pillars of the GTCI model are: Enable, Attract, Grow, Retain, Vocational and Technical Skills, and Global Knowledge Skills. https://www.insead.edu/sites/default/files/assets/dept/globalindices/docs/GTCI-2019-Report.pdf (Accessed on February 24, 2019)
Ⅲ-9 established in 1961 to promote growth strategies, especially in manufacturing sector. In 1967, the National Productivity Center was created under the EDB and later upgraded to a separate agency, the National Productivity Board (NPB) in 1972. At the time, the concept of productivity was greatly influenced by Western practices and way of thinking. As Singapore was formerly a British colony, the country has been strongly influenced by Western style of management. Thus, emphasis was placed on logic, rationality and results rather than practices and process. By the second half of the 1970s, Singapore had to shift its focus of industrial policy from the existing labor-intensive industries to knowledge-, technology-, and capital- intensive industries, as neighboring Asian countries started to adopt labor-intensive industrial policies. This shift triggered the emphasis on the importance of human resource development. Prime Minister Lee Kuan Yew emphasized development of human resources focusing on high-skill production, and visited Tokyo frequently to learn the secrets of Japan’s success in advancing productivity. He met with key Japanese employers in Singapore to discuss practices, work attitudes and labor-management relations in Japan. In June 1981, he met with Mr. Kohei Goshi, the founder of the Japan Productivity Center (JPC), who led the initial Productivity Movement in Japan. Goshi advocated three principles of productivity, which Prime Minister Lee Kuan Yew was strongly convinced of: (1) maintenance and expansion of employment, (2) harmonious relationships and joint consultations between workers and managers, and (3) fair distribution of outcomes.9 At its root, there was the idea of “humanity is the basis of productivity”. These principles became the guiding principles of the Productivity Movement in Singapore (see BOX 1 below). In this way, the Japanese model of Productivity Movement was more practical and very different from the Western style of management. Starting from the second half of the 1980s, Singapore changed its development policy to strengthen global competitiveness – aiming to become a business hub through establishing a knowledge-intensive economic structure, promoting advanced technology, high value added industries, research and development and services. Since then, various organizations have been involved with improving productivity in Singapore. Currently, the Enterprise Singapore, a statutory board under the Ministry of Trade and Industry formed in 2018, is carrying out its mission to promote upgrading and innovation, adoption of new technologies, expansion into overseas markets, and strengthening
9 JICA (2016), History of Friendship and Cooperation: The 50th Anniversary of Japan-Singapore Diplomatic Relations
Ⅲ-10 leadership capabilities to build talent pool.10
Figure 1: Major Productivity-related Organizations in Singapore
1964 1967 1972 1983 1995 1996 2001 2002 2018 2019
Productivity Unit within Economic Development Board (EDB) (1964)
National Productivity Center under EDB (1967-72)
National Productivity Board (1972-95)
Productivity Standard Board (1996-2001)
Singapore Trade Development Board (1983-) International Enterprise Singapore (-2018) Enterprise Singapore Standards, (2018) Productivity and Innovation Board (SPRING) (2002-2018)
Source: Prepared by MURC based on various reference materials
3. Productivity Movement in Singapore (1981-1990s)
Productivity Movement in Singapore was a government-led initiative, with strong leadership of Prime Minister Lee Kuan Yew. In 1981, the Singaporean government established the National Productivity Council (NPC) and launched its own Productivity Movement. The NPC is an oversight and policy coordination body comprising representatives from the government, businesses, labor movements, and academia for promoting the Productivity Movement. In response to a request from the Singaporean government, Japan supported a crucial part of the country’s Productivity Movement through technical cooperation. JICA-supported Productivity Development Project (PDP) was implemented for seven years between 1983 and 1990. Singapore was the first country to receive support from JICA on comprehensive productivity support. The achievements of the PDP were as follows: (1) approximately 200 Singaporeans took part in training in Japan, (2) approximately 4,000 Singaporeans received training using materials developed in Singapore as part of the PDP, (3) 200 Japanese experts participated as lecturers, (4)
10 https://www.enterprisesg.gov.sg/about-us/overview (Accessed on February 25, 2010)
Ⅲ-11
Japanese experts and consultants from NPB provided more than 200 companies with guidance for productivity development, and (5) some 100 companies incorporated 5S with guidance from NPB.11 The basic idea of the guiding principles of Productivity Movement in Singapore was drawn from the principles of the JPC as shown in BOX 1.
BOX 1: Guiding Principles of Productivity Movement in Singapore
1. Improvements in productivity will increase employment in the long run. 2. Government, employers and labor must work together to implement measures to improve productivity. 3. Fruits of improved productivity must be distributed fairly among management, labor and consumer. Source: JICA and GRIPS Development Forum (2011), Kaizen National Movement: A Study of Quality and Productivity Improvement in Asia and Africa, Chapter 3, Productivity Movement in Singapore
As mentioned in Part 2 of this report, Productivity Movement in Singapore evolved through three phases: Phase I (awareness, 1981-1985), Phase II (action, 1986-1988) and Phase III (ownership, 1989-1990s) as shown in Figure 2. ・ Awareness: creating widespread awareness of productivity among companies and the workers, paying attention to flexible thinking, willingness (positive attitude) and teamwork, which are virtues of Japanese work attitude. ・ Action: putting into practice through specific programs to upgrade the skills at the workplace for both workers and management. ・ Ownership: sustaining and expanding the achievements of the Productivity Movement by private companies.
11 JICA (2016), History of Friendship and Cooperation: The 50th Anniversary of Japan-Singapore Diplomatic Relations
Ⅲ-12
Figure 2: Evolution of the Productivity Movement in Singapore
Source: JICA and GRIPS Development Forum (2011), Kaizen National Movement: A Study of Quality and Productivity Improvement in Asia and Africa, Chapter 3, Productivity Movement in Singapore
Initially, there were many twists and turns since people were used to the Western way of management. But the Japanese style gradually penetrated and the Productivity Movement turned out to be very active with a strong commitment of Prime Minister Lee Kuan Yew and government’s aggressive campaign. Singapore is widely regarded as a successful case, achieving sustainable, robust productivity improvement. After completion of the PDP, Singapore has become a country to provide international cooperation to Asia and Africa to share its own experiences in productivity development. The existing studies point out key factors which have greatly contributed to its success (see BOX 2).
BOX 2: Key Factors that Contributed to the Success of Singapore’s Productivity Improvement Efforts
1. Strong commitment and effective oversight from the highest level of leadership 2. Linkages to comprehensive and integrated strategies 3. Strong collaboration among government, private sector, unions, industrial associations, and educational and professional institutions 4. Vigorous learning form best practices, especially from Japan, through international
Ⅲ-13
cooperation 5. The support of workers who understand the need to change and embrace a productivity culture 6. The idea that an ambitious goal can only be achieved through an effective combination of sound policies and strategic institutional design, emphasizing cross-sectoral collaboration and sustained efforts Source: Vu Minh Khuong (2014), Boosting Vietnam’s Productivity as a Strategic Approach to Deepening Economic Reforms Urgency, International Experience, and Policy Recommendations
4. Singapore’s recent initiatives on productivity improvement
The Singaporean government has so far established ad hoc committees to develop strategies for the country to maximize opportunities in a new world environment, and to achieve sustained and inclusive growth. The goal, targets and strategies put up by the Economic Strategies Committee (ESC)12 in 2010 are summarized in Table 1. They aim at improving productivity through enhancing skills and innovation.
Table 1: Strategies put up by the ESC in 2010 Goal High Skilled People, Innovative Economy, Distinctive Global City Targets Achieve 2 to 3% growth per year in productivity – which will raise the country’s productivity by one-third over the next 10 years – and realize GDP growth at 3 to 5% per yea Key 1. Growing through Skills and Innovation Strategies 2. Anchor Singapore as a Global-Asia Hub 3. Build a Vibrant and Diverse Corporate Ecosystem 4. Make Innovation Pervasive, and Strengthen Commercialization of R&D 5. Become a Smart Energy Economy 6. Enhance Land Productivity to Secure Future Growth 7. Build a Distinctive Global City and an Endearing Home Source: Prepared by MURC based on Report of the Economic Strategies Committee (Feb. 2010)
One concrete measure under these strategies is the introduction of the Productivity and Innovation Credit (PIC) Scheme, introduced in Budget 2010 for 5 years from Year of Assessment (YA) 2011 to YA2015. PIC is a tax incentive scheme which aims to
12 The ESC was established in May 2009 with the members drawn from the government, the labor movement, the private sector and academia.
Ⅲ-14 encourage businesses related to specific activities to invest in productivity and innovation13. The scheme was extended in Budget 2014 for another three years (YA 2016 to YA 2018). Since 2015, Small and Medium Enterprises (SMEs) are given special treatment to promote technology transfer from foreign companies to local SMEs. The Committee on the Future Economy (CFE)14 was formed in 2016 to build on the work of the ESC for the next 5 to 10, and to chart a new growth direction for Singapore. In 2017, the CFE announced vision, targets and strategies for Singapore to stay ahead and achieve sustainable economic growth in a challenging global climate. (Table 2) According to the Report of the CFE (Feb. 2017), it assessed Singapore’s productivity as weak in the domestically-oriented sectors, although overall real productivity grew by 2.5% p.a. in 2009-2016. These strategies are to respond to significant structural shifts in the external environment such as sluggish global productivity growth and changing global value chains with rise of China and other major trading nations.
Table 2: Strategies put up by the CFE in 2017 Vision To be the pioneers of the next generation Targets To grow by 2-3% per year on average, exceeding the performance of most advanced economies Key 1. Deepen and diversify our international connections Strategies 2. Acquire and utilize deep skills 3. Strengthen enterprise capabilities to innovate and scale up 4. Build strong digital capabilities 5. Develop a vibrant and connected city of opportunity 6. Develop and implement Industry Transformation Maps (ITMs) 7. Partner each other to enable innovation and growth Source: Prepared by MURC based on Report of the Committee on the Future Economy (Feb. 2017)
The 2017 strategies continue to emphasize the importance of supporting SMEs. For example, Strategy 3 advocates the importance of promoting tighter collaboration between SMEs and large organizations on collaborative projects to improve SMEs’
13 https://www.mof.gov.sg/Policies/Tax-Policies/Corporate-Income-Tax/Productivity-Innovation-Credit (Accessed on February 25, 2019) Six specific activities target for PIC scheme are: - Acquisition and leasing of PIC IT and Automation Equipment; - Training of employees; - Acquisition and licensing of Intellectual Property Rights; - Registration of Patents, Trademarks, Designs and Plant varieties; - Research and development activities; and - Design projects approved by Design Singapore Council 14 The CFE members come from different industries, operating in both global and domestic markets, and enterprises both large and small.
Ⅲ-15 potential and to scale up. Strategy 4 states helping SMEs adopt digital technologies by providing expertise as well as financial support. In fact, for Budget 2017, the Singaporean government spent more than S$ 80 million for programs to help SMEs to go digital. In parallel to this, S$600 million International Partnership Fund was set up to support Singapore-based companies expand into global markets. On April 1st 2018, the Enterprise Singapore, a statutory board under the Ministry of Trade and Industry was formed. The International Enterprise Singapore which supported enterprises to expand their business overseas and the SPRING which supported innovation of startups and SMEs came together as a single agency, the Enterprise Singapore, to support enterprise development and the country’s growth.
5. The direction Singapore is trying to advance
It was a visionary top leader Prime Minister Lee Kuan Yew who advocated the importance of human resource development when promoting efforts to improve productivity in Singapore. After 40 years since then, the Principles of Productivity Movement have been surly passed on to the current Singapore, despite the changing global environment surrounding the country. Singapore is aiming to become a business hub through innovation and technology, and the current focus is to support SMEs to move to higher value-added activities and raise efficiency. Through digitalization, SMEs can now get connected to stakeholders around the world for new business development, as well as transfer of knowledge and technologies, which was difficult a few decades ago. Singapore is expected to achieve further leap in its economic growth if SMEs can improve productivity and transfer to globally active companies that will play an important part of business hub.
Ⅲ-16
REFERENCES
Committee on the Future Economy (2017), Report of the Committee on the Future Economy, Pioneers of the Next Generation
Economic Strategies Committee (2010), Report of the Economic Strategies Committee, High Skilled People, Innovative Economy, Distinctive Global City
Fujita, Takeshi, Japan Productivity Center (2016), Learning from Productivity Movement and Its Network in Asia for KAIZEN Dissemination and Network in Africa15
INSEAD, the Adecco Group, and Tata Communications (2019) The Global Talent Competitiveness Index 2019
JETRO (2016), Overview of Productivity and Innovation Credit (PIC) in Singapore (Japanese)
JICA (2016), History of Friendship and Cooperation: The 50th Anniversary of Japan-Singapore Diplomatic Relations
JICA and GRIPS Development Forum (2011), Kaizen National Movement: A Study of Quality and Productivity Improvement in Asia and Africa, Chapter 3, Productivity Movement in Singapore
Vu Minh Khuong (2014), Boosting Vietnam’s Productivity as a Strategic Approach to Deepening Economic Reforms Urgency, International Experience, and Policy Recommendations
15 https://www.jica.go.jp/english/news/field/2015/c8h0vm00009ulhdo-att/02_fujita.pdf (Accessed on February 22, 2019)
Ⅲ-17
III. Attachments
1. Attachments related with Vietnam Productivity Report (2) Materials related with expert committees (draft reports and minutes omitted) First Expert Conference: Handout 1
平成 30 年度アジア産業基盤強化等事業（【ベトナム】生産性向上支援調査）
Heisei 30th Asian Industrial Foundation Strengthening Project (【Vietnam】Productivity Improvement Support Survey)
First Expert Conference Agenda
Date: Friday, September 28, 2018 Time: Tokyo: 16:00-17:30 Hanoi: 14:00-15:30 Singapore: 15:00-16:30 Venue: Tokyo: METI（経本館 13 階東８） Hanoi: Embassy of Japan/VEPR office Singapore: Dr. Vu Minh Khuong’s office
1. Opening
2. Opening Remarks from Mr. Masao Shimizu of METI
3. Self-Introduction of Experts
4. Proceedings
(1) Introduction about this METI Study from the secretariat (MURC)
(2) Presentation on Part I draft from Dr. Duc Thanh, President of VEPR
(3) Comments from Prof. Kenichi Ohno
(4) Comments from Prof. Tran Van Tho
(5) Comments from Dr. Vu Minh Khuong
(6) Discussion among experts
(7) The way forward (undertakings of future) from Dr. Duc Thanh, President of VEPR
5. Closing
【Handouts】 1) Agenda 2) Participant List 3) Objectives and Outline of this METI Study 4) Draft Productivity Report Part I First Expert Conference: Handout 2
平成 30 年度アジア産業基盤強化等事業（【ベトナム】生産性向上支援調査）
Heisei 30th Asian Industrial Foundation Strengthening Project (【Vietnam】Productivity Improvement Support Survey)
First Expert Conference Participant List
Experts: Kenichi Ohno Professor, National Graduate Institute for Policy Studies (GRIPS)
Nguyen Duc Thanh President, Viet Nam Institute for Economic and Policy Research (VEPR)
Tran Van Tho Professor, Economics, Graduate School of Social Sciences, Director, Vietnam Research Institute, Waseda University
Vu Minh Khuong Associate Professor, Lee Kuan Yew School of Public Policy, National University of Singapore
Ministry of Economy, Trade Industry (METI): Masao Shimizu Director for ASEAN Bilateral Relations, Asia and Pacific Division, Trade Policy Bureau
Hiroko Masuda Assistant Director, Asia and Pacific Division, Trade Policy Bureau
Takuya Koide Assistant Director, Asia and Pacific Division, Trade Policy Bureau
Embassy of Japan, Viet Nam: Go Watanabe First Secretary
Secretariat: Masumi Shimamura Chief Policy Analyst, Mitsubishi UFJ Research & Consulting Co. Ltd.
Shin Egishi Research Analyst, Mitsubishi UFJ Research & Consulting Co. Ltd.
First Expert Conference: Handout 3
平成 30 年度アジア産業基盤強化等事業（【ベトナム】生産性向上支援調査）
Heisei 30th Asian Industrial Foundation Strengthening Project (【Vietnam】Productivity Improvement Support Survey)
First Expert Conference Objectives and Outline of this METI Study
1. Objectives
The Government of Japan and the Government of Vietnam agreed on cooperation to advance the industrialization of Vietnam in the Joint Statement of the Japan-Vietnam Summit on June 6, 2017 and the Memorandum of Understanding on the Japan-Vietnam Industrial Cooperation dated September 14 in the same year. The Vietnamese government intends to promote the development of supporting industries in particular (which refers to parts manufacturing industries to be delivered to assembly industries such as automobiles and electric machinery). For Japanese manufacturing companies in Vietnam, demand for procurement of parts from Vietnam is also increasing. As the economic integration progresses in East Asia, division of labor within the ASEAN region, particularly by Japanese companies is advancing although the level of production technology in Vietnamese manufacturing industry is still not high. In order to incorporate Vietnamese companies into the supply chain of Japanese companies and to enhance competitiveness of the entire supply chain, it is important to firmly establish the foundation for strengthening competitiveness of Vietnamese supporting industries, which also helps Japanese companies to enter Vietnam. In order to formulate the development base of Vietnamese supporting industry, it is necessary to improve production control and quality control, and to enhance technical level through strengthening transactions and cooperation between foreign enterprises and local companies. Against this background, “Vietnam Productivity Report” will be prepared through close interaction among the stakeholders of Japan and Vietnam in both public and private sectors.
2. Outline of the Study
This Study aims to improve productivity of Vietnamese companies and to prepare “Vietnam Productivity Report” thorough vigorous dialogue among private, public and research institutions in Vietnam. A seminar which contributes to increasing productivity will also be carried out in the area where Vietnamese government is focusing, and policy advice to the government will be made regarding “Productivity Enhancement” towards the end of the study period. The Report consists of three parts as described below: - Part I: i. Overview (executive summary), ii. What is productivity?, iii. Where Vietnam Stands, and iv. Steps Forward (policy proposal). - Part II: Introduction of possible productivity measures based on Japanese experience in own development and international cooperation. - Part III: Introduction (list) of productivity initiatives and movements in various countries.
3. Time Scope
The METI Study will be completed until the end of February, 2019. During this study period, two to three Expert Conferences will be held, connecting relevant stakeholders. Experts will provide comments and inputs to the draft Report to improve the draft.
Second Expert Conference: Handout 1
平成 30 年度アジア産業基盤強化等事業（【ベトナム】生産性向上支援調査）
Heisei 30th Asian Industrial Foundation Strengthening Project (【Vietnam】Productivity Improvement Support Survey)
Second Expert Conference Agenda
Date: Wednesday, December 26, 2018 Time: Tokyo: 15:30-17:00 Hanoi: 13:30-15:00 Singapore: 14:30-16:00 Venue: Tokyo: METI（経本館 16 階東８） Hanoi: Embassy of Japan/VEPR office Singapore: Dr. Vu Minh Khuong’s office
1. Opening
2. Self-Introduction of Experts
3. Proceedings
(1) Information sharing about the progress from the First Expert Conference from the secretariat (MURC)
(2) Presentation on revised Part I draft from Dr. Duc Thanh, President of VEPR
(3) Presentation on Part II draft from Prof. Kenichi Ohno, GRIPS
(4) Comments from Prof. Kenichi Ohno
(5) Comments from Prof. Tran Van Tho
(6) Comments from Dr. Vu Minh Khuong
(7) Discussion among experts
(8) The way forward (taking into consideration the feedback seminar to be carried out in March, 2019) from Dr. Duc Thanh and Prof. Ohno
5. Closing
【Handouts】 1) Agenda 2) Participant List 3) Revised Draft of Productivity Report Part I 4) Draft of Productivity Report Part II Second Expert Conference: Handout 2
平成 30 年度アジア産業基盤強化等事業（【ベトナム】生産性向上支援調査）
Heisei 30th Asian Industrial Foundation Strengthening Project (【Vietnam】Productivity Improvement Support Survey)
Second Expert Conference Participant List
Experts: Kenichi Ohno Professor, National Graduate Institute for Policy Studies (GRIPS)
Nguyen Duc Thanh President, Viet Nam Institute for Economic and Policy Research (VEPR)
Tran Van Tho Professor, Economics, Graduate School of Social Sciences, Director, Vietnam Research Institute, Waseda University
Vu Minh Khuong Associate Professor, Lee Kuan Yew School of Public Policy, National University of Singapore
Ministry of Economy, Trade Industry (METI): Hiroko Masuda Assistant Director, Asia and Pacific Division, Trade Policy Bureau
Takuya Koide Assistant Director, Asia and Pacific Division, Trade Policy Bureau
Embassy of Japan, Viet Nam: Go Watanabe First Secretary
Secretariat: Kensuke Shimura Chief Policy Analyst, Mitsubishi UFJ Research & Consulting Co. Ltd.
Masumi Shimamura Chief Policy Analyst, Mitsubishi UFJ Research & Consulting Co. Ltd.
Shin Egishi Research Analyst, Mitsubishi UFJ Research & Consulting Co. Ltd.
III. Attachments
1. Attachments related with Vietnam Productivity Report (3) Professor Ohno’s productivity lecture material at the Prime Minister’s Office Productivity in Vietnam Current Issues and Possibility of Further Cooperation with Japan
Kenichi Ohno (GRIPS) Hanoi, November 2018 Productivity: Definition and Measurement
• Definitions and types • Vietnam’s productivity performance over time and in comparison with other countries • The risk of a middle income trap
What is Productivity?
• Productivity measures efficiency between input and output— how much is expended in terms of effort or materials versus how much is produced in terms of goods or services.
Economy, Input Sector or Output Factory
• If large output is obtained with small input, productivity is high. If little value is produced despite large effort and input, productivity is low. • For most countries (except resource-rich), attaining high income and improving productivity are essentially the same thing. That is why productivity is critical for Vietnam’s future development. Total Factor Productivity (TFP) • TFP combines all inputs into an aggregate index (human and non-human factors of production).
Labor
Capital (machines Output & buildings) Production Land • It is the most comprehensive productivity measure. • However, it is difficult to calculate with speed and reliability. Many data are required, estimates and delays are inevitable, and results are different across researchers. • Technical problems include: - Summing capital stock with different age, use and quality - Summing labor with different age, quality, education, etc. Labor Productivity • Labor productivity asks how much labor is used to produce output.
Labor Output Production
• Labor productivity is important because - Human is directly related to living standard and welfare. - Data availability—only labor and output data are required, with relatively short delay. - International comparison is possible because data are available from Asian Productivity Organization and others. • Most nations use “number of workers” instead of “hours worked” (which is more precise but more difficult to obtain). Capital Efficiency
• Capital efficiency (or capital productivity) asks how much capital is used to produce output.
Capital (machines Output & buildings) Production Existing capital or new addition
• Because capital lasts for many years, we need to distinguish “stock” (total existing amount) and “flow” (new investment). • The incremental capital-output ratio (ICOR) asks how much new investment is needed to produce GDP. Higher the ICOR, the less efficient is capital.
Land Productivity
• Land productivity asks how much land is used to produce output. This is very important for agriculture, but less important for manufacturing or services.
Land
Farm Output
• Capital and land are non-human inputs. Land is mostly nature-given (we cannot create it freely) but capital is man- made. Additional Remarks
• We are mainly interested in manufacturing labor productivity. Productivity in agriculture and service is also important and should be analyzed by other studies. • Productivity can be discussed at different levels—nation (GDP), industry or factory. • Level and growth of productivity should be distinguished. Both are important. • Output should properly be measured on “value-added” basis (subtracting intermediate inputs). But gross output is sometimes used (e.g., number of shirts per worker per day). • For economic development, quality and innovation are also important. But productivity is the base of all these. Vietnam should attain high productivity, then expand effort to quality and innovation. Overcoming a Middle Income Trap
• A middle income trap is a situation where a nation is unable to create value beyond what is delivered by “given advantages.” • “Given advantages” include location, climate, natural resources, cheap labor, trade, FDI, ODA, asset bubbles, large construction projects, etc. • An economy starting from low income may grow rapidly for a decade or two even without good policy. But one-time freeing effect will eventually end. • A trapped country may still grow, but at a speed too slow to reach high income even in the long run. • To overcome a middle income trap, active value creation by domestic citizens and enterprises is essential. This requires skills, technology and knowledge. Why Do Countries Diverge?
Per capita income Country that creates internal value through human capital upgrading High Skills, technology, knowledge, innovation
Middle income trap Middle
Initial growth by liberalization, Country that grows by given privatization, advantages only – natural integration resources, trade opportunity, FDI, ODA, big projects, asset bubbles; Low little creation of internal value Critical 10-20 years point in Time history Stages of Catch-up Industrialization
Internalizing Internalizing Pre- Initial FDI parts and skills and Internalizing industrialization absorption components technology innovation Creativity & originality STAGE FOUR Technology learning Full capability in STAGE THREE innovation and Acceleration R&D as global Management & of FDI leader Arrival of STAGE TWO technology mastered, can Fully advanced manufacturing Have supporting produce high economies FDI STAGE ONE industries, but still quality goods under foreign Simple guidance Korea, Taiwan STAGE ZERO manufacturing under foreign Thailand, Malaysia Monoculture, guidance subsistence agriculture, aid Vietnam? dependency Middle income Poor/fragile trap for ASEAN states countries Speed of Catching Up: East Asia Per capita real income relative to US (Measured by the 1990 international Geary-Khamis dollars)
Sources: Angus Maddison, The World Economy: Historical Statistics, OECD Development Centre, 2003; the Central Bank of the Republic of China; and IMF, World Economic Outlook Database (for updating). Catch-up Performance Index (CUPI) Speed of catching up with real US income (1995-2005)
CUPI Relative income level (US=100) Country Vietnam grew relatively (1995-2015) 1995 2015 fast within Asian region. 1. Myanmar 7.08 2.3 9.4 This is natural because 2. China 6.89 6.5 25.8 late starters can usually 3. Cambodia 4.02 2.8 6.2 4. Laos 3.70 4.8 10.1 grow faster than already 5. India 3.68 5.2 10.9 mature economies. 6. Vietnam 3.66 5.2 10.8 7. Sri Lanka 3.04 11.4 21.0 8. Bangladesh 2.44 3.7 6.0 However, Vietnam’s 9. South Korea 2.14 42.6 65.2 income level is still low. 10. Singapore 1.46 113.6 152.2 11. Malaysia 1.36 36.6 48.0 12. Philippines 1.36 10.0 13.2 13. Indonesia 1.29 15.2 19.7 14. Nepal 1.24 3.4 4.4 15. Hong Kong 1.07 82.0 101.4 Source: Vu Minh Khuong & Kris Hartley, 16. Thailand 1.00 23.9 29.1 “Nation learning for economic catch-up: 17. Pakistan 0.23 8.5 8.9 Insights from recent developments in Asia,” forthcoming in IPS Working Paper, 18. Japan -0.67 82.1 71.9 LKYS/NUS, Singapore. 19. Brunei -2.27 219.8 139.7 Data used: World Bank Development Mean (M) 2.25 35.76 39.67 Indicators dataset measured in PPP Standard Deviation 2.30 55.17 45.88 dollar at constant prices. CV=SD/M 1.02 1.54 1.16 Drivers of Catch-Up (1995-2005) Vietnam’s catch-up was driven by investment with no TFP growth Contribution to CUPI by Component
Capital Labor TFP Capital Labor TFP Country CUPI Deepening Participation Growth Deepening Participation Growth Value Share (Total=100%) China 6.89 3.45 0.43 3.01 50.1% 6.2% 43.7% Cambodia 4.02 1.60 1.38 1.04 39.8% 34.3% 25.9% Laos 3.70 3.40 0.28 0.03 91.7% 7.5% 0.8% India 3.68 1.37 0.07 2.24 37.3% 1.8% 60.8% Vietnam 3.66 4.20 0.13 -0.66 114.6% 3.5% -18.1% Sri Lanka 3.04 1.20 0.69 1.15 39.5% 22.7% 37.8% Bangladesh 2.44 2.80 0.47 -0.82 114.5% 19.2% -33.7% 0.53 South Korea 2.14 1.55 0.05 72.6% 2.5% 24.9% Singapore 1.46 0.92 0.54 0.00 63.0% 36.7% 0.3% Philippines 1.36 0.32 0.27 0.77 23.7% 19.8% 56.5% Malaysia 1.36 0.08 0.26 1.02 6.1% 19.0% 74.9% Indonesia 1.29 1.62 0.49 -0.83 125.9% 38.2% -64.1% Nepal 1.24 0.54 0.62 0.08 43.8% 49.7% 6.5% Hong Kong 1.07 0.68 0.35 0.04 63.9% 32.6% 3.5% Thailand 1.00 0.56 -0.15 0.59 56.3% -15.5% 59.2% 0.45 Pakistan 0.23 -0.53 0.31 -225.4% 133.0% 192.4% Japan -0.67 -0.68 -0.19 0.21 102.4% 28.3% -30.7% Median 1.46 1.20 0.31 0.45 56.3% 19.8% 24.9% (Same source and data) Vietnam Labor Productivity, 1990-2017
Figure 1: GDP per person employed level and growth rate in Vietnam, 1990-2017 14,000 8.00
7.00 12,000
6.00 10,000
5.00 8,000
4.00
6,000 3.00
4,000 2.00
2,000 1.00
0 0.00 1990199119921993199419951996199719981999200020012002200320042005200620072008200920102011201220132014201520162017 GDP per employed person (left, USD converted to 2017 price level with updated 2011 PPPs) Growth rate of GDP per employed person (right, %)
Source: The Conference Board Total Economy Database™ (Adjusted version), March 2018 15 Vietnam Labor Productivity in International Comparison
Figure 2: GDP per person employed in Vietnam and selected countries, 1990-2017 160,000
140,000
120,000
100,000
80,000
60,000
40,000
20,000
0 1990199119921993199419951996199719981999200020012002200320042005200620072008200920102011201220132014201520162017
Cambodia China Indonesia Japan Malaysia Philippines Singapore South Korea Thailand Vietnam
Source: The Conference Board Total Economy Database™ (Adjusted version), March 2018 16 Vietnam Labor Productivity Growth in International Comparison
Figure 3: Growth rate of GDP per person employed in Vietnam and selected countries, 1990-2017 20
15
10
5
0 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 2015 2016 2017
-5
-10
-15
-20
Cambodia China Indonesia Japan Malaysia Philippines Singapore South Korea Thailand Vietnam
Source: The Conference Board Total Economy Database™ (Adjusted version), March 2018 17 Total Factor Productivity Growth, 1993-2017
Figure 4: Vietnam's TFP growth rate (%), 1993-2017 8
7
6
5
4
3
2
1
0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
-1
-2
Source: Authors’ calculation from the statistics of World Bank (2018)
18 Capital Efficiency – ICOR, 1990-2017
Figure 6: Vietnam's ICOR, 1990-2017 8
7
6
5
4
3
2
1
0 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 2015 2016 2017
Source: Authors’ calculation from the statistics of IMF (2018) 19 Capital Efficiency – ICOR in International Comparison
Figure 7: ICOR of Vietnam and selected countries, 2008-2017 60.0
51.7 50.0
40.0
30.0
20.0 16.2
10.2 11.1 10.0 6.9 7.0 5.8 6.2 6.1 5.5 5.3 5.4 4.6 3.4 3.6 1.0 0.0 Cambodia China Indonesia South Korea Malaysia Philippines Thailand Vietnam
2008-2012 2013-2017
Source: Authors’ calculation from the statistics of IMF (2018) 20 Tentative Conclusion • Since the 1990s, Vietnam’s productivity growth has been moderate in terms of TFP, labor productivity and capital efficiency. • The level of productivity is still low. Vietnam needs to accelerate productivity growth. It should not slow down now. • Sectoral labor shifts (from agriculture to manufacturing, etc.) explain most productivity growth in the past, not efficiency improvement in each sector. This cannot sustain economic growth unless each sector also improves. • Labor productivity growth has been driven by capital deepening (investment and infrastructure construction) rather than TFP. Capital efficiency was low (ICOR was high) and debt burden rose. • Performance improved recently. Labor productivity growth rose from 3-4% per year to about 6%. TFP and ICOR also improved. We need to analyze the cause and ask whether this is temporary or permanent.
(Deeper analysis will be conducted in the forthcoming Vietnam Productivity Report) Policy Direction for Productivity
• Set target—to overcome a middle income trap and reach high income in the future, Vietnam should aim at sustained labor productivity growth of 7-8% (subject to further discussion). • For any nation, the core of productivity policy should be creation of competitive human resource and enterprises. • For countries that receive large amounts of FDI (such as Vietnam), strategy should consist of (i) inviting high-quality FDI, (ii) improving domestic capacity, and (iii) linking them.
Attracting FDI that Improving capacity transfers skill and of domestic labor technology and enterprises
Linkage promotion
• Also important—administrative reform, SOE reform, good business environment, industrial infrastructure and efficient logistics. Exploring Possibilities of Vietnam-Japan Cooperation
• Japanese productivity methods • How Japan teaches productivity to other countries • A new productivity initiative in Vietnam (currently discussed between Vietnam and Japan)
Japan’s Labor Productivity Performance (Annual change)
Source: computed by the Japan Productivity Center from the data of the Cabinet Office, the Ministry of Internal Affairs and Communications and the Ministry of Health, Labor and Welfare.
• During the high growth period (1960s), labor productivity grew 10% annually, and nominal wage also grew about 10%. Productivity and wage rose at the same high rate. • Productivity growth slowed down subsequently, but only after Japan reached high income (around 1970). Japan did not experience a middle income trap. Japanese Methods for Productivity In the last 70 years (after WW2), Japanese government and private sector developed many productivity ideas and tools. • Monozukuri mindset • Policy organization for SME promotion • 5S and kaizen • Shindan and shindanshi (SME advisory system) • Handholding • Kosetsushi (SME technical support centers) • Kosen (technical college) • Gino Jisshusei (Vietnamese technical interns in Japan) • Kishin-ho and Denshin-ho (supporting industry promotion laws) • Teaching productivity to other nations
Monozukuri Spirit • Mono means “thing” and zukuri (or tsukuri) means “making.” • It describes a sincere attitude in—even obsession with—manufacturing any product with pride, skill and dedication. Production is not a means of making money but a way of pursuing innovation, perfection and customer satisfaction, even disregarding the firm’s short-term profit. • Many of Japan’s excellent manufacturing firms were founded by engineers full of monozukuri spirit. With greasy hands, they were determined to create good products that would conquer the world. Features of Japanese FDI Strengths: Manufacturing-centered Serious pursuit of quality, efficiency and customer satisfaction Long-term orientation Partner assistance—providing knowledge and training to foreign partners and workers because long-term trust is key to success Legal compliance—high observance of contracts and laws; little bribe giving Weaknesses: Slow and risk-averse decision-making Inward orientation—staying within Japanese ways; not good at working dynamically with foreigners; language problem Can Vietnam Improve Mindset? • Mindset change is necessary before improving productivity. Japanese experts can teach productivity tools, but these tools are not effective unless Vietnamese managers and workers fully accept and own them. • Dr. Nguyễn Đăng Minh (GKM Institute), who worked at Toyota’s Production Technology Department in Aichi, Japan for seven years, is developing a method to teach TÂM THẾ (mindset) to Vietnamese firms including Truong Hai Auto.
Japanese Organization for SME Promotion
Japanese SME policy has a long history with multiple support tools at different administrative levels.
Japanese SME Policy Shifted from Protection to Competitiveness Japan currently has 3.81 million SMEs (all sectors) accounting for 99.7% of establishments and 70% of employment. Their number peaked in the 1980s and has now declined to about half.
• In the 1950s-80s, policy thrust was protection of weak SMEs against exploitation by large firms. Many manufacturing SMEs were captured suppliers to large firms (keiretsu group). • SMEs suffered from low productivity, low wage and job insecurity.
• After the 1990s, policy shifted to supporting high-tech SMEs to excel and globalize as a source of national competitiveness. • SMEs now face slow domestic demand, aging of owners, and the lack of young managers and engineers. • In 2010, government began to actively promote outward FDI of SMEs. Vietnam is the most popular destination for Japanese SMEs. 5S and Kaizen
• Kaizen is a bottom-up, low-cost way of improving efficiency at workplace, imported from USA and developed in Japan. • Kaizen is a philosophy with many practical tools. It pursues elimination of muda (any thing or action that does not add value). • The most basic kaizen tool is 5S (Seiri, Seiton, Seiso, Seiketsu & Shitsuke; or Sàng lọc, Sắp xếp, Sạch sẽ, Săn sóc & Sẵn sàng). Seiri is removing unnecessary things from the workplace. Seiton is placing remaining things in clear visibility for easy pickup. • Kaizen was developed in the late 1950s and practiced all over Japan. It also spread to many countries through FDI, ODA and private consultants (Singapore, Taiwan, Korea, China, Thailand, India, Mexico, Argentina, Tunisia, Ethiopia, Tanzania, Mauritius, etc.) Kaizen Tools Are Many
Source: M. Imai, Kaizen: The Key to Japan’s Competitive Success, McGraw-Hill, 1986. Shindan and Shindanshi • Shindan is diagnosis and advice for SMEs. Shindanshi is a state- certified person—official or private expert—who practices this. Japan’s shindan system was created in the late 1940s and evolved as social needs changed. • Japanese shindanshi are increasing and stands at 25,746 as of 2016. Shindanshi must pass written and practice tests, and certificate must be renewed every five years with additional training and practice. SME Universities administer tests and training. • Shindanshi work both in Japan and abroad. Many JICA experts are shindanshi.
Handholding • Handholding (also called hands-on) is an official program to assist a small number of SMEs with customized and intensive support for 2-3 years. Firms with proper mindset and potential are selected. • One goal is set for each firm, and an expert team is formed (official, business consultant, technical expert, etc.) to offer marketing, design, technology, ICT and other support as needed. • JETRO and Japanese local governments conduct many handholding programs for SMEs that want to improve management, export or invest abroad. Japan has many experienced experts (shindanshi and others) willing to work for small fees. • Korea, Taiwan and Malaysia also provide handholding support for export, outward FDI and creation of high-quality products. Kosetsushi (technical support centers) • Kosetsushi is Public Testing and Research Organizations located in every prefecture in Japan. They perform technical support for SMEs such as analysis, testing, equipment rental, research, training, certification, product development and production support. • Kosetsushi has a long history of more than a century. Many are run and subsidized by local governments. Others are operated by NPOs. SMEs are charged with low or no fees. • Technical staff at kosetsushi are highly experienced but receive low local government salary. They are happy to work for firms in their hometowns. They are very busy due to high demand for their services. Kosen (technical college) • Kosen is a Japanese technical and vocational higher education system for producing practical and creative engineers. It offers a five-year program to students aged 15 to 19. • Japan has 57 kosen. 51 are state-run, 3 are under local governments and 3 are private. 10,000 students enter and graduate from kosen each year with a total student body of about 50,000 at any time. • Kosen combines theory and practice. Besides technical skills, it teaches proper mindset, creativity, problem-solving capacity and communication skills. • Kosen builds close and practical linkage with firms through factory visits, internship and graduation studies. Graduates are highly demanded by industry. Pilot Kosen Project in Vietnam • From 2013 to 2018, JICA introduced kosen to the Industrial University of HCMC, then to Cao Thang Technical College (HCMC), Hue Industrial College (Thua Thien-Hue) and Phuc Yen College of Industry (Vinh Phuc). Initial results are encouraging. • Because kosen is new to Vietnam and because Vietnamese situation is different from Japan, the Japanese model had to be modified without losing the main thrusts of kosen education. • The Vietnamese Kosen Model requires five conditions: 1. Education in technical knowledge and skills 2. Teaching proper attitude and mindset 3. Creativity (just doing what is told is not acceptable) 4. School’s strong assistance in students’ job search and placement 5. School’s capacity building to implement above activities • Currently, Vietnamese technical schools teach knowledge and skills (1 above) but other elements are missing. Gino Jisshusei (Technical Interns)
Under this system, young foreign workers are invited to Japan for three years to learn technical skills before returning home. Gino Jisshusei from Vietnam are rapidly increasing. Vietnam now sends largest number to Japan. Many Japanese SMEs are impressed with the serious working attitude and skill-learning of Vietnamese Gino Jisshusei, and decide to hire them permanently or invest in Vietnam. To cope with acute labor shortage, Japanese government is revising this system to include more sectors and allow longer periods. However, this system also generates problems such as unpaid wage or overtime, illegal work assignment, worker disappearance and crime. Japan and Vietnam are working to solve these problems by improving selection and monitoring. Gino Jisshusei Sending Companies Best Ones in Vietnam • Some labor sending companies were founded by Vietnamese engineers who know Japan very well. They train workers intensively for six months before sending them to Japan. • They teach manners, attitudes, 5S, Japanese thinking and Japanese language with great discipline. Workers are monitored during and after their stay in Japan. They are encouraged to use acquired skills for future career, not going back to farms or restaurants. • The Japanese embassy, JICA and GRIPS support both companies.
Kishin-ho & Denshin-ho (Supporting Industry Laws)
• Kishin-ho is short for the Provisional Act to Promote Machinery Industry, enacted in 1956 and renewed two times (in effect 1956-1971). • Denshin-ho is short for the Provisional Act to Promote Electronics Industry, enacted in 1957 and renewed two times (in effect 1957-1971). • These were time-bound laws for developing supporting industries in machinery and electronics, with almost identical contents.
Basic Mechanism – combining technology support (by MITI) with loan provision for new investment (by MoF) 1. MITI’s Machine Industry Deliberation Council identifies potential key components and creates promotion programs every year. 2. MITI invites and screens applications from SMEs. 3. MITI coaches SMEs on production plan, equipment choice, purchase negotiation, etc. so applications are improved. 4. Selected applications are sent to Japan Development Bank or Japan Finance Corporation for SME for additional check and loan provision. How JICA Teaches Kaizen to Other Nations • Mobilize a group of Japanese industrial experts. Select 20-30 firms through ministry information or initial classroom courses. Interview general directors for finalizing candidate firms. • Each firm forms a kaizen team and selects one production process. • A Japanese expert visits every week to make the firm team think, identify and solve problems. Give them hints and weekly homework. This process goes on for 3 to 6 months, with possible extension.
Kaizen learning has three levels: 1. Only-once project – JICA experts teach and firms improve, but nothing remains after the project ends. 2. Internalization – JICA experts coach officials so they can sustain kaizen after Japanese experts leave (Training of Trainers). National agencies, standards and programs are created. 3. Privatization – Government withdraws from implementation and let private consultants take over the productivity movement. How JICA Teaches National Productivity Movement to Other Nations • JICA’s first comprehensive productivity support was for Singapore (1983-1990) at the request of Prime Minister Lee Kuan Yew. Singapore learned very quickly and started to teach others. • It proceeded in three phases:
Phase I – Awareness Phase II – Action Phase III – Autonomy (1981-85) (1986-88) (1989-) Importance of productivity Japanese experts coach Singapore can practice is hammered into all firms; Singaporeans learn without Japanese help; citizens, even taxi drivers how to do this start to teach other nations
• Awareness (Phase I) was most important and difficult. Singaporeans had to be convinced, Japanese had to adjust, and trust had to be built. • Many countries tried institutionalization of kaizen—with or without JICA cooperation—with varying results: Thailand, Philippines, India, Hungary, Brazil, Argentina, Paraguay, Tunisia, Egypt, Ethiopia, Tanzania, Zambia, Ghana, Botswana, Mauritius, Burkina Faso, etc. My Proposal for Vietnam-Japan Industrial Cooperation • Japanese FDI, ODA and industrial cooperation have been active for 25 years, but Vietnamese skill and technology did not improve as much as initially expected. • I have been involved in the Ishikawa Project, commenting on SEDP & SEDS, Motorbike and Automotive Master Plans, Supporting Industry Action Plan, Vietnam Industrialization Initiative, Ha Nam and Ba Ria-Vung Tau industrial cooperation, etc.—but with limited results. • Vietnam and Japan should engage in new industrial cooperation focused on productivity for win-win benefits: - Vietnam to acquire Japanese technology and skills to overcome a middle income trap - Japan to deepen economic ties with Vietnam to solve labor shortage and monozukuri inheritance problem
Need to Intensify Effort and Action • Despite many years of close economic interaction, Vietnam has not adopted any of the Japanese productivity tools fully or nationally. • 5S and Kaizen have been tried randomly at the firm level or by JICA support, but scale is too small and action lasts only for short-term. They have not been internalized or expanded to national level. • Any industrial project should be scaled up in the following sequence: 1. Pilot project (with international support) 2. Establish a national model 3. Train domestic experts 4. Create a mechanism with sufficient mandate and budget 5. Full nationwide implementation 6. Government recedes, the private sector takes over • Vietnam should adopt productivity tools with close cooperation among the Party, the Government and the business community.
Proposed Actions STEP 1. Initial actions (in progress) • Vietnam Productivity Report (VEPR/GRIPS with METI support) • Productivity awareness campaign—seminars, TV programs, events, competitions, awards, etc. STEP 2. Establish official mechanism for bilateral productivity cooperation (under discussion) • Vietnamese side: Party Central Economic Commission; National Productivity Committee and Secretariat; VCCI to represent business; researchers • Japanese side: METI and MoFA; Japanese Embassy, JICA, JETRO, GRIPS, Japanese firms STEP 3. Implementation • Concrete contents to be decided by the bilateral mechanism • Reinforce existing productivity programs and start new ones with Japanese official and private cooperation Vietnam Productivity Report (in progress) Research team: Vietnamese and Japanese researchers supported by METI, Japanese Embassy in Vietnam, Mitsubishi UFJ Research & Consulting
Part I Main Report What is productivity? (concepts and measurement) Where Vietnam stands (Vietnamese and international data) Review of past productivity policies Steps Forward
Part II Concrete Measures with Possible Japanese Cooperation Mindset change / 5S and kaizen / Handholding Shindan / TVET-industry linkage / Kosen / Gino Jisshusei Kosetsushi / FDI-domestic firm linkage Revitalizing supporting industry programs / Productivity Center, etc.
Part III International Experiences (to be conducted later) Sharing productivity policy experiences among Asian neighbors
III. Attachments
1. Attachments related with Vietnam Productivity Report (4) Professor Ohno’s productivity lecture material at VCCI Productivity Policies in Japan Historical review and Implications for Vietnam
Kenichi Ohno (GRIPS) Hanoi, December 2018 Vietnam’s Productivity Performance
• Data review—labor productivity, TFP, ICOR • Core policy and enabling policy • Suggested strategy for Vietnam • Issues with current policy
Labor Productivity Growth in International Comparison %/year
20
15
10
5
0 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 2015 2016 2017
-5
-10
-15
-20
Cambodia China Indonesia Japan Malaysia Philippines Singapore South Korea Thailand Vietnam
Source: The Conference Board Total Economy Database™ (adjusted version), March 2018. 3 Labor Productivity Level in International Comparison
160,000
140,000
120,000
100,000
80,000
60,000
40,000
20,000
0 1990199119921993199419951996199719981999200020012002200320042005200620072008200920102011201220132014201520162017
Cambodia China Indonesia Japan Malaysia Philippines Singapore South Korea Thailand Vietnam
Source: The Conference Board Total Economy Database™ (adjusted version), March 2018. Total Factor Productivity Growth %/year
8
7
6
5
4
3
2
1
0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
-1
-2
Source: Authors’ calculation from the statistics of World Bank (2018). Capital Efficiency Incremental Capital Output Ratio (ICOR)
8
Less efficient 7
6
5
4
3
2
1
0 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 2015 2016 2017
Source: Authors’ calculation from the statistics of IMF (2018). Vietnam’s Productivity Performance • Since the 1990s, Vietnam’s productivity growth has been moderate in terms of TFP, labor productivity and capital efficiency. • The level of productivity is still low. Vietnam needs to accelerate productivity growth. It should not slow down now. • Sectoral labor shifts (from agriculture to manufacturing, etc.) explain most productivity growth in the past, not efficiency improvement in each sector. This cannot sustain economic growth unless each sector also improves. • Labor productivity growth was driven by capital deepening (investment and infrastructure construction) rather than TFP. Capital efficiency was low (ICOR was high) and debt burden rose. • Performance improved recently. Labor productivity growth rose from 3-4% per year to about 6%. TFP and ICOR also improved. We need to analyze the cause and ask whether this is temporary or permanent.
(Deeper analysis will be conducted in the forthcoming Vietnam Productivity Report) Structure of Productivity Policy ENABLING POLICY (providing environment for competitiveness and value-creation)
Industrial Efficient infrastructure logistics CORE POLICY (strengthening value creators) Good business SOE reform Human and enterprise environment competitiveness
Legal and policy Administrative framework reform Policy Direction for Vietnam
• Set targets—to overcome a middle income trap and reach high income in the future, Vietnam should aim at sustained labor productivity growth of 7-8% (subject to further discussion). Targets on productivity level may be set additionally. • Initial focus should be manufacturing labor productivity. Over time, productivity in agriculture and services should also be targeted. • For countries that receive large amounts of FDI such as Vietnam, strategy should consist of (i) inviting high-quality FDI, (ii) improving domestic capacity, and (iii) linkage between them.
Attracting FDI that Improving capacity transfers skill and of domestic labor technology and enterprises
Linkage promotion
Problems with Vietnam’s Policy • Despite many years of close economic interaction, Vietnam has not adopted any of the Japanese productivity tools fully or even partially. • Some productivity measures such as 5S and kaizen have been tried at firm level or by JICA support, but scale is too small and action lasts only for short-term. They are not institutionalized or expanded to national level. • National Productivity Movement should be carried out for at least several years with clear targets. The Party, Government and the business community should work together.
Any industrial project should be scaled up in the following sequence: 1. Pilot project (with international support) 2. Establish a national model 3. Train domestic experts 4. Create a mechanism with sufficient mandate and budget 5. Full nationwide implementation 6. Government recedes, the private sector takes over Vietnam’s projects often end at Stage 1 with little scaling up. Meiji Japan (1868-1912)
• In the mid 19th century, feudal Japan was forced open by Western military threat. New Meiji government decided to adopt Western technology and systems as quickly as possible. • Time-invariant factors – policy learning, development of HRD, infrastructure, legal framework and government-business collaboration under strong foreign pressure (colonialism). • Uniqueness of Meiji Japan – domestic capacity for technology absorption was high; learning proceeded from simple to complex with strong Japanese ownership.
Rapid Technology Absorption
• Meiji Japan had extraordinary Absorptive Capacity in both public and private sector which led to quick technology transfer and internalization with proper local adjustments. • Technology transfer progressed from simple to complex, from foreigner-dependent to Japanese ownership, with rapid “import substitution” of engineers. Book learning Turnkey projects Foreign instruction Student dispatch abroad Engineering education at institutes & schools Selective learning through machinery import, patent acquisition and joint ventures
• Within 50 years of forced opening, Japan attained Industrial Revolution (in textile), overtook UK in cotton product export, and was admitted to the Big Five (UK, US, France, Italy & Japan) in international conferences.
Reading Dutch books In 1854, relying solely on (outdated) Dutch books, some hans (provinces) mobilized scholars and craftsmen to build furnaces for casting cannons. But haphazard copy production of steel and arms generally failed. Some hans also test-produced Western-style ships and steam engines from Dutch texts, but results were inferior. Working under Foreign Instructors Construction of a Western-style wooden ship at Heda in the Izu Peninsula in 1854, where carpenters worked under Russian naval officers and shipwrights, was the first successful on-site technology transfer. Japanese carpenters absorbed the technology very quickly. Nagasaki Naval Training Center, established by Dutch assistance in 1855, taught crew of Western-style battleship. Five Dutch navy officers trained 167 samurais in navigation, artillery and engine maintenance. Graduates later operated many of the 166 ships imported by the Edo government and hans. Turnkey Projects by Foreign Contractors
In early Meiji, government hired 300 to 600 foreign advisors in any year on project contract basis to establish Western style state- owned railroads, telegraphy, silk reeling, etc. as quickly as possible. Each project contracted a foreign team, usually of the same nationality with various functions, who imported all materials to create an exact replica of a foreign model. Japanese workers took over operation after project completion. Yokosuka Shipyard, Tokyo-Yokohama Railroad, Imperial Mint and Ikuno Silver Mine were biggest projects. There were also many other projects as well as foreign advisors hired individually. Speed, not technology transfer, was the main aim of turnkey projects, but many Japanese workers became competent machine operators, steam engine drivers, steelworkers and electricians. Many migrated to the private sector or set up their own factories, spreading new technology and management.
Replacing Foreign Advisors with Japanese Some foreign advisors received salaries higher than that of the prime minister. In 1874, their payrolls accounted for 34% of the current expenditure of the Ministry of Industry. Government hoped to replace them with Japanese as soon as possible. It stopped new turnkey projects around 1875. Foreign engineers disappeared from all but a few state-owned projects by 1880. The private sector also hired foreign advisors. Many foreigners taught foreign languages (Americans mostly taught English). By the late 1890s, to set up a national telephone network, Japanese officials visited UK, US & Germany, compared their systems and negotiated with foreign manufacturers. They no longer needed any foreign advice. Sending Students Abroad In 1862, the Edo (Bakufu) government sent seven students to Netherlands for naval training (associated with battleship order). By the 1880s, 80 Japanese students had studied engineering abroad (shipbuilding, mechanics, civil engineering, mining and metallurgy, military, chemistry). They studied in UK (28), US (20), France (14), Germany (9) and Netherlands (8). Japanese students received top-class education and could easily replace foreign advisors upon returning to Japan. They mostly worked as government officials and contributed to policy making at the Ministry of Interior, Ministry of Finance, Army, Navy, Ministry of Industry, etc. At that time, few modern private industries existed to receive them. Domestic Engineering Education The Institute of Technology produced top-level government officials who guided and accelerated Japanese industrialization. High-level Industrial Schools offered practical knowledge and skills for engineers and technicians who worked on factory floors. General trading houses (sogo shosha) such as Mitsui Bussan, Okura & Takada also hired engineers to assist manufacturing firm customers with provision of technical information, selecting right models & producers, import procedure, installing equipment, etc. Kobu Daigakko (Institute of Technology)
1871, Koburyo (Industrial Training School) established by the Ministry of Industry; 1877, renamed to Kobu Daigakko; 1886, merged with Tokyo Imperial University under the Ministry of Education. The first Rector was Henry Dyer, a hired British engineer with a philosophy of “judicious combination of theory and practice.” The six-year program included preparatory course (language & math, 2 years), specialized studies (2 years), internship at government project (2 years). Top students were additionally sent overseas with scholarship. Courses were: (i) civil engineering, (ii) mechanical engineering, (iii) shipbuilding, (iv) telecommunication, (v) chemistry, (vi) architecture, (vii) metallurgy, and (viii) mining. Classes were given mostly in English. Top-class engineers were produced: Tanabe Sakuro (designer of Biwako-Kyoto irrigation canal & power generation); Tatsuno Kingo (designer of Tokyo Station, Bank of Japan building, Nara Hotel, etc.) Koto Kogyo Gakko (High-level Industrial Schools)
High-level Industrial Schools were proposed by Gottfried Wagener (hired German engineer) and Tejima Seiichi (Ministry of Education official). The first such School was established in Tokyo in 1881. Students were recruited from chugaku (high school, about age 16-17) through exam, but best students were accepted without it. Mechanical engineering and chemical engineering were initially offered. More courses were added later. Unlike Kobu Daigakko, instructors were all Japanese except Wagener. Tokyo Kogyo Gakko became the leading institute for supplying industrial instructors, factory managers, engineers and entrepreneurs. After the Great Kanto Earthquake of 1923, Tokyo Kyogo Gakko relocated to O-okayama (Meguro-ku, Tokyo). It is now the Tokyo Institute of Technology. Seven more Schools were created in Osaka (1901), Kyoto (1902), Nagoya (1905), Kumamoto (1906), Sendai (1906), Yonezawa (1910) and Akita (1910). After Meiji and until 1945, twenty-three more Schools were added.
Number of Japanese Engineers (By Type of Education)
Employer Category of engineer 1880 1890 1900 1910 1920 Early Meiji-era engineers 61 72 - - - Government University graduates 25 183 474 1,075 1,795 departments and agencies Industrial school graduates - 45 263 1,160 1,999 Subtotal : 86 300 737 2,235 3,794 Early Meiji-era engineers - 17 54 34 - Private University graduates - 131 385 846 3,230 organizations Industrial school graduates - 34 389 1,963 7,138 Subtotal : - 182 828 2,843 10,368 Early Meiji-era engineers 61 89 54 34 - University graduates 25 314 859 1,921 5,025 Total Industrial school graduates - 79 652 3,123 9,137 Grand total : 86 482 1,565 5,078 14,162
Source: Uchida (1990), p. 281. Learning from Imported Machinery When battle ships were ordered to UK, Japanese engineers travelled to UK to observe construction. This provided ample opportunity to learn about British ship design and construction, leading to domestic production of arms, support vessels and even principal battle ships. Government imported ten sets of cotton spinning equipment. After installing and test running, they were sold to the private sector as ten separate cotton mills with government engineers assisting operation. More Selective Learning From the 1900s, technical cooperation agreements and joint ventures enabled sharply targeted transfer of state-of-art technology. For telephone equipment, Western Electric (US) established Nippon Electric Company (NEC) as its Japanese subsidiary in 1899. It was WE’s sole agency in Japan receiving technical guidance from WE. In 1905, General Electric (US) concluded a technical agreement with Tokyo Electric for producing light bulbs. Tokyo Electric engineers were able to quickly master any new technology developed by GE. How Did Japan Acquire Initial Capability? Before mid 19th century
• Long-term cause – Japan’s evolutionary history without serious disruption allowed repeated and paced import of high civilization, followed by sufficient internal digestion (for two millennia). • Medium-term cause – under political stability, the preceding Edo period fostered preconditions for industrialization—(i) development of agriculture & manufacture, (ii) nationally integrated transport and market, (ii) rise of commerce, finance and rich merchants, (iv) industrial promotion by local governments, (v) high level of education (for two centuries). • Short-term cause – on encountering hostile foreign powers, feudal politics disintegrated, new social and economic forces emerged, and balance between political competition and national unity was preserved (1853 onward).
Post WW2 (1945-2018)
• Monozukuri spirit was firmly in place. • Globalization pressure was used to speed up learning by automotive, electronics and mechanical sectors. • Technical, managerial and financial support were integrated under one mechanism. • 5S, kaizen, shindan, handholding and kosetsushi were mobilized to strengthen SMEs. There were many Japanese industrial experts willing to work for public purpose. • Kosen supplied industrial engineers. Technical interns from Vietnam and other nations were introduced. • Japan began to teach productivity to other nations.
Japan’s Labor Productivity Performance (Annual change)
Source: computed by the Japan Productivity Center from the data of the Cabinet Office, the Ministry of Internal Affairs and Communications and the Ministry of Health, Labor and Welfare.
• During the high growth period (1960s), labor productivity grew 10% annually, and nominal wage also grew about 10%. Productivity and wage rose at the same high rate. • Productivity growth slowed down subsequently, but only after Japan reached high income (around 1970). Japan did not experience a middle income trap. Japanese Methods for Productivity In the last 70 years (after WW2), Japanese government and private sector developed many productivity ideas and tools. • Monozukuri mindset • Policy organization for SME promotion • Kishin-ho and Denshin-ho (supporting industry promotion laws) • 5S and kaizen • Shindan and shindanshi (SME advisory system) • Handholding • Kosetsushi (SME technical support centers) • Kosen (technical colleges) • Gino Jisshusei (Vietnamese technical interns in Japan) • Teaching productivity to other nations
Monozukuri Spirit • Mono means “thing” and zukuri (or tsukuri) means “making.” • It describes a sincere attitude in—even obsession with—manufacturing any product with pride, skill and dedication. Production is not a means of making money but a way of pursuing innovation, perfection and customer satisfaction, even disregarding the firm’s short-term profit. • Many of Japan’s excellent manufacturing firms were founded by engineers full of monozukuri spirit. With greasy hands, they were determined to create good products that would conquer the world. Features of Japanese FDI Strengths: Manufacturing-centered Serious pursuit of quality, efficiency and customer satisfaction Long-term orientation Partner assistance—providing knowledge and training to foreign partners and workers because long-term trust is key to success Legal compliance—high observance of contracts and laws; little bribe giving Weaknesses: Slow and risk-averse decision-making Inward orientation—staying within Japanese ways; not good at working dynamically with foreigners; language problem Can Vietnam Improve Mindset? • Mindset change is necessary before improving productivity. Japanese experts can teach productivity tools, but these tools are not effective unless Vietnamese managers and workers fully accept and own them. • Dr. Nguyễn Đăng Minh (GKM Institute), who worked at Toyota’s Production Technology Department in Aichi, Japan for seven years, is developing a method to teach TÂM THẾ (mindset) to Vietnamese firms including Truong Hai Auto.
Japanese Organization for SME Promotion
Japanese SME policy has a long history with multiple support tools at different administrative levels.
Japanese SME Policy Shifted from Protection to Competitiveness Japan currently has 3.81 million SMEs (all sectors) accounting for 99.7% of establishments and 70% of employment. Their number peaked in the 1980s and has now declined to about half.
• In the 1950s-80s, policy thrust was protection of weak SMEs against exploitation by large firms. Many manufacturing SMEs were captured suppliers to large firms (keiretsu group). • SMEs suffered from low productivity, low wage and job insecurity.
• After the 1990s, policy shifted to supporting high-tech SMEs to excel and globalize as a source of national competitiveness. • SMEs now face slow domestic demand, aging of owners, and the lack of young managers and engineers. • In 2010, government began to actively promote outward FDI of SMEs. Vietnam is the most popular destination for Japanese SMEs. Kishin-ho & Denshin-ho (Supporting Industry Laws)
• Kishin-ho is short for the Provisional Act to Promote Machinery Industry, enacted in 1956 and renewed two times (in effect 1956-1971). • Denshin-ho is short for the Provisional Act to Promote Electronics Industry, enacted in 1957 and renewed two times (in effect 1957-1971). • These were time-bound laws for developing supporting industries in machinery and electronics, with almost identical contents.
Basic Mechanism – combining technology support (by MITI) with loan provision for new investment (by MoF) 1. MITI’s Machine Industry Deliberation Council identifies potential key components and creates promotion programs every year. 2. MITI invites and screens applications from SMEs. 3. MITI coaches SMEs on production plan, equipment choice, purchase negotiation, etc. so applications are improved. 4. Selected applications are sent to Japan Development Bank or Japan Finance Corporation for SME for additional check and loan provision. Integrated SME Support
< Policy level > MITI Deliberation Council Business associations, officials, for specific sector industrial experts, academicians Instruct < Implementation >
Ministry of International Ministry of Finance Trade and Industry (MITI) (MoF)
Fiscal Fund Bureau of MoF
Heavy Industry Japan Development Bureau of MITI Bank (JDB) Managerial advice Technical advice & Investment loans Individual SMEs
Source: Prof. Akira Suehiro’s 2006 lecture in Vietnam, redrawn by author. 5S and Kaizen
• Kaizen is a bottom-up, low-cost way of improving efficiency at workplace, imported from USA and developed in Japan. • Kaizen is a philosophy with many practical tools. It pursues elimination of muda (any thing or action that does not add value). • The most basic kaizen tool is 5S (Seiri, Seiton, Seiso, Seiketsu & Shitsuke; or Sàng lọc, Sắp xếp, Sạch sẽ, Săn sóc & Sẵn sàng). Seiri is removing unnecessary things from the workplace. Seiton is placing remaining things in clear visibility for easy pickup. • Kaizen was developed in the late 1950s and practiced all over Japan. It also spread to many countries through FDI, ODA and private consultants (Singapore, Taiwan, Korea, China, Thailand, India, Mexico, Argentina, Tunisia, Ethiopia, Tanzania, Mauritius, etc.) Kaizen Tools Are Many
Source: M. Imai, Kaizen: The Key to Japan’s Competitive Success, McGraw-Hill, 1986. Shindan and Shindanshi • Shindan is diagnosis and advice for SMEs. Shindanshi is a state- certified person—official or private expert—who practices this. Japan’s shindan system was created in the late 1940s and evolved as social needs changed. • Japanese shindanshi are increasing and stands at 25,746 as of 2016. Shindanshi must pass written and practice tests, and certificate must be renewed every five years with additional training and practice. SME Universities administer tests and training. • Shindanshi work both in Japan and abroad. Many JICA experts are shindanshi.
Handholding • Handholding (also called hands-on) is an official program to assist a small number of SMEs with customized and intensive support for 2-3 years. Firms with proper mindset and potential are selected. • One goal is set for each firm, and an expert team is formed (official, business consultant, technical expert, etc.) to offer marketing, design, technology, ICT and other support as needed. • JETRO and Japanese local governments conduct many handholding programs for SMEs that want to improve management, export or invest abroad. Japan has many experienced experts (shindanshi and others) willing to work for small fees. • Korea, Taiwan and Malaysia also provide handholding support for export, outward FDI and creation of high-quality products. Kosetsushi (technical support centers) • Kosetsushi is Public Testing and Research Organizations located in every prefecture in Japan. They perform technical support for SMEs such as analysis, testing, equipment rental, research, training, certification, product development and production support. • Kosetsushi has a long history of more than a century. Many are run and subsidized by local governments. Others are operated by NPOs. SMEs are charged with low or no fees. • Technical staff at kosetsushi are highly experienced but receive low local government salary. They are happy to work for firms in their hometowns. They are very busy due to high demand for their services. Kosen (technical college) • Kosen is a Japanese technical and vocational higher education system for producing practical and creative engineers. It offers a five-year program to students aged 15 to 19. • Japan has 57 kosen. 51 are state-run, 3 are under local governments and 3 are private. 10,000 students enter and graduate from kosen each year with a total student body of about 50,000 at any time. • Kosen combines theory and practice. Besides technical skills, it teaches proper mindset, creativity, problem-solving capacity and communication skills. • Kosen builds close and practical linkage with firms through factory visits, internship and graduation studies. Graduates are highly demanded by industry. Pilot Kosen Project in Vietnam • From 2013 to 2018, JICA introduced kosen to the Industrial University of HCMC, then to Cao Thang Technical College (HCMC), Hue Industrial College (Thua Thien-Hue) and Phuc Yen College of Industry (Vinh Phuc). Initial results are encouraging. • Because kosen is new to Vietnam and because Vietnamese situation is different from Japan, the Japanese model had to be modified without losing the main thrusts of kosen education. • The Vietnamese Kosen Model requires five conditions: 1. Education in technical knowledge and skills 2. Teaching proper attitude and mindset 3. Creativity (just doing what is told is not acceptable) 4. School’s strong assistance in students’ job search and placement 5. School’s capacity building to implement above activities • Currently, Vietnamese technical schools teach knowledge and skills (1 above) but other elements are missing. Gino Jisshusei (Technical Interns)
Under this system, young foreign workers are invited to Japan for three years to learn technical skills before returning home. Gino Jisshusei from Vietnam are rapidly increasing. Vietnam now sends largest number to Japan. Many Japanese SMEs are impressed with the serious working attitude and skill-learning of Vietnamese Gino Jisshusei, and decide to hire them permanently or invest in Vietnam. To cope with acute labor shortage, Japanese government is revising this system to include more sectors and allow longer periods. However, this system also generates problems such as unpaid wage or overtime, illegal work assignment, worker disappearance and crime. Japan and Vietnam are working to solve these problems by improving selection and monitoring. Gino Jisshusei Sending Companies Best Ones in Vietnam • Some labor sending companies were founded by Vietnamese engineers who know Japan very well. They train workers intensively for six months before sending them to Japan. • They teach manners, attitudes, 5S, Japanese thinking and Japanese language with great discipline. Workers are monitored during and after their stay in Japan. They are encouraged to use acquired skills for future career, not going back to farms or restaurants. • The Japanese embassy, JICA and GRIPS support both companies.
How JICA Teaches Kaizen to Other Nations • Mobilize a group of Japanese industrial experts. Select 20-30 firms through ministry information or initial classroom courses. Interview general directors for finalizing candidate firms. • Each firm forms a kaizen team and selects one production process. • A Japanese expert visits every week to make the firm team think, identify and solve problems. Give them hints and weekly homework. This process goes on for 3 to 6 months, with possible extension.
Kaizen learning has three levels: 1. Only-once project – JICA experts teach and firms improve, but nothing remains after the project ends. 2. Internalization – JICA experts coach officials so they can sustain kaizen after Japanese experts leave (Training of Trainers). National agencies, standards and programs are created. 3. Privatization – Government withdraws from implementation and let private consultants take over the productivity movement. How JICA Teaches National Productivity Movement to Other Nations • JICA’s first comprehensive productivity support was for Singapore (1983-1990) at the request of Prime Minister Lee Kuan Yew. Singapore learned very quickly and started to teach others. • It proceeded in three phases:
Phase I – Awareness Phase II – Action Phase III – Autonomy (1981-85) (1986-88) (1989-) Importance of productivity Japanese experts coach Singapore can practice is hammered into all firms; Singaporeans learn without Japanese help; citizens, even taxi drivers how to do this start to teach other nations
• Awareness (Phase I) was most important and difficult. Singaporeans had to be convinced, Japanese had to adjust, and trust had to be built. • Many countries tried institutionalization of kaizen—with or without JICA cooperation—with varying results: Thailand, Philippines, India, Hungary, Brazil, Argentina, Paraguay, Tunisia, Egypt, Ethiopia, Tanzania, Zambia, Ghana, Botswana, Mauritius, Burkina Faso, etc. My Proposal for Vietnam-Japan Industrial Cooperation • Japanese FDI, ODA and industrial cooperation have been active for 25 years, but Vietnamese skill and technology did not improve as much as initially expected. • I have been involved in many industrial projects in Vietnam, but outcomes were limited. • Vietnam and Japan should engage in serious industrial cooperation focused on productivity for win-win benefits: Vietnam to acquire Japanese technology and skills to overcome a middle income trap Japan to deepen economic ties with Vietnam to solve labor shortage and monozukuri inheritance problem • Specifically, Vietnam should adopt some of the Japanese productivity tools (especially from post-WW2 period) with selectivity and proper adjustments. Japanese firms and government should cooperate with this.
III. Attachments
1. Attachments related with Vietnam Productivity Report (5) Materials of the feedback seminar to related organizations VIETNAM CHAMBER OF JAPANESE EMBASSY JAPAN MINISTRY OF ECONOMY, COMMERCE AND INDUSTRY IN VIET NAM TRADE AND INDUSTRY
WORKSHOP AGENDA “IMPROVING VIET NAM LABOR PRODUCTIVITY TO ENHANCE THE NATIONAL COMPETITIVENESS” Hanoi, 21 March 2019 Venue: Conference Hall 1, 7th Floor, VCCI, No.09 Dao Duy Anh Street, Dong Da Dist., Hanoi
Time Activity
13h00- h Registration 13 30
13h30- Opening Remarks h 13 45 - Dr. Vu Tien Loc, President, Vietnam Chamber of Commerce and Industry (VCCI) - Mr. Kunio Umeda, Japanese Ambassador in Viet Nam 13h45- Major characteristics of the labor productivity progress in Viet Nam h 14 15 Assoc. Prof. Nguyen Duc Thanh, President, Vietnam Institute for Economic and Policy Research (VEPR), University of Economics and Business – Vietnam National University 14h15- Methods to improve labor productivity and economy-wide efficiency: 14h30 Suggestions from Japan’s experience Prof. Kenichi Ohno, National Graduate Institute for Policy Studies (GRIPS) 14h30- Productivity improvement initiatives in Singapore: Introduction of 14h40 good practices of other country Ms. Masumi Shimamura, Chief Policy Analyst, Center for International Studies, Mitsubishi UFJ Research and Consulting Co., Ltd (MURC) 14h40- h Tea Break 15 00
15h00- Comments of Experts h 15 45 Mme Pham Chi Lan, economic expert, Former Vice President of VCCI Mr. Nguyen Anh Tuan, President, Vietnam National Productivity Institute (VNPI) Assoc. Prof. Ho Dinh Bao, Department of Economics, National Economics University
15h45- h Open Discussion 16 45
16h45- h Closing Remark 17 00
Good policy, Sound economy
Viet Nam Productivity Report Part 1 Major Characteristics of the Labor Productivity Progress in Viet Nam
Vietnam Institute for Economic and Policy Research (VEPR) University of Economics and Business, Vietnam National University Nguyen Duc Thanh, Pham The Anh Pham Thi Huong, Bui Thi Thuy Linh
Ha Noi, 21/03/2019 Copyright © VEPR 2019 Good policy, Sound economy Objective of Part 1
Determine the measurement of labor productivity and identify the sources of labor productivity growth via fundamental methods.
Analyse in depth the trend of Viet Nam's labor productivity progress to explore its main characteristics. At the same time, put Viet Nam’s labor productivity progress in international comparison to understand the relative position of Viet Nam in the region.
Summarize and evaluate policy efforts to improve productivity in Viet Nam since Doi Moi.
Suggest policy recommendations at the national level and firm level to improve Viet Nam’s labor productivity in a sustainable manner.
2 Copyright © VEPR 2019 Good policy, Sound economy Content
Definition of labor productivity and measurement Current situation of Viet Nam’s labor productivity since Doi Moi Viet Nam’s labor productivity in international comparison A review of policy efforts on to improve labor productivity in Viet Nam since Doi Moi Conclusions and policy implications
3 Copyright © VEPR 2019 Good policy, Sound economy
LABOR PRODUCTIVITY AND MEASUREMENT
4 Copyright © VEPR 2019 Good policy, Sound economy Definition of labor productivity (LP) and measurement
Productivity is an indicator that reflects the amount of final goods and services generated per unit of input (labor, capital, land, etc.).
=
𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑜𝑜𝑜𝑜 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 𝑖𝑖 Labor productivity is a partial productivity indicator,𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 reflecting𝑖𝑖 the amount of goods and services generated per unit of labor input (OECD)
=
𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 Output is measured in GDP (or value added𝐿𝐿𝐿𝐿𝐿𝐿 for𝐿𝐿𝐿𝐿 each𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 sector)
Labor input is measured by the total number of employed person (or total hours worked)
5 Copyright © VEPR 2019
Good policy, Sound economy Decomposition of LP growth Growth accounting method
The method of growth accounting was initiated from the neo- classical growth model of Solow (1957).
Labor productivity growth ( ) is broken down into capital density growth ( ) and total factor productivity (TFP) growth 𝑔𝑔𝑦𝑦 ( ). In which, is the income share of capital in production 𝑔𝑔𝑘𝑘 function. 𝑔𝑔𝐴𝐴 𝛼𝛼 = . +
𝑔𝑔𝑦𝑦 𝛼𝛼 𝑔𝑔𝑘𝑘 𝑔𝑔𝐴𝐴
6 Copyright © VEPR 2019 Good policy, Sound economy Decomposition of LP growth Shift-share analysis method
LP growth is decomposed into three components: (i) within effect, (ii) shift effect, (iii) interaction effect (Timmer và Adam, 2000; Adam et al., 2008).
( ) = + + 𝑡𝑡 0 𝑛𝑛 𝑡𝑡 0 0 𝑛𝑛 0 𝑡𝑡 0 𝑛𝑛 𝑡𝑡 0 𝑡𝑡 0 𝑃𝑃𝑚𝑚−𝑃𝑃𝑚𝑚 ∑𝑗𝑗=1 𝑃𝑃𝑗𝑗 −𝑃𝑃𝑗𝑗 ∗𝑆𝑆𝑗𝑗 ∑𝑗𝑗=1 𝑃𝑃𝑗𝑗 ∗ 𝑆𝑆𝑗𝑗 −𝑆𝑆𝑗𝑗 ∑𝑗𝑗=1 𝑃𝑃𝑗𝑗 −𝑃𝑃𝑗𝑗 ∗ 𝑆𝑆𝑗𝑗 −𝑆𝑆𝑗𝑗 0 0 0 0 𝑃𝑃𝑚𝑚 𝑃𝑃𝑚𝑚 𝑃𝑃𝑚𝑚 𝑃𝑃𝑚𝑚
Within effect: capturing the impact of industries’ labor productivity growth to economy-wide labor productivity, assumed that employment share is unchanged
Shift effect: impact of labor movement among industries when the industries’ labor productivity is unchanged
Interaction effect: a residual, reflecting the change in labor productivity growth caused by the shift of labor from the increasing labor productivity industries to the declining labor productivity ones. 7 Copyright © VEPR 2019 Good policy, Sound economy
CURRENT SITUATION OF LABOR PRODUCTIVITY IN VIET NAM
8 Copyright © VEPR 2019 Good policy, Sound economy
LABOR PRODUCTIVITY PROGRESS
9 Copyright © VEPR 2019 Good policy, Sound economy Economy-wide labor productivity
Level and growth rate of Viet Nam’s labor Economy-wide labor productivity, 1991-2015 productivity is calculated 60 by GDP per worker, GDP
measured in VND at 50 constant 2010 price.
40 The labor productivity in Viet Nam increased from 30 VND 18,886 million VND per worker (1991) to 20 54.427 million per worker(2015). 10
0 After 25 years, Viet Nam’s 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
labor productivity Labor productivity for the entire economy (million VND per worker, left) increased by less than 3 Growth rate of labor productivity (%, right) times (2.88). Source: Authors’ calculation from the statistics of GSO 10 Copyright © VEPR 2019 Good policy, Sound economy Labor productivity by economic sectors
Labor productivity of the Industry and Construction sector is the highest, followed by the Service sector and the lowest is the Agriculture, Forestry and Fisheries sector. In terms of contribution to GDP, the Agriculture, Forestry and Fisheries sector has lowest contribution to GDP and this ratio also decreases (maintaining around 20%); although Service sector has lower labor productivity level compared to Industry and Construction sector, the contribution shares of these two sectors are nearly equal (around 40% from 2000 onwards).
Labor productivity of economic sectors Contribution shares to GDP by economic sectors, (million VND per worker, 1991-2015) 1991-2015 100 100% 90 90% 80 80% 70 70% 60 60% 50 50% 40 40% 30 30% 20 20% 10 10% 0 1991 2000 2010 2015 0% 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
The economy Agriculture, Forestry, Fisheries Industry and Construction Services Agriculture, Forestry, and Fisheries Industry and Construction Services 11 Copyright © VEPR 2019 Source: Authors’ calculation from the statistics of GSO Good policy, Sound economy Labor productivity by economic sectors
Labor productivity of Industry and Construction sector increased strongly until 2001, then there was a sign of slowdown. Since 2007, most FDI projects have been focused on Industry and Construction sectors. This entails a large amount of agricultural land converted into industrial zones. Accompanying this process is the phenomenon of rural workers moving to urban areas to find jobs or move to work in the same industrial parks.
Industry and Construction sector, Structure of the labor force aged 15 years and 1991-2015 above by rural and urban, 2005-2015 100 15 100% 90 90% 80 10 80% 70 70% 60 5 50 60% 40 0 50% 30 40% 20 -5 30% 10 20% 0 -10 10%
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Labor productivity for the entire economy (million VND per worker, left) Growth rate of labor productivity (%, right) Rural Urban
12 Copyright © VEPR 2019 Source: Authors’ calculation from the statistics of GSO Good policy, Sound economy Labor productivity of Agriculture, Forestry and Fisheries Agriculture contributes mainly to the value added of this sector (about 76%), Forestry and Fisheries account for 4% and 20% the sector’s value added in the period 1991-2015. Therefore, the labor productivity of Agriculture is the main dominant factor to labor productivity of this sector.
The contribution shares of industries’ value-added to Agriculture, Forestry Level and growth rate of labor and Fisheries sector, 1991-2015 productivity in Agriculture, 1991-2015 100% 25 20 90% 80% 20 15 70% 15 10 60% 50% 10 5 40% 30% 5 0 20% 0 -5 10%
0% 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Labor productivity for the entire economy (million VND per worker, left) Growth rate of labor productivity (%, right) Agriculture Forestry Fisheries
13 Copyright © VEPR 2019 Source: Authors’ calculation from the statistics of GSO Good policy, Sound economy Labor productivity of Industry and Construction sector
Industries with the largest contribution to Industry and Construction sector (2015) are Manufacturing (around 50%), Mining (30%), and Construction (nearly 18%). The contribution shares of industries’ value-added to Industry and Construction sector, 1991-2015 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
Construction Water supply, waste management,and remediation activities electricity production and distribution Manufacturing Mining
Source: Authors’ calculation from the statistics of GSO 14 Copyright © VEPR 2019 Good policy, Sound economy Labor productivity of Industry and Construction sector
Level and growth rate of labor productivity in Level and growth rate of labor productivity Mining, 1991-2015 in Construction, 1991-2015 15 1600 35 70
1400 30 60 10 25 1200 50 20 5 1000 40 15 800 0 10 30 600 5 -5 20 400 0 -10 10 200 -5
0 -10 0 -15 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Labor productivity for the entire economy (million VND per worker, left) Labor productivity for the entire economy (million VND per worker, left) Growth rate of labor productivity (%, right) Growth rate of labor productivity (%, right)
Source: Authors’ calculation from the statistics of GSO 15 Copyright © VEPR 2019 Good policy, Sound economy Labor productivity of Service sector
Labor productivity of Wholesale, retail Level and growth rate of labor and repair industries is lower than the productivity in Wholesale, Retail and average of the service sector. Repair, 1991-2015 (constant 2010 price) 70 10 In the period of 2002 - 2006 and 2013 60 - 2015, its labor productivity was only 5
around 50 million VND per worker per 50 year. Even in 2013, the labor 0 productivity growth was at -15%. This 40 -5 is also the period of strong purification 30
process of Vietnamese enterprises, -10 70,500 enterprises were dissolved and 20
-15 temporarily suspended, up 10% 10 compared to 2012, while this figure was only 3-4% compared to years 0 -20
ago. In particular, nearly 40% of these 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 businesses operated in the wholesale Labor productivity for the entire economy (million and Retail activities. VND per worker, left) Growth rate of labor productivity (%, right)
Source: Authors’ calculation from the statistics of GSO 16 Copyright © VEPR 2019 Good policy, Sound economy Labor productivity of Service sector
Financial, Banking and Insurance activities Real estate business activities 500 200 2,000 150
400 150 1,500 100
300 100 1,000 50 200 50 500 0 100 0
0 -50 0 -50 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 1991199319951997199920012003200520072009201120132015
Labor productivity for the entire economy (million VND per worker, left) Labor productivity for the entire economy (million VND per worker, left) Growth rate of labor productivity (%, right) Growth rate of labor productivity (%, right)
Transport and storage Professional, scientific and technical activities 70 15 250 150 60 10 200 100 50 5 40 150 50 0 30 100 0 -5 20 50 -50 10 -10 0 -15 0 -100 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Labor productivity for the entire economy (million VND per worker, left) Labor productivity for the entire economy (million VND per worker, left) Growth rate of labor productivity (%, right) Growth rate of labor productivity (%, right) 17 Copyright © VEPR 2019 Source: Authors’ calculation from the statistics of GSO Good policy, Sound economy Labor productivity of economic sectors based on types of economic ownership
From 1991 to 2001,the labor productivity of all economic sectors increased gradually In which, the labor productivity of the FDI sector is the highest, almost double in comparison with the labor productivity of the two remaining sectors combined. After 2002, this trend has reversed, the labor productivity of the FDI sector has gradually decreased, and that of the state sector has caught up and surpassed in 2015. The contribution of the state sector, the non-state sector and the FDI sector to GDP was 35.8%, 49.5%, and 14.7% relatively.
Labor productivity by economic sector (million VND, 1991 – 2015, constant 2010 price) 450
400
350
300
250
200
150
100
50
0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
State Non-state FDI 18 Copyright © VEPR 2019 Source: Authors’ calculation from the statistics of GSO Good policy, Sound economy Labor productivity of economic sectors based on types of economic ownership 250 20 The proportion of value-added State sector contributions by economic sectors 200 to GDP (%), 1991 – 2015 15 150 100% 10 80% 100 60% 5 40% 50 20% 0 0 0%
1990199219941996199820002002200420062008201020122014 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Labor productivity for the entire economy (million VND… State Sector Non-State Sector FDI sector Growth rate of labor productivity (%, right) 35 12 450 30 Non-state sector 10 400 FDI sector 30 20 8 350 10 25 6 300 0 20 4 250 -10 15 2 200 -20 0 150 10 -30 -2 100 5 -4 50 -40 0 -6 0 -50 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Labor productivity for the entire economy (million VND per worker, left) Labor productivity for the entire economy (million VND per worker, left) Growth rate of labor productivity (%, right) Growth rate of labor productivity (%, right) 19 Copyright © VEPR 2019 Source: Authors’ calculation from the statistics of GSO Good policy, Sound economy Labor structural shift by sector
1991 2000 2010 2015 By economic activities 100% 100% 100% 100% Agriculture, Forestry and Fishing 72.3% 67.8% 49.5% 44.0% Industry and Construction 11.2% 12.0% 21.0% 22.7% Mining 0.9% 0.6% 0.6% 0.4% Manufacturing 7.7% 8.6% 13.5% 15.3% Construction 2.3% 2.5% 6.3% 6.5% Service 16.5% 20.2% 29.5% 33.2% Wholesale, Retail and Repair 4.9% 7.3% 11.3% 12.7% Transportation and storage 2.2% 2.5% 2.9% 3.0% Accommodation and food service activities 1.4% 1.8% 3.5% 4.6% Information and Communication 0.3% 0.3% 0.5% 0.6% Financial, Banking and Insurance activities 0.2% 0.2% 0.5% 0.7% Real estate business activities 0.1% 0.3% 0.2% 0.3% Professional, scientific and technical activities 0.1% 0.1% 0.4% 0.5% By type of ownership 100% 100% 100% 100% State sector 12.9% 11.7% 10.4% 9.8% Non-state sector 86.3% 87.3% 86.1% 86.0% FDI sector 0.8% 1.0% 3.5% 4.2% 20 Copyright © VEPR 2019 Source: Authors’ calculation from the statistics of GSO Good policy, Sound economy
SOURCES OF LABOR PRODUCTIVITY GROWTH
21 Copyright © VEPR 2019 Good policy, Sound economy Growth accounting method
TFP gradually replaces the capital intensity in leading labor productivity growth in Viet Nam
Contribution of capital density and TFP to labor productivity growth in Viet Nam, (1991-2015, % point) 15
10
5
0
-5
-10
TFP Capital density Labor productivity growth rate
Source: Authors’ calculation from the statistics of GSO 22 Copyright © VEPR 2019 Good policy, Sound economy Growth accounting method
Contribution share of capital density and TFP to labor productivity (1991-2015, %) 100%
80%
60%
40%
20%
0%
-20%
-40%
Capital density TFP
Source: Authors’ calculation from the statistics of GSO 1991-2000: Increasing capital intensity is the main driver for Viet Nam's labor productivity growth while the influence of TFP is negative. 2001-2010: The effect of capital intensity diminishes with the rate of contribution to annual labor productivity growth reduced to 70%; Meanwhile, TFP also has a positive influence on labor productivity growth. 2011-2015: TFP replaces the role of capital intensity in leading labor productivity growth. 23 Copyright © VEPR 2019 Good policy, Sound economy Growth accounting method
Labor productivity growth decomposition by sub-period
Contribution Contribution shares Labor Period productivity growth Capital density TFP Capital density TFP
1991-2015 4.51% 4.23% 0.28% 93.89% 6.11%
1991-1995 6.32% 11.05% -4.73% 174.90% -74.90%
1996-1999 3.99% 6.35% -2.36% 159.02% -59.02%
2000-2007 4.10% 3.02% 1.08% 73.64% 26.36%
2008-2012 3.18% 0.73% 2.45% 22.97% 77.03%
2013-2015 5.69% 2.03% 3.66% 35.73% 64.27%
Source: Authors’ calculation from the statistics of GSO 24 Copyright © VEPR 2019 Good policy, Sound economy ICOR and TFP growth in Viet Nam, 1991-2015
8 8
6 6
4 4
2 2
0 0
-2 -2
-4 -4
-6 -6
-8 -8
-10 -10
ICOR (left) TFP growth (right, %)
Source: Authors’ calculation from the statistics of GSO
25 Copyright © VEPR 2019 Good policy, Sound economy Agriculture, Forestry and Fisheries Sector, 1991-2015
Contribution shares of capital density and TFP to labor productivity of industries in Group 1
Agriculture Forestry Fisheries 100% 100% 100% 80% 80% 80% 60% 60% 60% 40% 40% 40% 20% 20% 20% 0% 0% 0% -20% -20% -20% -40% -40% -40% -60% -60% -60% 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Source: Authors’ calculation from the statistics of GSO
26 Copyright © VEPR 2019 Good policy, Sound economy Industry and Construction Sector, 1991-2015
Contribution shares of capital density and TFP to labor productivity of industries in Group 2
Manufacturing Construction Mining 100% 100% 100%
80% 80% 80%
60% 60% 60%
40% 40% 40%
20% 20% 20%
0% 0% 0%
-20% -20% -20%
-40% -40% -40% 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Cường độ vốn TFP
Source: Authors’ calculation from the statistics of GSO
27 Copyright © VEPR 2019 Good policy, Sound economy
Service Sector, 1991-2015
Contribution shares of capital density and TFP to labor productivity of industries in Group 3
28 Copyright © VEPR 2019 Source: Authors’ calculation from the statistics of GSO Good policy, Sound economy Shift-share analysis method
Contribution to labor productivity (% point), 1991-2015 10
8
6
4
2
0
-2
-4
-6 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Within effect Shift effect Interaction effect Labor productivity growth rate
Source: Authors’ calculation from the statistics of GSO 29 Copyright © VEPR 2019 Good policy, Sound economy Evaluating the impact of structural shift to labor productivity 1988-1991: a series of policies based on the supply-side theory was implemented, contributing to the economic achievements of Viet Nam in the "Doi Moi". These policies can help to liberate the production capacity of the economy at this stage such as removing internal trade barriers, allowing the establishment of private companies, “Khoan 10”, dissolving and merging weak state-owned enterprises, opening up to attract foreign investment (Pham The Anh and Nguyen Tuan Minh, 2013). This may be the reason for the dramatic improvement of within-sector labor productivity in the 1990s.
Since 2000, policy to promote domestic economic development was the promulgation of the Enterprise Law 2000 to creating a favorable environment for the establishment of businesses and accelerating the process of equitizing state-owned enterprises. Viet Nam also signed a bilateral trade agreement with the US and reforming a series of laws to join the Trade Organization World WTO. These policies contribute to creating favorable conditions for the formation and development of domestic enterprises and FDI enterprises, which may be the cause of the strong shift of labor from sectors with low labor productivity to industries with high labor productivity in the period 2001-2010, reflected by the overwhelming effect of the shift effect. 30 Copyright © VEPR 2019 Good policy, Sound economy Evaluating the impact of structural shift to labor productivity
From 2011 to 2015, the influence of the shift effect was not as clear as in the previous decade but dropped to only 20.95% in 2015. The within effect regained its leading position to labor productivity growth with the contribution share to labor productivity growth was up to 84% in 2015. This corresponds to the improvement of labor productivity of each industry due to the efforts to apply science and technology to improve the added value of sectors. The interaction effect was still negative but has a smaller value (in 2015 is -0.62%), halving the absolute value compared to 2011 (-0.31 points%), expressing the added value of industries with shifting labor still increased more slowly than the growth of labor in those industries.
31 Copyright © VEPR 2019 Good policy, Sound economy
VIET NAM’S LABOR PRODUCTIVITY IN INTERNATIONAL COMPARISON
32 Copyright © VEPR 2019 Good policy, Sound economy
Economy-wide labor productivity
Labor productivity of Viet Nam and selected countries, Selected countries in 1991-2015 140 comparison:
Northeast Asia 120 (Japan, South Korea, China) 100 ASEAN 80 (Singapore,
Thailand, 60 Philippines, Malaysia, 40 Indonesia, Cambodia) 20
0
Japan South Korea China Singapore Thailand Philippines Malaysia Indonesia Cambodia Viet Nam
Note: Unit of LP: thousand USD per worker, constant basic prices using 2011 PPP; Cambodia’s data is from 1993
Source: Authors’ calculation from the statistics of APO 33 Copyright © VEPR 2019
Good policy, Sound economy
Economy-wide labor productivity
The growth rate of labor productivity in Viet Nam and selected countries (%), 1991-2015
15
10
5
0
-5
-10
-15 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Japan South Korea China Singapore Thailand Philippines Malaysia Indonesia Cambodia Viet Nam
Source: Authors’ calculation from the statistics of APO 34 Copyright © VEPR 2019 Good policy, Sound economy
Labor productivity by industries
In 2015, the labor productivity of Viet Nam within almost all industries was at the lowest level in comparison with other selected countries. Viet Nam's labor productivity was the lowest, ranking behind Cambodia in three industries, namely Manufacturing; Construction; Transport, storage and communications. Viet Nam's labor productivity was the second lowest, only higher than that of Cambodia in Agriculture, forestry, and fisheries; Electricity, gas, and water supply; Wholesale and retail trade, repair of vehicles and household goods, hotels and restaurants. In contrast, Viet Nam had higher labor productivity than some other countries in three industries, including: Mining and quarrying; Financial intermediation, real estate, renting and business activities; Community, social and personal services.
35 Copyright © VEPR 2019 Good policy, Sound economy Labor productivity of Viet Nam and selected countries (1991-2015)
Agriculture, forestry and fisheries Mining and quarrying 80 3000
70 2500 60
2000 50
40 1500
30 1000
20
500 10
0 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Japan South Korea China Singapore Japan South Korea China Thailand Philippines Malaysia Indonesia Thailand Philippines Malaysia Cambodia Viet Nam Indonesia Cambodia Viet Nam
Note: Unit of LP: thousand USD per worker, constant basic prices using 2011 PPP; Singapore does not have Mining and quarrying; Cambodia’s data is from 1993 36 Copyright © VEPR 2019 Source: Authors’ calculation from the statistics of APO Good policy, Sound economy Labor productivity of Viet Nam and selected countries (1991-2015)
Manufacturing Electricity, gas and water supply
180 700
160 600
140 500 120
100 400
80 300
60 200 40
100 20
0 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Japan South Korea China Singapore Japan South Korea China Singapore Thailand Philippines Malaysia Indonesia Thailand Philippines Malaysia Indonesia Cambodia Viet Nam Cambodia Viet Nam
Note: Unit of LP: thousand USD per worker, constant basic prices using 2011 PPP; Cambodia’s data is from 1993
Source: Authors’ calculation from the statistics of APO 37 Copyright © VEPR 2019 Good policy, Sound economy Labor productivity of Viet Nam and selected countries (1991-2015)
Construction Wholesale, retail, repair, hotels and
80 160 restaurants
70 140
60 120
50 100
40 80
30 60
20 40
10 20
0 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Japan South Korea China Singapore Japan South Korea China Singapore Thailand Philippines Malaysia Indonesia Thailand Philippines Malaysia Indonesia Cambodia Viet Nam Cambodia Viet Nam
Note: Unit of LP: thousand USD per worker, constant basic prices using 2011 PPP; Cambodia’s data is from 1993
Source: Authors’ calculation from the statistics of APO 38 Copyright © VEPR 2019 Good policy, Sound economy Labor productivity of Viet Nam and selected countries (1991-2015)
Transport, storage and communications Financial intermediation, real estate, renting and business activities 160 700
140 600
120 500
100 400 80 300 60
200 40
20 100
0 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Japan South Korea China Singapore Japan South Korea China Singapore Thailand Philippines Malaysia Indonesia Thailand Philippines Malaysia Indonesia Cambodia Viet Nam Cambodia Viet Nam
Note: Unit of LP: thousand USD per worker, constant basic prices using 2011 PPP; Cambodia’s data is from 1993
Source: Authors’ calculation from the statistics of APO 39 Copyright © VEPR 2019 Good policy, Sound economy Labor productivity of Viet Nam and selected countries (1991-2015)
Community, social and personal services
60
50
40
30
20
10
0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Japan South Korea China Singapore Thailand Philippines Malaysia Indonesia Cambodia Viet Nam
Note: Unit of LP: thousand USD per worker, constant basic prices using 2011 PPP; Cambodia’s data is from 1993
Source: Authors’ calculation from the statistics of APO 40 Copyright © VEPR 2019 Good policy, Sound economy
Composition of labor productivity growth
Japan, 1971-2015 South Korea, 1971-2015 15% 15%
10% 10%
5% 5%
0% 0%
-5% -5%
-10% -10% 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Source: Authors’ calculation from the statistics of APO 41 Copyright © VEPR 2019 Good policy, Sound economy
Composition of labor productivity growth
China, 1979-2015 Viet Nam, 1991-2015 15% 15%
10% 10%
5% 5%
0% 0%
-5% -5%
-10% -10% 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
42 Copyright © VEPR 2019 Source: Authors’ calculation from the statistics of APO Good policy, Sound economy Decomposing LP growth using shift-share analysis method Selected Northeast Asian countries and Singapore:
Within effect is the leading factor for labor productivity growth. Observations in South Korea and China show that the contribution of the shift effect is relatively low compared to the within effect.
To have income convergence, Viet Nam need negative correlation between productivity level and growth. China is still middle income but grew fast. Korea is already high but also grew fast. But Viet Nam is only lower-middle income and growing average. It seems to be a reason for Viet Nam facing middle-income trap as addressed by some current studies.
43 Copyright © VEPR 2019 Good policy, Sound economy Composition of labor productivity growth, 1991-2015
Singapore Malaysia 20% 15%
15% 10%
10% 5%
5%
0%
0%
-5% -5%
-10% -10% 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: Authors’ calculation from the statistics of APO 44 Copyright © VEPR 2019 Good policy, Sound economy Composition of labor productivity growth, 1991-2015
Philippines Thailand 15% 20%
10% 15%
10% 5%
5% 0%
0%
-5% -5%
-10% -10% 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: Authors’ calculation from the statistics of APO 45 Copyright © VEPR 2019 Good policy, Sound economy Composition of labor productivity growth, 1991-2015
Indonesia Cambodia 15% 15%
10% 10%
5% 5%
0% 0%
-5% -5%
-10% -10%
-15% -15% 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: Authors’ calculation from the statistics of APO 46 Copyright © VEPR 2019 Good policy, Sound economy Decomposing LP growth using shift-share analysis method
Other selected ASEAN countries:
These countries relied on the shift effect in the early stage, then move gradually to depend on the within effect.
For Viet Nam, the effect of the shift effect has reduced and been replaced by within effect. However, Viet Nam’s labor is still concentrated mainly in Agriculture, Forestry and Fisheries sector, indicating that there is possibility of shifting labor among sectors. To increase labor productivity, Viet Nam must unfold the shift effect while continue to increase within effect.
47 Copyright © VEPR 2019 Good policy, Sound economy
A REVIEW OF PRODUCTIVITY ENHANCEMENT POLICY IN VIET NAM SINCE ĐỔI MỚI
48 Copyright © VEPR 2019 Good policy, Sound economy
A review of productivity enhancement policy in Viet Nam since post-Doi Moi
The process of awareness on the productivity issues in Viet Nam Viet Nam’s efforts on improving national productivity - The process of planning and implementing productivity policies - National productivity center: Vietnam National Productivity Institute - National productivity programme: Programme No. 712 Viet Nam’s efforts on improving enterprises’ productivity - The system of organizations supporting productivity improvement - The system of tools to improve enterprise productivity Concluding remarks and policy recommendations
49 Copyright © VEPR 2019 Good policy, Sound economy The process of awareness on the productivity issues in Viet Nam
50 Copyright © VEPR 2019
Good policy, Sound economy Efforts on improving national productivity
The process of planning and implementing productivity policies in Viet Nam (Based on the process of implementing Resolution 05-NQ / TW (2016) on renovating the growth model, improving the growth quality, labor productivity and competitiveness of the economy) State agencies (ministries, departments and institutes ...) propose policies to the National Assembly and the Government. The National Assembly approves and issues guidelines and policies (Resolution); Government set up an action program. The ministries shall follow their assigned tasks, allocating works to agencies under their management (through circulars and guiding documents). ⇒ it often takes 5 months for an initial policy (on paper) to be basically disseminated to the units directly responsible for implementation (on action).
51 Copyright © VEPR 2019 Good policy, Sound economy
Efforts on improving national productivity
Vietnam National Productivity Institute (VNPI) VNPI was established in 1997 with the support of APO (Asia Productivity Organization) Three key missions: (i) Conducting research to propose policies and solution to bolster up national productivity; (ii) Providing consulting services and organizing workshops focusing on managerial skills and business development; (iii) Fostering the transforming of up-to-date methods and international experience to improving productivity Cooperation with Japan: about 10 JICA volunteers (Japan International Cooperation Agency) have worked at VNPI. The number of experts of VNPI by the end of 2018 is 25, of which 15 people have trained from the JPC (Japan Productivity Center) through the two-year training program of JPC. Most experts have attended short-term training courses in Japan through the annual APO program. => VNPI operates under the management of MOST and its role is not as complete as a national productivity agency. 52 Copyright © VEPR 2019 Good policy, Sound economy
Efforts on improving national productivity
National productivity programme: Programme No. 712 The first national scale program on productivity in Viet Nam: "Improving productivity and quality of products and goods of Vietnam's enterprises by 2020" (Programme No. 712)
Source: Collected by authors from Decision No.1385/QĐ–BKHCN in 06/10/2014 53 Copyright © VEPR 2019 Good policy, Sound economy
Efforts on improving enterprises’ productivity The deployment process of support for enterprises to improve productivity & quality
Source: The authors’ compilation; Illustration based on the deployment progress of the project: “Improving 54 Copyright © VEPR 2019 productivity and quality of the Industrial products” chaired by the Ministry of Industry and Trade Good policy, Sound economy
Efforts on improving enterprises’ productivity
The system of organizations that support enterprise productivity improvement
QUATEST: Quality Assurance and Testing Center; SMEDEC: SME Development Support Center; QTC: Quality Training Centre; QUACERT: Vietnam Certification Centre; HwC: Vietnam-Germany Technology Training and Transfer Centre
Source: Compilation from the Report of Activities supporting enterprises to apply the management system, models, and tools to improve the productivity & quality within 55 Copyright © VEPR 2019 the framework of the National Productivity and Quality Program of VNPI Good policy, Sound economy Efforts on improving enterprises’ productivity
The system of tools and methods to improve enterprise’s productivity are widely applied in Viet Nam.
International Organization for • Standard management system Standardization (ISO)
• Recommendation system Western countries • Standard benchmark and learning from the best method
• Total Quality Management (TQM) • 5S • Just In Time - JIT • Kaizen Japan • Lean production system • Seven Tools of Quality Control (SPC) • Total Productive Maintenance • Lean Six Sigma Source: The Authors’ compilation 56 Copyright © VEPR 2019 Good policy, Sound economy Evaluating the policies to improve labor productivity in Viet Nam
Achievements Promoting "productivity" associated with "quality" after the Doi Moi period through two Decades of Quality I and II. Relevant agencies gain considerable experience in the field of productivity along with a large number of trained and technology-transferred personnel. Limitations The policies only focused on improving productivity associated with the business sector, while the problem of productivity improvement is the problem of the nation, businesses, and households altogether. The productivity movement favored the quality factor, some other aspects of productivity have not been given as much attention as labor productivity. The awareness of productivity issues in Viet Nam seems to follow traditional planning thinking (the top-down planning) and less coming from the practices of individuals and units. The agencies that are related to productivity are scattered in different ministries, the communication process between parties is often hampered and delayed.
57 Copyright © VEPR 2019 Good policy, Sound economy Evaluating the policies to improve labor productivity in Viet Nam
General comments
Viet Nam has been working on productivity for many decades and there have been high-level resolutions, interests at Party congresses and government policies, but they remained ineffective because of
(i) lack of continued top-level support & commitment; (ii) lack of incentives for firms, workers, enterprises, etc. to participate; (iii) lack of effective detail design (only broad directions) and necessary staffing, budgeting and mechanisms; (iv) traditional government & ministerial bureaucracy & delays; and (v) insufficient international support.
=> As a result, productivity movement so far has been too small, scattered and only partially implemented, and did not reach the critical point to change the national mindset and produce visible results.
58 Copyright © VEPR 2019 Good policy, Sound economy
CONCLUSIONS
59 Copyright © VEPR 2019 Good policy, Sound economy Conclusion
1. The progress of labor productivity of the economy and sectors
The economy-wide labor productivity tends to increase over time but is still slow and unstable. Compared to countries that have achieved high economic achievements, Viet Nam has not experienced a period of rapid increase in productivity to take off. In line with the general experience, the labor productivity of the Industry and Construction sector is the highest, followed by the Service Industry, and the lowest is the Agricultural and Fisheries sector, but it is noteworthy that the labor productivity of the Industry and Construction sector tends to slow down quite early (early 2000s). In terms of type of ownership, labor productivity of FDI sector has tended to decrease, the state and non-state sectors’ have increased gradually. Meanwhile, despite improvements over the years, labor productivity of non-state sector is very low.
60 Copyright © VEPR 2019 Good policy, Sound economy Conclusion
Labor productivity of important industries has not been significantly improved. Industry and Construction sector contributes nearly 40% to the country's GDP. However, labor productivity of industries that account for a large proportion in the sector such as Manufacturing and Construction (accounting for about 50% and 18% of this sector’s added value, respectively) did not increase, even regressed in recent years.
61 Copyright © VEPR 2019 Good policy, Sound economy Conclusion
2. Sources of economy-wide labor productivity growth Viet Nam's labor productivity growth has been gradually shifting from relying on capital density to TFP. The driving force for labor productivity growth in the period 1991 - 2015 mainly came from the within effect, although there was also a period of overwhelming in shift effect (2001-2010), due to the expansion of the FDI sector and the process of industrialization and urbanization. The shift effect is decreasing while a large part of the labor is still in the rural areas with low productivity, showing that there are barriers in labor shifting, such as limited production scale (market) in sectors with high labor productivity, or the transition requires more skills that the education and training market does not meet.
62 Copyright © VEPR 2019 Good policy, Sound economy Conclusion
3. Viet Nam’s labor productivity in international comparison: In comparison with some Northeast Asian countries and ASEAN countries, Viet Nam's labor productivity is still very low despite the high growth rate in the past two decades. For Viet Nam, the effect of the shift effect has reduced and been replaced by within effect. However, Viet Nam’s labor is still concentrated mainly in Agriculture, Forestry and Fisheries sector, indicating that there is possibility of shifting labor among sectors. To increase labor productivity, Viet Nam must unfold the shift effect while continue to increase within effect.
63 Copyright © VEPR 2019 Good policy, Sound economy Conclusion
4. Policy efforts in improving labor productivity in Viet Nam Although the awareness process of productivity in Vietnam is slower than other countries in the region. But with the support of Japanese experts and APO in the early stages of establishing the VNPI, Vietnam basically outlined the framework of a national productivity movement. After two decades of the productivity movement, the policy planning, and enforcement framework has been generally shaped. Relevant agencies have also accumulated considerable experience in productivity, along with a large number of well-trained workers and technological transfer in the past period.
64 Copyright © VEPR 2019 Good policy, Sound economy Conclusion
Some limitations of policy efforts:
The productivity movement in Viet Nam is lacking in generality and comprehensiveness.
In terms of the planning process and policies implementing, because the agencies that are related to productivity are scattered in different ministries, the communication process between parties is often hampered and delayed.
Regarding the methods and models to improve productivity for enterprises, most Vietnamese enterprises are currently consulted and implemented productivity improvement tools transferred from many different countries, especially Japan instead of building and applying a "made in Vietnam“ management model.
65 Copyright © VEPR 2019 Good policy, Sound economy Conclusion
It can be seen that Vietnam has been working on productivity for many decades and there have been high-level resolutions, interests at Party congresses and government policies, but they remained ineffective because of (i) lack of continued top-level support & commitment; (ii) lack of incentives for firms, workers, enterprises, etc. to participate; (iii) lack of effective detail design (only broad directions) and necessary staffing, budgeting and mechanisms; (iv) traditional government & ministerial bureaucracy & delays; and (v) insufficient international support. As a result, productivity movement so far has been too small, scattered and only partially implemented, and did not reach the critical point to change the national mindset and produce visible results.
66 Copyright © VEPR 2019 Good policy, Sound economy
Thank you! Questions and discussion
Contact to: Assoc. Prof. Nguyen Duc Thanh, PhD. Email: [email protected] Vietnam Institute for Economic and Policy Research (VEPR), University of Economics and Business – Vietnam National University Room 707, E4 Building, 144 Xuan Thuy, Cau Giay, Hanoi Email: [email protected]; Tel: 024.37547506 ext 714/ 0975608677; Fax: 024.37549921
67 Copyright © VEPR 2019 Vietnam Productivity Report Part 2
Japanese Productivity Enhancing Measures and the Possibility of their Adoption in Vietnam
Kenichi Ohno (GRIPS) Hanoi, March 2019 Objective of Part II • Part II presents a list of productivity enhancing ideas and measures which may be adopted in Vietnam. They are practiced widely in Japan. They are also practiced in many other countries with Japanese private and/or official assistance. • These tools must be introduced through selection and adjustment to fit Vietnam’s reality. Because each society is different, copying foreign models without proper modification will not work. Also, Japanese tools are often highly sophisticated. Simplification is advisable for initial adoption. • Careful preparation and sequencing are required. Not all tools can be adopted at once due to limitation in human and financial resources, institutions and policy experience. The Japanese side also has limited resources to assist. • There must be a realistic strategy and a special national agency to promote productivity in proper steps. Random and hasty adoption will not produce good results.
Problems with Vietnam’s Policy
• Despite many years of active bilateral economic interaction, Vietnam has not adopted any of the Japanese productivity tools fully or systematically. By contrast, Singapore, Taiwan, Korea, Malaysia, Thailand, India, etc. learned Japanese tools seriously. • Some tools such as 5S have been tried at firm level or by JICA support, but scale is too small and action lasts only for short- term. They are not institutionalized or expanded to national level. • National Productivity Movement should be implemented for at least several years with clear targets. The Party, Government and the business community should work together. • There are foreign models other than Japanese, but Japan is a leading nation for productivity tools, and Japan is willing to cooperate with Vietnam. For these reasons, Vietnam should begin with Japanese tools.
Proper Way to Introduce Foreign Models
1. Leadership commitment Top leader(s) of a nation must strongly and personally commit to the policy, and make sure that any problems that may arise are solved and the policy is executed effectively with good results.
2. National awareness raising All people including ministers, officials, business leaders, engineers, workers, farmers and students must become aware of the critical importance of productivity for themselves and the nation.
3. Execution: from pilot project to nationwide application 1. Pilot project (possibly with international support) 2. Establish a national model 3. Train domestic experts 4. Create a mechanism with sufficient mandate, budget & staffing 5. Full nationwide implementation 6. Government recedes, the private sector takes over Standard Policy Making Procedure (Five Necessary Conditions)
5. A secretariat with sufficient authority and Top leader responsibility to coordinate the entire process
1. Vision 2. Consensus building 3. Documentation
Brainstorming
Set broad Studies goals & Drafting Comments Finalize & surveys direction work & revisions & approve
Stakeholder (Drafting may be outsourced) consultation
4. Substantive stakeholder participation
Ministries Academics & Regions & & agencies Businesses consultants localities Suggestions for Adopting Japanese Productivity Tools in Vietnam • Part II explains ten possible ideas and measures. Prioritize and sequence them so some tools are adopted first and others are introduced in the medium to long run. • Start with tools which are (i) very important in Vietnam; and (ii) more ready to be implemented in Vietnam (because Vietnam’s preparation for learning varies across tools). • Leadership commitment must be clear. Japan cannot mobilize large resources without this condition. In Vietnam, this means top leaders of both the Party and the Government strongly support and involve in the policy process. • Productivity awareness raising campaign should be carried out. • National Productivity Movement should be launched. Awareness raising is one of the critical components of this Movement. National Productivity Movement: Key Components • Declaration of National Productivity Movement by top leader . • Designation of a responsible agency with sufficient mandate, budget and staffing. • Creation of national slogan, logo, mascot, song, dance, etc. • Awareness raising events including rallies, courses, speeches, seminars, conferences, TV & radio programs, movies, etc. • Teaching materials such as books, magazines, textbooks, web portals, stories of productivity pioneers, kaizen manuals (with translation if necessary). • Productivity awards and publicizing of winners. • Creation of Productivity Month in which many events are held including top leader’s speech and award ceremonies (November in Japan & Singapore; September in Ethiopia).
Japanese Productivity Tools (1 to 5)
Tool Description Existing programs Mindset change Proper mindset is the pre-condition for Productivity movements were productivity enhancement. Many launched in Korea, Singapore, 1 methods exist. National movement Ethiopia, etc. sometimes with should be carried out for several years. Japanese assistance. 5S and kaizen Kaizen is a philosophy with many Japanese firms, JICA, JPC and concrete tools to eliminate muda private consultants teach 5S & 2 (waste) and improve efficiency. 5S is kaizen in many countries; basic practice leading to kaizen. standardized method exists. Handholding Customized and comprehensive JETRO and Japanese local support for selected SMEs for 2-3 governments offer HH to 3 years to achieve a pre-set target. This SMEs. Taiwan, Korea, requires many competent experts. Malaysia also practice HH. Shindan A state-certified SME consultant Japan has 26,000 shindanshi system with standardized training, working at home and abroad. 4 exam and renewal procedure. JICA introduced shindan in Thailand, Indonesia, Malaysia. TVET-industry TVET must work closely with industry JICA assisted Hanoi Univ. of 5 linkage to improve curriculum, promote Industry, Industrial Univ. of internship and job placement. HCM for linkage formation Japanese Productivity Tools (6 to 10)
Tool Description Existing programs Kosen Japanese education system that offers JICA conducted pilot kosen (i) technical skills, (ii) mindset, (iii) project at Industrial Univ. of 6 creativity, and (iv) student support for HCM and Technical Colleges of internship and employment. Cao Thang, Hue & Phuc Yen. Mobilization of Foreign technical interns learning Vietnam sends largest number gino jisshusei skills in Japan for 3 years before of interns to Japan. Japanese 7 returning home. Their skills must be SMEs are often impressed utilized for for national with Vietnamese interns, but industrialization. problems also exist. Kosetsushi Technical support centers providing Most nations have technical equipment, testing and R&D services support centers but often at 8 to SMEs at low cost. Japan has central level. MOIT is studying kosetsushi in every prefecture. kosetsushi possibility. FDI-domestic firm Support & incentives for FDI looking Thai BOI conducts matching linkage for local procurement or partnership: services. Malaysia used to 9 trade fairs, matching events, database, have VDP and ILP. Vietnamese subsidies, etc. events are not very effective. Supporting Integrated support for management, Japan, Thailand and Malaysia 10 industry promotion technology and finance. Easy-to-use promoted SI in each way. incentives and linkage formation. Vietnam is still primitive. Vietnam’s Preparation Fully done Partly done Execution Leaders Awaren Tool Pilot VN Special Nationwi Privatiza hip ess HRD project model agency de impl. tion
1 Mindset GKM Tam the
Firms, VNPI 2 5S & kaizen JICA
3 Handholding
4 Shindan
5 TVET-ind. link JICA
6 Kosen JICA
7 Gino jisshusei Bilateral
8 Kosetsushi
9 FDI-dom. link JICA
Discussed PM Phuc MOIT? 10 SI promotion for long 1. Monozukuri Spirit • Mono means “thing” and zukuri (or tsukuri) means “making.” • It describes a sincere attitude in—even obsession with—manufacturing any product with pride, skill and dedication. Production is not a means of making money but a way of pursuing innovation, perfection and customer satisfaction, even disregarding the firm’s short-term profit. • Many of Japan’s excellent manufacturing firms were founded by engineers full of monozukuri spirit. With greasy hands, they were determined to create good products that would conquer the world. Can Vietnam Improve Mindset? • Mindset change is necessary before improving productivity. Selfishness, short-termism, inattention to details and lack of planning should be ended. Japanese experts can teach productivity tools, but they are not effective unless Vietnamese managers and workers fully accept and own them. • Dr. Nguyễn Đăng Minh (GKM Institute), who worked at Toyota’s Production Technology Department in Aichi, Japan for seven years, is developing a method to teach TÂM THẾ (mindset) to Vietnamese firms including Truong Hai Auto.
How JICA Teaches National Productivity Movement to Other Nations • JICA’s first comprehensive productivity support was for Singapore (1983-1990) at the request of Prime Minister Lee Kuan Yew. Singapore learned very quickly and started to teach others. • It proceeded in three phases:
Phase I – Awareness Phase II – Action Phase III – Autonomy (1981-85) (1986-88) (1989-) Importance of productivity Japanese experts coach Singapore can practice is hammered into all firms; Singaporeans learn without Japanese help; citizens, even taxi drivers how to do this start to teach other nations
• Awareness (Phase I) was most important and difficult. Singaporeans had to be convinced, Japanese had to adjust, and trust had to be built. • Many countries tried institutionalization of kaizen—with or without JICA cooperation—with varying results: Thailand, Philippines, India, Hungary, Brazil, Argentina, Paraguay, Tunisia, Egypt, Ethiopia, Tanzania, Zambia, Ghana, Botswana, Mauritius, Burkina Faso, etc. 2. 5S and Kaizen
• Kaizen is a bottom-up, low-cost way of improving efficiency at workplace, imported from USA and developed in Japan. • Kaizen is a philosophy with many practical tools. It pursues elimination of muda (any thing or action that does not add value). • The most basic kaizen tool is 5S (Seiri, Seiton, Seiso, Seiketsu & Shitsuke; or Sàng lọc, Sắp xếp, Sạch sẽ, Săn sóc & Sẵn sàng). Seiri is removing unnecessary things from the workplace. Seiton is placing remaining things in clear visibility for easy pickup. • Kaizen was developed in the late 1950s and practiced all over Japan. It also spread to many countries through FDI, ODA and private consultants (Singapore, Taiwan, Korea, China, Thailand, India, Mexico, Argentina, Tunisia, Ethiopia, Tanzania, Mauritius, etc.) Kaizen Tools Are Many
Source: M. Imai, Kaizen: The Key to Japan’s Competitive Success, McGraw-Hill, 1986. How JICA Teaches Kaizen to Other Nations
• Mobilize a group of Japanese industrial experts. Select 20-30 firms through ministry information or initial classroom courses. Interview general directors for finalizing candidate firms. • Each firm forms a kaizen team and selects one production process. • A Japanese expert visits every week to make the firm team think, identify and solve problems. Give them hints and weekly homework. This process goes on for 3 to 6 months, with possible extension.
Kaizen learning has three levels: 1. Only-once project – JICA experts teach and firms improve, but nothing remains after the project ends. 2. Internalization – JICA experts coach officials so they can sustain kaizen after Japanese experts leave (Training of Trainers). National agencies, standards and programs are created. 3. Privatization – Government withdraws from implementation and let private consultants take over the productivity movement. 3. Handholding • Handholding (also called hands-on support) is an official program to assist a small number of SMEs with customized and intensive support for 2-3 years. Firms with proper mindset and potential are selected. • One goal is set for each firm, and an expert team is formed (official, business consultant, technical expert, etc.) to offer marketing, design, technology, ICT and other support as needed. • JETRO and Japanese local governments conduct many handholding programs for SMEs that want to improve management, export or invest abroad. Japan has many experienced experts (shindanshi and others) willing to work for small fees. • Korea, Taiwan and Malaysia also provide handholding support for export, outward FDI and creation of high-quality products. 4. Shindan and Shindanshi • Shindan is diagnosis and advice for SMEs. Shindanshi is a state- certified person—official or private expert—who practices this. Japan’s shindan system was created in the late 1940s and evolved as social needs changed. • Japanese shindanshi are increasing and stands at 25,746 as of 2016. Shindanshi must pass written and practice tests, and certificate must be renewed every five years with additional training and practice. SME Universities administer tests and training. • Shindanshi work both in Japan and abroad. Many JICA experts are shindanshi.
5. TVET-Industry Linkage • TVET institutions should develop strong linkage with industries for updating curriculum and creating suitable job and internship opportunities for students. For this, two functions are required. • Training process management, featuring the PDCA (Plan, Do, Check, Action) cycle, has seven steps: (i) research of skill needs; (ii) selection of training fields; (iii) curriculum development; (iv) preparation for training implementation; (v) implementation; (vi) evaluation; and (vii) formulation and implementation of action plans. • is composed of Employment support system Internship (i) internship; (ii) company tours; (iii) lectures Program Career Company by TVET graduates; (iv) job fairs; (v) Counseling Study Tour circulation of job opportunity information; Suitable and (vi) career counseling. These must be Job Job Lecture by Opportunity conducted in an integrated and Gradates complementary way. Information Job Fair • Japanese polytechnic universities, colleges and centers are already equipped with these Source: Mori et al. (2013) functions. In Vietnam, JICA supported Hanoi University of Industry to introduce these functions in 2010-13. 6. Kosen (technical college) • Kosen is a Japanese technical and vocational higher education system for producing practical and creative engineers. It offers a five-year program to students aged 15 to 19. • Japan has 57 kosen. 51 are state-run, 3 are under local governments and 3 are private. 10,000 students enter and graduate from kosen each year with a total student body of about 50,000 at any time. • Kosen combines theory and practice. Besides technical skills, it teaches proper mindset, creativity, problem-solving capacity and communication skills. • Kosen builds close and practical linkage with firms through factory visits, internship and graduation studies. Graduates are highly demanded by industry. Pilot Kosen Project in Vietnam • From 2013 to 2018, JICA introduced kosen to the Industrial University of HCMC, then to Cao Thang Technical College (HCMC), Hue Industrial College (Thua Thien-Hue) and Phuc Yen College of Industry (Vinh Phuc). Initial results are encouraging. • Because kosen is new to Vietnam and because Vietnamese situation is different from Japan, the Japanese model had to be modified without losing the main thrusts of kosen education. • The Vietnamese Kosen Model requires five conditions: 1. Education in technical knowledge and skills 2. Teaching proper attitude and mindset 3. Creativity (just doing what is told is not acceptable) 4. School’s strong assistance in students’ job search and placement 5. School’s capacity building to implement above activities • Currently, Vietnamese technical schools teach knowledge and skills (1 above) but other elements are missing. 7. Gino Jisshusei (Technical Interns)
Under this system, young foreign workers are invited to Japan for three years to learn technical skills before returning home. Gino Jisshusei from Vietnam are rapidly increasing. Vietnam now sends largest number to Japan. Many Japanese SMEs are impressed with the serious working attitude and skill-learning of Vietnamese Gino Jisshusei, and decide to hire them permanently or invest in Vietnam. To cope with acute labor shortage, Japanese government is revising this system to include more sectors and allow longer periods. However, this system also generates problems such as unpaid wage or overtime, illegal work assignment, worker disappearance and crime. Two governments are working to solve these problems by improving selection and monitoring. Japan just recently passed a new law that will significantly change gino jisshusei system (Dec. 8, 2018). Gino Jisshusei Sending Companies Best Ones in Vietnam • Some labor sending companies were founded by Vietnamese engineers who know Japan very well. They train workers intensively for six months before sending them to Japan. • They teach manners, attitudes, 5S, Japanese thinking and Japanese language with great discipline. Workers are monitored during and after their stay in Japan. They are encouraged to use acquired skills for future career, not going back to farms or restaurants. • The Japanese embassy, JICA and GRIPS support both companies.
8. Kosetsushi (technical support centers) • Kosetsushi is Public Testing and Research Organizations located in every prefecture in Japan. They perform technical support for SMEs such as analysis, testing, equipment rental, research, training, certification, product development and production support. • Kosetsushi has a long history of more than a century. Many are run and subsidized by local governments. Others are operated by NPOs. SMEs are charged with low or no fees. • Technical staff at kosetsushi are highly experienced but receive low local government salary. They are happy to work for firms in their hometowns. They are very busy due to high demand for their services. 9. FDI-Domestic Firm Linkage • For survival and competitiveness, Japanese manufacturing firms have made serious effort to find (or foster) competent firms in Southeast Asia. This includes both short-term input procurement and long-term business partnership. • Government can host trade fairs, matching events, seminars, supplier database, individual matching services, etc. It can also subsidize FDI firms that improve and purchase from local firms. • In Thailand, Board of Investment (BOI) offers reasonably good support including (i) individual matching service; (ii) SUBCON Thailand (trade fair); (iii) ASEAN Supporting Industry Database; and (iv) Vendors-Meet- Customers Roadshow (subsidy for overseas trade fair participation). • Malaysia introduced Vendor Development Program (VDP) in 1988 and Industrial Linkage Program (ILP) in 1995. Incentives, business matching and SME support package were offered. Results were not very good, and Malaysia subsequently abandoned linkage promotion. • Vietnam also has trade fairs, reverse trade fairs and databases. But they remain fragmented and less systematic than in Thailand or past Malaysia. Currently JICA, World Bank and Korea separately assist Vietnamese SMEs for upgrading and linkage.
10. Kishin-ho & Denshin-ho (Supporting Industry Promotion Laws) • Kishin-ho is short for the Provisional Act to Promote Machinery Industry, enacted in 1956 and renewed two times (in effect 1956-1971). • Denshin-ho is short for the Provisional Act to Promote Electronics Industry, enacted in 1957 and renewed two times (in effect 1957-1971). • These were time-bound laws for developing supporting industries in machinery and electronics, with almost identical contents.
Basic Mechanism – combining technology support (by MITI) with loan provision for new investment (by MoF) 1. MITI’s Machine Industry Deliberation Council identifies potential key components and creates promotion programs every year. 2. MITI invites and screens applications from SMEs. 3. MITI coaches SMEs on production plan, equipment choice, purchase negotiation, etc. so applications are improved. 4. Selected applications are sent to Japan Development Bank or Japan Finance Corporation for SME for additional check and loan provision. Integrated SME Support
Members: business associations, < Policy level > MITI Deliberation Council officials, industrial experts, for specific sector academicians Instruct < Implementation >
Ministry of International Ministry of Finance Trade and Industry (MITI) (MoF)
Fiscal Fund Bureau of MoF
Heavy Industry Japan Development Bureau of MITI Bank (JDB) Managerial advice Technical advice & Investment loans Individual SMEs
Source: Prof. Akira Suehiro’s 2006 lecture in Vietnam, redrawn by author. Vietnam Productivity Report - Part 3
Productivity Improvement Initiatives in Singapore Introduction of good practices of other country
Masumi Shimamura Hanoi, March, 2019
Mitsubishi UFJ Research and Consulting Outline of Presentation
1. Background of Singapore’s productivity improvement efforts Features and context of Singapore 2. Productivity Movement in Singapore (1981-1990s) Strong leadership of Prime Minister Lee Kuan Yew Guiding Principles Evolution of Productivity Movement Key factors for the success 3. Singapore’s recent initiatives on productivity improvement Self-sustaining efforts
1 Mitsubishi UFJ Research and Consulting Background of Singapore’s Productivity Improvement Efforts
Features Productivity Movement is driven by the government in Singapore. Focus is on the development of human resources. Singapore was the first country to receive technical cooperation from JICA on comprehensive productivity support – Productivity Development Project. Singapore continues its own efforts to improve productivity even after completion of JICA support. Singapore, aiming to become a business hub for innovation, succeeds in attracting and developing talent.
2 Mitsubishi UFJ Research and Consulting Background of Singapore’s Productivity Improvement Efforts
Context of Singapore 1965: Idea of productivity already existed around the time of independence. 1960s～first half of 1970s: Labor-intensive policy was adopted to promote entry of foreign companies and to facilitate export.
A foundation for policy making and institutions on productivity development was created and strengthened.
Concept of productivity was greatly influenced by Western practices at the time. By second half of 1970s: Singapore had to shift its policy; from labor-intensive to knowledge-, technology-, and capital- intensive industries.
The shift triggered the emphasis on the importance of human resource development. ”Humanity is the basis of productivity”
3 Mitsubishi UFJ Research and Consulting Background of Singapore’s Productivity Improvement Efforts
Context of Singapore (cont.) From second half of 1980s: Singapore changed its development policy to strengthen global competitiveness; to become a business hub through establishing a knowledge-intensive economic structure, promoting advanced technology, high value added industries, R&D and services.
Various organizations have been involved with improving productivity in Singapore.
2018: The Enterprise Singapore, the government agency championing enterprise development, was established with the merger of International Enterprise Singapore and SPRING.
Its mission is to promote upgrading and innovation, adoption of new technologies, expansion into overseas markets, and strengthening leadership capabilities to build talent pool.
4 Mitsubishi UFJ Research and Consulting Background of Singapore’s Productivity Improvement Efforts Major Productivity-related organizations in Singapore 1964 1967 1972 1983 1995 1996 2001 2002 2018 2019
Productivity Unit within Economic Development Board (EDB) (1964) National Productivity Center under EDB (1967-72)
National Productivity Board (1972-95) Productivity Standard Board (1996-2001)
Singapore Trade Development Board (1983-) International Enterprise Singapore (-2018) Enterprise Singapore Standards, (2018) Productivity and Innovation Board (SPRING) Source: Prepared by MURC based on various reference materials (2002-2018)
5 Mitsubishi UFJ Research and Consulting Productivity Movement in Singapore (1981-1990s)
Strong leadership of Prime Minister Lee Kuan Yew
LKY emphasized development of human resources focusing on high-skill production.
LKY visited Tokyo frequently to learn the secrets of Japan’s success in advancing productivity.
LKY met with key Japanese employers in Singapore to discuss Japanese style of work management – practices, work attitudes and labor-management relations.
June 1981: LKY met with Mr. Kohei Goshi, the founder of the Japan Productivity Center (JPC), who led the initial Productivity Movement in Japan.
Political commitment from the top leadership
Sept. 1981: The government established National Productivity Council (NPC) and launched its own Productivity Movement.
6 Mitsubishi UFJ Research and Consulting Productivity Movement in Singapore (1981-1990s)
Guiding Principles (originally, drawn from the principles of the JPC)
1. Improvements in productivity will increase employment in the long run. 2. Government, employers and labor must work together to implement measures to improve productivity. 3. Fruits of improved productivity must be distributed fairly among management, labor and consumer.
Source: Source: JICA and GRIPS Development Forum (2011), Kaizen National Movement: A Study of Quality and Productivity Improvement in Asia and Africa
7 Mitsubishi UFJ Research and Consulting Productivity Movement in Singapore (1981-1990s) Evolution of Productivity Movement Singapore was well prepared to initiate Productivity Movement High-level political commitment Productivity promotion through participation of all parties concerned Realistic and comprehensive action plan Three Phases of Productivity Movement Awareness (Phase I): through massive national campaign creating widespread awareness of productivity among companies and the workers, paying attention to flexible thinking, willingness (positive attitude) and teamwork Action (Phase II): putting into practice through specific programs to upgrade the skills at the workplace for both workers and management Ownership (Phase III): sustaining and expanding the achievements of the Productivity Movement by private companies
8 Mitsubishi UFJ Research and Consulting Productivity Movement in Singapore (1981-1990s) Evolution of Productivity Movement
Awareness stage Action stage Ownership stage 90s - 1981-85 1986-88 1989-90s
Create widespread awareness Translate “Awareness” Encourage ownership of Start international of productivity among companies into specific programs Productivity Movement cooperation and the workforce to improve productivity by private firms at workplace
JICA-supported Productivity Development Project (PDP: 1983-90) Training of National NPB staff (with JICA experts) Private management Productivity Board conduct company visits, model consultants (NPB) staff company project, etc. Massive campaign Source: Source: JICA and GRIPS Development Forum (2011), Kaizen National Movement:
9 Mitsubishi UFJ Research and Consulting A Study of Quality and Productivity Improvement in Asia and Africa, redrawn by MURC Productivity Movement in Singapore (1981-1990s)
First comprehensive productivity support by JICA -- Productivity Development Project (1983-1990) Achievements of the PDP:
Approximately 200 Singaporeans took part in training in Japan
Approximately 4,000 Singaporeans received training using materials developed in Singapore as part of the PDP
200 Japanese experts participated as lecturers
Japanese experts and consultants from National Productivity Board (NPB) provided more than 200 companies with guidance for productivity development
Some 100 companies incorporated 5S with guidance from NPB
Source: JICA (2016), History of Friendship and Cooperation: The 50th Anniversary of Japan-Singapore Diplomatic Relations
10 Mitsubishi UFJ Research and Consulting Productivity Movement in Singapore (1981-1990s) Key factors of the success 1. Strong commitment and effective oversight from the highest level of leadership 2. Linkages to comprehensive and integrated strategies 3. Strong collaboration among government, private sector, unions, industrial associations, and educational and professional institutions 4. Vigorous learning from best practices, especially from Japan, through international cooperation 5. The support of workers who understand the need to change and embrace a productivity culture 6. The idea that an ambitious goal can only be achieved through an effective combination of sound policies and strategic institutional design, emphasizing cross-sectoral collaboration and sustained efforts Source: Vu Minh Khuong (2014), Boosting Vietnam’s Productivity as a Strategic Approach to Deepening Economic Reforms Urgency, International Experience, and Policy Recommendations
11 Mitsubishi UFJ Research and Consulting Singapore’s recent initiatives on productivity improvement
Singapore continues its own efforts to improve productivity even after completion of JICA support. Ad hoc committees have been developed to achieve sustained and inclusive growth
Strategies put up by the Economic Strategies Committee in 2010 Goal High Skilled People, Innovative Economy, Distinctive Global City Targets Achieve 2 to 3% growth per year in productivity – which will raise the country’s productivity by one-third over the next 10 years – and realize GDP growth at 3 to 5% per year Key 1. Growing through Skills and Innovation Strategies 2. Anchor Singapore as a Global-Asia Hub 3. Build a Vibrant and Diverse Corporate Ecosystem 4. Make Innovation Pervasive, and Strengthen Commercialization of R&D 5. Become a Smart Energy Economy 6. Enhance Land Productivity to Secure Future Growth 7. Build a Distinctive Global City and an Endearing Home
Source: Prepared by MURC based on Report of the Economic Strategies Committee (Feb. 2010)
12 Mitsubishi UFJ Research and Consulting Singapore’s recent initiatives on productivity improvement Singapore continues to emphasize support for SMEs to promote technology transfer, capacity development and scale-up with necessary budget measures. Singapore, aiming to become a business hub for innovation, succeeds in attracting and developing talent.
Strategies put up by the Committee on the Future Economy in 2017 Vision To be the pioneers of the next generation Targets To grow by 2-3% per year on average, exceeding the performance of most advanced economies Key 1. Deepen and diversify our international connections Strategies 2. Acquire and utilize deep skills 3. Strengthen enterprise capabilities to innovate and scale up 4. Build strong digital capabilities 5. Develop a vibrant and connected city of opportunity 6. Develop and implement Industry Transformation Maps (ITMs) 7. Partner each other to enable innovation and growth
Source: Prepared by MURC based on Report of the Committee on the Future Economy (Feb. 2017)
13 Mitsubishi UFJ Research and Consulting Final Remarks
A visionary top leader Prime Minister Lee Kuan Yew advocated Productivity Movement in Singapore. Strong, high-level political commitment and institutional setting was necessary to widespread awareness of productivity, put into action, and firmly take root in business society. After about 40 years from the launch of Productivity Movement, the Principles of Productivity Movement have been surly passed on to the current Singapore. Singapore continues its self-sustaining efforts to improve productivity and to achieve further leap in economic growth.
14 Mitsubishi UFJ Research and Consulting
III. Attachments
2. Attachments related with carrying out seminars (food related business) Food seminar report Foodseminar Report
Japan-Vietnam Seminar for Advancing Food-processing Industry in Vietnam
(Hosted by the Ministry of Economy, Trade and Industry of Japan and the Ministry of Industry and Trade of the Socialist Republic of Vietnam)
Seminar Report
Venue Can Tho City ...... 2 Buon Ma Thuot City ...... 7
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Foodseminar Report
Can Tho City
[Seminar Program] Time and Date: 8:30 to 11:30, Thursday, December 20, 2018
Venue: Muong Thanh Luxury Can Tho Hotel Time Content Speaker 8:30–8:40 Opening Speech from host Mr. Masao Shimizu, Director for (10 minutes) ASEAN bilateral relations, Asia and Pacific Division, Ministry of Economy, Trade and Industry of Japan; Mr. Do Quoc Hung, Deputy Head of the Asia-Africa Market Department, Ministry of Industry and Trade of Vietnam 8:40–9:10 Challenges in upgrading the food Mr. Masao Shimizu, Director for (30 minutes) processing industry in Vietnam ASEAN bilateral relations, Asia Mr. Shimizu introduced the challenges and Pacific Division, Ministry of identified at last year’s research to Economy, Trade and Industry of Promote Upgrading the Food Japan Processing Industry in Vietnam and presented proposals to overcome these challenges. 9:10–10:10 Japan Food Safety (JFS)-C Mr. Nobutake Uchibori, Director, (60 minutes) Standards, global food safety Japan Food Safety Management standards originated in Japan Association (JFMS) *including a 10- Mr. Uchibori presented a general minute Q&A outline, key features, benefits, and session examples of the use of the JFS-C Standards and those of the JFS-A and B Standards, which are the first and intermediate level standards, respectively. The JFS-C Standards are newly recognized as a component of the Global Food Safety Initiative (GFSI) standards, which have become de facto global standards in the field of food safety management. 10:10–10:25 Coffee Break 10:25–11:25 Key points for trading with Mr. Katsuki Kishi, Managing (60 minutes) Japanese-affiliated companies Director, Aeon TopValu (Hong *including a 10- (retailers) Kong) Co., Ltd minute Q&A session Mr. Kishi presented Aeon’s quality control and other criteria required of its suppliers. 11:25–11:30 Closing Speech Mr. Nguyen Minh Toai, Director, (5 minutes) the Trade and Industry Department, Can Tho City’s People Committee
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Foodseminar Report
[Main Questions and Answers] (Question) Are there any countries other than Japan that have obtained JFS-C certification? (Answered by Mr. Uchibori) There are none at this moment. On the other hand, steps are being taken to enter into contracts with overseas accreditation bodies for JFS-C certification. (Answered by Mr. Shimizu) As far as I know, some Japanese companies in Thailand are trying to acquire JFS-C in Thailand.
(Question) Is JFS-C certification an appropriate food safety certification plan for a Vietnamese company? How long is the JFS-C certification valid? (Answered by Mr. Uchibori) Yes, JFS-C certification is an appropriate food safety certification plan for a Vietnamese company if it wishes to expand business globally. JFS-C certification is valid for three years.
(Question) Does Aeon sell its TopValu brand products overseas? If yes, does Aeon study the taste and flavor preferences of consumers in other countries? (Answered by Mr. Kishi) We launched our TopValu brand around the world, including China and Vietnam. We have been making best efforts to adapt our strategy and product offering to suit customer preferences in each market. As a matter of fact, in Vietnam, we sell unique TopValu products for Vietnamese consumers (although we launched them only recently).
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Foodseminar Report
[Questionnaire Results] Question 1. Type of industry where a participant works and a participant’s job description (Select all that apply)
1. Food Manufacturing Industry 6% 2. Wholesale Industry
3. Foodservice Industry 27% 41% 4. Retail Industry
5. Food Machinery/Food Materials Industries 5% 6. Civil Service 7% 14% 7. Other 0% n=63
1. Food 2. 3. 5. Food 4. Retail 6. Civil Manufacturing Wholesale Foodservice Machinery/Food 7. Other Industry Service Industry Industry Industry Materials Industries 26 9 0 4 3 17 4
11% 11% 1. Top Management
2. Managers 27% 3. non-management employees 4. Other 51%
n=63
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Foodseminar Report
3. non- 1. Top Management 2. Managers management 4. Other employees 615286
Question 2. Challenges in trading with Japanese-affiliated companies (Select all that apply) In terms of the challenges in trading with Japanese-affiliated companies, the largest number of participants named the lack of opportunities to come into contact with Japanese-affiliated companies (52%) followed by language barriers (25%).
1. Lack of opportunities to come into contact with Japanese-affiliated companies 2. Language barriers 3% 5% 9% 3. Terms and conditions of trade proposed by Japanese-affiliated 6% companies are too stringent and demanding 4. Existing products do not meet the needs of Japanese-affiliated 52% companies 5. The Vietnamese government’s 25% failure to provide appropriate support
6. Shortage of capable personnel
n=63
3. Terms and 1. Lack of conditions of 4. Existing 5. The opportunities to trade proposed by products do not Vietnamese 6. 2. come into contact Japanese- meet the needs government’s Shortage Language with Japanese- affiliated of Japanese- failure to provide of capable barriers affiliated companies are affiliated appropriate personnel companies too stringent and companies support demanding 46 22 5 8 4 3
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Foodseminar Report
Question 3. Evaluation of the Seminar (Did you find the seminar useful for future business operations?) In their evaluation of this seminar, all participants responded affirmatively with 65% responding that the seminar was very useful and 35% responded that the seminar was useful.
0% 0%
35% 1. Very Useful 2. Useful 3. Not Very Useful 4. Not Useful at All 65%
n=63
1. Very Useful 2. Useful 3. Not Very Useful 4. Not Useful at All 40 22 0 0
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Foodseminar Report
Buon Ma Thuot City
[Seminar Program] Time and Date: 13:30 to 16:30, Friday, December 21,2018
Venue: Muong Thanh Luxury Buon Ma Thuot Hotel
Time Content Speaker 13:30–13:40 Opening Speech from host Mr. Masao Shimizu, Director for (10 minutes) ASEAN bilateral relations, Asia and Pacific Division, Ministry of Economy, Trade and Industry of Japan; Mr. Do Quoc Hung, Deputy Head of the Asia-Africa Market Department, Ministry of Industry and Trade of Vietnam 13:40–14:10 Challenges in the sophistication of Mr. Masao Shimizu, Director for (30 minutes) the food processing industry in ASEAN bilateral relations, Asia Vietnam and Pacific Division, Ministry of *The content of the presentation is the Economy, Trade and Industry of same as that in Can Tho City (The Japan same applies hereinafter). 14:10–15:10 Japan Food Safety (JFS)-C Mr. Nobutake Uchibori, Director, (60 minutes) Standards, global food safety Japan Food Safety Management standards originated in Japan Association (JFSM) *including a 10- minute Q&A session 15:10–15:25 Coffee Break 15:25–16:25 Key points for trading with Mr. Katsuki Kishi (60 minutes) Japanese-affiliated companies Managing Director, Aeon TopValu *including a 10- (retailers) (Hong Kong) Co., Ltd minute Q&A session 16:25–16:30 Closing Speech Mr. Vin Dinh Tuan, Deputy (5 minutes) Director, Department of Industry and Trade of Dak Lak Province
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Foodseminar Report
[Main Questions and Answers] (Question) I run an instant coffee manufacturing company, and we started exporting our products to Japan this year. We obtained Hazard Analysis Critical Control Points (HACCP) certification four years ago. Is it beneficial for us to obtain JFS-C certification as well? (Answered by Mr. Uchibori) Only in terms of exporting products to Japan—it is not necessary for you to obtain JFS-C certification to ensure compliance with the HACCP because the JFS-C Standards are plus-alpha standards to the HACCP standards. That said, it would not hurt if you obtained JFS-C certification on a voluntary basis.
(Question) Is it correct for me to understand that the companies that participated in the GFSI certification program can trade in countries, such as Thailand, Malaysia, and Indonesia? (Answered by Mr. Kishi) In the case of Aeon, the Group-wide policy is to adopt international standards. It is safe to assume that one of the necessary conditions to trade with us has been satisfied, but of course, we have to take other necessary conditions of trade, such as prices, into consideration.
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Foodseminar Report
[Questionnaire Results] Question 1. Type of industry where a participant works and a participant’s job description (Select all that apply)
1. Food Manufacturing Industry 4% 2. Wholesale Industry
27% 3. Foodservice Industry
4. Retail Industry 45% 5. Food Machinery/Food 12% Materials Industries 6. Civil Service 6% 4% 2% 7. Other
n=45
1. Food 2. 3. 5. Food 4. Retail 6. Civil Manufacturing Wholesale Foodservice Machinery/Food 7. Other Industry Service Industry Industry Industry Materials Industries 14 6 1 3 2 23 2
10% 1. Top Management 30% 2. Managers
30% 3. non-management employees 4. Other
30% n=45
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Foodseminar Report
3. non- 1. Top Management 2. Managers management 4. Other employees 9993
Question 2. Challenges in trading with Japanese-affiliated companies (Select all that apply) In terms of the challenges in trading with Japanese-affiliated companies, the largest number of participants named the lack of opportunities to come into contact with n=45 Japanese-affiliated companies (49%) followed by language barriers (18%).
1. Lack of opportunities to come into contact with Japanese-affiliated companies
2. Language barriers
11%
5% 3. Terms and conditions of trade proposed by Japanese-affiliated 7% companies are too stringent and 49% demanding 4. Existing products do not meet the 10% needs of Japanese-affiliated companies
5. The Vietnamese government’s 18% failure to provide appropriate support
6. Shortage of capable personnel
n=45
3. Terms and 1. Lack of conditions of 5. The opportunities to trade proposed 4. Existing products Vietnamese 6. come into 2. by Japanese- do not meet the government’s Shortage contact with Language affiliated needs of Japanese- failure to provide of capable Japanese- barriers companies are affiliated companies appropriate personnel affiliated too stringent support companies and demanding 28 10 6 4 3 6
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Foodseminar Report
Question 3. Evaluation of the Seminar (Did you find the seminar useful for future business operations?) In their evaluation of this seminar, almost all participants responded affirmatively with 56% responding very useful and 42% responding useful.
2% 0%
1. Very Useful 42% 2. Useful 3. Not Very Useful 56% 4. Not Useful at All
n=45
1. Very Useful 2. Useful 3. Not Very Useful 4. Not Useful at All 25 19 1 0
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（様式２）
二次利用未承諾リスト
報告書の題名:Business strengthening of the Asia Industrial infrastructure in 2018 (【Vietnam】Productivity Improvement Support Survey) Survey Report
委託事業名:Business strengthening of the Asia Industrial infrastructure in 2018 (【Vietnam】Productivity Improvement Support Survey)
受注事業者名:Mitsubishi UFJ Research and Consulting Co., Ltd.
頁 図表番号 タイトル
The following data etc. are all in the Attachment 1. (1) Vietnam Productivity Report (Part 2 and Part 3)
Ⅱ-20 Figure 2-2 Training Process Management Ⅱ-20 Figure 2-3 Employment Support System Ⅱ-36 Figure 2-6 Integrated SME Support under Kishin-ho and Denshin-ho Ⅲ-5 Figure 1 History of the Economic Growth Rate in the late 20th Century in Taiwan Ⅲ-6 Table 1 Notable accomplishments of the CPC Ⅲ-7 BOX 1 Current main supporting programs of the CPC Key Factors that Contributed to the Success of Singapore’s Productivity Ⅲ-13 BOX 2 Improvement Efforts