Vietnam's Industrialization Strategy
Industrial Parks and FDI Attraction
Ideally, a nation's business environment should be improved uniformly across all cities and provinces. However, this cannot be done overnight in a latecomer country like Vietnam whose institutions and infrastructure are very weak. Under such circumstances, it is a good idea to set up a small number of limited areas where superior business environment is offered on a priority basis to attract foreign direct investment (FDI). In East Asia, industrial parks were innovated in Taiwan and spread to Korea, China and ASEAN4 countries. But some industrial parks succeed while others fail. What are the secrets for success, and what should Vietnam do to improve the performance of its industrial parks?
Many empty parks
As of end 2002, Vietnam has 71 industrial parks including 67 industrial zones (IZs), 3 export processing zones (EPZs), and 1 high-tech park. Additional 35 industrial parks were approved but not created. Some of the existing industrial parks already serve as an important medium for absorbing domestic and foreign investment. There have been 914 projects approved in industrial parks with the total registered capital of US$8.9 billion and VND 24.4 billion. Among these, almost all projects (93 percent) are engaged in manufacturing while the rest provide infrastructure services inside these parks.
By the end of 2002, industrial parks are home to 36 percent of manufacturing FDI into Vietnam (measured by registered capital and excluding oil, gas, and construction). Industrial parks contributed to 21 percent of the country's manufactured output and 15 percent of its manufactured exports in 2000, respectively. While industrial parks play an important role in accelerating industrialization, Vietnam's economy itself is still small. Thus, FDI absorption through industrial parks remains modest by international standards (also see Critical mass of FDI).
Among Vietnam's existing industrial parks, some boast occupancy exceeding half, including Sai Dong B and Thang Long in the North, and Bien Hoa II, Tan Thuan, Linh Trung, Vietnam-Singapore, Viet Huong and Vinh Loc in the South. All of these successful parks are located in the peripheries of the two largest urban areas: Hanoi and Ho Chi Minh City. On the other hand, there are many industrial parks which are almost empty. (For further information on Vietnam's industrial parks, please click here.)
Distribution of Vietnam Industrial Parks
In any country (including Japan), local governments love to build industrial parks because they think--quite naively--that these parks will bring jobs, income and tax revenue for their locality. However, designating a piece of land as an industrial park does not itself create any value. Unless the park is additionally equipped with important ingredients that attract foreign manufacturing firms, such a park is bound to fail. Government officials with little knowledge of what firms require tend to build too many empty parks all over the country. The myth that industrial parks automatically generate economic benefits must be ended. A large amount of skill and effort is required to make an industrial park attractive.
The most important business rule in a market-oriented economy is customer satisfaction. This applies to any industry, including industrial park management. It is neither government officials nor industrial park developers who decide which firms or industries will come to the park. It is entirely up to the manufacturing firms themselves to make the decision. Therefore, FDI attraction policy must begin with knowing what potential client firms require. After grasping their needs, the desired conditions must be provided professionally. Customer orientation is where Vietnam fails seriously in general, and particularly in the business of industrial park management.
Specialized industrial parks such as "high-tech parks," "software parks," and "parts industry parks" are not very effective at this stage of development in Vietnam. Specialization will become desirable and meaningful only when a much larger industrial agglomeration has been achieved, and when industrial policy and industrial park management have been greatly improved. So far, specialized industrial parks have not attracted much interest with the exception of Quang Trung Software Park and, to a lesser degree, Saigon Software Technology Center.
Industrial parks are a part of economic infrastructure and should be built by the host country itself. In Japan, EU, US and Asian NIEs, domestic developers build and manage them. However, since low-income developing countries lack required know-how, capital and marketing skill, foreign commercial developers also come to create them for profit. If the host country and the foreign developer successfully cooperate to meet the needs of client firms, the industrial park will generate a triple-win situation for the host country, the developer, and investing firms. But it will fail if either side balks.
Ingredients of success
What are the key conditions for a successful industrial park? According to experienced Japanese industrial park developers, they are (i) location; (ii) infrastructure service; and (iii) management capability.
(i) Location: since an industrial park is a type of real estate property, the golden rule for property development also applies. It is location, location, and location. Unless the location is appropriately chosen, an industrial park will not attract many manufacturing firms. More specifically, the following conditions must be met.
(ii) Infrastructure service: manufacturing firms require various inputs including electricity, telephone, internet, water, sewage treatment, transportation, residence, etc. While the relative importance of each input depends on each firm, an industrial park must offer all of them. Stable supply, high and consistent quality, and low cost are essential for all services. Large-scale infrastructure (such as ports, airports, major highways, national power grids, etc.) and local infrastructure in the immediate neighborhood (road access, apartments, water plants, power substations, etc.) are both necessary. In Vietnam, it is perhaps worth emphasizing that the provision of these services is the responsibility of the host country, not foreign developers or investing firms. Provision of these services requires close coordination among various ministries, local governments, and public utility companies. It is also important to link public infrastructure projects (including ODA) with the development plans of industrial parks. The pricing and investment policies of infrastructure services must be designed from the viewpoint of overall national development and not for the profitability of utility companies alone. The standards of these services must be as good as the regional best practice in East Asia, if not better.
(iii) Management capability: Another crucial factor is that the management of an industrial park is efficient and responsive. Investors (especially foreign ones) encounter a large number of problems in setting up and running their factories. The managing company of the park must guide and support them so that their business plan goes smoothly. This includes marketing, information, procedural support, and all kinds of trouble-shooting. Quick and sincere response to the demand of each customer is the key. At one successful industrial park, the general director of the management company will rush to the client firm whenever a problem arises, day or night, and takes personal responsibility for solving it. If dedicated service spirit is lacking, even industrial parks with good location and superb physical infrastructure will fail to attract investors.
Needless to say, in addition to the above three points, attraction of a critical mass of FDI requires an excellent investment climate at the national level. In this regard, unfortunately, there is much to be desired in today's Vietnam. It is essential that central government policies be improved in parallel with the management of individual industrial parks.
Moreover, the existence of a wonderful industrial park does not automatically guarantee ample investment. Foreign firms must be reached, informed and persuaded to come to Vietnam through vigorous marketing efforts abroad, amid severe competition among neighboring countries including China. Host countries often complain that they receive too little FDI, accusing foreign investors of not responding to their incentives. However, if you do not advertise vigorously abroad, no one will know the existence of good business environment.
To promote Vietnam as the preferred FDI destination, it is essential to appeal to the factors that foreign investors care most about. Thorough market research is required on the true desire of foreign investors. The preferences may also vary depending on the source country.
In marketing to attract Japanese investors, Vietnam's strengths are typically described as follows, by industrial park management companies as well as Japanese manufacturing firms themselves:
Among these sales points, it is worth re-emphasizing that Vietnam is very fortunately situated between China and the rest of ASEAN, and can become a close production partner to both. Vietnam should take full advantage of this geography rather than trying to build an isolated industrial cluster by itself. Especially, the proximity to dynamic Southern China is a great asset--an asset which remains to be exploited by enterprise effort and bold policy action.
For Japanese manufacturers considering new FDI in East Asia, the question posed is roughly as follows. The fundamental choice is between China and ASEAN. China is huge, dynamic and very attractive, and it is in fact the most preferred destination for virtually all investors. But since putting all eggs in one basket is dangerous, large Japanese corporations which already have a production base in China want to diversify (The SARS incident in 2003 may have strengthened such a desire although its long-term effect remains to be seen). On the other hand, ASEAN is the traditional destination of Japanese FDI with an extensive network of production capacity organized by Japanese firms. While the ASEAN economy at present appears lethargic compared with China's, Japanese manufacturers will not abandon it; instead, they want to strengthen their ASEAN capability and make additional investment in China simultaneously. Operating from two bases will allow more flexibility in business strategy.
In this way, ASEAN competes with China as a FDI destination. Once ASEAN is chosen, the next question is which country in ASEAN? At present, Indonesia and the Philippines are not attractive due to their political instability (Indonesia also suffers from the deterioration of FDI policy). Malaysia is now too expensive to invest due to high wage and the fixed exchange rate. For these reasons, most investors are interested in the choice between Thailand and Vietnam. Thailand has long received Japanese FDI and its business climate is reasonably good. By contrast, Vietnam's policy and infrastructure are far inferior, but its economy is younger and more dynamic. Therefore, safety-oriented investors go to Thailand while seekers of excitement and risk choose Vietnam. If Vietnam greatly improves its policy climate, it can even firmly establish itself as the most favored FDI destination in ASEAN.
To realize this dream, it is necessary to understand investors' psychology and arouse their interest by professional marketing. Rather than waiting at home, Vietnam should go out and loudly publicize its merits noted above as well as the recent improvements in FDI procedure and cost reduction. The right audience must be targeted with the right message. To do this properly, a new campaign should be launched with a close cooperation with foreign experts in industrial marketing.
JBIC's survey on Japanese manufacturers, 2002
Every year, the Japan Bank for International Cooperation (JBIC) conducts a survey on Japanese multinational corporations. In 2002, the number of surveyed enterprises was 508. The sample includes a wide range of industries from food processing to automobiles, and from small to large firms. Here is what they say about regional expansion plans. The popularity of China is remarkable.
Below is the list of conditions that concern Japanese investors most. The survey asked whether each condition improved between 2000 and 2001. It additionally asked about management-labor relationship, tax system, and procedure for investment approval (not reported here). Again, China scores highest among Asian neighbors, though Vietnam's performance is not bad either. However, in the following year (2002), the Japanese perception of Vietnam significantly worsened after a series of irregularities including the motorbike problem.
Revamping Vietnam's industrial parks
Based on the above discussion, the following course of action is recommended in order to receive a critical mass of manufacturing FDI into Vietnam, particularly through industrial parks.
Vietnam is a very popular country among all foreigners, including Japanese investors. Despite poor FDI environment, they like Vietnamese people, land, culture and food. They are looking for an excuse to stay in Vietnam. To grant their wish and invite even more of them, the Vietnamese government must cooperate with foreign experts to genuinely grasp the meaning of industrial hospitality. The content of industrial hospitality is changing rapidly in the age of globalization. Vietnam needs to work in close partnership with foreigners since it has little international experience in this field.
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