Since the beginning of economic reform in 1986, Viet Nam has rapidly integrated with the global economy. The value of all trade to and from Viet Nam is now twice its GDP, and FDI inflow in 2018 equaled 8% of GDP.
Viet Nam is a signatory to 12 free trade agreements that integrate the economy in global value chains (GVCs). However, participation in GVCs has been driven largely by foreign-owned firms. Domestic private firms in Viet Nam are predominantly small and mediumsized enterprises (SMEs).
In 2017, more than half a million domestic SMEs contributed nearly half of GDP, but hardly any participated in GVCs. The uneven quality of products and services offered by domestic SMEs is the main constraint on their integration into GVCs. This is particularly problematic as international markets tighten their technical, quarantine, environmental, and health standards. SMEs have little access to new technologies that would help them overcome these barriers.
A World Bank Enterprise Survey found that SMEs in Viet Nam approached product innovation primarily as a way to reduce costs, not to improve product quality. In addition, few SMEs purchase or license newer technologies developed elsewhere.
Indeed, SMEs in Viet Nam suffer many constraints. Their capacity to purchase and adapt newer technologies is restricted by limited access to finance and a shortage of workers with the necessary skills.
Affordable financing is often out of reach because of banks’ stringent collateral requirements and complicated procedures, and because capital markets are insufficient, despite the existence of multiple mechanisms to provide finance to SMEs: the SME Development Fund, commercial banks, credit guarantee funds, and the Viet Nam Development Bank, among others. Regarding the shortage of skills, a recent survey by ManpowerGroup showed that only 11% of firms in Viet Nam can provide the skills required for GVC participation.
Yet the “low cost, low skills” era of Viet Nam’s development is over, and Viet Nam must become a higher-skilled economy. To address the underlining causes of uneven product quality, policy should encourage and support the adoption of new technology and, eventually, domestic innovation. SMEs need credit for purchasing and leasing capital equipment and new technologies.
Developing the necessary skills requires comprehensive and integrated solutions that bring together governments, schools, and the private sector to provide technical and vocation training that responds to demand. Without better access to finance and skills, SMEs will continue to lag in their integration into GVCs.
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