THE COMPETITIVENESS OF VIETNAM’S THREE LARGEST CITIES

A Survey of firms in Hanoi, Haiphong, and Ho Chi Minh City

Vu Minh Khuong Jonathan Haughton December 2003

ACKNOWLEDGEMENTS

The study could not have been completed without the assistance of a wide variety of individuals and institutions. Vu Minh Khuong is most grateful for the financial support provided by the Mekong Project Development Facility. We deeply appreciate the enthusiasm and cooperation of hundreds of business people in Hanoi, Haiphong, and Ho Chi Minh City, who spent a great deal of their precious time discussing and filling out the lengthy questionnaire used for this survey. In particularly, we very much acknowledge the contributions of Mr. Dang Ngoc Hoa of the DASO Company in Ho Chi Minh City, Mr. Nguyen Gia Hao of the ICCI Company in Hanoi, and Ms. Nguyen Thi Ngan and her colleagues at the Union of Non-State Businesses in Haiphong, who provided us with both valuable insights into the business dynamics in their cities as well as important support for our survey in the three cities. Our special thanks go to the people at the Vietnam Chamber of Commerce and Industry, the Young Business People Association, and Associations of Non-State Businesses and Statistical Bureaus in the three cities for their remarkable contributions to the successful organization of the survey. We are most grateful to Professors Michael Porter, Robert Barro, Dwight Perkins, and Richard Zeckhauser for their encouragement and guidance on this project; to Tim Campbell of the World Bank, Thomas Davenport of the International Finance Corporation, Michael Fairbanks of the Country Competitiveness group at the Monitor Company, and David Dapice and Thomas Vallely of Harvard’s Kennedy School of Government for their valuable advice and suggestions on the approach and framework of the study. We are indebted to Mario Fischel, John McKenzie, and Trang Nguyen at the Mekong Project Development Facility for the great support they have provided to all the work leading to this report. We would also like to thank Philip Marten, Joseph Tragert, Dao Duc Luyen, Randall Kempner, Duong Thanh Trung and Warigia Bowman for useful comments and support that helped us in completing the report. In particular, the intensive communication and in-depth comments from Trang Nguyen were very helpful in shaping the final form of the report, as were the detailed and most useful comments from Nick Freeman and Nguyen Van Lan. However, we are fully responsible for the views expressed in this report.

TABLE OF CONTENTS EXECUTIVE SUMMARY ..........................................................................................................................................i Chapter 1. INTRODUCTION ..................................................................................................................................1 Purpose of the Study ..........................................................................................................................................1 Sketches of Hanoi, Haiphong and Ho Chi Minh City........................................................................................3 Chapter 2: METHODOLOGICAL BACKGROUND..............................................................................................5 Measuring Competitiveness...............................................................................................................................5 Competitiveness Matters....................................................................................................................................7 Why Competitiveness Is Relevant Within Vietnam ..........................................................................................8 Chapter 3: THE SURVEY OF BUSINESS LEADERS ..........................................................................................9 Sampling Procedures and Response Rate ..........................................................................................................9 Profile of Surveyed Firms................................................................................................................................10 Possible Sources of Bias ..................................................................................................................................13 Chapter 4: MEASURING COMPETITIVENESS OF THE THREE CITIES ...................................................14 Government .....................................................................................................................................................14 Institutions .......................................................................................................................................................16 Infrastructure....................................................................................................................................................17 Human Resources ............................................................................................................................................19 Technology ......................................................................................................................................................19 Finance.............................................................................................................................................................23 Openness..........................................................................................................................................................24 Supporting Industries.......................................................................................................................................27 Domestic Competition .....................................................................................................................................28 Competitiveness Overall..................................................................................................................................30 Chapter 5: BUSINESS ATTITUDES .....................................................................................................................31 Attitudes toward Business................................................................................................................................31 Attitudes toward Economic Development .......................................................................................................32 The Most Pressing Problems ...........................................................................................................................32 Medium-Term Priorities ..................................................................................................................................33 Chapter 6: FROM COMPETITIVENESS TO OUTCOMES ...............................................................................35 A Composite Measure of Economic Success...................................................................................................39 Chapter 7: CONCLUSIONS AND FUTURE STUDY ..........................................................................................41 Broad Policy Recommendations......................................................................................................................41 City-Specific Recommendations .....................................................................................................................45 REFERENCES ..........................................................................................................................................................52 ANNEX 1. Maps of Hanoi, Haiphong and Ho Chi Minh City...............................................................................54 ANNEX 2. The Growth Dynamics of the Manufacturing Sector in the Three Cities (1995-2000)....................57 ANNEX 3. Performance of the Major Industrial Parks in the Three Cities .......................................................58 ANNEX 4. Summary of Survey Results..................................................................................................................59 I. BACKGROUND SECTION ........................................................................................................................59 II. BUSINESS ENVIRONMENT....................................................................................................................64 II. FIRMS’ STRATEGY AND OPERATION.................................................................................................67 1. MARKET POSITIONING ..........................................................................................................................67 2. MOST PRESSING PROBLEMS FACING FIRMS....................................................................................67 3. ACTIONS OF TOP PRIORITY ..................................................................................................................68 4. COMPUTERS AND INTERNET USAGE .................................................................................................68 III. ATTITUDES TOWARD BUSINESS AND ECONOMIC DEVELOPMENT .........................................70 IV. PRIORITIES FOR GOVERNMENTS IN THE NEXT 3 YEARS............................................................71 ANNEX 5. Construction of the Competitiveness Index.........................................................................................72 ANNEX 6. Listing of Comparative Advantages and Disadvantages for the Three Cities..................................73 ANNEX 7. Survey Questionnaire and Accompanying Letter (English Translation) .........................................76

EXECUTIVE SUMMARY

Purpose of the Study Vietnam has had one of the ten fastest-growing economies in the world over the past decade, with average annual growth in per capita Gross Domestic Product (GDP) of 5.9% during 19922002. However, the economic growth has been geographically uneven, with particularly rapid growth in and around Ho Chi Minh City, and slow growth in some urban and many rural areas. In this study we focus on Vietnam’s three largest cities – Ho Chi Minh City, Hanoi, and Haiphong – and ask why growth rates have differed so much among them. Brief introductions to the cities are given in Box 1.1. The ultimate purpose of the study is to determine what policies and underlying conditions are conducive to rapid economic growth. There are two main reasons for undertaking a study of this nature. First, it should provide pointers for those parts of Vietnam that hope to emulate the economic success of the larger cities, by helping better to identify those policies that enhance economic development, as well as those that hinder it. Second, despite its recent strong economic performance, Vietnam cannot afford to be complacent, and needs to pay continued attention to being competitive. The clearest evidence that Vietnam could develop even faster comes from a comparison with China; both countries have followed a similar path from a planned to a (largely) market economy, but economic growth in China has typically exceed the Vietnamese rate by about two percentage points annually, and inflows of foreign direct investment are twice as high (per capita) for China as for Vietnam. Our approach is to focus on competitiveness. Following the work of Michael Porter, we identify the key components of competitiveness in Ho Chi Minh City, Hanoi and Haiphong. This in turn enables us to identify strengths and weaknesses, and to draw out the policy implications. Competitiveness Matters There is clear evidence that countries and areas that are more competitive are able to achieve and maintain a higher level of affluence. But what is meant by competitiveness? We define a state, province or city as being competitive if it has in place the policies and conditions that ensure and sustain a high level of per capita income and continued growth. To achieve this, a state, province or city “needs to be able both to attract and incubate new businesses, and to provide an environment that is conducive to the growth of existing firms” (Haughton and Slobodyanyuk 2002). In the spirit of the Porter-inspired Global Competitiveness Report, we actually classify our indicators of competitiveness into nine groups. The nine groups are summarized in Table S-1, with brief descriptions of their contents.

i

Table S-1 Nine Components of Competitiveness Group Government and Fiscal Policy Institutions Infrastructure Human Resources Technology Finance Openness Supporting Industries Domestic Competition

Key measures Tax rates; government efficiency and transparency. Regulatory burden, functioning legal system, low crime. Quality and cost of roads, electricity and telecommunications. Cost and quality of labor. Spending on research and development; number of scientists, engineers Ease with which good entrepreneurial ideas can be financed. Extent to which an area is open to trade with the outside world. Availability of local supplies; industrial clustering. Vigor of local competition.

Note: Classification loosely based on those used by Porter (2003) and Haughton and Murg (2001).

The measures of competitiveness in this report are largely based on a survey of business leaders in Hanoi, Haiphong and Ho Chi Minh City that was conducted in summer 2002. We obtained 544 valid responses out of 1,400 questionnaires sent out, representing a respectable overall response rate of 39%. The response rates were 28% for Hanoi, 64% for Haiphong, and 38% for Ho Chi Minh City.1 The survey was confined to registered firms with five or more employees located in the three cities. Manufacturing firms were over-sampled, so as to ensure that they consisted of at least half of all firms interviewed in each city. This was done in the belief that such firms are particularly important at this point in Vietnam’s economic development, and would be well placed to provide insights into the business dynamics in each city. Almost a third (31%) of the firms surveyed were state-owned enterprises; the rest were owned privately (42%) or by foreign firms (16%) or had mixed ownership (11%). The details are provided in Table S-2. Results: Measuring Competitiveness We now summarize the results of the survey, organizing the ideas into the nine groups shown in Table S-1 above. Government. In each of the three cities, respondents felt that the most urgent priority was to “effectively fight corruption”, with particularly clear support for this proposition coming from business people in Haiphong and Ho Chi Minh City. There is considerable agreement among business leaders in Hanoi and Ho Chi Minh City about what else government should be doing to promote business development. In both cities, respondents would like to see a more streamlined regulatory system, an improved educational system, better transportation infrastructure, cheaper communications, and stronger incentives for business investment.

1

There were 128 responses to 450 questionnaires for Hanoi, 128 responses to 200 questionnaires for Haiphong, and 288 responses to the 750 questionnaires distributed in Ho Chi Minh City.

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Table S-2 Profile of firms surveyed # of firms % of firms Ownership Private State-owned Foreign-invested Joint ventures All Line of business End-Consumer Mnf. Products Intermediate Mnf. Products Trade, Business Service/ Banking All Firm was established Before 1954 1955-1975 1976-1989 1990-2000 After 2000

Hanoi 128 23.5 % 37.7 44.3 12.3 10.7 100 % 43.8 7.8 48.4 100 % 3.9 19.5 7.8 52.4 16.4 100

Haiphong 128 23.5 % 50.8 31.3 12.5 5.5 100 % 43.8 20.3 35.9 100 % 0.8 17.2 10.2 20.8 21.0 100

Ho Chi Minh City 288 52.9 % 41.3 26 18.8 13.9 100 % 52.8 10.4 36.8 100 % 1.7 2.4 21.5 53.8 20.5 100

Total 544 100.0 % 42.3 31.1 15.6 11.0 100 % 48.5 12.1 39.3 100 % 2.0 9.9 15.6 52.7 19.7 100

Source: Appendix 4.

Institutions. The most positive news is that business people in all three cities agree that the procedures for starting up a new business are simple. This represents an improvement, because this issue was widely perceived to be a serious problem until a few years ago. Opinion is divided as to whether local government treats all types of firms (private, state-owned, foreign-invested) equally, and there was no consensus on whether the regulatory system is “clear and effective.” There is serious concern about intellectual property rights, as evidenced in the problem of counterfeit products, which is seen as especially severe in Hanoi and Ho Chi Minh City. Infrastructure. Overall, the quality of infrastructure is considered to be neither particularly good nor bad. Land rent in the cities is viewed as being high, especially in Hanoi and Ho Chi Minh City, and the procedure for acquiring land is not simple. While the telephone system is considered to be good in Hanoi and Ho Chi Minh City, it received mixed reviews in Haiphong. Human Resources. Respondents agreed that the supply of unskilled labor is ample. They also expressed a relatively high degree of satisfaction, in all three cities, with the quality of basic education, from kindergarten through to the end of high school. However, some managers complained about a shortage of skilled personnel, suggesting weaknesses at the university level. Although the working environment in Hanoi and Ho Chi Minh City is “attractive to talented people,” this is definitely not seen to be the case for Haiphong. Technology. Some, but not all, firms are embracing technology quickly. Most business leaders use computers, e-mail and the Internet, although firms in Haiphong clearly lag behind those in the two bigger cities. Firms in Ho Chi Minh City have an easier time recruiting and retaining engineers, and appear to have the best information about technology and market demand. In all

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three cities there is substantial collaboration with foreign suppliers and customers, a key element in the process of technology transfer. However, links with universities and research institutes are not particularly strong, and strengthening them is not seen as a high priority in any of the cities. Between 1995 and 2000, the share of manufacturing in “low technology” industries fell sharply in Hanoi (from 49% to 41%) and more modestly in Ho Chi Minh City (from 67% to 62%), but actually rose in Haiphong (from 55% to 57%). Finance. In the two larger cities, banks are seen as responsive (although slightly less so in Ho Chi Minh City than Hanoi, perhaps because customers are more demanding there); loans are not too difficult to obtain; and the cost of borrowing is perceived to be “reasonable”. The difference in views on these between the private and SOE sectors is not significant in Ho Chi Minh City and only somewhat significant in Hanoi. The situation in Haiphong, however, is very different. The distinction between the private and SOE sectors is striking: respondents from the private firms report unresponsive banks, high borrowing costs, and problems in getting financing for projects while respondents from the SOE sector report experiences similar to their counterparts in Hanoi and Ho Chi Minh City (Annex 4, questions 8, 9,10). Openness. The simplest measure of openness is the ratio of exports to GDP, which is 123% for Ho Chi Minh City, 65% for Hanoi, and only 41% for Haiphong. Haiphong is twice as dependent on import substituting industries as either Hanoi or Ho Chi Minh City. As trade barriers continue to come down, the protected manufacturing sector will have to struggle to remain competitive. Supporting Industries. The survey results show that in Hanoi and Ho Chi Minh City, suppliers are competitive on price, but less so on quality (Figure 5.10). In all three cities, suppliers get high marks for being responsive to companies’ needs, and for communicating well with them; this is particularly true of foreign suppliers. This suggests that conditions are suitable for the development of industrial “clusters,” along the lines suggested by Michael Porter. Domestic Competition. Business leaders believe that they operate in a competitive environment. There is broad agreement that competition is “intense,” that one learns a lot from one’s competitors, and that customers provide “sophisticated” feedback on products and services. It is generally accepted that competition is “fair.” This is an important factor that is conducive to enhancing the competitiveness of the three cities in the future.

Competitiveness Overall To construct a summary measure of competitiveness we 1. Re-scale each indicator variable so that it varies from 0 (least competitive) to 10 (most competitive). 2. Assign each of the indicator variables to one of the nine sub-indexes.

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3.

Compute the mean of these indicator variables within each group, in order to construct the nine sub-indexes (for “institutions”, “infrastructure,” etc.). 4. Compute the mean of the nine sub-indexes, to get the overall index. The results provided in Table S-2 show that Ho Chi Minh City is the most competitive of the three cities, with an index of 5.7; Hanoi is not far behind, with an index of 5.6; and the laggard is Haiphong, with an index of 4.9. However, if this study covered the whole country, Haiphong’s position would certainly look better. Table S-3 Overall indexes of competitiveness Sub-index Government and Fiscal Policy Institutions Infrastructure Human resources Technology Finance Openness Suppliers and Supporting Industries Domestic Competition Overall

HCMC* 5.01 4.79 4.99 5.40 6.70 5.04 7.17 5.73 6.78 5.92

Hanoi 5.51 4.52 5.25 5.51 6.69 5.41 5.33 5.54 6.62 5.44

Haiphong 3.69 4.20 4.69 5.03 6.07 3.82 4.86 5.29 6.22 4.74

Note: The indexes range from 0 (least competitive) to 10 (most competitive). Numbers in bold face show highest values for each sub-index. * Ho Chi Minh City.

Of the nine indicators, Ho Chi Minh City has the highest score in five indicators, and Hanoi in the other four indicators. Haiphong lags in every dimension, but is especially far behind in indicators for finance, openness, and human resources. Attitudes Towards Business. Firms in all three cities have a strong appreciation of the need for business vision and strategy, and the importance of innovation. Among business people in Haiphong there is a very strong aversion to risk. Attitudes toward economic development. Business leaders in Hanoi and Ho Chi Minh City strongly believe that Vietnam needs to integrate with the world economy; their colleagues in Haiphong are more divided, with a majority there expressing support for tariff protection. In other matters there is broader support for an important role for government, with most respondents seeing access to government as vital to the success of a business, and believing that “major” state-owned corporations will play a “leading role” in the country’s industrialization. The Most Pressing Problems. Top of the list is a strong concern about the “unhealthiness of the business environment,” which refers to corruption, counterfeit products, and uncertainty in regulatory changes. In addition, in descending order of importance, firms appear to: have difficulty finding skilled labor, face high production costs, and have difficulty raising capital and acquiring land. It is interesting to note that the problems of over-staffing and low product quality, which used to be serious in the early 1990s, are now seen as less severe for firms in all three cities.

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From Competitiveness to Outcomes If the concept of competitiveness is to be useful, it should be a good predictor of economic success. There are at least four common ways to measure economic success: higher wages and labor productivity, higher profitability, higher economic growth, and higher job creation. We have chosen to create a composite measure of these variables, the Economic Success Index, whose components are: (i) The average wage in 2000. A higher average wage indicates a better living standard, which is the ultimate goal of growth. (ii) The profitability of the private sector in 2000, and the “efficiency ratio” (each weighted equally). The private sector enjoys few subsidies or special favors from the government, and so the performance of this sector may be taken to be a good indicator of the sustainability of growth.2 (iii) The growth rate of GDP, 1995-2000. This takes into account the growth of all sectors, and so is preferred to a measure of industrial growth only. (iv) Job growth over 1995-2000: The more jobs are created, the better the growth process. These indicators are indexed against the national overall rates (by dividing each indicator for a city by the corresponding indicator for Vietnam). A scorecard of the four indices for the three cities is provided in Table S-3 and Figure S-1. Table S-4. Scorecard of Economic Success for the Three Cities Index (vs. the national overall) 1. Average Wage, 2000 2. Private Sector Profitability, 2000 3. GDP growth, 1995-2000 4. Job growth, 1995-2000* Economic Success Index (ESI) * Industrial workforce

HANOI 1.00 0.95 1.53 0.97 1.09

HAIPHONG 0.76 0.48 1.23 1.10 0.84

HCMC 1.35 1.23 1.41 1.53 1.38

National average Profitability: 1.0%. 7.0% p.a. 18% over 5 years 1.00

The overall Economic Success Index is computed as the geometric mean of the component indexes. By this measure, Ho Chi Minh City scores highest, followed by Hanoi and Haiphong; by construction, the index takes on a value of one for the nation as a whole. This is the order that would be predicted using the competitiveness index.

Figure S-1. The Cities Positioned by their Economic Success Indexes

Worse

Haiphong (0.84)

Vietnam (1.00) Hanoi (1.09)

HCMC (1.38)

Better

2

Private firms receive essentially no subsidies. However, they are eligible for a number of fiscal incentives (lower corporation tax rates if located in remote areas; tax holidays for startups; export credit). Nonetheless, it is widely believed that the playing field is not yet level, when comparing private with state-owned enterprises. See Economist Intelligence Unit (January 2003).

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Broad Policy Recommendations We have six broad recommendations, stated below with accompanying comments, as well as a number of recommendations that are specific to each of the three cities. Recommendation 1: Given the importance of competitiveness in increasing economic growth and development, the government should measure the competitiveness of each province and city on a regular basis. The results should be widely disseminated, in part to spur provincial and city governments to improve their “microeconomic” policies and procedures. Pressuring all provinces and cities to enhance the fundamentals of their competitiveness is also a very effective way to enhance the quality of local business environment. A practical step would be to publish an annual (or biennial) report ranking the competitiveness of the country’s 64 provinces and cities, with an in-depth analysis of the strengths and weaknesses of each province/city. The success of provinces such as Binh Duong, which is likely to stand out on the top of a competitiveness ranking report, will send a powerful message about what the local government in other provinces/cities should do to advance their growth and prosperity. The identification of areas of weakness is needed in order to help provinces and cities channel their energies into the most appropriate directions. Recommendation 2: There is a need to improve the professionalism of and provide training to government officials in the mid- and upper levels of the administration. The single clearest message from the survey is that business people are concerned about the corruption and lack of competence of government officials. The same message appears in international comparisons: on the key dimensions of governance indicators -- Regulatory Quality, Government Effectiveness, and Control of Corruption -- Vietnam ranks much lower than other countries in East Asia, except Indonesia (Figure 7.1) and improved very little in comparison to China over 1997-2001 (Figure 7.2). A practical step forward would be to modernize the curricula of the government and party schools at both central and provincial levels. China and Singapore have successfully designed curricula that effectively enhance the competence and commitment of government officials and staff, who go through mid-career training programs in these schools. The main focus of their training is on economic development strategy, policy analysis, and teamwork. Recommendation 3: Firm managers need training in business strategy, modern management skills, and information for making their strategic decisions. The government should proactively work with international donors and local economics and business schools to provide a series of intensive management training workshops in cities and provinces throughout the country. Management training is one of the most effective measures to boost the competitiveness of Vietnam for two reasons:

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1) 2)

Vietnamese managers have a good appreciation of business strategy (Annex 4, questions 84, 87, 90) and are very keen to improve their management capability (Annex 4, question 68); There exists a huge gap between the potential and actual capabilities of Vietnamese managers, especially in the small and medium enterprise (SME) sector. For example, the hardship that private firms in Haiphong face in dealing with banks is partly due to their inability to develop sound business plans from good business ideas.

Many organizations and donors, such as the Mekong Project Development Facility, the German GTZ, and the US Agency for International Development, are likely to be willing to assist Vietnam in this effort. But a proactive role by the government will be crucial to make this assistance most effectively meet the needs of firm managers, especially in the SME sector. Recommendation 4: The government at both central and local levels should continue to improve the country’s infrastructure, including transport, power, and telecommunications. In responding to the survey, business leaders expressed only guarded satisfaction with the quality of the country’s infrastructure. The need for continued improvements must not be forgotten. Recommendation 5: More attention needs to be paid to improving the quality of schooling and vocational education. Despite the recent rapid expansion of the educational sector, many respondents complained about shortages of skilled labor, and worried about the quality of schooling. The shortage of skilled labor may be solved by a more effective partnership between the business sector and government in identifying the vocational skills most needed, and the most efficient ways to develop those skills. Spending a large amount of money on building vocational schools without the close cooperation of the business sector is unlikely to be very effective. A preferable approach would be to use “extension” courses, tailored to the needs of specific businesses, and provided by universities and technical institutes. Recommendation 6: A more pro-competitive mindset towards business and economic development is needed, both on the part of government officials and even on the part of some businesses. As discussed above, business people in the three cities strongly appreciate strategic thinking, managerial talent, and innovation. However, their efforts to build global competitiveness are still seriously hindered by some old attitudes, such as an over-reliance on government patronage and protection, and a reluctance to take risks in making business decisions. The problem is especially acute in Haiphong, where many managers are reluctant to grow their firms because they are concerned that then they will become targets (of officials, tax collectors, public envy) and hence vulnerable. Government officials would better understand business ways of thinking if there were more frequent contacts between business leaders and government officials. Typically the two groups meet when they are in “trouble-shooting mode,” or when businesspeople appear to be asking for

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favors. This is not conducive to the development of a healthy appreciation of the ways of business and the important role played by competitive markets. City-Specific Recommendations Hanoi. As the nation’s capital, Hanoi is likely to remain only moderately competitive as a manufacturing center, due to the high cost of land and the ample other opportunities (in government and services) for skilled labor. However, it has great potential to become a center of knowledge-intensive products and services. Hanoi enjoys a very large pool of highly educated workers provided by a wealth of universities and research institutes located in the city. In addition, the more knowledge-intensive industries already account for a significant share of Hanoi’s manufacturing output and they grew faster during 1995-2000 than in the country at large. The city has relatively good infrastructure and human resources, along with a strong presence of the banking sectors. The performance of the city government appears to be improving. Yet much remains to be done. The cost of living, particularly housing, is high; government officials, though seen by some as improving, are still considered to lack professionalism; local government is seen as unresponsive to the needs of the business sector; counterfeiting is widespread; and land acquisition is complex. This diagnosis suggests the following recommendations: Recommendations for Hanoi: (i) Encourage the further development of high quality and flexible higher education in Hanoi, as the base for knowledge-intensive activities such as research and administration, and encourage collaboration between firms and universities/research institutes. (ii) Review and if necessary simplify the procedures for land acquisition and transfer. (iii) Improve the system of roads and public transport, so that residents can live more cheaply on land farther from the center and still commute to work. (iv) Curb counterfeit products. (v) Fight corruption. (vi) Coordinate better with neighboring provinces/cities, so as to enhance regional competitiveness and the quality of growth in the region. As Hanoi grows, the city will necessarily encroach on the neighboring provinces, and cooperation will be needed on the planning of infrastructure such as roads, rail, and waste treatment. Haiphong. The city has enjoyed strong growth in industrial output over the past decade. However, this growth has been heavily reliant on import-substituting industries such as cement and steel (as documented below). The most serious problems are: • difficulties in attracting and retaining highly educated workers. • a protected industrial sector, which in turn prompts business people to continue to ask for government help; the protected sector is vulnerable to tariff reductions, and the mentality of seeking government help corrodes the kind of business ethic that the city needs.

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• •

local government is seen as only weakly responsive to business, short on skills, and resistant to change. private firms face real difficulties in gaining access to bank loans.

Recommendations for Haiphong: (i) Substantially upgrade the motivation and qualifications of government officials, especially in those positions dealing directly with the business sector. (ii) Form an effective partnership between the local government and the private sector by improving the local business environment with a special focus on promoting the image and role of the private sector (iii) Work with the banks to analyze and deal with the root causes of the problem facing the private sector in obtaining bank loans; (iv) Fight corruption; and (v) Improve the power and telecommunications infrastructures. Ho Chi Minh City. Compared to Hanoi and Haiphong, Ho Chi Minh over the past decade has enjoyed more rapid and balanced growth, with vibrancy in all three sectors: state-owned, private, and foreign-invested. However, when compared with China’s leading provinces and cities, the growth of Ho Chi Minh City during 1990-2000 looks significantly less vigorous. Problems include a shortage of skilled labor; a regulatory system that is neither clear nor effective; extensive counterfeiting; and continued concerns about the competence and honesty of local government. The growth of manufacturing output in Ho Chi Minh City was actually lower than the national average during the 1995-2000 period (it grew by a factor of 2.0 versus 2.2 respectively). This indicates the critical need for the city to shift towards a center providing higher value-added products and services. Recommendations for Ho Chi Minh City. (i) Encourage the growth of the knowledge-intensive and higher value-added industries, such as information technology, agro-technology, banking, education, and tourism; (ii) Fight corruption; (iii) Increase investments in human capital development, with a special focus on upgrading the quality of K-12 education and (in consultation with business) vocational training; (iv) Encourage firms to develop a geographically broader growth strategy, which is more focused on exploiting nation-wide resources and global opportunities, rather than staying confined to the provincial markets in which they operate. Directions for Future Study This study represents a useful initial step, but considerable further work is needed to ensure that the study of competitiveness in Vietnam pays off in the form of concrete actions. Future studies are needed in two areas – expanding the analysis to other cities and provinces in Vietnam, and examining in more detail some of the issues that have been raised in the current report. It would be valuable to have an annual Provincial Competitiveness Report that would assess the competitiveness of each of the country’s cities and provinces, and identify areas that need

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improvement. The typical province in Vietnam has more than a million residents, which is a large enough unit for competitiveness to matter, and is larger than several of the states in the United States studied by Haughton and Slobodyanyuk (2001). Many entrepreneurs who are able to create a small enterprise find they have difficulty growing their businesses, because once a firm reaches a certain size the managerial and strategic skills required are not the same as those typically required for a small business. Our survey suggests that emerging firms need to devote more attention to formulating business strategies. In this context it would be helpful to develop a 30-page management tool kit, available both on-line and promoted in a series of workshops throughout the country, particularly in secondary cities and provincial towns. Subsequent modules could include further details on the construction and use of financial ratios; the conduct of customer surveys; the sources of business information; and the development of business plans. Experience from India has shown that a contest for the development of business plans can be helpful, and this might work in Vietnam too. No country is entirely free from corruption, but many of the managers that we surveyed indicated that they see this as a problem, and international surveys and top government officials concur. In combating corruption, transparency is important. It would be useful to study in some detail the ways in which greater transparency might help combat corrupt practices in Vietnam; the results could be discussed at government-business forums in order to refine any proposals. One specific problem raised in this report is that private firms appear to have difficulty obtaining credit in Haiphong. This needs to be investigated – perhaps by studying a score of loan proposals from small and medium enterprises that failed to obtain credit – in order to identify the sources of the problem and suggest solutions.

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Chapter 1. INTRODUCTION Purpose of the Study Vietnam has had one of the ten fastest-growing economies in the world over the past decade, with average annual growth in per capita Gross Domestic Product (GDP) of 5.9% during 19922002.3 However, the economic growth has been geographically uneven, with particularly rapid growth in and around Ho Chi Minh City (HCMC), and slow growth in some urban and many rural areas. In this study we focus on the three largest cities – Ho Chi Minh City, Hanoi, and Haiphong – and ask why growth rates have differed among them; brief introductions to the cities are presented in Box 1.1. The purpose of the study is to determine what policies and underlying conditions are conducive to rapid economic growth in Vietnam. There are two main reasons for undertaking a study of this nature. First, it should provide pointers for those parts of Vietnam that hope to emulate the economic success of the larger cities, by helping better to identify those policies that enhance economic development, as well as those that hinder it. This is important, because there is evidence that the slight rise in expenditure inequality that has occurred over the past decade was largely due to a growing rural-urban gap [Haughton et al. 2001; Economist Intelligence Unit, December 2003]. Lagging areas will only be able to close this gap if they adopt best practices, and this is more easily done when there are useful lessons from the growth process in the top-tier cities. Second, despite its recent strong economic performance, Vietnam cannot afford to be complacent, and needs to pay continued attention to being competitive.4 The clearest evidence that Vietnam could develop even faster comes from a comparison with China; both countries have followed a similar path from a planned to a (largely) market economy, but economic growth in China has typically exceed the Vietnamese rate by about two percentage points annually, and inflows of foreign direct investment are twice as high (per capita) for China as for Vietnam.5 This view is widely held; in the words of United Nations Development Program resident representative in Hanoi, Jordan Ryan, "Vietnam should not be lulled by its success, … [it] can and must do much better as it faces intense global competition."6 Our approach is to focus on competitiveness. Following the work of Michael Porter (1990) and Jonathan Haughton and Vadym Slobodyanyuk (2002), we identify the key components of competitiveness in Ho Chi Minh City, Hanoi and Haiphong.7 This in turn enables us to identify 3

World Development Indicators CDROM, The World Bank, 2003. For a recent argument along these lines, see David Dapice, Vietnam’s Economy: Success Story or Weird Dualism? A SWOT Analysis, Vietnam Program, Kennedy School of Government, Harvard University, May 2003. 5 Between 1992 and 2002, GDP per capita rose at an annual rate of 5.9% in Vietnam and 8.3% in China, according to World Bank figures (from World Development Indicators CDROM, 2003). Foreign direct investment inflows to China averaged $34 p.a. in 1997-99 and $35 p.a. in 2000-02. The equivalent figures for Vietnam were $23 and $17 respectively, according to the IMF, International Financial Statistics, various issues. 6 As reported by Agence France Presse, August 13, 2003. 7 The seminal work is Michael Porter, The Competitive Advantage of Nations, Free Press, New York, 1990. For an application to urban competitiveness, see Jonathan Haughton and Corina Murg, Metro Area and State 4

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strengths and weaknesses, many of which may be influenced by the actions and decisions of local authorities, even in a country as administratively centralized as Vietnam. We are thus able to draw out a number of useful policy implications. To measure competitiveness, we rely heavily on the responses of 544 business managers to a survey that was undertaken in summer 2002, supplemented where possible by more ‘objective’ data such as wage and profit rates, and GDP and job growth rates. The questionnaire used in the survey is modeled on one developed by Michael Porter, adapted to the conditions of Vietnam. The overall response rate to the survey was a respectable 39%; further technical details are given in Chapter 3 and Annex 4. Box 1 A Primer on the Three Large Cities Hanoi, Haiphong, and Ho Chi Minh City are the three largest cities in Vietnam. They have “first-tier city” status,8 which means that they not only have provincial status, but also enjoy certain special privileges and priority from the central government in budget allocation and infrastructure investments. Hanoi is the capital of Vietnam. With an official population of 2.7 million (including about 1.1 million living in rural areas) and GDP per capita of US$821 in 2000, Hanoi accounts for 7.1% of GDP, 7.6% of industrial output, and 16.3% of cumulative foreign direct investment (FDI) commitments. The combined annual growth rate of GDP9 during 1995-2000 was 10.7%, substantially higher than the national rate of 7.1%. Hanoi is positioned by the central government to be the major pole of a strategic growth triangle that stretches to Haiphong and Quang Ninh. Haiphong is the major gateway to the sea for the provinces of northern Vietnam. Haiphong port is handling a rapidly increasing throughput, which exceeded 5 million tons in 2000. The population of Haiphong is 1.7 million (including about 1.1 million living in rural areas). With a GDP per capita of US$426 in 2000, Haiphong accounts for 2.3% of national GDP, 4% of industrial output, and 5% of FDI commitments. The combined annual growth rate of GDP Haiphong was 8.6% for the period of 1995-2000, or one fifth higher than the national growth rate. Ho Chi Minh City is the economic center of southern Vietnam, with an official population of 5.2 million (including 0.9 million living in rural areas). Ho Chi Minh City enjoys the highest GDP per capita (except Vung Tau) in the country, at US$1,030 in 2000. The city accounted for 17% of GDP, 25.5% of industrial output, and 25.4% of cumulative FDI commitments in 2000. During 1995-2000 the annual growth rate of GDP of Ho Chi Minh City was 9.9%, or two fifths above the national growth rate. Competitiveness Report 2002, Beacon Hill Institute, Boston, 2002. A fuller description of Porter’s work is given below. 8 There are only four cities in Vietnam that have provincial status. The fourth city, Danang, was granted this status in 1996. 9 However, the GDP growth rates for provinces/cities should be used with caution because they are not perfectly compatible with the national rate, although all these data are prepared under the auspices of the Central Statistical Bureau and published in the country’s statistical year books.

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The methodological approach is set out in the next section, followed by an explanation of the survey in section 3. We then provide further background on the three cities (section 4) and describe the measurement of competitiveness (section 5), before turning to business attitudes (section 6). We link competitiveness to outcomes, such as economic growth, in section 7, before drawing some conclusions in section 8. Sketches of Hanoi, Haiphong and Ho Chi Minh City Hanoi and Haiphong are the two main industrial centers of northern Vietnam. During 35 years of the centrally planned economic system (1955-1990), the two cities were developed mostly through investments made by the central and local governments, based on the domestic projected by a series of five-year plans. This favored heavy industry in the model of the countries in the socialist block, especially China and the Soviet Union. For most of this period, especially during 1960-1975, the private sector was not legally existent (Mekong Project Development Facility, 1999). The entrepreneurship of the two cities, therefore, atrophied for about three decades, until its rebirth in the late 1980s, when economic reform (“doi moi,” or “renovation”) was initiated in the country. Ho Chi Minh City came under the socialist economic planning system in 1975 when the country was unified. Private firms of medium to large size were nationalized during the 1975-1978 period. While the private sector still existed legally, it was very weak. In 1979, under the critical pressure of a severe contraction of foreign aid from the Soviet Union and Eastern Europe, coupled with a complete cut in aid from China, the country leadership came to a decision to “unfetter the production and business activities” and allowed private businesses to re-emerge (MPDF, 1999). Taking advantage of this watershed change, Ho Chi Minh City has pioneered the effort, dubbed as ‘fence-breaking’, to promote the business activities of all sectors. As a result, the city has become a driving force in the country’s shift towards economic reform launched nationally in the late 1980s. Therefore, the industries of Ho Chi Minh City, which were marketoriented prior to 1975, were less distorted during the years of the planned economy than those in Hanoi and Haiphong. In 1989, the state-owned sector accounted for a dominant share of industrial production in all three cities. This share was over 80% in Hanoi and Haiphong, and about 70% in Ho Chi Minh City -- all higher than the national level of 66%. The true private sector, including household businesses and private firms, accounted for a small share in the three cities (4.4% in Hanoi, 8.4% in Haiphong, and 16.8% in Ho Chi Minh City), again lower than the national level of 21.8%, as Figure 1.1 shows.10

10

Source: Industrial Data 1989-1993, Statistical Publishing House, 1994.

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Figure 1.1. Share of Industrial Production by Sector 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

State-owned Cooperatives Private

Hanoi

Haiphong

Ho Chi Minh City

Vietnam

In 1989, Hanoi, Haiphong, and Ho Chi Minh together accounted for about 38% of national gross industrial production. By 2000, the three cities represented 26.4% of GDP, 37.1% of gross industrial production,11 46.7% of accumulated foreign direct investment (FDI) commitments, and 56.4% of exports for the whole country. In addition, the GDP growth rate of the three cities exceeded that of the country overall. During the period 1995-2000, the GDP growth rates of the three cities were higher than the national average – 53% above the national average in Hanoi, 23% higher in Haiphong, and 41% higher in Ho Chi Minh City. The three cities, as such, have had a substantial impact on the dynamics and pattern of nationwide growth over the last decade, as the indicators in Table 1.1 show clearly. Table 1.1 Selected key indicators for Hanoi, Haiphong, and Ho Chi Minh, 2000 Indicator

Vietnam

Hanoi Number HN/VN 921 0.3% 2.7 3.5% 2,112 6.7% 1,008 7.4%

Haiphong Number HP/VN 1,508 0.5% 1.7 2.2% 719 2.3% 253 1.9%

Ho Chi Minh Number HCM/VN 2,095 0.6% 5.2 6.7% 5,476 17.3% 3,922 28.9%

329,600 Land area (km2) 77.6 Population (million) 31,724 GDP (million, US$)* 13,583 Industrial production, 1989** (billion VND, current price) 15,168 7.6% 7,995 4.0% 50,533 Industrial production 198,326 (billion VND, 1994 price) 3,506 196 5.6% 108 3.1% 677 Industrial Labor Force (‘000) * The GDP data at current price (2000) are converted into $US at the rate 14,000 VND=1USD. ** Industrial Data 1989-1993, Statistical Publishing House, 1994 Note: HN is Hanoi, HP is Haiphong, HCM is Ho Chi Minh City, and VN is Vietnam.. Source: Vietnam General Statistics Office, 2001.

25.5% 19.3%

11

The share of the gross national industrial production of the three cities would be even higher if oil production were excluded.

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Chapter 2: METHODOLOGICAL BACKGROUND There is clear evidence that countries and sub-national units (states, metropolitan areas) that are more competitive are able to achieve and maintain a higher level of affluence (e.g. Haughton and Murg 2002; Porter 2003). To the extent that sub-national units have some decision-making authority – and we argue that in Vietnam they have considerable and growing powers – then the study of competitiveness can provide useful pointers to the policies and procedures that provincial and city governments should put in place in order to encourage economic development. Measuring Competitiveness What is meant by competitiveness? We define a state, province or city as being competitive if it has in place the policies and conditions that ensure and sustain a high level of per capita income and its continued growth (Haughton and Slobodyanyuk 2001). To achieve this, a state, province or city “needs to be able to attract and incubate new businesses, and to provide an environment that is conducive to the growth of existing firms” (ibid, p.5). It is useful to think of competitiveness as a ‘catch-all’ term that covers what Michael Porter calls “the microeconomic foundations of prosperity” (Porter 2000). The three main cities in Vietnam face the same macroeconomic environment, but they differ in their microeconomic in terms of legacy, resources, and local policies. And these factors matter. In Porter’s words, “wealth is actually created at the microeconomic level … in the ability of firms to create valuable goods and services using productive methods” [(2000, p.40). Thus the outcome of competitiveness should be greater affluence. For the concept of competitiveness to be useful, it needs to be ‘operationalized’, so that it can be measured. The World Economic Forum has done this in its annual Global Competitiveness Report, and the Beacon Hill Institute has followed the same route in three recent reports on competitiveness at the sub-national level of the United States. However, there has been as yet no attempt to measure competitiveness at the sub-national level in Vietnam. In measuring competitiveness, it is helpful to begin with the basic economic relation: Y = f(K, L, technology) This says that income (or output) depends on the amount of inputs of capital (K), labor including human capital (L), and technology. More inputs lead to more outputs. But what influences raise input levels? And why do some cities mix the ingredients more successfully than others? The most systematic recent approach to answering these questions is given by the ‘diamond’ model developed by Michael Porter (1998). Porter finds it useful to group the influences into four inter-related components (see Figure 2.1): i. Factor conditions, which cover the availability, quality and cost of inputs, including human resources, capital goods, natural resources, and infrastructure (physical, administrative, and informational). ii. Demand conditions, and particularly the sophistication of local demand.

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iii.

Related and supporting industries, which focuses on the capability of locally based suppliers. The context for firm strategy and rivalry, which covers the rules, incentives and pressures governing local rivalry, including the role played by government. Porter believes that keener competition spurs innovation and the growth of productivity.

iv.

Figure 2.1. Determinants of Regional Competitiveness • •

A local context that encourages investment and sustained upgrading Vigorous competition among locally based rivals

GOVERNMENT

Context for Firm Strategy and Rivalry

Factor (Input) Conditions

Demand Conditions

•

•

Factor (input) quality, cost, quantity, and specialization: - Natural resources - Human resources - Capital resources - Physical infrastructure - Administrative Infrastructure - Information infrastructure - Scientific and Technological infrastructure

• Context Related forand Firm Strategy Supporting and Industries Rivalry • •

Availability of capable, locally based suppliers and supporting industries Presence of clusters of firms instead of isolated industries

•

Sophisticated and demanding local customers Customer needs that anticipate those elsewhere Unusual local demand in specialized segments that can be served globally

CHANCE

Source: Porter 1998: 211.

These are still very broad categories, and so, in the spirit of the Porter-inspired Global Competitiveness Report, we actually classify our indicators into nine groups. The first two groups refer to government and related institutional factors; the next four groups refer to input conditions and supporting industries; the seventh group covers openness; and is followed by groups that refer to the nature of suppliers, and the extent of domestic competition.

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The nine groups into which we classify the determinants of competitiveness are summarized in Table 2.1, with brief comments on why they are expected to be important to enhancing growth in an area. Table 2.1 Nine components of Competitiveness Government and Fiscal Policy Institutions Infrastructure

Human Resources Technology Finance

Openness

Supporting Industries

Domestic Competition

Businesses are more likely to flourish in an area with moderate tax rates, and with efficient, transparent government. An area will be more attractive to business if the legal system is sympathetic to business concerns, if the regulatory burden is light, and if crime is low. The quality and cost of the infrastructure – roads, electricity, water, and telecommunications – are important components of competitiveness because they affect the cost of doing business. Businesses can compete successfully if they can hire good quality workers at moderate wages. The development and application of technology is at the very heart of economic development, and has been so since the industrial revolution. Businesses need to be able to mobilize financing for investment, both internally and from the financial system, both in order to grow and in order to spread risk. When cities and provinces are open to trade, their businesses are more likely to be competitive, because they are subject to the discipline of the world market. This makes them more productive, and less prone to lobby for continued protection from imports. A region will be more competitive if capable locally based suppliers and supporting industries are available. This creates clusters of firms, which potentially reinforce each other. Firms become more competitive if their customers are sophisticated and demanding, because it forces firms to improve the quality and price of their output.

Note: Classification loosely based on those used by Porter (2003) and the Beacon Hill Institute (2001, 2002).

Competitiveness Matters For competitiveness to be useful as a guide to policy, it needs to be measured in a coherent and consistent fashion, and the measure needs to be associated with economic growth and development. It turns out that the measures of competitiveness that have been constructed are relatively successful at “explaining” economic success. Using an approach similar to the one outlined here, the Beacon Hill Institute constructed indices of competitiveness for the 50 states of the United States (Haughton and Slobodyanyuk 2001), and for the 50 largest metropolitan areas in the country (Haughton and Murg 2002). In both cases the authors found that a higher index of competitiveness was clearly related to the level of real personal income per capita (a good measure of affluence), and to its growth rate. Also using a 9-factor model to create a “microeconomic competitiveness index,” Porter (2003) found that countries with better scores on this index were more affluent. Using data on 80 countries in 2001, he found that “the measured microeconomic differences among nations prove to account for 81 percent of the variation across countries in the level of GDP per capita” (Porter 2003: 24). In short, it makes sense to measure competitiveness, because it is a useful guide to the economic potential and performance of countries, states and cities. Before discussing the

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competitiveness of Hanoi, Haiphong and Ho Chi Minh City, we first will describe how the survey data were collected, and provide some additional information on the three cities. Why Competitiveness Is Relevant Within Vietnam The study of competitiveness is of purely academic interest unless the units that one is examining, whether provinces, cities, or countries, have significant decision-making power. Only then can these units make the policy and administrative changes – the “microfoundations” – that would improve competitiveness. Vietnamese provinces have less autonomy than, for instance, a typical state or even city in the United States. All key personnel are appointed, or at least approved, by the central authorities; major financial decisions must be approved centrally; and there is little local autonomy in determining school curricula or staffing levels. In this regard, Vietnamese provinces are closer in concept to the French départements (on which they were modeled) than to an American state. However, Vietnamese provinces have considerable authority in some key areas. For instance, in some cases they can grant investment permits. They can facilitate land clearance. They can help smooth the way for investors. They have a role in planning and building roads and other infrastructure, can appropriate and sell land, and can often issue project bonds for infrastructure. These decisions are made at the provincial (including city) level by the People’s Council and mayor, and in the parallel structure of the Communist Party. There is considerable overlap in personnel between the two structures, which helps ensure that information flows easily and that decisions are made in a consistent fashion. The importance of provincial/city government in supporting economic growth and development has only recently become clear. David Dapice (2003), in an interesting commentary on the state of the Vietnamese economy, argues that “the importance of shrewd provincial economic policies may not yet be fully appreciated” (p.12). While not every province can attract much foreign investment, he argues that investment by government and by private businesses is larger, and more widely spread, and increasing private investment should be the main target of provincial efforts. In his words, “while a survival strategy is to rely on state funding, a success strategy is to try to attract more domestic investors in general, and perhaps foreign investors in particular cases” (p.14). Recognizing the importance of sub-national government to economic growth, the United Nations Development Program has called for strengthened local governance in Vietnam.12 They are also more similar to municipalities in the Philippines, where in 2002 the Asian Institute of Management and the Department of Trade and Industry ranked 33 cities and towns by their levels of competitiveness.

12

As reported by Agence France Press, August 13, 2003.

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Chapter 3: THE SURVEY OF BUSINESS LEADERS There are two approaches to measuring competitiveness. One is to base the measure on “objective” data, using variables such as the tax burden, the number of Internet connections per capita, average educational level per capita, and so on. This is the approach taken by Haughton and Murg (2002) for the metropolitan areas of the United States; provided the data are available, this approach is inexpensive, and the results highly defensible. However, it is sometimes necessary to collect information directly from business leaders, especially if one is trying to measure attitudes. The excellent annual Global Competitiveness Report combines survey data with objective measures in constructing its measures of competitiveness. The main problem with specially designed surveys is that they are expensive to administer. In the case of Vietnam, the amount of objective information on competitiveness at the provincial and city level is relatively limited. Thus is was necessary to undertake a survey of business leaders in order to obtain the necessary data. In this section we discuss the design of the survey and the sampling procedures followed. Sampling Procedures and Response Rate The measures of competitiveness in this report are largely based on a survey of business leaders in Hanoi, Haiphong and Ho Chi Minh City that was conducted in summer 2002. The survey had two main objectives: (i) to document the microeconomic foundations of growth and competitiveness in Vietnam’s three largest cities: and (ii) to solicit the opinions of business people about strategies for the future, and policy changes that need to be made. The survey was confined to registered firms with five or more employees located in the three cities. Manufacturing firms were over-sampled to ensure that they consisted of at least half of all firms interviewed in each city. This was done in the belief that such firms are particularly important at this point in Vietnam’s economic development, and would be well placed to provide insights into the business dynamics in each city. The information on all registered firms, as of December 31, 2000, for the three cities is given in Table 1.1, and represents the universe from which the firms were sampled. Table 3.1 Registered Firms in Hanoi, Haiphong, and Ho Chi Minh City, December 31, 2000 All Registered Firms Of which: Manufacturing Firms City 1-5 More than 5 1-5 More than 5 Total employees employees Total employees employees 4,643 Hanoi 1,090 Haiphong 8,583 Ho Chi Minh 14,316 TOTAL Source: GSO, 2002

477 197 1,910 2,584

4,166 893 6,673 11,732

Competitiveness of Hanoi, Haiphong and Ho Chi Minh City

1,044 337 2,043 3,424

21 5 21 47

1,023 332 2,022 3,377

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In cooperation with the Vietnam Chamber of Commerce and Industry (VCCI), local units of the General Statistics Office, and local business associations in the three cities, a sample of 1,400 firms, including 450 firms in Hanoi, 200 firms in Haiphong, and 750 firms in Ho Chi Minh, was randomly selected, taking into account the two criteria set out above. A complete list of firms with more than 5 employees was generated, using a database from the VCCI in combination with information from the Department of Industry and Provincial Statistical Offices. Then 20% of the manufacturing firms on the list, and 10% of all non-manufacturing firms, were chosen as randomly as possible in order to construct the sample13. The survey questions were based on those used by Michael Porter in generating data for the Global Competitiveness Report. The questionnaire (translated into English) is reproduced in Annex 7. Over half of the questions in the questionnaire were new or were adapted to Vietnamese conditions, while the remainder were taken directly from Porter’s questionnaire. Most of the questions about business attitudes, corruption, counterfeit goods, and the role of local government are unique to the questionnaire designed for the Vietnam study. The questionnaire was first tested on a small sample of business leaders, which allowed for some additional fine-tuning before it was used in the field. The survey questionnaire was sent to the 1,400 selected firms. 14 . Each firm was invited to participate in one of a series of workshops on “Competitive Strategy of Firms and Regional Competitiveness” organized in each of the three cities, in cooperation with VCCI, local business associations, and executive training programs in the three cities. These workshops significantly enhanced the cooperation of participating firms in the survey process. We obtained 544 valid responses, representing a respectable overall response rate of 39%. The response rates for each of the cities was: 28% (128 out of 450) for Hanoi, 64% (128/200) for Haiphong, and 38% for Ho Chi Minh City (288/750). The notable effectiveness of and special cooperation of the Union of non-state businesses in Haiphong substantially enhanced the response rate of private firms from the city. Profile of Surveyed Firms In this section we provide a brief profile of the firms surveyed, looking at their age, size, line of business, and export orientation. This helps provide some context for the subsequent discussion. Ownership Almost a third of the firms surveyed were state-owned enterprises, with a higher proportion (44%) in Hanoi and a lower proportion in Ho Chi Minh City (26%). Locally owned private firms made up two-fifths of the total surveyed, with foreign-owned and joint-venture firms making up the balance, as Table 3.2 shows.

13

About 70% of the sample are perfectly randomly selected in this process. The remaining 30% of the sample is selected based on the recommendations by the participants in the strategy workshops. 14 See Annex 4 for the survey questionnaire.

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Table 3.2 Profile of firms surveyed, by ownership Hanoi # of firms % of firms in the entire sample Ownership Private State-owned Foreign-owned Joint ventures All

Haiphong

128 23.5 % 37.7 44.3 12.3 10.7 100

128 23.5 % 50.8 31.3 12.5 5.5 100

Ho Chi Minh City 288 52.9 % 41.3 26.0 18.8 13.9 100

Total 544 100.0 % 42.3 31.1 15.6 11.0 100

Period of establishment About half of the firms surveyed in each city were established during the period 1990-2000, as the country was moving rapidly from a planned to a largely market economy15 and experiencing rapid economic growth, as Figure 3.1 shows. Approximately 20% of the surveyed firms in each city were established after 2000, when a new enterprise law came into effect, substantially simplifying the procedures for starting a new business. The remaining 30% of firms were established before 1990, and most of them have some experience of working in a planned economy. The similarity of the distributions of surveyed firms by period of establishment across the three cities partly confirms the randomness of our sample selection. Figure 3.1. Distribution of Surveyed Firms by Year Founded

Share of City Subsample

100% 90%

16%

21%

20%

51%

54%

80% 70% 60%

After 2000

53%

50% 40%

1990-2000 Before 1990

30% 20% 10%

31%

28%

26%

Hanoi

Haiphong

Hochiminh

0%

15

The start of Vietnam’s transition from a planned to a market-driven economy is usually given as December 1986, when the Party Congress approved the policy of doi moi (“renovation”). The major reforms were implemented in the following years, including the institution of use rights for property, price and exchange rate liberalization, creation of a modern banking system, and encouragement of foreign investment.

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Line of Business As a consequence of the deliberate bias towards the manufacturing sector in our sample selection, the shares of manufacturing firms in the sub-samples of all three cities are high (52% for Hanoi, 64% for Haiphong, and 63% for Ho Chi Minh City), as indicated in Figure 3.2. The ratio of surveyed firms producing consumer products to those producing intermediate inputs are similar for Hanoi (44%:8% =5.5) and Ho Chi Minh City (53%:10%=5.3), but much lower for Haiphong (44%:20%=2.2). A possible explanation for this difference is the long-standing bias of Haiphong firms towards the production of intermediate goods. Figure 3.2. Distribution of Surveyed Firms by Line of Business 100% 90% 80%

44%

44%

53%

70% 60%

Services

8%

50%

20%

Intermediate Inputs

10%

40%

End-Consumer Products

30%

48%

20%

36%

37%

Haiphong

Hochiminh

10% 0%

Hanoi

Size of employment The size distributions of surveyed firms are similar in the three sub-samples, as Figure 3.3 shows. Most of the firms interviewed have fewer than 500 employees (82% for Hanoi, 88% for Haiphong, and 85% for Ho Chi Minh City). Figure 3.3. Distribution of Surveyed Firms by Employment 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

13%

18%

22% 26%

15% 25% >500 100-499

37%

28%

35%

50% of revenues Export