Comment on “Revisiting Exports and Foreign Direct Investment in Vietnam”
Article first published online: 8 JUN 2011
© 2011 The Author. Asian Economic Policy Review © 2011 Japan Center for Economic Research
Asian Economic Policy Review
Volume 6, Issue 1, pages 132–133, June 2011
How to Cite
TRAN, V. T. (2011), Comment on “Revisiting Exports and Foreign Direct Investment in Vietnam”. Asian Economic Policy Review, 6: 132–133. doi: 10.1111/j.1748-3131.2011.01188.x
- Issue published online: 8 JUN 2011
- Article first published online: 8 JUN 2011
Since the early 1990s, the Vietnamese economy has been characterized as high growth, trade-oriented, and highly dependent on foreign direct investment (FDI). In the context of the East Asian dynamism, characterized by the nexus of trade and FDI, Vietnam appears to join the multilayered catching-up process of economic development in this region. From these perspectives, Thanh and Duong's (2011), which focuses on exports and FDI is highly welcome.
The paper uses various analytical techniques to identify the characteristics and the role of exports and FDI in the economic development of Vietnam. Thanh and Duong reach a number of important conclusions, such as those regarding the changes in export structure, the sources of export expansion, and the impacts of FDI on exports. The analysis of the paper is useful for understanding important aspects of the Vietnamese economy. However, the analytical techniques using aggregated trade and FDI data may not fully discover the real story. A closer look at the picture from other angles would give us other insights.
First, Thanh and Duong attribute the sources of export expansion to the growth of world trade and the competitiveness of Vietnamese products. In my view, however, the growth of world trade is just a necessary condition, and the competitiveness is also not important since, as seen below, it remained static over a long period. Institutional factors were much more important. Before 1990, Vietnam's trade had been undertaken by a small number of state-owned enterprises (SOEs). Along with substantial reforms in the 1990s, private and FDI firms have been allowed to engage in trade activities. By 1998, the number of domestic firms and FDI firms engaging in foreign trade rose to 2250 and 1500, respectively. Institutional changes in the world's largest market also contributed greatly to Vietnam's exports. The most favored nation status given to Vietnam by the USA, according to the USA–Vietnam Commercial Treaty (effective in 2001), has resulted in a jump in the share of the US market in Vietnamese exports from only 5% in 2000 to nearly 20% in 2008.
Most of these export products, however, are unskilled labor-intensive items such as footwear and garments, and natural resources-based such as marine products. Moreover, Vietnam's manufactured exports have heavily depended on the import of parts and other intermediate goods. Therefore, the expansion of exports has been due to institutional changes which revealed the static comparative advantage of Vietnam, rather than improvements in competitiveness. This observation is further strengthened by the next point.
Second, the point made by Thanh and Duong on how well Vietnam's export structure matches the import structure of trading partners is noteworthy. According to their analysis, the degree of complementarity has been large in the case of Japan and the USA, while it was the smallest in the case of China. The authors also pointed out that Vietnam's export products have successfully penetrated into high-income markets such as Japan and the USA. However, it is difficult to share this optimistic view, since, as noted above, Vietnam has supplied only low value-added products to high-income markets, and this pattern has remained unchanged to date. Moreover, if the “small degree of complementarity with China” was well analyzed, we would discover the critical problems faced by Vietnam.
The gravity model would suggest the two-way trade expansion between Vietnam and China due to their geographical closeness and the fact that both countries are highly growing economies. However, the trade imbalance between the two has expanded at an extraordinary rate and Vietnam recorded a large trade deficit amounting to three times the Vietnamese exports to China in 2008. In addition, the structure of exports to China has been characterized by raw materials and other primary products, in contrast to expanding imports of manufactured goods from China.
Third, trade in East Asia has been increasingly characterized as intra-industry and this pattern has been promoted by the expanding trade of parts and products of various types of machinery. But Vietnam so far has been left behind the mainstream of trade in this dynamic region. This point is suggestive when we discuss the major challenges faced by Vietnam in the next decade which will be increasingly highlighted by the rise of China and the tide of free trade. Under these two impacts, there appears a strong possibility that the current comparative advantage of Vietnam will be fixed. Without strong and effective actions, it seems increasingly difficult for Vietnam to upgrade the industrial and export structure for sustained development (Tran, 2010).
Fourth, Thanh and Duong seem optimistic to point out the spillover effects of FDI. My case studies showed that the linkage effects of FDI on local firms have been weak (Tran, 2006, 2010). FDI firms tended to rely on imports or on the products of other FDI firms for their inputs. The reasons can be found in the inefficiency of SOEs and the weaknesses of non-SOEs.
Further reforms of SOEs and factor markets, and the nourishment of private sector are essential for Vietnam to efficiently participate in the dynamic division of labor in the East Asian region.
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