July 15, 2020 15:48

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Enterprises under pressure to join global value chain

09:30 | 06/04/2019

VCN -The integration ability of the domestic private sector into the global economy is not high. This is a big ‘disadvantage’ for businesses because Vietnam has more and more opportunities for integration and international cooperation.

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The domestic private sector's ability to integrate into the global economy is not high. Photo: ST

Chain participation rate still low

According to the World Bank, global value chains generate about 50-60% of Vietnam's total added value. Currently, Vietnam's commercial scale is more than 200% of GDP; however, much of this economic activity depends on foreign direct investment (FDI). According to the General Statistics Office, in 2018, the FDI sector accounted for about 80% of export production and 72% of the total national export turnover, playing an increasingly important role in the economy. Meanwhile, according to the Vietnam Chamber of Commerce and Industry (VCCI), very few domestic private enterprises participate in global value chains, or only in the scope of suppliers of goods and services to enterprises. FDI is operating in Vietnam or in the form of exports to third parties which participate in the global value chain. Currently, just 21% of Vietnam's small and medium enterprises are part of global value chains, much lower than the 46% in other ASEAN member countries.

As well as the low quantity, the quality of participation in value chains is also being competed by FDI enterprises. The results of the Provincial Competitiveness Index (PCI) survey 2018, coordinated by VCCI, show that the activities of FDI enterprises continue to be smaller, both in terms of equity and labour size. The PCI report 2018 said the number of businesses participating in the survey employing 1,000 or more workers decreased from 6.4% (in 2017) to 4% (in 2018). The narrowing of the labour scale of FDI enterprises is accompanied by a corresponding decrease in capital scale. Compared to 2017, 2018 witnessed an increase in the proportion of enterprises located in small-scale groups; only 3.9% of respondents said that their owners' equity was over VND500 billion, while last year this rate was 5.9%.

Not only that, research by Prof. Dr. Edmund Malesky, Duke University, USA, said that FDI enterprises in Vietnam often operate under the "China + 1" strategy (that is, foreign enterprises investing in China will expand and set up branches or production facilities in other Asian countries such as Thailand, Vietnam, Indonesia or Myanmar). Therefore, some experts have warned, many small FDI enterprises enter Vietnam only to be satellites – suppliers for larger FDI projects. Such FDI enterprises may overwhelm domestic suppliers, hindering the domestic private sector from integrating into the global value chain and benefiting from the spread of technology and governance. The fact that the issue was raised made the Ministry of Planning and Investment to take into account that it would stipulate the minimum investment capital for FDI projects as a measure to solve the problem.

Dispute risk

Talking about obstacles faced by Vietnamese enterprises when participating in the global value chain, Mr. Dau Anh Tuan, Head of the Legal Department at VCCI, said the reason is not only the level of labour, quality of management and financial resources; but also due to the limited dispute settlement system. Because enterprises are only familiar with traditional methods, dealing with contracts based on familiarity and informal arbitration, it will be very difficult to work with foreign enterprises; so foreign partners are always concerned about legal risks.

According to Mr. Mac Quoc Anh, Vice President and General Secretary of the Association of Small and Medium Enterprises in Hanoi, in the context of current global economic integration, the importance of contracts is increasing. Opportunities with businesses and foreign investors have grown, but each transaction has potential risks for the parties. Vietnam International Arbitration Center (VIAC) said that in the last 25 years, about 23.3% of disputes have been resolved through VIAC with parties being FDI enterprises and 36.6% of disputes with foreign-related elements. Among the disputes with FDI enterprises, 32% were in the field of goods trading, 25% in the construction sector, 20% in the field of leasing and 16% in the service sector. Disputes in many cases are due to late delivery or damaged goods, improper payment or unsatisfactory service quality.

However, many businesses said that ensuring contract enforcement is expensive and uncertain in Vietnam. According to the Annual Report on Doing Business by the World Bank, settling a dispute over contract performance in Ho Chi Minh City takes about 400 days, costing businesses about 29% of the contract value. Due to these concerns, businesses tend to look for other ways to resolve disputes.

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However, commitments to settle disputes through participation in international trade agreements will not be enough to overcome the limited capacity of the global private sector to participate in global value chains. Therefore, it is necessary that Vietnam has to establish a comprehensive policy, which considers the dispute settlement mechanism a pillar in the chain of solutions including improving the quality of infrastructure and resources of workforce, reforming the legal system and the quality of domestic governance.

By Huong Diu/Bui Diep