Vietnam textile urged to improve and enhance in global value chain

The foreign direct investment (FDI) firms has greatly contributed to Việtnam’s economic growth, accounting for around 70 percent of national export turnover while domestic enterprises has not yet deeply involved in the global value chain, according to Central Institute for Economic Management (CIEM) former director Le Dang Doanh.

Doanh said that domestic enterprises had been urged to improve capacity and enhance competitiveness right when the contribution of FDI firms in the export value was standing at 50 percent. However, until now, when the rate had risen to 70 percent, local firms still remained passive in global value chains.

According to the General Statistics Office, in 2016, Việtnam’s export turnover reached over US$175 billion, up 8.6 percent year-on-year. Of the estimate, the export value earned by FDI enterprises reached more than $120 billion, up 10.2 percent against the previous year.

The significant presence of FDI companies in exports partly reflected the low level of competitiveness exhibited by domestic businesses, a major part of Vietnamese firms were just joining in the low value outsourcing service industries.

According to Ngo Duc Hoa, chairman of Thang Loi Textile Garment JSC, all of Thắng Lợi’s products serving domestic use are self-designed, produced and distributed. But for the exported goods, the company just provides “cut and sew” services for foreign partners, meaning that the firm creates apparel and accessories out of materials owned by the foreign companies that contract them.

The biggest difficulty textile exporting enterprises is facing is the lack of raw materials for production, leading to the only option of importation. In addition, Vietnam’s textile and garment industry hasn’t thrived yet, thus gaining low attention from customers.

Due to the fact that the firm is only hired to “cut and sew” products for foreign partners, they have to use raw materials supplied by the partners or import the materials themselves. If an exported T-shirt costs $10, the company has to spend $8.5 to import materials and earn only $1.5 for processing services.

It is not an exaggeration to say that textile enterprises pinch pennies for a living, Hoa said.

At the recent Prime Minister’s roundtable conference with global specialist network on Vietnam’s development, Prof. Tran Van Tho from Japan-based Waseda University said that Việtnam was actively and thoroughly integrating in the world’s economy, avoiding the “outsourcing trap” was a significant challenge, drawing high attention of policy makers.

According to Doanh, Vietnam’s economy strongly depending on the FDI sector may become alarming issue as when the economic advantages vanish, the FDI capital flow may be diverted to other countries. This is actually what’s happening with their textile industry as outsourcing service orders are shifting to Cambodia and Bangladesh.

In a bid to improve the situation, the country’s policies need to focus on developing agricultural production, which have already strongly contributed to the national economy, on a larger scale so that the agriculture sector can participate more deeply in the global value chain

The government also needs to concentrate on the development of the supporting industry to enable private enterprises to join in production chains. They must create more motivation for private enterprises to actively produce rather than gaining profit through the investment in property and resources exploitation, Doanh said.

Regarding tax issue, economic expert Bui Trinh said that input VAT levied on FDI enterprises were deducted. Many Vietnamese enterprises whose input VAT should have been deducted still has to pay for it.

The government should begin with concrete actions such as reducing taxes, reconsidering tax policy to guarantee fairness between FDI and domestic enterprises. The government’s policies should be more focused on assisting domestic enterprises.