Chapter 8
Why market-supporting institutions are vital to the IT development

The economy of Vietnam remains overwhelmingly dependent on exports of crude oil, minerals, and primary sector produce. Still, a basic element in the national economic development strategy is industrialization. The government wants a swift transformation of the relatively small industrial sector to a larger and technologically more up-to-date one, while not neglecting the on- going modernization of agriculture and food processing. Vietnamese industry should become competitive in the domestic as well as on foreign markets. Thus, the industrialization could be described as export-driven.

This current strategy for Vietnam's industrial development is a clear departure from two earlier strategies: (1) The 'basic industries approach', inspired by the former Soviet development model, which puts a few key in- dustrial subsectors -- such as the steel industry and the machine-tool industry in the center; and (2) a 'resource-based strategy' for industrialization, which focuses on the optimum exploitation of the domestic resources drawn from mining, agriculture, fishery and forestry. Both strategies concentrate on the supply or the availability of existing resources for industrialization in Vietnam. Even though these two supply-side strategies have lost support among policy-makers, they still have many proponents. Actually, in delibera- tions on the industrial rehabilitation and growth there is often no clear di- viding line between those who still propose the 'basic industries approach' or the 'resource-based strategy' and the others, who promote the export-driven strategy.

The latter, third type of strategy for Vietnamese industrialization looks into the expanding markets for industrial products -- at home and abroad -- while identifying the necessary means for indigenous industrial production capabilities. Following this third approach, there is no ambition to create a coherent industrial structure in Vietnam, but to find dynamic subsectors in industry, where old and new products and processes could be exploited commercially. One such possible sub-sector, already much discussed as part of this third industrialization strategy, is the IT industry.

Among Hanoi's decision-makers there seems to be a clear understanding that to succeed in this particular sub-sector, where new and advanced tech- nology plays a crucial role for competitiveness, the country needs to attract foreign direct investors, who will see Vietnam as a potential market and/or as a production platform for exports to the South East Asian region or to the world market.

The original model of a centrally planned economy, as applied in Vietnam, has been weakened considerably in the course of implementing the economic reforms of the late 1980's and early 1990's. Decentralization of economic decision-making has led to changes in the structure and the owner- ship of industry. Now, the market is seen as the single most important environmental factor for any macro-economic planning and policy-making.

In economic terms -- given any of the three industrialization strategies summarized above -- Vietnam's competitive industries largely derive their advantages from basic factor conditions such as low wages, cheap raw materials, special skills among the work force, etc. On the other hand, the IT industry would symbolize modern Vietnam as an 'investment-driven econo- my'. This means that competitive advantages are achieved through sustained investment in production capacities, in applications and improvements of imported technology, by exploiting economies-of-scale through improved production capabilities and, of course, also through some factor-cost advantages. (1) In the early stage of the 'investment-driven economy', market demands could play a role for selecting investments. In a later phase of the development -- when the local and national markets have developed further -- there will definitely be much more of demand-pull from customers on various markets.

While furthering the third type of strategy for Vietnamese industrializa- tion -- the export-led, market-oriented strategy -- the regional and interna- tional markets will play increasingly important roles for the diffusion of new products, processes and related services. This might have far-reaching impli- cations for the structure of industry and for the organization and management of industrial firms. The changes may involve conflicts and redundancies. But like in other economic transformation processes, institutional changes will be needed to create a hospitable environment for the industrial enterprises. (2)

Regulation and institutional reforms do not have to be a consequence of economic growth. More often institutional reforms and regulations may come first. We have seen clear indications of this while visiting a number of companies in Vietnam's IT industry. The economic history of the highly- industrialized countries also provides plenty examples of government practices and programs that have paved the way for new industries and revitalized old ones.

Like any other market economy, Vietnam's new economy needs rules and regulations, i.e. institutional support to an environment that fosters entrepreneurial and innovative businesses. Markets do not exist and operate aside from the rules or apart from institutions that establish them and help them grow. In retrospect, countries like Japan, South Korea, Malaysia and Singapore each have created rather different institutional and regulatory arrangements for their national economies. There are, consequently, a variety of ways in organizing markets for, e.g., electronics and other information technology products and services. And, there is no single best way for linking government and markets while streamlining the institutional support to economic growth.

Common to all market economies is the fact that a seemingly endless range of institutions matter to the dynamics of the national market and in the ways the national market is part of the world market. Vietnam's financial system, for instance, does not stand alone in channeling investment capital to the IT industry. Foreign direct investments are growing. Government purchases and service arrangements generate import investment funds. Joint ventures provide access to international banks. These market-supporting institutions do not stand alone; they interact among themselves, with the government and with firms and institutions in other parts of the economy.

One illustration of the complexity of government policy and regulation: Without formulating an explicit policy for the IT industry, but while reform- ing its tax system and changing tariffs mainly for fiscal reasons, Vietnam has created a vital assembly industry for electronics products, mainly consumer products such as television sets, radios and tape-recorders. Nearly all tele- vision sets of virtually any brand are assembled in the country; in some cases there is local production. Cf. Chapters 14 and 15.

In Vietnam's new 'investment-driven economy', a market-oriented strategy for industrialization would probably lead to a further decentraliza- tion of decision-making. Yet at the same time, it will require more elaborate public policies at various levels of government.

Diffusing microelectronics and promoting an IT industry in Vietnam, allowing more foreign direct investments in this industrial sector, and letting market forces play a larger role, will be necessary but not sufficient condi- tions.for economic growth. A whole new system of cross-sectoral coordina- tion, technical standards, taxes and other public regulation and rewards will have to be developed. The government will have to combine measure s and policies across ministerial boundaries in order to create an eco nomic environment that promotes industrial investments in IT.

To sum up: No market can survive and prosper without regulat ions, without an institutional support structure. (3) As we have pointed out, a na tional market for IT products and services is a function not only of the comp anies that do business in that market, but of rules and regulations that restric t and stimulate their market behavior. The market-supporting institutions ar e, in turn, influenced by the links to regional and international markets th rough trade and financial transactions; technology and skill transfer; internat ional standards; patents, licenses and other legal arrangements; price and qu ality competition; safety standards; customer-support and after-sales se rvice agreements; etc. The patterns of constraints and incentives may be nation al in character, but they resemble the patterns of other countries. National ma rkets tend to be interdependent.

Foot Notes:
  1. Cf. a briefing document by the Centre for Technology and Social Change, "Structural competitiveness in Australian industry: Towards an action plan", (Wollongong: TASC, 1992).
  2. Cf. Freeman, C: Tcchnical change and unemployment. The links between macro-economic policy and innovation policy, Maastricht: MERIT (University of Limburg), October 1993 (working paper), pp. 33-.
  3. Zysman, J: (1993). How institutions create historically rooted uajector ies of growth, Berkeley: BRIE (University of California), October 1993 (v, orking paper).

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