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|Vietnam is expected to soon adopt a plan to support businesses in the development and application of advanced technologies|
Since supply chain disruption and rising unemployment came to the fore in 2020, Vietnam has been urged by international organisations to invest more in innovation as well as research and development (R&D), which will help the nation woo more high-quality investment and further climb regional and global value chains.
The Executive Board of the International Monetary Fund (IMF) two weeks ago concluded its consultation with Vietnam on the country’s macroeconomic policies, stating that the economy has grown at a rapid pace over the last decade, but productivity growth has played a limited role in this expansion.
Increasing productivity requires more innovation, including through greater digitalisation of production processes, investments in human capital and worker skills, removal of barriers to firm growth, and also a reduction of resource misallocation, the board said.
Meanwhile, according to the World Bank, despite rapid and sustained economic growth in recent years, total factor productivity (TFP) in Vietnam has lagged. Prior to the pandemic, Vietnam’s GDP grew by an average of 6.5 per cent each year.
However, this expansion was driven primarily by low-cost and labour-intensive manufacturing, with TFP growth playing a small role in the country’s economic success. Average firm-level TFP grew by less than 2 per cent between 2014 and 2018, below the levels seen in selected Asian countries.
Last September the World Bank released a report on Vietnamese sci-tech and innovation, which stated that the digital gap persists when it comes to automation in manufacturing. A miniscule number of firms in Vietnam use technologies associated with Industry 4.0 such as robotics or 3D printing.
“Given that only 29 per cent of firms use machines controlled by computers and only 8.7 per cent use this technology intensively, it is a matter of concern,” said the report. “The results show a significant distance to the technological frontier and dampens down the prospects of leapfrogging. Businesses in Vietnam need to continue accumulating innovation capabilities, first by upgrading processes to the use of digital technologies and then to more sophisticated Industry 4.0 ones. The dividends of doing so can be very large.”
Moreover, the level of investment in digital technology infrastructure in Vietnam remains low as indicated by the digital enabling index. The index measures the average investment compared to a situation of full use of digital infrastructure – from cloud services to computers – and ranges between zero and 100, where the highest value indicates complete access to each digital enabler.
“The enabling index for Vietnam suggests that on average firms are operating at 38 on the full digital infrastructure index. While on average, internet infrastructure is at a score of 75, the access/use to digital platforms is only 27 in terms of potential and 4 for cloud services,” stated the survey.
The government recently reported to the National Assembly (NA) that Vietnam’s labour productivity (LP) for 2016-2020 increased 5.79 per cent, higher than 4.27 per cent in the 2011-2015 period. The TFP created 45.42 per cent of economic growth, far higher than the initial target of 30-35 per cent.
However, according to the IMF Executive Board, improving TFP growth would require more innovation. Expenditure on R&D as a share of GDP and patent applications per person are broadly in line with Vietnam’s level of development. However, small business participation in the digital economy, and digital skills acquisition among the general population remains low compared to peers.
Only 40 per cent of businesses report adequate ICT skills to use and maintain their digital systems. R&D is mostly conducted by government institutions, which suffer from low quality and relevance. Low human capital and skill mismatches in the labour market remain a concern.
Despite greater integration with global value chains, the board cited data from the Firm-level Adoption of Technology survey of Vietnamese firms as showing that most firms are at a significant distance from the technological frontier, reflecting weak technology diffusion. The extent of process innovation is considerably weaker in small firms, compared to medium or large companies and in domestic firms.
The United Nations Development Programme (UNDP) said Vietnam must better prepare for, and adapt to, the impact of Industry 4.0 on drivers of growth and job creation.
“Accelerating Industry 4.0 offers both opportunities and risks in terms of future employment creation, as Vietnam embarks on new growth pathways. It is anticipated that automation and AI will displace jobs in several sectors that have been driving Vietnam’s growth,” said a UNDP report on the subject in Vietnam.
The International Labour Organization has previously suggested that 70 per cent of jobs in Vietnam were at risk of automation. Sectors with a very high proportion of jobs at risk of automation include agriculture, forestry and fisheries (83.3 per cent at risk); manufacturing (74.4 per cent); food and beverages (68 per cent); garments (85 per cent); electronics (75 per cent); wholesale, retail, and repair of motor vehicles (84.1 per cent); the service sector (about 32 per cent); and retail (70 per cent).
Meanwhile, currently in Vietnam, about 1.6 million new people enter the local labour market annually. This employment burden is expected to grow further when Industry 4.0 is rising, with robots and high technologies believed to replace many labourers, especially manual ones. The need for Vietnam to increase its LP has become increasingly imperative.
In the first half of 2022, Vietnam saw about 83,600 enterprises withdrawing from the market. If each enterprise employs about 20 people, the total number of unemployed people will be over 1.67 million, according to the General Statistics Office.
Under Vietnam’s 2021-2025 Economic Restructuring Plan, the first solution to create a new growth model based on higher productivity, with higher economic growth, is to increase LP.
“The LP must increase over 6.5 per cent a year in 2021-2025, in which the LP of the manufacturing and processing sector [which creates 80 per cent of industrial growth] must annually climb 6-7 per cent – up from 5 per cent during 2016-2019,” stated a plan report. “The ratio of TFP in GDP must be 45 per cent, while the gap in national competitiveness with the ASEAN-4 countries (Indonesia, Malaysia, Thailand, and the Philippines) must be filled, especially in terms of institution, infrastructure, and human resources.”
The NA has also set a target of an average annual rise of 6-7 per cent in LP in the 2021-2025 period, up from an average of 5 per cent in the 2016-2020 period. To this end, it will revise the Law on Employment in a manner suitable to the digital era, with a plan to reduce informal employment to below 50 per cent by 2025 from 56 per cent in 2021.
The government is expected to soon adopt a scheme for supporting industrial businesses in applying Industry 4.0 technologies via digital transformation for smart production development this decade. Under the draft scheme, about 36 per cent of Vietnam’s businesses will implement digital transformation effectively in 2025 and the rate will increase to 85 per cent by 2030.
Kieu Nguyen Viet Ha, a senior expert from the Ministry of Industry and Trade’s Department of Science and Technology who directly drafted the scheme, told VIR that digital transformation will help enterprises further join global supply chains, cooperate with foreign partners, and improve their competitiveness.
“Enterprises will also have new values in developing new business models, products, and services, while also increasing their ability to satisfy customers and improving their corporate governance,” Ha said.