Index results spark reforms in Vietnamese metropolises

John Rockhold - Vice chairman, American Chamber of Commerce Hanoi

Vietnam was successful in its dual efforts to contain the pandemic and maintain economic growth, emerging as one of the few countries in the world to record a reasonably high rate of positive economic growth in 2020.

The Provincial Competitiveness Index’ (PCI) infrastructure index ranks the quality of infrastructure and connectivity in each province. This index is not included in the calculation of the PCI scores. However, it serves as a useful reference for businesses as well as policymakers.

The PCI research team has determined it is unfair to include infrastructure in the overall ranking for three reasons: initial endowments were dramatically different across provinces, making it very difficult for some rural provinces to catch up; provinces are not solely responsible for infrastructure within their borders, as many investments are funded through central government initiatives; and the team strongly believes the improvement of infrastructure is best achieved through regional cooperation and does not want to encourage duplicative and damaging competition in construction, particularly for large projects such as ports and airports.

Infrastructure in Vietnam has generally improved since 2014. However, in 2020, the median score of the infrastructure index dropped slightly to 67.41 points from the all-time high of 68.45 points, achieved in 2019.

The findings show the correlation between the quality of governance and infrastructure in 2020. There remains a close correlation across all provinces. Consistent with previous surveys, the PCI 2020 finds that provinces performing well in governance indicators tend to have higher quality infrastructure. Provinces that outperform the median province in terms of infrastructure but do not perform as well in governance appear to be caught in a structural advantage trap.

They have not vigorously pursued good governance because they were confident that investment would come regardless of their efforts. Finally, provinces that perform better than the median province in terms of their governance but face the obstacle of limited infrastructure have to “conquer hardships” through dedicated reforms to overcome their limited endowments.

The 2020 report also dedicates another special chapter to explore factors that drive businesses to invest in green technologies and discover what motivates them to become more eco-friendly. The Vietnamese government has declared environmental protection as a key element in its foreign investment attraction and economic development policies.

In emerging markets like Vietnam, where much of the world’s future demand for energy and infrastructure will be located, there is a clear recognition of the central role that businesses can play in promoting green growth and climate action. However, there is less clarity about how to motivate private players to invest in green technologies and environmentally friendly operations.

In Chapter 4 of the 2020 PCI report, we use a survey experiment embedded in two nationally representative surveys in Vietnam to test which type of stakeholder pressure (governmental or societal) has the strongest impact on whether and how much domestic and foreign business leaders are willing to invest in green operations.

Our main findings include: Foreign investors are more susceptible to intensive regulatory pressure; and around 74 per cent of foreign businesses that received the regulatory treatment expressed a willingness to expend greater resources on environmental upgrading, compared to 67 per cent of businesses that received the social pressure treatment.

By contrast, we find no difference for domestic investors; 68 per cent expressed a willingness to invest in new environmental equipment and processes, regardless of treatment. We also do not find evidence for change with respect to the intensive margin (the increase in the share of operating costs that foreign and domestic businesses were willing to incur to increase the environmental cleanliness of their operations).

The most effective policy varies by actor. Digging deeper, we disaggregated our analysis by whether businesses’ primary customers are citizens and businesses in Vietnam or customers outside the country, who are reached through export. Fascinatingly, the effects on the extensive margin (the business’ willingness to pay for environmental upgrading) are most pronounced for foreign investors seeking to access the domestic market, and domestic businesses pursuing exports.

However, the type of stakeholder pressure that matters most varies between the two groups. Domestic-oriented foreign businesses, particularly because of their visibility and size, are more likely to respond to the regulatory pressure treatment.

By contrast, export-oriented domestic players, as they are concerned about selling to consumers with Western values, are more likely to be influenced by the social pressure treatment. Businesses’ assessment of climate risk does not influence the effect of regulatory or social pressure on their decisions to upgrade. Businesses’ subjective and objective vulnerability to climate risk does not influence the effects of regulatory or social pressure. The higher the climate risk to a company’s particular business, the more likely they are to upgrade, but this effect is not enhanced by additional social or governmental pressure.

As businesses’ role in climate action becomes increasingly important, the question is whether more government regulation is needed to bring about change in businesses’ behaviour or whether there is room for self-regulation, when they respond most strongly to pressures from non-government actors, including non-governmental organisations and citizens’ demands.

The bottom line is that there is no one-size-fits-all approach to encouraging environmental upgrading. Enhanced regulation of domestic businesses will not pay the same dividends as it does for foreign ones and comes with more costs to inspect the numerous, diffuse, and small domestic companies. At the same time, ambitious domestic businesses hoping to reach international markets will find that social pressure is an extremely effective force in motivating green behavioural change.