Technology transfer is missing the boat

Technology transfer from transnational companies in Vietnam is failing to hit the mark.

The Ministry of Planning and Investment (MPI) in association with United Nations Industrial Development Organisation (UNIDO) has just issued a “Vietnam Industrial Investment Report 2011” showing the spillover effect from subsidiaries of transnational companies (TNCs) in Vietnam is lower than stand-alone foreign-invested enterprises (FIEs).

“Stand-alone FIEs are more vertically integrated than TNCs in the host economy and purchase a higher share of their production inputs locally, most likely because they are generally more focused on local market opportunities than TNCs operating in industrial zones and primarily for global exports,” said the report.

Vietnam’s foreign direct investment (FDI) attraction strategy is now shifting to quality from quantity, with the focus on TNCs. So far, some TNCs have built factories in Vietnam like Intel, Samsung or LG. But as most stand-alone FIEs are more engaged in low tech manufacturing than TNCs’ subsidiaries are, this means technology transfer from TNCs to domestic companies does not reach the expectation.

“When we are trying to attract investment from TNCs and hope to enjoy technology from them, these companies have not yet created a linkage with local suppliers. Thus, the technology transfer is limited,” said Dinh Manh Hung, a sen expert at the Subcontracting and Partnership Exchange Centre in Vietnam, set up to link domestic enterprises to large company supply chains.

The report indicated that foreign companies operating in the hi-tech sector import 19.1 per cent of total production input from domestic manufacturers. Meanwhile, this proportion in medium-tech and low-tech sectors was 23.5 and 30.7 per cent, respectively. This meant, technology from foreign firms, if transferred to domestic ones, was mostly in the low-tech manufacturing sectors such as food, textiles, leather and furniture, said Hung.

Some 79 per cent of foreign firms referred prices as the main factor hindering them from cooperating with local companies. Meanwhile, 50 per cent reported they had cancelled or not entered into domestic procurement contracts because of the low quality of local products. This is the consequence of underdeveloped supporting industries in Vietnam.

In fact, TNCs’ investment has added Vietnam into the global manufacturing chain and contributed to attract other foreign companies to the country. These enterprises create jobs and help Vietnam to integrate deeper into the global market. However, in terms of technology transfer, a recent Ministry of Industry and Trade (MoIT) report also points out export-oriented TNCs like Intel and Foxconn do not transfer technology to domestic suppliers.

The MoIT added that the investment from big foreign companies over the past years had not yet help Vietnam develop supporting industries because most of them just set up assembling facilities to take the advantage of cheap labour costs.

The MoIT proposed the government to adjust regulations on import and export taxes that would give the investors operating in supporting industries more incentives. But, these incentives will be granted only to foreign investors who build a supporting industry factory to serve the Vietnamese market and use input materials from local markets.