ANALYZING FACTORS AFFECTING THE DEVELOPMENT OF SUPPORTING INDUSTRIES IN VIETNAM: EVIDENCE FROM DONG NAI PROVINCE

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1 ANALYZING FACTORS AFFECTING THE DEVELOPMENT OF SUPPORTING INDUSTRIES IN VIETNAM: EVIDENCE FROM DONG NAI PROVINCE MA. Luu Tien Dung and MBA. Nguyen Minh Quan Lac Hong University, Viet Nam Abstract In the new context of international integration with the strong change of the nature, content and form will make the competition will increase strongly, supporting industries will actually play an important role in maintaining and enhancing the competitiveness of enterprises, industry, and nationals. This study analyzes the current situation of the development of supporting industries in Vietnam; and based on multivariable regression model which analyzes factors affecting the development of supporting industries in Vietnam. The research results show that there are five factors that directly affect the development of supporting industries in Vietnam including (1) High-quality industrial human resource, (2) competitiveness of supporting industries, (3) tax policy and tax incentives, (4) the stability of the policy environment, and (5) size of demand; and three factors have indirect effects including (i) quality, (ii) cost and (iii) supply capacity. Key word: Supporting industries; Vietnam; Competiveness; International economic integration; Structural Equation Modeling (SEM). 1. Introduction International economic integration has described as one of the means to increase welfare, that is, with this tool, countries can increase welfare either or together in partly or wholly (Jovanovic, 2014). In the new context of international integration with the strong change of the nature, content and form of international economic integration, the competitive pressures will increase powerfully. Thus, supporting industries will actually play an important role in maintaining and enhancing the

2 competitiveness of enterprises, industries, local areas and nations. Along with the government policies, resource conditions, demand conditions and firm strategies; the structure of supporting industries have particularly important roles in shaping the competitive advantage of nations, industries and strengthen the competitive advantage of firms in the market. This study will focus on clarification of some literature issues about supporting industries, the current situation of the development of supporting industries and the analyzing of the factors that affecting the development of supporting industries in Vietnam based on structural equation modeling (SEM). Stand on the findings, the research also proposes some policies in order to develop the supporting industries in Vietnam in the next few years with the reference to experience in some developing Asian countries. 2. Supporting Industries: Review of Concepts and Development 2.1 The definition of supporting industries The evolution of the term "supporting industries" The terminology "supporting industries" is used very extensively by Japanese firms before being used in official documents of the government since the mid-1980s due to the appreciation of of Japanese yen (JPY) along with the effort that support the business more competitive, and the term is commonly used in other Asian countries including Vietnam officially since 2003 (Thuy, 2007). Recent years, the term increasingly attracted is the major concern of researchers and policy makers in Vietnam due to the press of competition on the international market requires increased circulation products on the market must be of serious quality, speedy on the market, prove the origin to enjoy the preferential tariff, increasing the volatility of unpredictable global economy, pressure to maintain the rest of trade, growth and sustainable growth. As a consequence, according to assessment of investment in Vietnam, supporting industries in Vietnam have grown much more quickly than in the early the 1990s, when Vietnam officially opened to draw foreign investment (Ichikawa, 2005). Although the term "supporting industries" have been widely used in many countries for a long time, but still there are differences in the definition of the term. The difference in the definition of the term "supporting industries" is due to develop policies, socioeconomic status, level of development and the challenges that each economy faced when integrating global economy. However, essentially "supporting industries" can be understood as all industries that providing inputs to serve production

3 activities or detailed as the industry that offers the sections, details and tools for the production of the finished industry, while the broader definition of supporting industries also includes built-in support services such as logistics, insurance, warehousing distribution. Besides that, Thailand industrial authority determines supporting industries are industries that product parts and components used in the final assembly process of the automobile, machinery and electronics manufacturing industry (Eiamkanitchat, 1999). After that, Malmedal, Kroposki, and Sen (2007) identified the supporting industries as the industries that provide material supports and processes needed to form and manufacture the products before they are marketed to end-user industries. The definition currently used in Asian countries is rooted in Japan in 1993 when the Ministry of Industry and International Trade Japan used in the industrial development plan for the new Asean (AID plan) contains many cooperation programs, including the development program that support Asean industries defines that support industry is the industry which provide the necessary things such as raw materials, parts and materials for the assembly-type manufacturing industry. Initially, supporting industry is used for small and medium-sized enterprises in the supply of inputs, but later it expanded to industries that do not depend on the size of the business. In the mid-1980s, when the JPY appreciated against the U.S. dollar, making exports of Japanese firms in trouble and moved production to lower labor costs countries. However, in the provision of inputs for production, Japanese firms still use subcontracts for domestic supply due to the poor quality of local requirements, including ASEAN 4 (Indonesia, Malaysia, Thailand, Philippines). Therefore, at this stage supporting industries refer to the shortage of supply industry inputs in these countries (Thuy, 2007). In Vietnam, the term "supporting industries" appeared relatively late and only appeared unofficially in the mid-1990s, when foreign investors in Vietnam has asked the government to make the inputs supply more successful, yet this period also face many troubles because of the lack of definition in the legislation. As part of the cooperation program between Japan and Vietnam, Vietnam- Japan Joint Initiative, launched in 2003, aimed at strengthening the competitiveness of Vietnam economy by promoting FDI flows into Vietnam. In the initial action plan, the first item in the list of required action is "develop, introduce, and use the supporting industries in Vietnam", also there is the determination of the importance of theoretical and practical support industry in the process of industrialization and attracting FDI. Nonetheless, in the first phase, which lasted for two years, this

4 action was not fully implemented. Therefore, action needs to be reaffirmed in its second phase, which includes the establishment of a comprehensive plan to support the development of supporting industries, establish a database of supporting industries, and form industrial parks to improve supporting industries. To answer this necessitates with an efficient manner, the Vietnam policy makers must understand the nature of the supporting industries, associated concepts, and select a comprehensive and clear definition for the supporting industries that can serve as the foundation for planning a comprehensive industrial policy for the diligence (Mori, 2005). With the appearance of this term in Japan, simultaneously, there are equivalent terms used in other areas in the word such as related and supporting industries (Porter, 1990); ancillary industries (Mookherjee, 1995); vendors (Eiamkanitchat, 1999); subcontracting (Watanabe, 1972) The definition of supporting industries in Vietnam By arranging the releases and developments of concepts linked to supporting industry; and although there are deviations in the definition of this term by a number of causes, in general the definition of supporting industry is used to imply an industry can offer input to complete the production of some other good of another industry. In general, there are three different levels of the definition of supporting industries given popularly in Vietnam. The first definition is the narrowest and core one by determining the support industries as industries that provide accessary, parts and tools for the production of parts and components. The second definition descript wider that supporting industries provide accessary, parts and tools for not only the production of parts and components, but also for the services as production logistics, warehousing, distribution and coverage while third one determined to define the industry as the sector provides all the physical inputs including parts, ingredients, tools, machinery and equipment. In terms of Vietnam included budget limitations, weak infrastructure and pressure from international economic integration and competition, thus the first and narrowest concept will fit Vietnam to the current period to mobilize all resources to develop the supporting industries: "The supporting industries can be outlined as a group of industries that provide intermediate inputs for the type of assembly, process manufacturing." (Thuy, 2007). When studying on issues related to the development of supporting industries, it is necessary to pay attention to some characteristics of the

5 industry such as (i) more capital-intensive and require skilled workers than industrial assembly, (ii) the product of industry support is provided for both businesses in the country and abroad, (iii) manufacturing industry catering to export-oriented and domestic demands, (iv) the product of this industry need for the assembly industries and process manufacturing, but there are differences in the features of each sector. So the requirements for the development of supporting industries in every industry are diverse (Thuy, 2007). 2.2 Factors affecting the development of supporting industries The determinations of the Vietnam Development Forum (VDF) in 2007 with the participation of the Ministry of Industry of Vietnam with Japanese enterprises operating in Vietnam in the electrical and electronics industry, motorcycle, automobile; the competitiveness and size of market demand for two deciding factors for the development of supporting industries. The prerequisites for the industries to improve competitiveness are capabilities for cost reduction, quality and delivery (Ohno, 2006). In size of market demand, the studies suggest that the large size is very important for the development of supporting industries in orders to require relatively minimum value of large size to enter the market, and generally need more capital than the type of industrial assembly. Once the above two factors achieved, four areas have been forced to accelerate the growth of supporting industries in Vietnam, including (1) the high quality industrial human resources, (2) tax policy and tax incentives, (3) a stable policy environment, and (4) asymmetry information between investors and local providers (Vietnam Development Forum, 2007). - High quality industrial human resource: The most crucial factor for the long-term development of Vietnam manufacturing industries is the highly skilled masters of manufacturing. High-quality industrial human resources are much more important than high-tech machines because of highly skilled workers, not new machines, were essential; and second-hand machines operated by good workers were superior to brand-new machines operated by poor workers. - Tax policy and tax incentives: Tariff reduction and tax incentives were standard policy instruments for promoting supporting industries by contribution for enhancing cost competitiveness of assemblers and could turn a country into an export base of certain finished products; liberalization of

6 industrial parts import would increase intra-industry parts trade and encourage enterprises to specialize in the production of certain parts to be exported globally. - A stable policy environment: A unstable policy environment will effect negatively on development of supporting industries. Policy instability has three main features: (i) the lack of communication with businesses; (ii) ambiguity of the policy purpose; and (iii) unexpected implementation. - Information and perception gaps: The information gap will make FDI assemblers are desperately looking for local suppliers; they do not know where good Vietnam parts manufacturers are located. The perception gap occurs when there is a difference between supply capacity, quality, and costs that Vietnam enterprise can meet the requirements of FDI assemblers. 3. Current situations and factors affecting industrial development of suppor - ting industries in Vietnam 3.1 The current development of of supporting industries in Vietnam The development of supporting industries is considered as one of the top policy priorities of Vietnam to promote the development of industries, contributing to accelerating the process of industrialization - modernization of the country. However, the actual situation of industries remains weak support Vietnam and the need for appropriate policy development. Supporting industries in Vietnam are not fully developed; they are just at the early stages of the development (Mori, 2005). This limits business opportunities for foreign-invested enterprises, specifically assemblers, because it is costly and time-consuming to find good local suppliers (Ohno, 2007). At this time, a number of industries of Vietnam have advantages such as electronics, textiles, footwear, assembly of automobiles, motorcycles, etc. And there is almost no supporting industries, hence Vietnam economy rely heavily on imported raw materials, making the production more fragmented, passive and high production costs.

7 In terms of policy, planning Vietnam has supported an industrial development vision 2020 to There also are policies that encourage the development of a number of supporting industries. The support of capital, science and technology, human resources also general interest, but the policy is still indirect, not taking into account the characteristics of each sector, each sector of industrial development support, almost 70% of the incentive is for FDI firms, these preferences are also unclear and indiscriminate form should not be promoted effectively. There is no policy to support small and medium enterprises engaged in the industrial sector while supporting businesses in Vietnam plays an important role in the economic structure of the industry in the current period. The percentage of local procurement in general of Vietnam in the period was 22.6%, while that of Malaysia, Thailand at the same time is over 45%. In the period 2010 to 2013, this figure has remained virtually not improved much while still stopping at an average of about 20-30%, most are around 10%, but even this figure also of interest because the majority of enterprise products domestic supply is only indirect materials or accessories simple low values. This consequently leads to value added in manufacturing low competitiveness of enterprises and the poor Vietnam increasingly more difficult. Investment in industry today largely supported by the implementation of FDI, the domestic enterprises are very limited owing to the great distance competitiveness in quality, cost, and availability The component supply business, selling products now mainly Japanese firms, Korean investment in Vietnam, followed by Taiwan enterprises, finally the Vietnam enterprises with a small proportion. 3.2 The factors impact the development of supporting industries in Vietnam Questions, Conceptual Model and Hypotheses Based on the research results of VDF in 2005 and 2007 combined with the expert group discussions with motorcycle firms, mechanical, textile with convenience sampling method in Dong Nai province. Most of the discussion was conducted at enterprises in the period from 1st June to 2nd July in The purpose of this discussion is used for adjusting the factors affecting the development of supporting industries; also elaborate the scales measuring these factors. After nine meetings with 1 issued with Decision No. 34/2007/QD-BCN dated 31/7/2007 and Decision Number 12/2011/QD-TTg on the issuance of policies encouraging the development of a number of supporting industries together with 1483/QD-Decision dated 08/26/2011 promulgating the list of supporting industries development priorities.

8 information saturation point is seven, the team has identified research model factors affecting the development of supporting industries (Figure 1) consists of three independent variables impact on competitiveness of the sector are (i) cost, (ii) quality, (iii) supply capacity and six independent variables directly impact the development of supporting industries including (1) stable policy environment, (2) high quality human resource, (3) competiveness, (4) size of demand, (5) tax policy and tax incentives and (6) the information asymmetry between enterprises and local suppliers. The dependent variable in the model is the development of supporting industries. The concept variables in the research model were measured by 5 point Likert scale with 1 - totally disagree with 5-strongly agree. A survey was carried out with 60 test samples from the other firms in textile, mechanical and motorcycle manufacturing that not participate in the interview above. The results showed that Cronbach's alpha coefficient achieved is at 86.08% for the scales show high reliability. Research is done formally by sending questionnaires directly via and convenience sampling to manufacturers in motorcycle, textiles, electronics and process manufacturing in Dong Nai province. After data are cleaned and assess the normal distribution will be analyzed using structural equation modeling (SEM) by IBM SPSS Amos to investigate the quality scale, the appropriateness of the model and assessment the hypotheses the relationship between the independent and dependent variables in the research model. Research model and the following assumptions: Conceptual model scales Figure 1: Conceptual Model

9 The scales of studied concepts in the model included thirty five observed variables measure for 10 studied concepts. Costs is a first-order model of one construct and measured by four items (C1-C4); Quality variations including 4 items from Q1 to Q4; the variable supply capacity includes 4 items (D1- D4); competitiveness variables is a second order exogenous constructs included 3 variables observed from COM1 to COM3 and is conceptualized as a second-order model of three sub constructs, which were assessed by cost, quality and supply capacity; the size of demand include 4 items (SD1-SD4); the high quality of industrial human resources contains 2 variations observed from HR1 to HR2; the variable tax policy and tax incentives take account of 3 items from TP1 to TP3; the information asymmetries observed by 3 items IG1 to IG3; the stable policy environment is assessed by 3 from MP1 to MP3; and the supporting industries development including 5 items (GSI1-GSI5) Characteristics of study sample Datasets are cleaned after 245 samples satisfy the conditions of factor analysis to explore the structure and linear model (Hoyle, 1995; Kline, 1998; Jackson, 2001, 2003; Hair, 2006 & Hair, 2009). Samples used in this study the authors collected in Dong Nai province in order to give the evidences to support the research model for Vietnam. Therefore, in this study, the authors did not analyze the odd of Dong Nai enterprises and attempt to review these businesses with the general characteristics of firms investing in Vietnam. Characteristics of the sample are categorized by the authors into 4 groups consisting of (i) the type of enterprise (ii) firm size, (iii) industries and (iv) national origin. Specific characteristics of the sample as shown in Table 1 below: Table 1: Characteristics of study sample Variable Enterprises by type FDI = 79%; domestic enterprises = 21%. Scale enterprises SMEs = 97.8%; Large scale enterprises = 2.2% Industries Textile = 23.7%; Mechanical = 44.5%; Electronics = 17.7%; Process manufacturing = 14.1%; National Origin Vietnam = 21%; Thailand = 11.8%; Japan =18%; South Korea = 22.0%; Taiwan = 17.5%; China = 7%; Others = 2.7% Source: Survey of the research team

10 3.2.3 Inspection the quality of scales and model research The quality of the first scale tested through Cronbach's alpha coefficient, exploratory factor analysis (EFA) and confirmatory factor analysis (CFA). The results detailed in Table 2 below: Table 2: Summarizes the results of testing scale Latent Variables Number of Testing of Scales ρvc observation Cronbach s Alpha ρc variables Quality Cost Supply Capacity Competiveness Size of demand High-quality industrial human resource Tax policy and tax incentives Stable policy environment Information asymmetries Supporting industries Development Source: Survey of the research team The quality of the first scale tested through Cronbach's alpha coefficient, exploratory factor analysis (EFA) and confirmatory factor analysis (CFA). The results of analysis to explore factors have 9 components are: three first-order subcontract, namely, (i) quality, (ii) cost, (iii) supply capacity and 6 independent variables directly impact the development of supporting industries include (1) stable policy environment, (2) high quality industrial human resource, (3) competitiveness, (4) size of demand, (5) tax policy and tax incentives and (6) the imbalance of information between enterprises and local suppliers are satisfied the terms and conditions of EFA and no one was deduced, (Table 3). Table 3: Factors (EFA result)

11 Observation Variables Quality Cost Supply capacity Size of demand HR Compe - tivenes s Tax policy Stable policy environ -ment Inform ation asymm -tries SI Development Q3.798 Q4.794 Q1.792 Q2.789 C1.835 C2.814 C3.793 C4.787 D1.830 D2.789 D3.776 D4.750 SD2.829 SD1.761 SD3.747 SD4.729 HR1.851 HR2.822 COM1 COM2 COM3 TP1 TP3 TP2 PM1 PM2 PM3 IG1 IG2 IG3 GSI1 GSI2 GSI3 GSI4 GSI5 Source: Survey of the research team Maximum Likelihood Estimation (MLE) is used for determining goodness of fit of the model. The estimation results confirmed that the model is sufficiently compatible with the data relatively

12 indicators such as Chi-square = , df = 515, p = (<0.05) was still acceptable due to the large sample size, corrected Chi-square (Chi-square/df) reached 1,916, GFI = 0.915, TLI = 0.898, CFI = (Chin & Todd, 1995; Segars & Grover, 1993) and RMESA = (Taylor, Sharland, Cronin, & Bullard, 1993). PCLOSE indexes are greater than 0.5 (minimum is 0.663) showed that the model qualified reliability, discriminant validity and convergent validity (Anderson & Gerbing, 1988; Segars & Grover, 1993; Steenkamp & Van Trijp, 1991). The correlation coefficient of the concepts (factors) are less than 1 and have statistical significance (Steenkamp & Van Trijp, 1991). The concept of synthesis reliability satisfied (ρc> 50%) and the variance of each factor extracted (ρvc> 50%) Hypothesis Testing The estimation results show that theoretical models are quite consistent with market data, appropriate theoretical models: Chi-square = ; df = 648; Chi-square/df = (Kettinger, Lee, & Lee, 1995); GFI = 0.915, TLI = 0.868, CFI = (Chin & Todd, 1995; Segars & Grover, 1993) and RMESA = (Taylor et al., 1993) and can be used to test the relationship has raised expectations and assumptions in the model. The test results of the assumptions in the model study showed that compared with original expectations, except for the relationship between the asymmetry of information between supply and demand and development of supporting industries has not been clearly shown (β = -0.61, p_value = 0.213), hence there is not enough sufficient evidence to accept or reject this hypothesis. The other hypotheses are accepted in particular, namely, in 3 factors that affecting competitiveness of industry, the impact of quality products offers the strongest (β = 0466, p_value = 0.000); followed by the cost approach (β = 0.364, p_value = 0.000) and finally the delivery (β = 0.175, p_value = 0.015). The additional five factors affect the development of supporting industries which are the impact of the high quality human resource is the most powerful (β = 0.282, p_value = 0.000); followed by the competitiveness (β = 0.242, p_value = 0.000); tax policy and tax incentives to investors (β = 0.203, p_value = 0.000); also the stability policy environment (β = 0.174, p_value = 0.000) and finally the size of demand (β = 0.127, p_value = 0.001). Thus, theoretical models and research hypotheses were tested; the results will be used as an important basis for policy recommendations related to the development of supporting industries in Vietnam.

13 Figure 2: Structural equation modeling (standardized regression weights) In this study, the authors repeated 250 times with Bootstrap method to test the stability of the estimates. The estimation results show that the difference from the initial estimate by ML method does not have a huge difference compared to the estimates by bootstrap methods. All the difference in the estimates is not statistically significant. So the model estimates of reliability are guaranteed for the verification of model assumptions. 4. Policy implications for the development of supporting industries in Vietnam in the context of international economic integration Based on research results combined with the experience to develop supporting industries in some countries such as South Korea, Taiwan, Japan, Malaysia, Thailand and there are some reference to actual conditions of Vietnam, research group proposed a number of policy implications are as follows: - Improving the high quality industrial human resource: The situation that there are "too many chiefs and not enough Indians" in Vietnam is the result of the the lack of clear human resources

14 development plan, so the quality human resources is insufficient. This requires a specific program to improve the quality of human resources in general and industrial skilled laborers in particular. - Enhancing competitiveness on the basis of providing preferential policies, including tax policies and tax incentives: Industrial development is capital intensive support; each sector has its own characteristics in a development requirement. Therefore, in addition to the financial incentives are also of interest and more specific policies for each sector. Policies are used to attract FDI firms should continue to be promoted in the coming period, special attention dedicated to the specific incentives for investment in supporting industries. In particular, preferential policies should not only focus on foreign enterprises that should be considered even more of a priority for most local businesses are small and medium enterprises. Until now, understanding how to support each industrial sector is still difficult to shape and define. Hence, planning strategy is clearly defined what supporting industries are to each specific industry is principally important in order to have appropriate investment for each stage of the development of supporting industries. - Maintaining and reforming the environmental policy, institutional framework: The investment climate is the institutional framework in the judgment of many businesses to invest in Vietnam and the lack of stability caused so many difficulties and risks for enterprises when constructing investment strategies. Thus, combined with pressure from the implementation of international commitments promoting institutional reform in Vietnam in the coming period will gain many advantages. - Motivating the demand for supporting industries output: Promote participation of global value chains is a growing trend of multinational companies. This can be done indirectly by supplying to domestic assemblers who may export finished products in large quantity or directly through industrial parts export. Experience from other countries shows, the role of government in making policies, creating a link between foreign enterprises and enterprises in the country is huge. A good database on the basis of information technology would be a good way to establish communication channels, reducing the gap of information asymmetry between foreign enterprises and domestic. 5. Conclusion

15 In the context of Vietnam is involve deeply with extensive and comprehensive global economy, the opportunities and benefits that received by Vietnam are unarguable, but this is accompanied by the increasing challenges and greater difficulties. The essence, content and form of international economic integration has made significant changes to witness the release of "new style" agreements such as Trans-Pacific Partnership (TPP), Regional Comprehensive Economic Partnership (RCEP), etc. and the introduction of an ASEAN Community (AC) along with the rise of China issues, has set the economy and the young supporting industries in Vietnam are principally more difficult before constraints. This research approach development issues supporting industries in Vietnam on the basis of inheriting the results of previous studies combined with quantitative and quantitative research through structural equation modeling has partially illustrate the current situation of development of supporting industries in Vietnam. Along with the studies on the basis of survey data 245 motorcycle production enterprises, mechanical, textile, electronics, process manufacturing in Dong Nai province through SEM model shows that there are five factors directly impact the development of supporting industries in Vietnam with evidence from Dong Nai province include (1) high-quality industrial human resource, (2) competiveness (3) tax policy and tax incentives (4) stable policy environment and (5) size of demand. References (DOE), U. D. o. E. (2005). Supporting industries: Industries of the future, fiscal year 2004 annual report. (JETRO), J. E. T. O. (2005). Japanese-affiliated manufacturers in Asia (ASEAN and India): Survey (JICA), J. I. C. A. (1995). Investigation report for industrial development: Supporting industry sector. Anderson, J. C., & Gerbing, D. W. (1988). Structural equation modeling in practice: A review and recommended two-step approach. Psychological bulletin, 103(3), 411. Chin, W. W., & Todd, P. A. (1995). On the use, usefulness, and ease of use of structural equation modeling in MIS research: a note of caution. MIS quarterly, Eiamkanitchat, R. (1999). The Role of Small and Medium Supporting Industries in Japan and Thailand: APEC Study Center, Institute of Developing Economies. Hair J.F, Black WC, Babin BJ, Anderson R.E., & Tatham R.L (2006), Multivariate Data Analysis, 6 th ed, Upper Saddle River, NJ: Prentice Hall. Hair, J. F. (2009). Multivariate data analysis. Hoyle, R. H. (Ed.). (1995), Structural equation modeling: Concepts, issues and applications, Thousand Oaks, CA: Sage.

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