Vietnam’s Ascendancy in the Electronics Trade and the Role of Inward Foreign Direct Investment

ABSTRACT

A new regression-based revealed comparative advantage index is used to analyze Vietnam’s exports. Vietnam now has the highest comparative advantage in electronics in the world. It suggests that Vietnam may be a new follower in the “flying geese” style and reinforces the Kojima (2000) view that sufficient inward FDI can change comparative advantage. With detailed FDI and local data, we estimate that this change was brought about by a massive surge of inward FDI amounting to 6% of GDP. Lastly, we opine that while the comparative advantage in footwear may decline, that in electronics may be here to stay.

KEYWORDS:

• Comparative advantage
• exports
• inward FDI
• revealed comparative advantage
• Vietnam

Acknowledgments

This research was funded, in part, by the Japanese Society for the Promotion of Science (JSPS) grant, type C, No. 19K01600. The authors are grateful for the support given by Queens College, City University of New York. The second author completed part of this work while a visiting scholar there. Special thanks go to Kiyotaka Sato, Nagendra Shrestha, Zadia Feliciano and Nadia Doytch who gave valuable comments at seminars and throughout the process.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. This effect will be more pronounced if the low-cost host country is a member of an FTA with access to another large, high-cost market, while the FDI host country is a nonmember. Despite the US’s withdrawal from the TPP pact, this was no doubt one large factor in LG and Samsung’s calculations. Korea is not a member of TPP. Vietnam is. For a theoretical model of export platform FDI of this type, see Karolina et al. (2003).

2. “Tech firms flock to Vietnam,” Wall Street Journal by James Hookway Sept. 27^th, 2013 online at https://www.wsj.com/articles/no-headline-available-1380253320; last accessed September 2020.

3. Note: The top 10 countries investing in electronics in Vietnam during 2003–2017 were: South Korea, Japan, Malaysia, United States, Taiwan, Singapore, Thailand, United Kingdom, China and France. (Source: www.unctad.org).

4. See chapter 4 in Otsubo (2016).

5. See the November 30, 2017 article by Atsushi Tomiyama in the Nikkei Asian Review “Samsung readies Vietnam R&D center for appliances.” Accessed on August 17, 2020 here: https://asia.nikkei.com/Business/Electronics/Samsung-readies-Vietnam-R-D-center-for-appliances.

6. Haberler (1930) was the first to re-frame Ricardo’s Comparative Advantage into that of a question of lower opportunity costs. See Bernhofen’s (2005) explanation.

7. While Balassa made this measure well-known, it was preceded by a similar method by Liesner (1958).

8. To construct these new RCA for a single country-product, one needs to run regressions (see below) not only on the trade flows of the country in question (Vietnam), but for all other countries and products as well. Ideally, one would use 180 or so exporters rather than just the 25 used here and elsewhere. However, even with 25 exporters, this pushes STATA’s software capacity the maximum.

9. Reminder: when we say “top position,” we, of course, mean this in the comparative advantage sense, not an absolute sense. Total electronics exports from China, for example, are still far greater than that of Vietnam`s.

10. Two of several empirical observations of the flying geese pattern are described below. A structural upgrading of textiles and related industries across Korea-Thailand-Malaysia-Indonesia from 1960 to 1990 was observed byKosai and Tho Tran (1994)Another example in machinery trade from 1975–1992 between Japan and other Asian countries (NIEs, ASEAN4 and China) was observed by Shinohara (1996).

11. See a recent article by the Asian Development Bank at https://www.adb.org/news/op-ed/foreign-direct-investment-not-coming-indonesia-really-edimon-ginting.

12. For more detailed data see the Bank of Thailand website as https://www.bot.or.th.

13. “Intel in Malaysia for the long haul” June 14, 2010 accessed Sept 17, 2020 at thestar.com.my.

14. For more detailed data see the Department of Statistics Malaysia website at https://www.dosm.gov.my/.

15. Das, Krishna “U.S. investment in Malaysia up sharply as trade row with China drags” on Sept 4, 2019, on Reuters.com; last accessed Sept 17, 2020.

16. The entire handbook, in pdf form, was found at www.customs.gov.vn.

17. This data was accessed in October 2018 at the Bacninh Statistics Department website http://bacninh.gov.vn/ in a book called “Niên giám thống kê Bắt Ninh 2015” (which means “Bacninh statistical yearbook 2015”). They have since taken that book offline, but it is available in hard copy in the Statistics Library of Vietnam in Hanoi.

18. Both Vietnam and the US joined the broadened TPP discussions in 2008 (the US in January 2008). LG and Samsung made massive investments and Samsung its first mobile phone factory in Bac Ninh (Vietnam) in 2007. Of course, LG and Samsung had made earlier, smaller investments in Vietnam in 2003. These were likely influenced by the normalization of trade relationships between the US and Vietnam in December of 2001. Vietnamese exports to the US skyrocketed following this agreement. Much later, the US signed the TPP agreement in February 2016. Although the US withdrew from the TPP in January 2017, at the time, Samsung and others made these investments clearly expecting a stronger and growing relationship with the US.

19. The Harding and Javorcik paper, published in 2011, naturally used the older, classic, Balassa Index for its measure of RCAs.

20. From Tractus (2019).

21. This data in this paragraph is taken from Parsons et al. (2020).

22. “Samsung invested about $17 billion in Vietnam, making it the country’s largest overseas investor.” (Waring, 2020a). This implies that another $4 billion has flowed in from Samsung in the last three years. Rumors that Samsung would move smartphone production out of Vietnam and into India have, thus far, been not been borne out. See Waring, 2020b.

23. While some of these investment projects have been added to in the years following, for the most part, this 6% figure is the sum of several huge lumps of investment over a period of years. That is to say, it is not 6% of GDP every year.

24. Source: Feenstra et al. (2015).

25. Most, if not all countries in the region, are taking very pro-active efforts to attract FDI. See “Invest India” investindia.gov.in, or Thailand (https://thaiembdc.org/invest-in-thailand/and Invest Indonesia (investindonesia.go.id), the Philippines (boi.gov.ph) just to name a few.

26. Dezan Shira and Associates (June 4, 2015).

27. There is a large domestic footwear industry in Vietnam that no doubt benefitted from the spillovers from the presence of Nike and Adidas. However, no Vietnamese brand has yet emerged in the world market.

28. Vietnam’s population is currently almost 100 million and is predicted to reach 106 million in 2030. By comparison South Korean has a population of 51 million. But South Korea’s GDP per capita is over $30,000 while Vietnam’s is about $2,000. (Source: World Bank.).

29. See a report by the OECD (2003) which describes the various policies in which host countries government can implement in efforts to secure more inward FDI. The report also explains the costs and benefits of each of the various policies, some of which can be quite wasteful either to the recipient country and/or to world welfare overall.