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Analysis of Vietnam's Economy

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Table of contents (Jump to)

1. Introduction

2. Why Vietnam – An overview

3. Theoretical literatures

3.1. Macroeconomic principles

3.2. Microeconomic principles

4. The level of unemployment and employment

4.1. Before the national reform – The beginning of the 1990s’

4.2. After the national reform

5. Skills needed and skills gaps

5.1. Disadvantages

5.1.1. Low IT skill availability

5.1.2. Low English proficiency level

5.2. Advantages

5.2.1. High tech sector

5.2.2. Textiles and garments sector

6. Conclusion

Bibliography

1. Introduction

The trend of global outsourcing has accelerated the economic activities in developing nations. Developed nations countries have gained the economy of scales and performed major functions in the long-term basis. The advantages of outsourcing are to reduce business operation expenses and thus corporations can sustain competitiveness.

The paper will discuss the Vietnamese economy, particularly skills needed and skills gaps, and the level of unemployment and employment. Some theoretical literatures will help explain the reasons and results of Vietnamese economic growth; the paper tries to access the underlying forces which have challenged Vietnam authority to change from the central control to the market economy.

2. Why Vietnam – An overview

Vietnam officially becomes the 150th member in WTO (World Trade Organization) on 11th January 2007. In order to join WTO, Vietnam government has to change its political, infrastructure and economic principals to fulfill the requirements of this international organization. ‘A sustained boom, with annual economic growth consistently around 7%-8% since 2000, has transformed Vietnam. It is over 20 years since Vietnam's ruling communists abandoned collectivism and embarked on their doi moi market-based reforms, not unlike those China adopted a few years earlier.’[1]

Additionally, Vietnam economy has gradually changed in order to adapt and join the world economy. From the control economy as of the principal of the communist ideals, Vietnam has undergone the reform and has let its economy to react in accordance with the law of supply and demand. Accordingly, ‘Real GDP growth is forecast to be robust in 2007, at an average of 7% a year, and will be driven mainly by industrial expansion. Business sentiment and consumer confidence will remain resilient, boosting investment and consumption.’ [2]

In fact, ‘Many Southeast Asian economies, namely, Malaysia, the Philippines, Singapore, and Vietnam are emerging as an outsourcing destination for some Fortune-500 companies.’ [3] The data from the Vietnamese economy has strongly reflected how outsourcing impacts on the level of unemployment and employment and skills needed and skills gaps, since the economy has moved so fast to the integration into the world economy.

Vietnam has positioned itself as a primary host by luring more investment than other emerging economies and developing nations in the region in the late 1990s. It is overtaking the Philippines and Indonesia. ‘By 2002, Viet Nam was the third largest recipient of foreign direct investment (FDI) flows in ASEAN [Association of South East Asian Nations], behind Singapore and Malaysia, strengthening its position as a significant investment base. Viet Nam has therefore achieved a key position both in terms of prime investment host within the region, and as a recipient of intraregional inflows.’[4]

3. Theoretical literatures

3.1. Macroeconomic principles

A concept of scarcity, relatively in relation to an entire country and its people, becomes a condition which individual producer and consumer have to face in every decision. The opportunity cost of each decision can be considered as subjective value that individual must scarify when making any decision for the next best alternatives.

In Vietnam, the command economy has literally turned into material incentives to allocate resources. The Vietnamese government has used its fiscal power, to influence the allocation of labor resources in the market economy to deal with unemployment rates and national outcomes. The Vietnamese economy, in term of the unemployment level, has reflected and responded to the law of supply, demand and material incentives. The questions are of what, how and for whom have been reflected as the economic movement away from the central control to the market economy.

The global outsourcing wave has created many opportunities as well as challenges for Southeast Asia, specifically Vietnam. Government functions can quite fit into categories, in tem of macro economic view, in term of regulation. In the microeconomic theory of a firm, an economy’s scare, benefit externalities can arise in the case of information, innovation, and productivity.

3.2. Microeconomic principles

A concept, namely economies of scale, has been applied in the long-run average cost. In order to keep a firm’s long-run average cost reduces as output increases, multinational firms are experiencing economies of scale. ‘The main reason for long-run scale economies is the underlying pattern of returns to scale in the firm’s long-run production function.’[5] Scale economies might result from many determinants. Specialization in the use of labor is a possible reason for economies of scale.

Regardless of how the market price has reacted in the short-run results in economic profit, the normal profit and a loss for competing firms, economic theory has stated that ‘ in the long run, the market price will settle at the point where these firms earn above a normal.’[6] In fact, in long run, firms have time to vary their fixed factors and costs of production. As a result, a number of multinational corporations have decided to relocate to all parts of Southeast Asia, where wages are lower to reduce the production cost. Manufacturing companies can benefit from the move to lower-wage countries

A thriving software development sector has emerged in India, and the wave has come to Southeast Asia. ‘The learning curve is the line showing the relationship between labor cost and additional units of output. Its downward slop indicates that this additional cost per unit decline as the level of output increases because workers improve with practice.’[7] Nevertheless, the low level of IT knowledge and skill accessibility and availability hinders the foreign investors’ considerations at first. Additionally, the infrastructure related to IT network has remains a primary hurdle for the growth of Vietnam as an offshore center for IT service centers.

Microeconomics has many multinational focuses on individual industry sector. Reducing operation expenses, taking advantage the economies of scales and sustaining opportunity costs will help a company in an industry, especially IT and textile and garments sector, stay competitive.

4. The level of unemployment and employment

4.1. Before the national reform – The beginning of the 1990s’

Majority of young Vietnamese had encountered hard time to find jobs. The government had to abandon its utopian socialism of providing jobs for everyone in the early 1980s. [8] Its mismanagement and the American embargo had put a stop to international aids and business activities from the West.

In the beginning of the 1990s, the communist party, under pressure of the collapse of the communist world and impacts of Chinese phenomenon, ‘it had granted more freedom to the private sector, which as too small to absorb the 1.2 million young people who enter the job market each year. Many had even look for their first jobs at least three to five years. Some even looked for more than a decade without success.’ [9]

‘With unemployment at about 20% in a population of 65 million, Vietnam is particularly eager to attract high-technology enterprises that use skilled labor and labor-intensive businesses utilizing Vietnamese materials and natural resources.’[10] Coupling with no job, boredom resulted in the lack of recreational facilities and drove many individuals to engage in crime to get more money in order satisfy their wants.

The embargo was stopped in the end of the 1990’s and the economic reform consequently has brought the inflow of consumer goods, impacted on the consumerism and materialism from the West. The growing expectations of more consumer products during the time Vietnam was thought as of one of the poorest nations in the world.

In short, fiscal policy had caused severe impacts on Vietnam economy, since the government interfered and watched closely any business activities and interactions of the economy.

4.2. After the national reform

The rapid advancement of information and communication technology has connected many companies worldwide and outsourced some of these functions to low-cost location oversea. Based on geographical differences and diversified locations, Vietnam is in line with its competitive advantage. This phenomenon has happened in Vietnam, and the Vietnamese economy has been beneficiary from this reform.

Many multinational corporations have adopted global outsourcing in developed economies. This trend has led to enormous redistributions of jobs and restructured many economic activities in the world. Vietnam has been beneficiary from this, emerging as a major outsourcing destination due to low-cost operation. ‘Thus, in the services sector, thousands of jobs have been migrating from the United States, Japan, and some OECD (Organization for Economic Cooperation and Development) countries to India, China, Singapore, Malaysia, the Philippines, and other developing countries in Asia’,[11] including Vietnam.

Although unemployment rates vary by geographical location, all the global integration and global outsourcing trend has result in lower unemployment rate. Vietnam has tried to sustain competitive in the race for becoming the destination of global outsourcing.

5. Skills needed and skills gaps

5.1. Disadvantages

5.1.1. Low IT skill availability

Nowadays, IT in operation and management is important, especially information structure for multinational companies worldwide. The IT advantages can help eliminate human error, time saving, reduce procedural document, improve efficiency and increase profitability overall. The tangible advantages of e-commerce and IT infrastructure have been broadly identified at internal operation as well as external users.

However, isolated itself from the developed world for many decades, Vietnam has low IT skills in which most of the work might happen through subcontracting rather FDI. Compared with countries in the regions, such as Singapore, Thailand, Malaysia, the speed of automation, development of new technology and know-how in operations and management requires relevant skills and knowledge for staff to do their work.

‘The country is hampered by the scarcity of professionals competent enough to handle complex IT applications and processes.’[12] It has positioned itself to attract offshore business movements favorable to its economies. Vietnam has a high stake in the recent global outsourcing wave.

5.1.2. Low English proficiency level

‘However, inadequate infrastructure and lack of English proficiency have affected its prospects of becoming an attractive destination for IT outsourcing.’ [13] Dominated by India, Vietnamese employees need to enhance their English ability in order to avoid communication misunderstanding at work. Compared with countries in the region, such as Singapore, Malaysia and the Philippines, Vietnam has lower levels of English proficiency.

The challenges for Vietnam to keep its competitive advantage are immense. Vietnam needs to invest in human resource and knowledge-based infrastructure to attract more FDI in order to sustain the financial inflows.

5.2. Advantages

5.2.1. High tech sector

Currently these transitional corporations have integrated their worldwide operations and concentrated their business operations in well-selected locations in order to take advantages of the economy of scales. ‘IT companies, namely, Anheuser Busch, Bayer, Cisco, IBM, Nortel Networks, and Sony are outsourcing software development projects to Vietnam - either directly or through third-party developers with an onshore presence in the United States and Europe.’ [14]

‘Moreover, IT companies in Vietnam retain key staff and keep project teams together for months at a time, thereby maintaining low rates of attrition.’ [15] As a result, this situation helps ensure familiarity and stability between customers and contractors, which consequently deliver a confident message for the foreign investors.

During short-run, a company can vary many of certain resource, especially labor cost; however, in long run any firm, able to vary quantities of all resources, can maximize its profit, although it has to sacrifice its short run to speculate long-run profit growth.

In fact, outsourcing can create more job opportunities for Vietnam, even if offshore activities have been taken placed by the affiliates or subsidiaries. This wave then will generate essential growing FDI flows from service field to the manufacturing field. ‘In IT outsourcing, Vietnam has a cost advantage over other Southeast Asian countries, in terms of salary of IT professionals.’ [16]

Although Vietnam starts welcome FDI later than its neighbor countries, early investment in ASEAN become attractive due to low labor cost related to the production and operation expenses. The corporate global links have come with the market penetration have reflected this new wave.

5.2.2. Textiles and garments sector

The textiles and garments sector in fact become dominated by international subcontracting arrangements. The operation chain is segmented in accordance with available materials, proper procedures and the end users’ demand. ‘Certainly, as increasing numbers of low-income countries enter the world economy, economic development posited on cheap, low-skilled labor is no longer a viable option for Viet Nam.’ [17]

The profit-maximization hypothesis, which a multinational company can pursue in term of market share, turnover growth, return on investment, technology, and shareholder value, can strategize different managerial decisions. ‘Sample firms stressed the relatively high education levels and quality of Vietnamese workers and recognized how far they and the country had come in a short time (a little over a decade). Viet Nam remarked that the quality and productivity awareness of Vietnamese workers is higher than any other developing Asian country, including People's Republic of China.’ [18]

Since textiles and garments sector is a labor-intensive manufacturing sector, a new comer, such as Vietnam, has intriguing the investors due to orientation of international trading agreements, and avoiding dumping tariffs imposed from imported nations.

6. Conclusion

Competitiveness and efficiency become crucial determinants of any company, industry and national economy. The above analysis has discussed in accordance with movement of Vietnam economy, under the impact of macro and micro views. Vietnam has tried to achieve comparative and competitive advantages in international market. The development strategies are good indicators for comprehensive and long-term planning of the authority. Vietnam has opened its economy to the world, joining ASEAN, APEC (Asia Pacific Economic Cooperation), and recently WTO. Such practices have been harmonized with the tendency of the economic integration and recent globalization. Lower unemployment rate and higher professional skills will surely happen in Vietnam.

Bibliography

‘Asia: Plenty to smile about; Vietnam 2007, The Economist, London, no. 382, no. 8522,31 March, p.76, viewed 1 May 2007, <http://ykien.net/blog>

‘Vietnam: Country forecast summary’ 2007, EIU ViewsWire, New York, 27 February, viewed 1 May 2007, < http://www.economist.com/countries/Vietnam/profile.cfm?folder=Profile-Economic Data>

Fox, T 1989, ‘Come Ye Back To Mandalay’, Financial World.New York, vol. 158, no. 10, 16 May,p.38.

Hiebert, M 1991, ‘The Drop-Out Factor: An Education Crisis Follows Economic Reforms; No Jobs for the Boys: Young Face Long-Term Unemployment Despite Reforms’, Far Eastern Economic Review, Hong Kong, 19 September.

Keat, GP & Young KYP 2000, Managerial Economics – Economic Tool for Today’s Decision Makers, Prentice Hall, New Jersey, United States, pp. 320-390.

Keat, GP & Young KYP 2000, Managerial Economics – Economic Tool for Today’s Decision Makers, Prentice Hall, New Jersey, United States, p. 322, viewed 1 May, < http://www.safarix.com/0131860151/ch07lev1sec6>

McDougall, P 2005, ‘Vietnam may be cheapest, but India is still a bargain’, InformationWeek,Manhasset, no. 1042, 6 June, p.20, viewed 1 May 2007, <http://www.asiafinest.com/forum/index.php?act=Print&client=printer&f=17&t=95266>

Mirza, H & Giroud, A 2004, ‘Regional Integration and Benefits from Foreign Direct Investment in ASEAN Economies: The Case of Viet Nam’, Asian Development Review, Manila, vol. 21, no. 1, p.66

Sen, R & Islam, MS 2005-2006, ‘Southeast Asia in the global wave of outsourcing: trends, opportunities, and challenges’, Regional Outlook, Southeast Asia, Singapore, p.75.

Page 1


[1] ‘Asia: Plenty to smile about; Vietnam 2007, The Economist, London, no. 382, no. 8522,31 March, p.76, viewed 1 May 2007, <http://ykien.net/blog>

[2] ‘Vietnam: Country forecast summary’ 2007, EIU ViewsWire, New York, 27 February, viewed 1 May 2007, < http://www.economist.com/countries/Vietnam/profile.cfm?folder=Profile-Economic Data>

[3] Sen, R & Islam, MS 2005-2006, ‘Southeast Asia in the global wave of outsourcing: trends, opportunities, and challenges’, Regional Outlook, Southeast Asia, Singapore, p.75.

[4] Mirza, H & Giroud, A 2004, ‘Regional Integration and Benefits from Foreign Direct Investment in ASEAN Economies: The Case of Viet Nam’, Asian Development Review, Manila, vol. 21, no. 1, p.66

[5] Keat, GP & Young KYP 2000, Managerial Economics – Economic Tool for Today’s Decision Makers, Prentice Hall, New Jersey, United States, p. 331.

[6] Keat & Young, 2000, p. 371

[7] Keat & Young 2000, p. 322

[8] Hiebert, M 1991, ‘The Drop-Out Factor: An Education Crisis Follows Economic Reforms; No Jobs for the Boys: Young Face Long-Term Unemployment Despite Reforms’, Far Eastern Economic Review, Hong Kong, 19 September.

[9] Hiebert, 1991.

[10] Fox, T 1989, ‘Come Ye Back To Mandalay’, Financial World.New York, vol. 158, no. 10, 16 May,p.38.

[11] Sen & Islam, 2005-2006.

[12] McDougall, P 2005, ‘Vietnam may be cheapest, but India is still a bargain’, InformationWeek,Manhasset, no. 1042, 6 June, p.20, viewed 1 May 2007, <http://www.asiafinest.com/forum/index.php?act=Print&client=printer&f=17&t=95266>

[13] Sen & Islam 2005-2006.

[14] Sen & Islam 2005-2006.

[15] Sen & Islam 2005-2006.

[16] Sen & Islam 2005-2006.

[17] Mirza & Giroud, 2004

[18] Mirza & Giroud, 2004


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