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Policy Recommendation: The case of the Electronics Industry
Yumiko Okamoto
 1. Importance of Industrial Development 1  |
(1) Since the industrial revolution, manufacturing has been the main engine for growth and for transforming the economic structures of poor countries. It has been the catalyst for shifting them from simple, low-value activities with poor growth prospects to activities with high productivity, increasing returns and strong growth potential.
(2) The rapid growth of technology-driven economic activity does not change this, despite the rising share of services in income and the high growth of the "new economy". Recent innovation in IT industry was only possible because of technological advances in the hardware of information processing and telecommunications.
(3) Latecomers with industrial bases cannot jump to the forefront without going through traditional industrialization. Development in information and communication services and advancement in their technology alone cannot facilitate leapfrogging and catching up by developing countries.
- Evidence
 Most countries that have succeeded in advancement in information and communication technologies have been relatively industrialized:
Onshore The US
Offshore India, Ireland, Israel
1 Please see UNIDO (2002), Industrial Development Report 2002/2003: Competing through innovation and learning.
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| 2. Importance of the Electronics Industry in the Contemporary Economy 2 |
| Historically, the capital goods sector served as a hub for diffusing innovation to other activities. Today, the electronics industry is the hub. The electronics industry is, indeed, an engine of industrialization.
2 Ibid.
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| 3. Current Status of Vietnam in the Electronics Industry |
The electronics industry is the most dynamic in East Asia. East Asia occupies more than half of the world production. Vietnam is, however, a latecomer and the electronics industry is still at the very infant stage of development (See Figure 1).
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| 4. How to Develop the Electronics Industry? |
As Table 1 shows, unlike the case of very labor-intensive industries such as wearing apparel and footwear, the share of labor cost in total output value is very small in the electronics industry. Instead, the share of intermediate inputs such as parts, components, materials and utilities is considerably high. Therefore, the development of the entire industry depends tremendously on how to develop efficient parts and components sectors.
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| 5. How to Develop the Parts and Components Industries, then? |
(1) Stop the current protectionist policy toward parts and components producers. Last year Vietnam announced trade policy of reducing tariff rates on final goods, but keeping high tariff rates on parts, components, and materials under the CEPT scheme. This is a big mistake. If the policy is not going to be reversed, consumer electronics foreign firms will withdraw from Vietnam. Vietnam loses important customers for their products (parts and components). Besides, the domestic market of consumer electronics will soon be filled up by products from other ASEAN countries.
(2) Instead, invite as many foreign producers of parts and components as possible by introducing the combination of various tax incentives, improvement in business environment, and overseas promotion activities. The parts and components producers are in fact even more capital and technology-intensive than the assemblers. Therefore, Vietnam cannot develop the electronics industry at least initially without calling upon the knowledge and know-how of foreign producers.
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| 6. Specific Policy Suggestions |
| (1) Establish basic strategy, master and action plans for the development of electronics industry (It is a must for Vietnam to introduce a unified policy and let the rest of the world know that Vietnam promotes the industry aggressively).
(2) Immediate action needed to retain current electronics assemblers.
 Reconsider tariff rates under the CEPT scheme. The suggested one is in Table 2.
Abolish local content requirements
Abolish the kitting of components
Facilitate the transaction between firms in EPZ and others to develop the domestic linkage.
(3) Introduce aggressive FDI promotion policies to develop parts and components sectors. To do so,
Establish Vietnam Industrial Development Authority equivalent to MIDA in Malaysia and implement policies decided by various ministers.
Provide one-stop services to the investors so that it is easy for them to find relevant information and apply for the investment project in Vietnam.
Admit 100 % foreign equity ownership without any export condition.
At least initially provide tax incentives more favorable than other ASEAN countries (corporate income tax, remittance tax for profit, etc).
Exempt import duty on intermediate inputs and machinery for export-oriented firms or provide them export bonus.
Initially, invite any foreign electronics firms. After the first stage, Vietnam can be selective in choosing.
Do not discriminate against SMEs.
Engage in aggressive investment promotion activities overseas.
(4) Improve infrastructure
Telecommunication and Internet services
Electricity
Transportation
Industrial estates
Legal infrastructure
Table 1 Structure of Output in the Case of Malaysia
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Share of
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| Industries |
Cost of Inputs
and Utilities (%)
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Wages
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Others
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| Wearing Apparel
Leather and Fur Products
Footwear
Electronics
Transport Equipment
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64.7
67.0
59.9
79.8
77.2
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19.1
22.9
17.6
5.8
5.7
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16.2
10.1
22.5
14.4
17.1
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Source : UNIDO, International Yearbook of Industrial Statistics.
Table 2 Suggested Tariff Structure
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2003 |
2004
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2005 |
2006~
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| Final products |
20% |
Follow the CEPT scheme
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Parts and materials 1
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0%
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0%
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0% |
0% |
| Parts and materials 2 |
15% |
10% |
5% |
0% |
Notes: 1 means that parts and materials without domestic sup
2 means that parts and materials with domestic suppliers.
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