Will Vietnam’s Private Sector Gamble Pay Off?

Vietnam recently passed Resolution 68, arguably the most consequential directive for its private firms in recent years. It cements the private sector as the most “important driving force” of the economy and aims to unleash homegrown firms and entrepreneurs so they can help deliver infrastructure upgrades, become more productive, and emerge into globally competitive firms.

In short, the government has pinned its hopes on them being the backbone of higher-value economic growth. But unless oversight, transparency, and fair competition are baked into its implementation, the strategy may repeat the mistakes of the past.

Resolution 68 is long overdue. Today, the private sector contributes 51 per cent to GDP and accounts for around 82 per cent of employment. Resolution 68 aims to lessen administrative burdens, increase protections for private businesses, and ease access to land, facilities, and capital. Resolution 68 enshrines the protection of property rights, business freedom, and contract enforcement, and directs future laws and institutional adjustments to eliminate barriers, unlock social capital, drive innovation, and enhance national competitiveness.

Ever since the National Assembly officially legalised the private sector in 1990, it has played second fiddle to foreign corporations and state-owned enterprises (SOEs). Riding the post-Cold War globalisation wave, Vietnam gave generous support to foreign corporations to court foreign direct investment (FDI). In the early 2000s, heavy-hitting SOEs were touted as the backbone for economic growth. SOEs enjoyed favorable access to capital, land, resources, and political cover, despite having lower productivity when compared to their private counterparts.

However, the nearly unfettered access to loans, along with opaque decision-making and rent-seeking behavior, led to a wave of mismanagement — the shipbuilder Vinashin serving as the most egregious example. The company amassed huge debts through reckless investments in power plants, real estate, and even agricultural production before going bust in 2010. By the mid-2010s, nearly all major SOEs had faced state sanctions for mismanagement.

The key lesson here is that simply removing barriers to investment alone is insufficient. The government must also ensure that state backing goes hand in hand with prudent oversight and anti-corruption efforts, a level playing field between large conglomerates and small to medium-sized enterprises (SMEs), and greater efforts to integrate domestic firms global supply chains.

Resolution 68 certainly shows promise, but unless safeguards are put in place, the strategy may repeat the mistakes of the past.

Private firms themselves are not immune from corruption and rent-seeking behavior. FLC Group Chairman Trinh Van Quyet was arrested in March 2022 for illegal stock trading, shortly after signing a major investment deal in an infrastructure railway project. His much-publicised trial enveloped many FLC personnel as well as the chairman’s own family members. FLC has struggled to regain its footing since the scandal.

Resolution 68 wants to create private economic groups that hold regional and global significance. Failing to combat corruption will stymie this aspiration.

Awarding contracts without proper due diligence will continually pose risks. Take the proposal to finance Vietnam’s High-Speed Rail (HSR) project by Vinspeed, a subsidiary of Vingroup, Vietnam’s largest private conglomerate founded by the country’s richest man, Pham Nhat Vuong. Vinspeed plans to finance HSR with 20 per cent of its own capital, with the remaining 80 per cent stemming from a 35-year, zero-interest loan from the state.

But Vingroup has faced increasing scrutiny over its investment decisions, and could find itself in a similar position to Vinashin. If HSR’s progress becomes wedded to Vingroup’s performance, the state may have to intervene, given the economic and reputational importance of the rail project.

Likewise, greater state promotion of the private sector also needs to ensure that large conglomerates do not put a stranglehold on the economy and monopolise knowledge transfer, thereby potentially blocking the growth of SMEs.

Resolution 68 notes that the private sector should compete on an equal footing with other economic sectors, but makes no mention of firms competing equally amongst each other. Korea’s chaebols provide a telling example of the perils of tilted playing fields. The corporate behemoths’ market dominance in recent years has blocked the growth of SMEs and startups, despite the latter accounting for a much higher share of employment.

Resolution 68 aims to establish 2 million enterprises within the economy. But as experts have pointed out, quantitative growth in private firms is not enough. SMEs need opportunities to integrate into value chains and establish strong linkages with domestic and foreign companies.

There is evidence of such progress in FDI. Ever since it first opened up to FDI in the late 1980s, Vietnam’s ability to attract FDI has been an unbridled success. However, Vietnamese domestic firms have struggled to benefit from the spillover effects of FDI and to become more integrated into supply chains. Samsung, Vietnam’s largest single source of FDI, has historically relied on foreign contractors to supply components.

To combat this, the Ministry of Industry and Trade organised a domestic supplier development program with Samsung. Meanwhile, U.S. chip giant Synopsys has agreed to set up chip design training in Vietnam to ensure better spillovers from FDI. The state’s investment plan for HSR, too, contains clauses that require potential FDI to attach commitments to technology transfer and human resource training.

Resolution 68 comes at a critical juncture. Vietnam is entering what General Secretary To Lam calls the “sprint period,” where ambitious reforms and projects will catapult Vietnam into higher quality levels of development. The state has pinned its hopes on domestic firms to lead that growth. But will its gamble pay off? Resolution 68 certainly shows promise, but unless safeguards are put in place, the strategy may repeat the mistakes of the past.

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