DETERMINING FACTORS AFFECTING COMPETITIVENESS OF VIETNAMESE FOOD PROCESSING ENTERPRISES

1
DETERMINING FACTORS AFFECTING COMPETITIVENESS OF
VIETNAMESE FOOD PROCESSING ENTERPRISES

• Team leader Assoc. Prof. Dr. Nguyen Thi Canh
• Tran Viet Hoang, PhD
• Le Nguyen Hai Dang, MA
• Luong Thu Ha , MA
• Nguyen Quoc Huy , MA
• Pham To Mai , MA
• Le Quang Minh , MA
• Ho Dac Nguyen Nga , MA
• Cung Tran Viet , MA

2
Contents

• Abstract
• Rationale
• Research questions and hypotheses
• Methodologies
• Data sources
• Work plan (next 5 weeks 3 months)

3
Abstract

• This proposal plans to apply and extend the
  methodologies and quantitative methods used in
  VEEMs previous studies on textile-garment
  industry in order
• To measure comparative advantage and firm-level
  competitiveness,
• To justify factors and policies affecting
  competitiveness of food processing enterprises
  (FPEs).

4
Abstract (cont.)

• Specifically, this proposal will be used
• Unit cost-based approach with different types of
  price
• Total factor productivity analysis
• Empirical models for measuring technical
  efficiency
• Identification of factors affecting firm-level
  competitiveness and
• Firm-reaction simulation to policy changes that
  influence FPEs.

5
Abstract (cont.)

• The outcomes will be compared with those of Thai
  producers as well as with those in different
  economic sectors (state, private and
  foreign-owned).
• The impacts of policies and ability of resource
  accessibility of enterprises will be analyzed by
  using qualitative methods.
• The consequences of quantitative and qualitative
  analyses will lay the foundation for policy
  recommendation and supporting solutions for FPEs.

6
Rationale The context

• Vietnam joined ASEAN, APEC, AFTA
• Preparing WTO accession
• Vietnam - US trade agreement signed (July 13,
  2000)
• ?Opportunities expand markets

7
Rationale (cont.)

• FPI is a key industry in manufacturing ind.
• FPI -gt 36.5 units, 27.1 prod. value, 30
  export rev., 15 labor force
• HCMC -gt 19 GDP, 33 national budget, 45 export
  value
• HCMC FPEs -gt 16 units, 32 total gross
  industrial production value of Vietnamese FPI
• Growth of Vietnamese FPI 7.42, that of HCMC
  FPI 9.41
• ?importantly contribute to economic growth, solve
  social issues (? jobs, ? poverty)

8
FPI compared with the others
9
HCMC compared with Vietnam
10
Rationale The context (cont.)

• HCMC FPI plays an important role
• contributing to the growth of FPI in Vietnam in
  general and HCMC in particular,
• taking part in solving other social issues such
  as creating jobs or alleviating poverty (not for
  people in HCMC only), as well as creating markets
  for products of farmers in Mekong River Delta,
  where more than 60 food of Vietnam is produced

11
Rationale The context (cont.)

• Some types of products of HCMCs foodstuff
  industry account for nearly 70 of total products
  of the same kind produced in Vietnam like instant
  noodles, vegetable oil and meat-based products
• Some kinds of products of HCMC have been taking a
  higher proportion in export value compared to
  that of the whole country like rice, frozen
  seafood, milk, coffee, tea, processed meat,
  canned fruits and vegetables.

12
Challenges

• Decreasing growth rate and share
• 13 compared with 7.42 (Vietnam)
• 13.42 compared with 9.41 (HCMC)
• ?negatively impact on growth of Vietnam FPI
• Decreasing trend of world prices of agro-products
• Subsidy and protection are off
• Increasing input costs
• More int. competitors

13
Burning issues in FPI

• Firstly, food processing products from Thailand
  have invaded Vietnams market, in which there are
  many products (e.g. rice, fruits, canned stuffs,
  instant noodles) enjoying price and quality
  competitiveness compared with those of Vietnamese
  producers.

14
Burning issues in FPI (cont.)

• Secondly, most food processing products of
  Vietnam have experienced high share of material
  inputs (accounting for 70-90 total production
  costs) while domestic material inputs from
  agriculture suffer supply and price instability.
  Unstable supply sources and prices while the
  Government currently has no policies on planning
  material zones and price stabilization have
  impeded firm competitiveness in implementing
  export contracts.

15
Burning issues in FPI (cont.)

• Thirdly, a big obstacle to competitiveness of
  Vietnamese FPEs is the world prices of food
  products have decreasing and unstable tendency
  while input costs of Vietnamese food products
  increase and the Government has no policies for
  stabilizing agro-product prices and reducing
  costs of public services.

16
Burning issues in FPI (cont.)

• Fourthly, as entering potential markets like
  USs, Vietnamese food processing products have
  encountered legal obstacles such as Anti-Dumping
  Law, which Vietnamese firms have not yet fully
  understood and have no substitute markets,
  causing big losses to them.

17
Rationale Related research

• Numerous projects, textbooks, working papers in
  the world
• In Vietnam, Trade liberalization and
  competitiveness in Vietnam textile-garment
  industry (VEEM project)
• Productivity analysis for Vietnam
  textile-garment industry (VEEM project)

18
Rationale Related research (cont.)

• In HCMC, Input costs and competitiveness of some
  products of FPI in HCMC (IER)
• examined five products (rice, instant noodles,
  vegetables oil, canned fruit and frozen shrimp)
• surveyed enterprises producing and trading the
  five products
• Input costs of Vietnam/HCMC-based products have
  been compared to those of Filipino same products
  and calculated DRC (Domestic Resource Cost), ERP
  (Effective Rate of Protection)

19
Rationale Limitations

• No quantitative analysis to measure the effects
  of factors impacting firm competitiveness, and
  have not yet measured firm- and industry-level
  competitiveness
• without analyzing firm-level competitiveness and
  without comparing competitiveness among
  enterprises by ownerships (state, private and
  foreign-owned)

20
Rationale Value added

• Methodologies and approach are completely new.
• Firm-level competitiveness analysis will be
  applied instead of product-level analysis.
• Firm-level data of the whole FPI not just of
  those producing 5 products will be used.

21
Rationale Value added (cont.)

• International comparison between Vietnamese and
  Thai producers will be undertaken, because
  Thailand has many competitive food processing
  products compared to Vietnam.
• Our study will apply the same methodologies used
  in VEEMs projects. However, ours have been
  extended by calculating unit cost in three
  different prices and firm-reaction simulation to
  changes in specialized policies for FPI.

22
Research questions

• What is the present situation of comparative
  advantage and competitiveness of
  Vietnam/HCMC-based FPEs?
• Hypothesis FPEs have comparative advantage, but
  their competitive capacity shown in indicators of
  unit cost and technical efficiency are not high.

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Research questions (cont.) Q.2

• How is the competitiveness among FPEs by economic
  sectors (state, private, foreign-invested) and
  among FPEs producing different products?
• Hypotheses
• State-owned and foreign-owned firms have
  competitive advantage compared with private ones,
  but their profitability and competitiveness may
  be not higher than that of private firms
• FPEs producing different products will enjoy
  different efficiency and competitiveness.
• HCMC FPEs manufacturing products that account for
  higher proportion in the total value of that
  product in the whole country will be higher
  competitive and efficient than firms
  manufacturing other products

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Research questions (cont.) Q.3-Q.4

• Q. 3 Can Vietnamese FPEs compete against Thai
  FPEs?
• Hypothesis Vietnamese/HCMC FPEs are less
  efficient than those in the same industry in
  Thailand, hence, less competitive.
• Q. 4 How is TFP changing pattern of
  Vietnamese/HCMC-based and Thai FPEs over time?
• Hypotheses
• TFP of Vietnam/HCMC FPI is lower than that in
  Thailand
• TFP of FPI is increasing over time.

25
Research questions (cont.) Q.5-Q.6

• Q. 5 Which policies and factors affect cost
  competitiveness of Vietnamese/HCMC FPEs?
• Hypothesis Policies impacting input costs (e.g.
  policies on trade, finance, land, macro business
  environment etc.) and factors (e.g. labor,
  capital, materials) affects cost competitiveness
  of Vietnamese/HCMC FPEs
• Q. 6 How do trade liberalization policies
  (tariff cut) impact cost-price competitiveness of
  FPEs?
• Hypothesis Trade liberalization policies (tariff
  cut following AFTAs Tariff Cutting Schedule)
  have influences on cost-price competitiveness of
  FPEs, especially on firms producing highly
  protected products.

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Research questions (cont.) Q.7

• Q. 7 Why are domestic input material supply and
  its prices unstable? How does this instability
  impact cost competitiveness of FPEs?
• Hypothesis The limitations of agricultural
  policies (price-stability policy, policies on
  planning on zone for agricultural materials etc.)
  lead to unstable prices and material input
  resources and strongly impact on the
  competitiveness of FPEs. In the condition of
  unstable input supply and prices, firms using
  imported inputs and those enjoying high share of
  value added in their product values will be more
  efficient and competitive.

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Research questions (cont.) Q.8

• Question 8 How do falling world price of
  agro-products affect efficiency and cost
  competitiveness of exporting Vietnamese/HCMC
  FPEs?
• Hypothesis Prices of food products in the world
  market are decreasing while input costs are not,
  especially costs of services monopolistically
  supplied by the Government, strongly affect cost
  competitiveness of FPEs.

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Research questions (cont.) Q.9

• Question 9 How do The US protection policies on
  agro-products affect Vietnamese firm
  competitiveness as they enter US markets and face
  increasing import tax rates such as on fish,
  shrimp?
• Hypotheses
• The application of US anti-dumping law to
  Vietnamese food products will impede
  competitiveness of firms having exports to US
  market
• FPEs (shrimps, fishes) will be more competitive
  if they switch to or diversify markets instead of
  only concentrate on US market.

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Research questions (cont.) Q.10

• Question 10 Have ability to access to resources
  of FPEs by ownerships been fair yet?
• Hypotheses
• At present, there is still unfair in accessing to
  resources among enterprises by ownership,
  reflecting in policies such as trade policies
  (export license, quota etc.), credit policies,
  and land policies, creating constraints and
  inequality in accessing to resources, and
  distortions of input prices, especially for
  state-owned enterprises
• Ability to access to production resources of
  Vietnam/HCMC-based FPEs in private sector is
  lower than that of state-owned and
  foreign-invested companies, thus lower
  competitive advantage.

30
Research questions (cont.) Q.11

• Question 11 How do qualitative factors affect
  competitiveness of Vietnamese/HCMC FPEs?
• Hypothesis Internal limitations of firms
  (managerial skills, labor skills, technological
  levels, firm strategy etc.) create constraints on
  firm competitiveness in integration process.

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Research questions (cont.) Q.12

• Question 12 How does firm react to anticipated
  policy changes which directly impact cost
  competitiveness of FPEs (changes in policies on
  stabilizing agro-products prices,
  increasing/decreasing costs for public services,
  changing interest rates, cutting import tax
  rates, changing minimum salary/wage anti-dumping
  laws of developed countries such as the US, EU
  etc. imposed on Vietnamese food imported
  products falling world prices of agro-products
  etc.)?
• Hypotheses
• If changes in policy on business environment
  occurred, they would create different reaction to
  cost competitiveness of FPEs by ownership and
  among FPEs producing different products
• If policy changes had an impact of increasing
  input costs and declining output prices, FPEs
  producing higher value added products would
  experience less impact than those producing lower
  value added products.

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Research questions (cont.) Q.13

• Question 13 What roles does the Government play
  and which measures does the Government should
  impose to enhance competitiveness of
  Vietnam/HCMC-based FPEs in the process of trade
  liberalization and economic integration?
• Hypotheses
• Vietnam/HCMC-based FPEs will have higher
  competitiveness if productivity and production
  efficiency are improved, input costs including
  material, energy and public services costs are
  reduced and have stable supply sources, the level
  of technology and human resources are enhanced
  and macro policies are stabilized
• FPEs in private sector will have higher
  competitiveness and efficiency if they have equal
  access to production resources
• Vietnam/HCMC-based FPEs will be more competitive
  if value added of their products increases
• Vietnam/HCMC-based FPEs will be more competitive
  if they have the capacity for diversifying
  markets and products.

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Methodologies

• Quantitative approach Unit cost (UC ? 1, three
  prices), econometric models (frontier model)
• Policy simulation
• Qualitative analysis (Porters app.)
• Linkage between quantitative and qualitative
  analysis

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Methodologies Unit cost

• Indicator measuring competitiveness of any
  production unit
• UC TC/VO TC/ (Q x P) ? 1,
• TC total cost of production,
• p price of output,
• Q quantity,
• VO value of output.

35
Methodologies Unit cost (cont.)

• Case 1 input and output costs are measured at
  domestic price. The formula (1) will then be as
  follows
• UCd TCd/ VOd TCd / (Q x Pd) ? 1 (1.1)
• Where
• TCd indicates total cost of production at
  domestic market price,
• Pd domestic market price of one unit of output,
• Q quantity produced,
• VOd total revenue at domestic market price.

36
Methodologies Unit cost (cont.)

• Case 2 input and output costs are measured at
  international or export price (CIF prices for
  imports or FOB prices for exports) .
• The formula (1) will be as follows
• UCx TCd/ VOw TCd / (Q x Pw) ? 1 (1.2)
• Where
• TCd Total cost of production at domestic market
  price
• Pwprice of output in international or export
  market (FOB prices for export)
• Q Quantity of export produced
• VOw Total revenue of export at international or
  export price

37
Methodologies Unit cost (cont.)

• Case 3 input and output costs are measured at
  shadow price.
• The formula (1) will be as follows
• UCs TCs/ VOs TCs / (Q x Ps) ? 1 (1.3)
• Where
• TCs Total cost of production at shadow price
• Ps price of output in shadow price
• Q Quantity produced
• VOs Total revenue at shadow price

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Methodologies Unit cost (cont.)

• TCs VIT VIN LCu LCs KCb KCo D
• VIT Q x Ps Q x ,
• where Reo is rate of currency over-evaluation
  (Es/E 1),
• NRP nominal rate of protection
• VIN value of non-tradable inputs at domestic
  prices
• LCu (number of unskilled labors ) x (average
  salary of unskilled labor in enterprise)
• LCs (number of skilled labors ) x (average
  salary of skilled labor in enterprise)
• KCb (total of borrowed capital) x (current
  interest rate in the market)
• KCo (total of own capital) x (current interest
  rate in the market)
• D rate of depreciation
• In this case, Domestic Resource Cost (DRC) will
  be additionally calculated in order to compare
  with UCs.

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Methodologies Unit cost (cont.)

• If UCs and DRC are all less than or equal to 1,
  meaning the product is competitive advantage due
  to cheap and abundant natural and labor resources
  or their high productivity.
• The outcomes of this approach will be the answers
  for questions (1), (2) and (3) and corresponding
  hypotheses will be tested.

40
Methodologies Frontier model

• technical efficiency is the ratio of actual
  output Yactual over potential output of an
  enterprise Ypotential.

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Methodologies Frontier model (cont.)

• Yactual the production output of the ith firm in
  the tth time period, defined by
• Ypotential shows the possible maximum output
• Xit vector of inputs
• ? vector of parameters to be estimated
• vit random variable

42
Methodologies Frontier model (cont.)

• uit technical inefficiency effect , affected by
• mit Zit x ?
• Zit vector (p x 1) of variables, which may
  affect the firm-specific efficiency, including
  age, size, kinds (state, private, or
  foreign-owned) of enterprise
• ? is a (1 x p) vector of parameters to be
  estimated
• (vi-ui ) is found by estimating the equation (2.1)

43
Methodologies Frontier model (cont.)

• The technical efficiency TE allows us to assess
  competitiveness of enterprises, which means the
  enterprise having higher TE is more competitive
  than one with lower TE.
• Moreover, based on production function (2.1), we
  can determine the level of effects of input
  factors to competitiveness of enterprises.
• On the other hands, based on production function
  will determine the contribution of each factor
  (capital, labor, TFP) to output.

44
Methodologies Frontier model (cont.)

• These outcomes of calculating unit costs and
  technical efficiency will lay the base for
  comparing the competitiveness of FPEs by
  ownership and for comparing Vietnamese FPEs with
  Thai FPEs, and to rank the level of
  competitiveness among FPEs.
• Then, the question (1), (2), (3), and (4) would
  be answered and relevant hypotheses will be
  tested.

45
Methodologies Policy simulation

• Simulating the effects of policy shock or
  business environment changes to firm
  competitiveness could be made possible by
  estimating the cost function and factor demand
  function of firm. The former, then, will be
  combined with unit cost analysis in order to have
  a clear view of how policy changes can affect the
  firm competitiveness.

46
Methodologies Policy simulation (cont.)

• Minimize cost c ?L ?K ?INTER subject to
  output constraint y f (L, K, INTER)
• L labors,
• K capital
• INTER intermediate inputs
• Maximize ? g(P, K, L, INTER) PQ rK wL
  hINTER
• subject to y f(L, K, INTER)
• By applying Lagrange function and Shepards
  lemma, we can arrive at factor demand functions
• factori f(w, r, h), i K, L, INTER

47
Methodologies Policy simulation (cont.)

• Changes in, say agricultural policies, policies
  on wages and interest rate, is likely to affect
  material input costs, increase/decrease input
  costs on labors and capital. Polices on trade
  liberalization, for instance tariff cut, are
  likely to reduce output prices. Anti-dumping law
  may affect relative prices of outputs etc.
• Based on this, we can exercise policy simulation
  to see how competitiveness could be affected by
  policy shocks.
• The outcomes of simulation can be used to answer
  question (5), (6), (7), (8), (9) and (12) and
  corresponding hypotheses will be tested.

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Methodologies Qualitative approach

• Michael Porters Production diamond
• factor conditions
• demand conditions
• related and supporting industries
• firm strategy, structure, and rivalry

49
Methodologies Qualitative approach (cont.)

• In general, affecting factors can be classified
  into two groups
• Group 1 global (trade liberalization) and
  industry-specific factors, which include ability
  to access to (1) inputs factors (2) distribution
  channel in domestic and international markets
  (3) production and service infrastructure (4)
  information sources (5) financial and currency
  markets (6)human resources.
• Group 2 firm-specific factors, including (1)
  firms strategy (2) organizational manner of
  production and labors (3) managerial skills and
  computerization of management activities.

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Methodologies Qualitative approach (cont.)

• Qualitative analysis will be based on
  questionnaire on surveying the difficulty levels
  in accessing resources of enterprises.
• The Governments roles and policies affecting
  firm competitiveness and ability to access to
  resources of FPEs are also shown based on
  qualitative analysis.
• Policies are going to be considered including
  fiscal and finance, tax, land, labor, technology,
  market policies and other policies relating to
  public services monopolistically supplied by the
  Government etc.
• The differences of those policies in different
  sectors (state, private, foreign-own) and
  policies on supporting input industries
  (agriculture) and supporting industries and
  services will also be analyzed.
• The outcomes of qualitative analysis will be the
  answers to question (5), (10) and corresponding
  hypotheses will be tested.

51
Methodologies LINKAGES BETWEEN QUALITATIVE AND
QUANTITATIVE ANALYSIS

• From quantitative analysis, we can rank firm
  competitiveness by products, by ownership and
  changing patterns of competitiveness over 6 years
  (1995-1997 1999-2001) based on calculated UC and
  TE.
• Following qualitative analysis, we can classify
  firms into 2 groups (affected and control group).

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Methodologies LINKAGES BETWEEN QUALITATIVE AND
QUANTITATIVE ANALYSIS

• Regarding ability to access to input materials,
  there will be two groups
• Group using imported inputs and
• Group using domestic inputs
• Regarding the impacts of prices and input
  stability
• Group with stable input price and resource and
• Group without
• Regarding trade and financial policies
• group with quota and
• group without quota
• group enjoys favorable credit policies and
• group does not etc.

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Methodologies LINKAGES BETWEEN QUALITATIVE AND
QUANTITATIVE ANALYSIS

• Comparing each group with its calculated UC to
  examine the impacts of each policy. On the other
  hands, we can compare UC and TE of each firm over
  periods (year with favorable treatment, and year
  without it) to assess the impact of policies to
  firm competitiveness.
• Determining and assessing the above-mentioned
  resources affecting competitiveness of studied
  products using qualitative and quantitative
  analyses will answer research questions (5), (6),
  (7), (8), (9), (10) and (11) at the same time the
  corresponding hypotheses will be tested.
• Based on quantitative and qualitative analysis,
  we can identify constraints and their reasons,
  obstacles impacting firm competitiveness,
  especially those of private enterprises. This
  will lay the foundation for measures and policy
  implications to the Government and enterprises to
  enhance competitiveness of FPI in the integration
  process. The outcomes will be the answers to
  questions 13 and corresponding hypotheses will be
  checked.

54
Data sources

• 430 and 350 surveyed enterprises
• 66 Thai FPE
• Qualitative survey will be undertaken
• Statistical data (FPI, ER, inflation rate,
  interest rate etc.)
• Reports on FPI

55
Work plan (next 5 week)

• Week 1 prepare qualitative questionnaire (all
  team members)
• Week 2 collect, check, clean data
• Week 3 send out qualitative questionnaire and
  pilot running quantitative models
• Week 4 review policy effects
• Week 5 discussion (all members)

56
Work plan (next 3 months)

• Month 2 process collected qualitative survey,
  run models again
• Month 3 in-depth survey, calculate indicators,
  write chapters (literature review, background of
  PFI, policy analysis affecting FPI)

57
Thank you for your attention

• Questions and comments are welcome