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BUSINESS SERVICES IN VIETNAM

prepared for:

Mekong Project Development Facility Metropole Center, Suite 706

56 Ly Thai To Hanoi, Vietnam

prepared by:

Service-Growth Consultants Inc. Vancouver, BC, Canada

and

Thien Ngan (Galaxy) Co., Ltd.

Hanoi, Vietnam

December 1998

BUSINESS SERVICES IN VIETNAM Preface .....................................................................................................................v Executive Summary................................................................................................vi Section 1: Business Services - An Overview............................................................. 1 1.1 The role of the services sector ............................................................ 1 1.2 Business services and economic development................................... 5 1.3 Factors in internationally competitive business services ................... 7 1.4 Business services in socialist economies............................................ 9 1.5 Services in Vietnam............................................................................ 9 1.6 Factors influencing the growth of Vietnam’s business services ...... 11 1.7 The objectives of this study .............................................................. 13 Section 2: Methodology............................................................................................ 16 2.1 Preparatory work............................................................................... 16 2.2 Selection of manufacturing industries to study ................................ 16 2.3 Selection of critical business services .............................................. 17 2.4 The field research approach.............................................................. 19 2.5 Characteristics of the final sample.................................................... 22 Section 3: Major Findings for All Business Services .............................................. 23 3.1 Presentation of the field research results .......................................... 23 3.2 Finding #1: Misperceptions about business services ...................... 23 3.3 Finding #2: Inappropriately expensive business services ............... 25 3.4 Finding #3: Average to poor quality of business services .............. 27 3.5 Finding #4: Excessive internal provision due to quality concerns.. 28 3.6 Finding #5: Regulatory framework undermines professionalism... 30 3.7 Finding #6: Lack of specialized capabilities ................................... 30 3.8 Finding #7: Dominant role of the public sector as a supplier ......... 32 Section 4: Strengths and Challenges for Seven Key Business Services.................. 34 4.1 Comparisons across key business services....................................... 34 4.2 Accountancy services........................................................................ 36 4.3 Computer services............................................................................. 39 4.4 Consultancy services......................................................................... 42 4.5 Design and packaging services ......................................................... 44 4.6 Distribution logistics......................................................................... 46 4.7 Market research................................................................................. 48 4.8 Training services ............................................................................... 50 Section 5: Proposed Vietnam Business Services Work Program............................ 54

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5.1 Rationale for a Vietnam business services work program............... 54 5.2 Summary of proposed initiatives...................................................... 54 5.3 Proposed demonstration investment project .................................... 57 Appendices A Selected references ........................................................................61 B Demographics of the enterprises interviewed................................64 C Data tables .....................................................................................66 D Selected sources of international technical assistance ...................74

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FIGURES AND TABLES Figures: 1 Functions played by business services ............................................... 6 2 Business services in Vietnam ........................................................... 15 Tables: 1 Average annual growth rates for world trade: 1990-96 ..................... 2 2 Percent of world exports by levels of development: 1990 & 1996.... 2 3 Gross domestic product by industry: 1990-96................................. 10 4 Employment by industry: 1990-95 .................................................. 10 5 Balance of payments: 1993-97 ........................................................ 11 6 Business services of importance to SMEs........................................ 18 7 Geographic distribution of firms interviewed .................................. 21 8 Percent rating the service important to competitiveness.................. 24 9 Perceived price by perceived quality................................................ 25 10 Perceived price by quality, by ownership......................................... 26 11 Perceived quality by respondents competing on quality.................. 27 12 Percent relying on internally provided business services................. 28 13 Source of supply for business services ............................................. 29 14 Percent citing quality control as reason ............................................ 29 15 Availability of specialized business services ................................... 31 16 Leading quality factor needing improvement................................... 32 17 Source of purchase by ownership ..................................................... 33 18 Comparison of key business services ............................................... 34 19 Distribution of customers ................................................................. 35 20 Types of domestic customers............................................................ 36 21 Computer usage by sector................................................................. 41 22 Quality of consultancy services by source of purchase.................... 44 23 Quality of distribution logistics by source of purchase.................... 48 24 Summary of initiatives proposed...................................................... 59

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Preface To facilitate private sector growth, international donors have focused mainly on increasing private sector access to finance, reducing legal and regulatory constraints, and building business support services. One such initiative is the multi-donor Mekong Project Development Facility (MPDF), managed by the International Finance Corporation (IFC) and designed to promote private, small- and medium-sized enterprises (SMEs) in Vietnam, Cambodia, and Laos. The Facility provides assistance through two core programs: investment evaluation and promotion (Part A) and business support services (Part B). Its target clientele for Part A are firms with investment projects of between US$250,000 and US$10 million. Part B of the Facility encourages expansion of institutions and firms that can provide in-country services that support SMEs in areas such as accounting, finance, legal services, marketing, market research, and management/technical consultancy. This Business Support Services component was created knowing that SMEs cannot develop effectively and profitably unless they have quality business services available to them. The present study addresses an “infrastructure” element critical to the success of both Parts A and B: the availability in Vietnam of high quality business services. The authors wish to thank all of the persons from firms and agencies who gave so generously of their time in interviews. Without their cooperation, this study would not have been possible. Finally, the authors are grateful to Leila Webster and John McKenzie of MPDF for their generous support to this study and to the Canadian International Development Agency for its funding.

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Executive Summary

To improve the competitiveness of small and medium enterprises (SMEs) in Vietnam, the Mekong Project Development Facility (MPDF) has focused to date on finance issues and strengthening managerial capability. MPDF, with its mandate to provide assistance to the development of SMEs, has commissioned this study so that a close look can be taken of the third competitiveness factor, i.e., the availability to SMEs of reasonably-priced, high quality business services that can provide specialized expertise in key operational areas. To achieve its objectives and to support MPDF’s ongoing activities in Vietnam, this study focused on six such business services: accountancy, consultancy, design, distribution logistics, market research, and training. Researchers interviewed 64 business service firms and 89 manufacturers in food processing, chemicals and plastics, construction materials, electronics, garments and shoes, and metal working representing both private and public enterprises in Hanoi, Ho Chi Minh City, and other provinces. As a result of both field research and interviews with knowledgeable informants, the major findings of the study are as follows:

#1: There is a striking disconnect between government’s perceptions of the role of business services in the economy and current economic realities.

#2: Vietnamese business services are more expensive than warranted by their

quality.

#3: The average quality of Vietnamese business services is only adequate to poor, placing the business community at a competitive disadvantage.

#4: There is an inordinately high level of internal service provision due to

quality concerns.

#5: The current regulatory framework undermines the professionalism of business service providers.

#6: Business service firms agree with their customers that they lack

specialized capabilities and a strong customer orientation.

#7: The public sector dominates the provision of business services normally provided in the private sector.

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Regarding the specific business services studied, all had significant challenges to

provide competitive inputs to their business customers. The issues that need to be addressed as a result of the major findings are complex and interrelated and, therefore, cannot be effectively solved as stand-alone issues. To deal with this implementation problem, this report proposes a series of interrelated activities that would comprise an initial work program (hereby referred to as the Vietnam Business Service Work Program) in order to strengthen the seven business services targeted in this study. Also, given limited resources and the different mandates of key players that could and should be involved with the implementation of the proposed work program (including relevant government agencies, donors, local enterprises, academic institutions, and business support organizations), a lead sector is recommended for each suggested activity. This would allow for immediate action to be taken for each targeted business service, and lessons learned from the pilot sector to be transferred to other business services. Structurally, each suggested activity is described in three phases: raising awareness of the issue, skills building, and then recognition of the success achieved. A summary of the initiatives proposed for the Vietnam Business Services Work Program is given below: • A seminar to report out the results of the study and form a Business Services

Advisory Council to assist MPDF in implementing the other initiatives in the Vietnam Business Services Work Program.

• An initiative to raise awareness about the contribution of business services.

• An initiative to strengthen services marketing and management skills in business

services firms.

• An initiative to improve service quality, including an awards program for service excellence.

• A case study of forming an autonomous, self-managed service industry association

to learn by seeing what works best.

• An initiative to enhance technical skills for service professionals.

• An initiative to institute ongoing continuing professional education to strengthen specialty skills.

• An initiative to address needed regulatory changes in the pricing of Internet

access and international telecommunications, the taxation policies for service

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firms, and the uneven playing field between public enterprises and private sector service firms.

• A demonstration investment project in back office operations.

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SECTION 1 BUSINESS SERVICES - AN OVERVIEW

1.1 The Role of the Services Sector 1.1.1 The present globalization of world markets is due in large part to the internationalization of the service sector. Although often “invisible” to policy makers, services play a vital role in facilitating all aspects of economic activity. Infrastructure services (utilities, transportation, telecommunications, and financial services) support all types of businesses. Education, health, and recreational services influence the quality of labor available to firms. Business and professional services provide specialized expertise to increase firm competitiveness. The quality of government services determines the relative efficiency of the business environment in which firms must operate. 1.1.2 The role played by service industries in economic development continues to be largely overlooked, despite careful documentation of its impact over the past twenty years (e.g., Riddle, 1984, 1985, 1986, 1987; Shelp, 1981; Singelmann, 1978; UNCTAD, 1989, 1993, 1995a). Service industries continue to lead economic growth in economies at all levels of development, driven in part by the rapid changes in information technology and telecommunications that support service delivery. Environmentally speaking, services are “clean” industries. In most service industries, massive start-up capital is not required so that service firms can be established even by persons with modest means. In keeping with the growth in services output, service firms have been the primary creators of new jobs, accounting for over 90 percent of new jobs globally since the mid-1990s. Of particular importance to developing economies, service firms create the kinds of jobs that are well-suited for skilled university graduates (thus stemming “brain drain” from less developed markets) as well as for a range of school-leavers who often find it hard to obtain work, including women. 1.1.3 Within domestic economies, service industries contribute at least 35 percent of the gross domestic product (GDP) in even the least developed economies and average over 50 percent in most economies. Even economies assumed to be primarily manufacturing are predominantly service economies, with services output comprising well over half of GDP, e.g., Germany (72%), Hong Kong (89%), Singapore (72%), and the USA (76%). Increasingly even in goods production, the major portion of value-added (up to 70%) comes from services inputs. 1.1.4 Unfortunately, inadequacies in capturing and reporting services statistics continue to be a problem worldwide (Riddle, 1989b; UNCTAD, 1995b; UNCTAD and World Bank, 1994) and mask the contribution made by service industries. “Services” are often equated with “personal and community” services rather than with the entire range of service industries. For example, economic overviews will talk separately about “transportation” (a service industry), “telecommunications” (a service industry),

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“finance” (a service industry), and “services.” Such treatment reinforces a traditional view of services as “residual” and makes invisible the critical subset of service industries known as “business services” or “producer services” that support all economic enterprises. There are also two categories of domestic economic activity that have been recognized in international trade statistics as “services” but that continue to be aggregated with manufacturing as “industry” in national GDP statistics - i.e., construction and utilities.1 The statistics presented in this report follow the convention of placing utilities and construction in the service sector. 1.1.5 By 1996, world trade in services was over US$1.3 trillion, with average annual growth rates equal to or higher than goods trade (see Table 1). Developing and transitional economies have been increasing their share of world services trade (see Table 2), with the fastest growth being in “other services” exports, i.e., business and professional services, telecommunications, construction, financial services, cultural services, education, health, etc.

Table 1 Average Annual Growth Rates for World Trade in Goods and Services: 1990-96

(percents)

Developing/Transitional Economies Developed Economies Sector Exports Imports Exports Imports

Goods 10.0 11.1 6.2 5.5

Services: Travel Transport Other services

11.4 12.2 8.3 15.5

8.9 7.9 13.3 9.4

6.0 4.5 6.8 6.9

5.6 4.6 5.7 7.3

Source: Calculated from IMF Balance of Payments data.

1While many associate construction only with newly built structures, in fact construction comprises a range of services including project management, repair and restoration, etc. Since construction is treated as a service from the perspective of trade statistics, classifying it with services in terms of domestic statistics allows for parallel treatment. For utilities, traditionally their production and distribution were inevitably linked. More recently, however, there has been a growth in companies that only distribute utilities such as electricity, gas, and water that they obtain from producers.

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Table 2 Percent of World Exports by Level of Development: 1990 and 1996

Developing/Transitional

Economies Developed Economies

World Total

Sector 1990 1996 1990 1996 1990 1996

Goods 29 34 71 66 100 100

Services: Travel Transport Other services

24 27 25 20

30 33 29 28

76 73 75 80

70 67 71 72

100 100 100

100 100 100

Source: Calculated from IMF Balance of Payments data. 1.1.6 Studies over the past fifteen years have documented the link between rapid economic growth and the development of key service industries, most notably telecommunications and business and professional services (Riddle, 1986, 1987; UNCTAD, 1989, 1993). There are four types of services in particular whose development influences economic growth (Riddle, 1991a). One of these is telecommunication services, which serves as a basic utility in all economies and the “highway” over which a majority of service transactions occur. The competitiveness of national economies is directly linked to immediate, reliable, and inexpensive access to telecommunications networks (UNCTAD, 1997). Not only do the speed and efficiency of communications affect all business transactions, but state-of-the-art telecommunications networks also facilitate three critical changes in industry structure:

a) Distance delivery of core services such as health and education through “telehealth” and “distributed learning” options, making high quality specialized services potentially available in even the most remote communities. Pilot projects in a number of developing countries are demonstrating the role that distance delivery can play both in narrowing the gap between quality of life in developing and developed economies and in increasing access to services for rural and remote communities.

b) The option of dispersed employment structures (“tele-commuting”), allowing

persons to work for larger organizations from smaller communities. This trend has been vital in preserving the viability of more remote communities (and so reducing population presssures on larger urban areas) by increasing employment options.

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c) The creation of “back office” operations, with associated high-skill jobs, as an alternative to out-migration.

1.1.7 The linkage of telecommunications with computer services now allows firms to use information technology efficiently to work with strategic partners in other economies and provide services readily across national borders. One of the outgrowths of this linkage has been the rapidly-expanding global Internet, which is estimated to have 300 million users by the end of 1999. Internet users can access digitalized information of all kinds anywhere in the world, creating a very dynamic environment in which new ideas and technologies spread rapidly. 1.1.8 As services trade liberalization progresses under the multilateral General Agreement on Trade in Services (GATS) and as part of regional free trade agreements, service firms in all economies are facing increasing international competition. To survive and thrive in a globalized economy, high-speed inexpensive Internet access has become a necessity for the business community. The Internet provides for the first time a real “level playing field” for small and medium service firms from developing economies to compete with the large service transnationals. Conversely, as purchasers of services turn more and more to the Internet both for information on services available worldwide and to purchase services, firms without efficient Internet access run a real risk of becoming marginalized in the global economy. 1.1.9 One of most direct competitive differences will be in the cost of international telecommunications, which is a critical and often costly input for service firms. Internet telephony is already a reality, providing international phone and fax services for the cost of a local call (due to making better use of bandwidth). Another will be in the structure of how services are delivered as the Internet is eliminating the need for many intermediary functions (e.g., distributors, wholesalers, and even retailers in some instances) and supporting customers to self-serve on-line. At the same time a range of new businesses (e.g., website design and maintenance, Internet access provision, facilitation of electronic commerce, etc.) is emerging that offer competitive opportunities for developing economy firms. 1.1.10 Service firms are already actively using the Internet to communicate easily with customers and strategic partners, to identify and bid on international contracts, to research international best practices and new export markets, and to promote their capabilities to potential new customers. The Internet has also provided the impetus for the explosion in electronic commerce involving both developing and developed economies. Estimates indicate that at least US$18 billion in electronic sales is already taking place via the Internet, with 2002 estimates at US$330 billion (Bacchetta et al, 1998). Over 10 percent of all consumer shopping is already taking place electronically, and research has indicated that transactions in business services are presently ten times the volume of consumer purchases. The development of highly specialized services, for example, depends on having a large enough customer base to warrant such specialization. Access to potential

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customers worldwide through the Internet's support of electronic commerce is helping create such a critical mass of customers. 1.1.11 Thirdly, education and training services need to be available to ensure an appropriately skilled labour force. International competition has shifted from price to quality and flexibility, meaning that low-cost, low-skill labour is not necessarily an advantage anymore. A major constraint for many developing economies is the lack of appropriately skilled workers due to educational systems that focus on rote acquisition of information supplemented by limited training capacity in-country, with resulting inefficiencies in the business community due to an inability of employers to find employees with the needed technical and analytical skills. Service sector workers, for example, need not only technical skills (including competence with information technology) but also the interpersonal communications and problem-solving skills that allow staff to interact effectively with customers to provide a quality service. The World Bank is experimenting with a new way of measuring national wealth through the measurement of “Human Capital”. It has already determined that, in high income countries like Japan, human capital accounts for over 80 percent of the national wealth. 1.1.12 The fourth type of service is specialized business and professional services available for sale to other businesses. Business and professional services, the focus of this study, form a critical part of the service infrastructure for any economy as all industries, goods and services alike, use service inputs. On average in developing economies, at least one-third of the inputs purchased by businesses are services - accountancy, legal services, insurance, research, design, marketing, transportation, communications, and utilities. Their quality and availability affects both the growth and export competitiveness of domestic industries that use them as inputs as well as the attractiveness of economies as investment sites. Business services support small and medium enterprise (SME) growth by providing them with the opportunity to contract out for specialized assistance, e.g., tax law, audit work, graphic design, etc. Where needed business services are not available, SMEs must either increase overheads by hiring new staff (who are likely to be generalists, not specialists) to provide the service or do without it. 1.2 Business Services and Economic Development 1.2.1 Business services are important throughout the production cycle. UNCTAD has described the timing of service provision in three stages: “upstream” (feasibility studies; research and development activities); “onstream” (such as accounting, engineering, and administrative services); and “downstream” (such as advertising, warehousing, and distribution). Another way of describing business services is by the function that they play for the firm using them (see Figure 1):

• reducing fixed costs • providing skills and quality enhancement

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• improving operational efficiency • supplying market information • supporting financial management • providing links to domestic and external markets.

1.2.2 Business services also play an important role in several aspects of structural change within economies (Riddle, 1989a). First, they support specialization within the economy. Second, they facilitate the move from government monopolies to private agencies by substituting for the wide range of support services available within government departments. Third, they are critical inputs for the process of moving from low-value-added to high-value-added exports. 1.2.3 The United Nations Conference on Trade and Development (UNCTAD) has found, in a series of studies (1989, 1995a), that the presence or absence of sophisticated business services is a key differentiator between developed and developing/transitional economies. In many developing/transitional economies, traditionally such services are provided only within large firms or government departments. Where business services are not readily available to private sector SMEs, expertise must be hired in-house (thus increasing fixed operating costs), purchased from a distant domestic source (thus reducing price competitiveness), or procured from a foreign supplier (thus increasing imports).

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Enterprise

Links to MarketImport/export

Trading housesAdvertisingAir cargo

Conference/exhibitionCustoms brokers

Freight forwardersMarketing; public

relationsVisa services

Reduce Fixed CostsEquipment rentalPersonnel supply

Photocopy; printingSecurity servicesTransportation

Translation servicesWarehousing

Market InformationDatabase development

Internet researchMarket research

Website design &management

Operational EfficiencyComputer services

Consultancy servicesCourier services

Environmental servicesEquipment repair

Geologists/geophysicistsLaboratory services

Legal servicesR&D

Telecom-related services

FinancialManagementAccountancy

BankingInsurance

Venture capital

Skills & QualityEnhancementDesign services

Inspection & testingInstrument calibration

PackagingQuality assurance

Training

Figure 1Functions Played by Business Services

1.2.4 An important change directly related to the development process has been the “externalization” of such services to become independent firms so that they are readily available to SMEs on a “variable cost” basis. Such an externalization process leads to a significant impact on both firms' cost structure and their overall competitiveness. Where external business services are available, SMEs can contract for the amount of expertise needed, keeping overhead lower and making the firms less vulnerable to economic swings. In addition, SMEs are free to access a wider range of specialized expertise on a hourly basis than they could afford to hire on a full-time basis. Within external service firms, the professional staff can develop specialty skills for which there would not be sufficient demand without having multiple clients. 1.2.5 In unpublished Asian Development Bank studies conducted by Service-Growth Consultants in Indonesia and Malaysia, both goods and service producers rated business and professional services2 as their most critical competitive input, followed by telecommunications and commercial education and training. The studies also showed that both goods and service exporters develop a relatively high dependence on imported business service inputs in order to be competitive in international markets if comparable services of good quality are not available domestically. Thus, a development focus on strengthening business services can have beneficial spin-offs in the local economy as well as decrease an economy's import dependence. In addition, unpublished studies by Service-Growth Consultants for the governments of Dominica, Hong Kong, and Nova Scotia (Canada) show that the quality and range of locally-available business services is one of the deciding factors in the decision-making of foreign investors. 1.2.6 One important trend from a development perspective in business services is that of “back office” operations, which are the provision from a distance of any business support function, e.g., data processing, customer call centers, insurance claims adjudication. OECD estimates that the 1998 “back office” market demand that could have been provided by developing countries was approximately US$438 billion, or at least 15 percent of non-OECD countries' current total exports. For example, world demand for medical transcription is approximately US$200 million, while that for legal transcription is US$400 million and for computer software Year 2000 (Y2K) compliance is over US$600 billion. U.S. corporations alone spend US$50 billion a year on information processing, at least 20 percent of which could be provided in a developing country back office environment. Given the high growth projections and potential for creating skilled jobs, governments in Barbados, Belgium, Canada, Ireland, Jamaica, the Netherlands, the Philippines, St. Kitts, and St. Lucia have formed special development corporations to attract such offshore business. 1.3 Factors in Internationally Competitive Business Services 1.3.1 The hallmark of competitive business service industries is the concept of self-regulation. Whether mandatory (as with accounting) or voluntary (as with

2“Business and professional services” in this case refers to services like accountancy, advertising, architecture and design services, computer services, consulting engineering, environmental services, legal services, management consulting, market research, and personnel supply.

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management consulting), most business service industries in developed economies have an industry association with the delegated legal authority to accredit professionals and require a minimum level of ethical conduct. Such associations typically have identified a common body of knowledge in which accredited professionals must demonstrate competence, whether by examination, experience, or a combination of both. Increasingly, associations also require continuing professional education to maintain such accreditation, as well as evidence of conformity to the industry's code of conduct. Associations often play the role of benchmarking the industry against international best practices and encouraging their members, through training options, to keep up with international trends. 1.3.2 The acquisition and application of a common body of knowledge is usually ensured through a strong link between industry and academia. No useful purpose is served if academic programs train new graduates to inadequate or outdated industry practices. Increasingly, technical and professional training programs have industry advisory boards to help ensure that the curriculum is comprehensive and relevant. Many business service industries also encourage or require some form of supervised practice, such as internships, apprenticeships, and practica. 1.3.3 From a customer perspective, dynamic business service firms are those that provide one-stop service that addresses their needs effectively. The “one-stop” aspect may be met through strategic alliances among specialty firms or through horizontal integration within firms across related disciplines. For example, accounting firms have expanded their staffing structures into information technology practices, business services consulting, and (more recently) legal services. Customers are looking beyond basic standardized services to having the service firm identify their needs accurately and provide customized solutions on a rapid turnaround basis. 1.3.4 One of the characteristics of business services in many economies is that firms are currently operating under cumbersome restrictions due to domestic regulations that were developed before policy makers realized that business services would become traded. For the past several years the Organisation for Economic Co-operation and Development (OECD) has had a work program aimed at identifying and addressing barriers to international trade in professional services (OECD, 1997). This work is relevant to a range of business services as it documents that internationally competitive service firms are most likely to develop when governments take the following actions:

• Allowing service providers to choose their most competitive form of ownership structure rather than prohibiting specific structures such as incorporation.

• Allowing partnerships between locally-licensed professionals and foreign

professionals, including foreign equity ownership.

• Ensuring that licensing and certification requirements are directly linked to competence (rather than being based on nationality or residency requirements).

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• Ensuring that national regulatory bodies (such as industry associations) enforce ethical standards and recognize both domestic and foreign training or experiential credentials.

The growing trend to challenge national restrictions on organizational structure, foreign ownership, or recognized professional credentials within the World Trade Organization (WTO) as non-tariff barriers will soon make such policy changes a necessity. 1.4 Business Services in Socialist Economies 1.4.1 Based on Marxist economics, socialist economies have traditionally devalued services as “non-productive” with the result of stifling their growth (Riddle, 1991b). For the past seven years, economies in transition in central and eastern Europe have struggled to fast-track development of their business services industries, recognizing that they are “decisive mediators of structural, managerial, and technological innovations” (Kigyóssy-Schmidt, 1998, p. 9). Lack of attention to service sector development under socialist policies has resulted in a lack of appropriate regulation, inefficient service production, slow and unreliable service delivery, and uncompetitive service content (Berthelot, 1996; Kostecki & Fehérváry, 1996). 1.4.2 A major study of business services in the Czech Republic, Germany, Hungary, Poland, and Slovenia has documented previous developmental distortions and analyzed the changes that are now occurring (Ghibutiu, 1998; Kigyóssy-Schmidt, 1998; Zeman, 1996, 1998). In an environment where enterprises belonged to the government, there was little motivation to become more efficient or productive. As these enterprises become privatized and subject to international market competition, however, they need assistance from specialized business service firms in controlling costs and improving product quality. Growth in business services has been shown not only to improve local enterprise competitiveness but also to stimulate employment growth and attract new foreign investors (Ghibutiu, 1998). 1.5 Services in Vietnam 1.5.1 Services in the domestic economy. Service industries already comprised 44 percent of Vietnam’s domestic production by 1996 (see Table 3). But, in contrast to more mature market economies where business services are at least 10 percent of domestic output (see, for example, Singapore, 1986), Vietnam’s business services are probably less than one percent of total domestic output. A transition is underway, however, as financial and business services have exhibited tremendous growth since 1990, almost double that of manufacturing. The other rapid growth sector has been construction as the country rebuilds and expands capacity.

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Table 3 Gross Domestic Product by Industry in Vietnam: 1990-96

(in 1989 constant currency)

Percent of GDP Sector 1990 1996

Average annual growth (1990-96)

Agriculture (includes forestry, fisheries)

41

32

4.4

Industry (includes mining, manufacturing, utilities)

19

24

13.2

Services: Construction Transport/communication Wholesale/retail trade Finance/insurance* Community/personal & public administration

40 4 2 12 1 21

44 5 2 12 2 23

9.5 13.5 8.0 8.1 16.8 9.2

Total 100% 100% 8.4% *Assumed to include business services. Source: Vietnam Statistical Yearbook 1997, Statistical Publishing House 1.5.2 The percentage of the work force employed by service firms is still low, but it has been increasing (see Table 4). Between 1990 and 1995, service industries created 1.4 million new jobs. Unfortunately, disaggregated data on specific sectors of job creation are not publicly available. 1995 GDP per worker for service industries averaged 2,876 thousand dong compared with 2,375 thousand for industrial workers.

Table 4 Employment by Industry in Vietnam: 1990-95

(in millions) Percent of Workers Change (1990-95)

Sector 1990 1995 Annual Growth New Jobs Agriculture (includes forestry, fisheries)

72%

69%

2.0%

+2.2 mn.

Industry (includes mining, manufacturing, utilities)

11%

12%

4.3%

+0.8 mn.

Services 17% 19% 4.9% +1.4 mn. Total 100% 100% 2.7% +4.4 mn. Source: ESCAP, Statistical Yearbook for Asia and the Pacific 1996. 1.5.3 Balance of payments. Services exports already represent a substantial portion of Vietnam’s international trade (see Table 5), especially in comparison to

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the global developing country average of under 20 percent. Until 1995, Vietnam showed a balance of payments surplus for traded services and, between 1993 and 1995, their growth was double that of Vietnam’s merchandise trade. However, growth slowed significantly after 1995 for reasons that are not clear. Preliminary figures for the first half of 1998 indicate a continued slowdown.

Table 5 Balance of Payments for Vietnam: 1993-97

Percent of Total Annual Growth Exports 1993 1995 1997 1993-95 1995-97

Goods 79% 71% 78% 32.0% 31.3% Services Transport Travel Government services Other: Finance/insurance Telecommunication Other services

21% 29% 22% 3 0 0 19 0 1 18

63.9% 10.4%

Total Exports 100% 100% 100% 39.1% 25.7% Percent of Total Annual Growth

Imports 1993 1995 1997 1993-95 1995-97 Goods 84% 80% 77% 46.1% 16.9% Services Transport Travel Government services Other: Finance/insurance Telecommunication Other services

16% 20% 23% 2 0 0 21 0 0 21

66.1% 28.2%

Total Imports 100% 100% 100% 49.6% 19.3% Source: State Bank of Vietnam 1.5.4 A similar high rate of growth from 1994 to 1995 can be seen on the import side indicating that there are substantial opportunities for some import substitution if key business services are strengthened. It should be noted, however, that the relatively high growth rate from 1995 to 1997 signals the potential that Vietnamese exporters are relying increasingly on imported business services. Ensuring that domestic business services are internationally competitive is an important step in achieving a positive balance of payments. 1.6 Factors Influencing the Growth of Vietnam’s Business Services 1.6.1 As a centrally planned economy, Vietnam’s business services have not been a target for development attention or investment attraction strategies. For decades under the old economic management mechanism, the service sector was often labeled as “unproductive” in comparison with the “productive” sectors of agriculture

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and manufacturing. However, since the start of Doi Moi, that attitude and perception has gradually changed, with the service sector being increasingly recognized as an important contributor to the national GDP. Especially, at the urging of the Vietnam Chamber of Commerce and Industry and other relevant local agencies, the guidelines on domestic investment have been amended to include a beginning attention to the needs of service sector firms. The specific changes made include incentives, officially stated in the Law on Domestic Investment, given for the establishment and operation of private service firms. 1.6.2 In order to strengthen business services, one needs to keep in mind certain political and ideological challenges to services development that Vietnam shares with other developing/transitional economies. These challenges can be grouped into five categories: limited self-regulation, lack of exposure to international competition, the dominant role of public service enterprises, impediments to outsourcing, and the low value placed on business services themselves. 1.6.3 Limited self-regulation. One of the critical mechanisms for developing quality business services is the creation of autonomous industry associations. They serve multiple functions including educating the business community about the value of a given service, providing objective verification of the competence of service providers (through licensing or certification), developing and enforcing codes of conduct (linked to international codes and best practices), and ensuring continuing professional education (CPE). None of Vietnam’s business services yet have such a mechanism in place. 1.6.4 Lack of exposure to international competition. Another factor limiting the use of business services by SMEs is a lack of direct contact with global competitive pressures. Many SMEs are mandated to “trade” only through Vietnamese trading houses or similar state-owned enterprises and depend on them to supply any market information needed. Therefore, they may remain unaware of the kinds of specialty inputs that could increase their competitiveness substantially. 1.6.5 The dominant role of public service enterprises. The ability to develop and maintain specialized expertise depends on having a large enough client base to develop scale economies. If a significant portion of demand is routed automatically to public sector competitors, as is the case in Vietnam at present, private business service providers may be hard pressed to compete unless export markets are readily available to provide access to additional clientele for sustained growth. Thus, direct competition from government agencies in service provision can impede private sector business service development. [Research in Australia (Industry Commission, 1997) is trying to identify the optimal role government agencies can play in supporting private sector services growth and development.] 1.6.6 Impediments to outsourcing. In many economies, government plays a key role in stimulating the development of quality business services by outsourcing its business service input requirements to the private sector. One of the rationales for such contracting out is more efficient use of public funds. When government functions become corporatized (and have the need to generate a net profit), the

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motivation for outsourcing business services becomes even stronger in order to lower fixed costs and improve their overall competitiveness. 1.6.7 In Vietnam, however, managers of state-owned enterprises by and large are evaluated on the size of their operation (as measured by number of employees) rather than on net profits. Further, any profits that are generated revert to a general fund rather than being under the manager’s control. Therefore, there is little incentive to outsource for business services. Rather, the incentive structure rewards keeping fixed costs high and internalizing business service provision so as to maintain a large staff. 1.6.8 Within the private sector, there are also impediments to outsourcing in the form of a strong ethic of “I’ll do it myself.” As a consequence, there is a sense that, if one outsources, it reflects a weakness in one’s own operation. A related issue is a concern, especially for family-based businesses, about sharing competitive information about one’s operations with others for fear that that knowledge may be misused. 1.6.9 The low value placed on business services. For the purchase of business services to make economic sense to SMEs, managers need to understand that they are an investment that will improve their overall competitiveness. At the present time, both managers and the trade organizations that assist SMEs in Vietnam tend to view key business services as ‘expensive’ without analyzing the increased revenues that could result to offset that expense. 1.7 The Objectives of This Study 1.7.1 This study is based on the belief that the vibrancy of local business services is critical to the growth of private sector enterprises. The linkages between strengthening business services, building capacity within manufacturing SMEs, and increasing investment activity in Vietnam are shown visually in Figure 2. Telecommunications, computer services, and training services serve to strengthen the production inputs of market research services, accountancy, and distribution logistics services as well as design/packaging and consultancy services.3 1.7.2 This study’s goal was to assess the competitiveness (availability and quality) of key business services for Vietnamese small and medium enterprises (SMEs) and to identify the steps needed for their strengthening. Specific objectives included the following:

a) Verify the importance of business services to Vietnamese SMEs b) Assess the quality of business services available, in comparison to

international benchmarks

3Design/packaging services and consultancy are shown with dotted lines in Figure 2 because Vietnamese manufacturers were less likely to rate them as “very important” to their competitive positioning.

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c) Determine the quantity of business services available (ratio of supply to demand)

d) Examine the range of specific services offered to firms, in comparison to the types of assistance they need

e) Identify the changes in key business services that would make the most competitive difference to Vietnamese SMEs

f) Make recommendations for addressing gaps linked to strategic levers for change, including specific recommendations for MPDF’s role

1.7.3 This study is a first step in MPDF’s efforts to increase the capacity of Vietnamese business services to support the growth and profitability of private sector SMEs in Vietnam. It is also a complement to any economic growth strategy linked to increasing foreign investment, as the quality and availability of business services is part of what make a location attractive to foreign investors.

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16

w

w

w

w

Figure 2Business Services in Vietnam

Q uality of equipm ent &processed m aterials

G oodsproducingSM EsBusiness

services

Strengtheningbusiness services

SM E capacitybuilding

Attracting foreigndirect investm ent

Tel om m unications &Internet

ec

M arketresearch

Accountancyservices

Distributionlogistics

Design &packaging

Consultancyservices

Com puterservices

Trainingservices

Cost-efficientinternational telecomlinks

Q uality of businessservices

Q uality of w ork forceavailable

SECTION 2 METHODOLOGY

2.1 Preparatory Work 2.1.1 The research team for this study comprised Service-Growth Consultants Inc. (Vancouver, Canada) and Galaxy Consulting (Hanoi and Ho Chi Minh City, Vietnam). In preparation for this study, the research team reviewed relevant international research on business services, their role in industrial competitiveness, and factors supporting their development. They also reviewed relevant material on Vietnam’s economy, the present state of development of SMEs, business services already available in Vietnam, and Vietnam’s economic development priorities. 2.1.2 Researchers were clear that business service companies themselves use a full range of business services as inputs. Thus, if one wanted to research the adequacy of business services in support of manufacturing competitiveness, one would also have to ask business service firms themselves if they had the types and quality of business service inputs that they needed in order to supply manufacturers. The research team decided, therefore, to interview both manufacturing (goods) firms and service firms about their perceptions of the Vietnamese business services they needed and used, followed by questions to the service firms about their challenges in supplying business services in Vietnam. Once the preparatory work had been completed, the research proceeded in the four stages outlined below. 2.2 Selection of Manufacturing Industries to Study 2.2.1 In selecting the group of manufacturing industries (goods firms) to study, the following criteria were used:

• Importance of the industry in the Vietnamese economy • A balance of labor intensive and technology intensive industries • Export orientation of the industry • Comprised at least in part of private sector SMEs • Prominence in the MPDF portfolio

2.2.2 As a result, the following six export-oriented industries were chosen from the sectors of priority to MPDF:

• Chemicals and plastics • Construction materials • Electronics • Food processing • Garments and shoes • Metal working

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Taken together, these industries represent a range of labor and technology intensity, including both traditional commodity-based industries and newer higher-value-added industries of importance in Vietnam’s economic growth. 2.3 Selection of Critical Business Services 2.3.1 Based on the preparatory research, an initial list of 53 possible business services to include was developed covering the six functions portrayed in Figure 1 (see Table 6 for the complete list). That list was then reviewed with key informants knowledgeable in working with Vietnamese SMEs at the Vietnam Chamber of Commerce and the Union of Cooperatives and SMEs (VICOOPSME). As a result, 20 business services were identified as critical business services in Vietnam (the first two rows of services in Table 6). 2.3.2 The shorter list of 20 business services was then narrowed to those business services with the following characteristics:

• Provided by the private sector, rather than a government monopoly • Not fully regulated or controlled by government (so that interventions by

international agencies could be effective) • Established enough in Vietnam for there to be a critical mass of firms

2.3.3 Through discussion and consultation, the research team chose to focus on the following six business services used by manufacturers:

• Accountancy • Consultancy (management, engineering) • Design (fashion, industrial) and packaging • Distribution logistics (transportation, freight forwarding, warehousing) • Market research • Training

Because design/packaging and distribution services were not of great importance to the service firms in the study, they were replaced on the “Service Provider” questionnaire with items asking instead about computer services and telecommunications (both known from international research to be critical to service providers).

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Table 6 Business Services of Importance to SMEs in Vietnam, by Function

Status Rating by Key Informants

Operational Efficiency

Financial Management

Skills & Quality Enhancement

Market Information

Reduce Fixed Costs

Links to Market

Critical; need improvement

Consultancy services - consulting engineering* - management consulting* Computer services* Equipment maintenance & repair

Accounting , audit, financial management*

Commercial education & training* Design services* (fashion; graphic; industrial) & packaging

Market research Internet services, including website design & management

Equipment leasing & rental* Personnel placement & supply* Translation services Transportation services Security services

Import/export facilitation services* Trading houses

Critical; highly regulated or provided by government

Courier services Telecommunication-related services

Banking* Insurance*

Inspection & testing services

Not valued Environmental services*

AdvertisingAir cargo Conference & exhibition services Marketing and public relations

Not mentioned Architectural services Geologists and geophysicists Geographic information services (GIS) Laboratory services (analytical) Legal services R&D Surveyors

Instrument calibrationservices Quality assurance services

Office furniture rental Photocopy & printing services Security services Storage & warehousing

Customs brokers Freight forwarders & shipping agents Visa services

*Informants emphasized the urgency of quality services.

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2.4 The Field Research Approach 2.4.1 All of the field research for this study took place in February and March 1998. Once the key business services had been selected, two parallel draft questionnaires were developed - one for goods firms and one for service firms (see Appendices C and D). In the questionnaires, primary focus was given to the key business services noted above; however, participants were also asked questions about their overall assessment of business services in Vietnam and about their use of 14 additional business services.4 The questionnaires were finalized as a result of pilot testing with selected firms in the target industries known to the researchers. 2.4.2 Participants in the study were confined to legally registered firms who could be identified through one of the five listings used to create the sampling frame:

• 1997-98 Vietnam Business Directory (Vietnam Chamber of Commerce and Industry), both the hardcopy and CD-ROM versions

• 1997-98 Industrial and Commercial Directory (Statistics Publishing House) • 1997-98 Business Directory (Foreign Trade Development Corporation) • 1998 Yellow Pages for Hanoi • 1998 Yellow Pages for Ho Chi Minh City

The selection of firms was random within a sampling frame stratified to ensure relatively equal numbers of firms by industry and by geographic location (Hanoi, Ho Chi Minh City, and towns outside of the two main cities). For firms selected in the two cities, the research team also tried to ensure that the participants were distributed throughout each city. 2.4.3 For manufacturing firms, the industry categories targeted were easy to identify in the listings used and there were numerous firms from which to choose. To aim for 15 manufacturers in each of the six industry groups, a total of 45 names were selected randomly for each industry and geographic location and then screened by phone to make sure that they met the following criteria:

• Still in business • A going concern, with employees • Willing to participate in the study

In general, the research team had a response rate of one in three firms being willing to participate in the study.

4These 14 business services covered the other services listed as “critical” in Table 6, minus Internet services (as the Internet had only been accessible for three weeks at the time of the interviews) and plus advertising and environmental services (rated as critical in international studies).

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2.4.4 For service firms, the following industry definitions were used for participant selection:

Accounting: Preparation and analysis of financial reports to be used by managers as tools to manage the company, including cost accounting and auditing of financial reports but excluding tax return preparation.

Computer services: Systems design, installation, and repair, including software customization and LANs.

Consultancy: Consulting services that improve the management of the company or the efficiency of production, including firms in the following categories: business consultants, consulting engineers, industrial engineers, industrial consultants, and management consultants.

Design and packaging: Fashion, graphics, and industrial design, as well as the design of packaging.

Distribution logistics: Provision of goods transportation, warehousing and storage facilities, as well as freight forwarding assistance.

Market research: Obtaining information and data on markets, customer preferences and needs, and competitors in order to help the firm be more competitive, including firms in market research as well as marketing consultants.

Training: Post-secondary training (of all kinds) provided to employees of a company that aims to make employees more competent at what they are doing, including training institutions and training consultants.

2.4.5 The number of business service firms from whom to choose was significantly fewer than for manufacturers as anecdotal evidence indicates that many of the service firms in Vietnam are not legally registered and so were not part of the sampling frame. To aim for 12 service firms in each of the six industry groups, a total of 40 names were chosen (if possible) and then screened by phone to make sure that they met the same criteria listed above for the manufacturing firms. For accounting, consultancy, and market research, all identified firms were contacted as the number of available firms was less than 40. 2.4.6 Once randomly selected and contacted, firms were given two days to decide whether or not they wished to participate in the study before either interviewing them or dropping them from the sampling pool. Those choosing to participate were then interviewed in person in Hanoi and Ho Chi Minh City and by telephone in smaller urban areas after faxing them the questionnaire for their review. A total of 89 manufacturers and 64 service firms completed the interview process, with their industry and geographic distribution presented in Table 7.

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2.4.7 In conducting the interviews, the interviewers defined “business services” for participants as follows: “services that firms use to operate more efficiently.” All 153 firms were asked about their experience with accountancy, consultancy, market research, and training services. Manufacturers were also asked about design/packaging services and distribution logistics, while service firms were asked about computer services and telecommunications. Because the interview was lengthy and on topics that firms were not used to discussing, not all respondents answered all questions due to time considerations; therefore, the number of respondents is listed under each data table in the following sections.

Table 7 Geographic Distribution of Firms Interviewed

Industry Hanoi HCMC Outside TOTAL

Goods Firms Chemicals/plastics 8 6 4 18 Construction materials 4 6 5 15 Food processors 5 5 5 15 Electronics 6 5 4 15 Garments/shoes 6 5 2 13 Metal working 5 6 2 13 Subtotal: Goods 34 33 22 89

Service Firms Accountancy 4 5 1 10 Consultancy 5 5 2 12 Design/packaging 5 5 10 Distribution logistics 5 4 2 11 Market research 6 5 11 Training 5 5 10 Subtotal: Services 30 29 5 64 TOTAL 64 62 27 153 2.4.8 Once the interviews of participating firms had been completed, key informants were also interviewed to validate the findings of the primary research and the types of recommendations being considered. Key informants included selected persons from the Vietnam Chamber of Commerce and Industry, the Non-State Economic Development Center (NEDGEN), the Union of Cooperatives and SMEs (VICOOPSME), Vietnam Women’s Union, the Foreign Trade and Development Corporation’s SME Support Unit, and the United Association of Industrial and Commercial Enterprises. Consistently, the response to the list of major findings and proposed recommendations was very positive, with informants making comments such as, “These are exactly the challenges we have - how have you been so thorough?”

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2.5 Characteristics of the Final Sample 2.5.1 Appendix B provides data on the demographic and business characteristics of the participating firms. The final sample of manufacturing firms interviewed had been in business on average over 10 years and had over 100 employees. Sixty-five percent of the firms were state-owned enterprises or collectives, and Vietnamese ownership for the 89 firms averaged 88 percent. Forty-four percent of the respondents were active exporters, and the firms derived an average of 22 percent of revenue from export revenues. 2.5.2 As would be expected, the service firms were younger and smaller than their manufacturing counterparts. Fifty-two percent had been in business five years or less and 43 percent had fewer than 50 employees. Half of the service firms surveyed were privately owned and had on average 69 percent Vietnamese ownership. 2.5.3 While only 22 percent of the service firms surveyed classified themselves as active exporters, their export intensity was more than double that of manufacturers (44% of revenues). In part this is due to the international definition of services trade as taking place through any of the following four modalities:5

• cross-border, with the producer in one country and the customer in

another (e.g., a market research report prepared in Vietnam and mailed to a customer abroad);

• consumption abroad, when the customer travels to the country of the

producer and consumes the service there (e.g., a market research report prepared in Vietnam for a donor agency with an office in Vietnam);

• commercial presence, where the producer establishes a temporary office

in the country of the customer for purposes of service delivery (e.g., a branch office of a Vietnamese market research firm in Laos to conduct ongoing market research for a customer there); or

• movement of natural persons, when the producer travels temporarily to

the country of the customer to provide the service (e.g., the travel of a Vietnamese market researcher to Laos to conduct focus groups for a customer there).

In the case of the service firms participating in this study, the bulk of their exports are to foreign donors and investors in Vietnam rather than to customers located outside the country.

5 This definition was negotiated as part of the General Agreement on Trade in Services (GATS) and appears in the initial section of that trade agreement.

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SECTION 3 MAJOR FINDINGS FOR ALL BUSINESS SERVICES

3.1 Presentation of the Field Research Results 3.1.1 The following sections discuss the seven major findings from both the 153 enterprises surveyed and the interviews with key informants that summarize the results regarding the general use of business services. Specific findings regarding the seven key business services studied are provided in Section 4. Section 5 presents a proposed Vietnam Business Services Work Program comprised of ten initiatives to address the issues raised in Sections 3 and 4. Appendix C contains detailed data tables, which are referenced as “Table Cx” in the discussion of results, while Appendix D lists sources of international technical assistance that could supplement domestic expertise. 3.1.2 Despite the diversity of respondents by industry, location, size, and ownership structure, there were surprisingly few differences among them regarding their perceptions of and experience with business services in Vietnam. The few that did emerge were primarily based on ownership, with public enterprises being more likely to purchase business services from other public enterprises than from private firms and also being more likely to value accountancy services, consultancy services and training as being important to their competitiveness. Any specific differences have been noted in the discussion below. 3.2 Finding #1: There is a striking disconnect between government’s perceptions of the role of business services in the economy and current economic realities. 3.2.1 While there is a shift underway in the way in which services in general are viewed within Vietnam’s policy framework, there is not yet an acknowledgement of the critical role played by business services. As recently as 1997, the Economist Intelligence Unit’s report on the Vietnamese economy, mirroring the domestic reporting structure, categorized the employed labor force as follows: Productive sector: Industry, construction, agriculture, trade & supply Non-productive sector: Education, health, finance, insurance, public administration. Several points are pertinent about the above approach to classification. First, education and health industries are critical to the quality of labor available (as well as to quality of life) and hence to overall productivity, especially as industrial output becomes increasingly dependent on worker knowledge and skills. Second, economic activity cannot take place in a global trading environment without financial and insurance

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services. Third, it is the efficiency of public administration that to a large part determines the productivity of industry. In fact, inefficient bureaucracy is a major reason for the recent slowdown in foreign investment. Finally, “business services” are conspicuous by their absence from either category. 3.2.2 By contrast, both public and private sector enterprises in this study indicated that key business services were very important for their competitiveness, with over 75 percent of respondents purchasing the top eight business services (see Table C1). The reasons given by respondents for using business services acknowledged their role in improving internal operating efficiency and market competitiveness. The business services that emerged as the most critical for respondents were telecommunications, computer services, and training (see Table 8).

Table 8: Percent Rating the Business Service as Important to Competitiveness

Business Service Goods Firms Service Firms Total Firms Telecommunications na 97 97 Computer services na 97 97 Training 94 95 95 Accountancy 97 88 93 Distribution 92 na 92 Market research 92 88 90 Consultancy 85 83 84 Design/packaging 82 na 82 [goods firms = 89; service firms = 64] 3.2.3 When asked about the view of business services in Vietnam, firms interviewed consistently reported that there was almost no public information available on business services and their facilitating role. Agencies responsible for working with SMEs tended to see business services as unnecessary, low-value expenses that would absorb scarce resources that could be better deployed. 3.2.4 Recommendations: In order for business services to receive appropriate attention in the national development planning process, there is an urgent need to raise awareness with government officials regarding the role presently served by business services and the growth barriers they encounter. The report of this study could provide an excellent opportunity. 3.2.5 Like many developing countries, Vietnam faces major challenges in collecting accurate and complete data on the activities of service sector firms. The lack of disaggregated and internationally comparable data reinforces the general invisibility of business services. To meet the need of governments to track international services trade statistics for negotiations under the General Agreement on Trade in Services, several new

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initiatives have been undertaken to help improve services statistics (see examples in Appendix D). 3.2.6 Awareness raising is needed not only with government officials but also with the managers of private and public enterprises. Potential customers need to understand why and how to select a business service provider and manage the working relationship in order to ensure value for money spent. 3.3 Finding #2: Vietnamese business services are more expensive than warranted by their quality. 3.3.1 While key informants believed that Vietnamese enterprises had a price advantage due to significantly lower-priced services in comparison with other economies in the region, this belief was not borne out by interview data. Only 16 percent of the respondents rated Vietnamese business services as “cheap” or “very cheap,” with 44 percent rating them as “expensive” or “very expensive” (see Table C2). Unfortunately, ratings of high cost were not linked to receiving high quality as 40 percent of respondents rated the quality of expensive services, as no more than “acceptable” (see Table 9). Exporters and foreign-owned firms, used to international comparisons, were especially likely to see Vietnamese business services as inordinately expensive (see Table C3).

Table 9: Perceived Price by Perceived Quality of Business Services (percent)

Perceived Price of Business Services Perceived Quality of Business

Services Cheap/Very

Cheap Just Right Expensive/Very

Expensive

Totals

Poor/Very Poor 9 13 16 38 Acceptable 6 23 24 53 Good/Very Good 1 4 4 9 Totals 16 40 44 100 [goods firms = 80; service firms = 62] 3.3.2 Paying a high price for no more than average service will rapidly undermine competitiveness. Unfortunately, while service firms also see business services in Vietnam as expensive, 71 percent report that their firm always provides good value for money. It is difficult to change the “value proposition” unless the service providers themselves recognize that there is a need for change. Without a change, the consequences are likely to be particularly negative for the 45 percent of private sector manufacturers who compete primarily based on price (see Table C4). Indeed, 61 percent of manufacturers report prices of business services as being very high (see Table C5). 3.3.3 Public enterprises often have little choice about the source of their business services, which is reflected in the 45 percent of public enterprises stating that their sources of business services supplied “poor” or “very poor” quality (see Table 10). Even though

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presumably public enterprises would receive preferential rates when dealing with suppliers, 35 percent found the services they received expensive for the value provided. 3.3.4 In examining the cost structure of business service firms, there are at least four factors that can lead to abnormally high prices: labour costs, telecommunications costs, profit taxation levels, and the cost of capital. Business service firms rely on highly skilled staff who in turn are in high demand in Vietnam. Having to pay the current high taxes on wage premiums make it difficult and expensive for service firms to attract and retain skilled employees. 3.3.5 With regard to telecommunications services, 89 percent of respondents rated the services as “expensive” or “very expensive” with 63 percent insisting that charges were too high. While Vietnam has made great strides in improving domestic phone access, costs for international calls and Internet access remain very high and Vietnam still lacks high-speed ISDN phone lines. At the time of this study, in-country Internet access had only been available for three weeks. Already at least a third of the service firms were using it and reporting the access as being too slow and the charges as too high. Nine months later, under the monopoly of Vietnam Data Communications Co., over 4,000 private firms are using the Internet even though charges remain 5 to 10 times higher than in neighbouring countries for only minimal services. Access through the four licensed Internet service providers (ISPs) is becoming even more challenging as the narrow national pipeline to international channels is similar in capacity to that used by a corporation, not a whole country. Table 10: Perceived Price by Quality of Business Services, by Ownership (percent)

Perceived Price of Business Services Perceived Quality of

Business Service Cheap/Very


Expensive

Totals

Public Enterprises Poor/Very Poor 13 17 15 45 Acceptable 4 20 20 44 Good/Very Good - 7 4 11

Private Firms Poor/Very Poor 4 7 22 33 Acceptable 7 29 25 61 Good/Very Good 1 - 5 6 [public enterprises = 79; private firms = 56] 3.3.6 In Vietnam, the historic “taint” associated ideologically with services is still reflected in the present tax structure. The profit tax on business services is as high as 45 percent (compared with 30 percent for heavy industry and 40 percent for light industry) and will naturally have to be passed on to the customer in the form of higher prices. Not only are profit tax rates high, but there are limitations on what service inputs can be claimed as tax deductible expenses. For example, expenses for trips abroad are only

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deductible if there is a specific contract signed between the firm and the foreign party to show that there is a real business need to travel. This policy leaves firms unable to deduct travel for purposes of business development or to learn about best practices abroad. Another example is the legal requirement that staff training funds be set up from net profits thus forcing firms to use after-tax rather than before-tax funds for staff training. 3.3.7 One-third of the service firms rated financing as a barrier to growth, indicating that the current lack of bank financing increases their cost of capital. As is common in developing countries, business service firms are constrained by their lack of tangible assets to use as collateral for financing such as overdraft facilities or export credit. Thus, the only alternative for offsetting the high costs mentioned above and funding growth is to raise prices to the customer. 3.3.8 Recommendations: Making the price of business services more appropriate can be achieved either through price reduction for the quality provided or through providing better “value for money” by improving quality. If the first approach is to be successful, regulatory changes will be needed in order to remove existing distorting factors. 3.4 Finding #3: The average quality of Vietnamese business services is only adequate to poor, placing the business community at a competitive disadvantage. 3.4.1 Overall, respondents reported only moderate satisfaction with the quality of business services available to them, with only 9 percent rating the service quality as “good” and 38 percent indicating that the quality was not acceptable (see Table C7). Goods firms were less likely to be satisfied with the quality of the business services they purchased than were service firms. Interview comments suggest that this difference may be because service firms, as providers of services themselves, tend to be more sophisticated in both how they select service providers and in how they manage the relationship. As one respondent put it, “There’s good quality out there if you have the patience to look for it. It took us two years of experimenting, but now we have some very good suppliers.” 3.4.2 For both public enterprises and private sector firms, over 60 percent compete primarily based on quality rather than price (see Table C4). When firms’ primary basis of competition is taken into account, 74 percent of the goods firms competing on price and 46 percent of those competing on quality rated service quality as “poor” or “very poor” (see Table C8). Service firms competing based on quality were the only group that indicated that they were pleased with the quality of the service they were receiving, again supporting the comments that service firms are more likely to invest time and resources in searching out service providers with good internal quality controls (see Table 11).

Table 11: Perceived Quality of Service by Respondents Competing Based on Quality

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(percent)

Perceived Quality of Business Services Sector Poor/Very Poor Acceptable Good/Very Good

Totals

Goods firms 46 50 4 100 Service firms 22 50 33 100 Average percent 32 50 18 100 [goods firms = 58; service firms = 44] 3.4.3 Public enterprises rated the quality of business services consistently lower than did private sector firms, with 45 percent indicating “poor” or “very poor” quality compared with 33 percent for the private sector (see Table C4). Interview comments indicate that this is likely due to formal or informal restrictions on state-owned enterprises that mandate their use of public sector services regardless of the quality of service received. Even if private sector purchase is an option, many public sector managers feel more comfortable dealing with another state-owned enterprise (SOE) especially as then there is no real need for due diligence. 3.4.4 Recommendations: Improving the quality of business services available is a critical priority if Vietnamese enterprises are to become more competitive and thrive in an environment of trade liberalization. Vietnam has been a member of the International Organization for Standardization for 20 years, but has only eight firms registered to the international quality assurance standard, ISO 9000. 3.4.5 Interview comments indicate that government officials and enterprises alike are unaware that ISO 9000 applies to service firms as well as to manufacturers. To support service firms in applying the ISO 9000 standard, which has been designed for large manufacturers, to small service operations, the International Trade Centre UNCTAD/WTO (ITC) has prepared a workbook on ISO 9000 for service firms. As with all ITC publications, this one is free of charge to governments and enterprises in developing countries. 3.4.6 Sixty percent of respondents cited customers’ unwillingness to pay for quality as their primary barrier to providing quality service (see Table C9). Given the apparent discrepancies between beliefs of service providers and the experience and expectations of their customers, this may or may not be the case. Interview data suggest that customers would indeed be willing to pay if they were certain that they were getting excellent quality and good value for their money. 3.5 Finding #4: There is an inordinately high level of internal service provision due to quality concerns.

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3.5.1 One of the critical roles played by business services is that of allowing enterprises to contract out for specialized support expertise. The purchase of business services allows the enterprise to remain focused on their main line of business rather than having to hire full-time staff to provide support functions internally. In Vietnam, however, there is an unusally high degree of reliance on internal service provision (see Table 12), which means that enterprises are incurring fixed costs for internal “generalists” rather than being able to rely on external (variable cost) specialists.

Table 12 Percent Relying on Internally Provided Business Services

Business Service Public Enterprises Private Firms All Firms

Accountancy 94 94 94 Market research 92 88 90 Distribution logistics 73 69 71 Design/packaging 74 67 70 Consultancy 62 66 64 Computer services 67 59 63 Training 54 59 57 [goods firms = 86; service firms = 62] 3.5.2 In other developing economies where business service industries are well developed, the reliance on externally-purchased services for those functions not part of a firm’s core competence usually averages at least 75 percent. In this study, up to 84 percent of respondents (for market research) reported relying entirely on self-service (see Table 13). The pattern of reliance on purchased business services shown in Table 13 for training, distribution, and computer services is much more common in developing countries, especially for SMEs with limited resources.

Table 13 Source of Supply for Business Services (percent)

Business Service Use Purchased

Services Use Purchased Services Only

Only Provide Internally

Market research 16 10 84 Accountancy 22 6 78 Consultancy 29 16 51 Design/packaging 42 30 58 Training 74 43 26 Distribution 76 29 24 Computer services 82 37 18 [goods firms = 86; service firms = 62]

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3.5.3 The reason for the over-reliance on internal services, especially for private sector firms, can be linked to the previously-discussed concerns about quality (see Table 14). With the exception of distribution logistics (where respondents reported that it was more economical to provide transportation and warehousing services internally), the primary reason given for internal production was the need to ensure better quality control. Ironically, in other economies enterprises usually report that they get better quality business supports if they contract out rather than try to provide the service themselves. At issue here is the strategic allocation of an organization’s resources. To the extent that organizations self-serve on business service inputs, they take critical resources away from meeting their prime business objective.

Table 14 Percent Citing Quality Control Concerns as the Reason for Internal Production of

the Business Service (percent)

Ownership Business Service

Public Private Total

Design/packaging 93 90 92 Training 90 88 89 Consultancy 85 88 86 Market research 82 74 79 Computer services 79 63 73 Accountancy 73 68 71 Distribution logistics 45 67 50 [public enterprises = 37; private firms = 23] 3.5.4 At an even more fundamental level, there are attitudinal barriers to the use of external business services. In the private sector, managers often do not trust other firms to provide high quality inputs and maintain professional standards. In public enterprises, managers may fear that using external service providers may be interpreted as a lack of competence on their part, thus putting their own jobs in jeopardy. Unfortunately, excessive internal business service production can undermine the emergence of a critical mass of customer demand to support the development of precisely the kinds of specialized, high-value-added business services that would allay customers’ fears. 3.5.5 Recommendations: Increasing the judicious use of external business services will require both attention to quality issues in order to build confidence in firms’ ability to deliver, and educating firms about the benefits of using external sources of supply. 3.6 Finding #5: The current regulatory framework undermines the professionalism of business service providers.

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3.6.1 Respondents expressed a range of concerns about the level of professionalism in service firms. Examples included concerns about protecting the confidentiality of competitive information and about the reliability of market research findings. The present legal impediments to allowing free formation of independent private sector service industry associations may be in part responsible for these difficulties as associations are usually the conduit for the enforcement of professional codes of conduct and related professional development activities. 3.6.2 Recommendations: In order to be effective, service industry associations need to have an arms-length relationship with government such that they can lobby government on behalf of their members while having the legal mandate to enforce professional standards of conduct. Hallmarks of dynamic industry associations include a credentialling process linked to required ongoing professional development, and enforced code of conduct, and a mechanism for more experienced members to mentor new members’ professional development. 3.7 Finding #6: Business service firms agree with their customers that they lack specialized capabilities and a strong customer orientation. 3.7.1 Less than half of the respondents indicated that they could always get the specialized expertise they needed, with accountancy and design service firms having specialized skills most readily available (see Table 15). Instead, firms indicated that either the quality of expertise varied or that the expertise was simply not available to them. What respondents describe is a business environment in which business services exist but they are quite basic and quality control is still inadequate.

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Table 15

Availability of Specialized Business Services, by Service (percent) Business Service Always Get Quality

Varies Not

Available Total

Accountancy 44 31 25 100 Computer services 24 32 44 100 Consultancy 15 53 32 100 Design 46 38 16 100 Distribution 36 33 31 100 Market research - 40 60 100 Training 11 32 61 100 [goods firms = 42; service firms = 38] 3.7.2 The most common reason given for not using other specialty services was that the expertise was not yet available in Vietnam, with a number indicating that they would gladly pay if they could only get the service they needed. With regard to consultancy services, for example, 34 percent of respondents indicated that their need for assistance is currently not being met. Examples of specialty services requested include financial leasing, high quality printing and package design services, corporate strategic planning, due diligence on customers abroad, executive management training, export market research, and customized software design. 3.7.3 Service providers shared their customers’ view of what they were able to offer. Seventy-nine percent indicated that they either did not have the expertise their customers required or that they were not able to supply it on a consistent basis. In computer services, for example, customers are often as knowlegeable as the providers said to be experts, and support for specialized software applications is very difficult to find. 3.7.4 Respondents are most critical of the expertise of trainers, citing lacks such as the ability to train beyond basic skill levels in specialty disciplines or the ability to provide more specialized financial accounting expertise. Ancedotal data confirmed that the training provided in the key business services at present through Vietnam’s universities and polytechnics is too general and too theoretical to be of real use to the business sector. The service firms themselves are relatively young, and so staff have not had a lot of time to hone their skills in the marketplace. 3.7.5 Both users and providers alike indicated that a primary weakness of Vietnam business service firms was an overall lack of customer orientation focus, which respondents described as weak marketing skills. Respondents indicated that most service firms were not proactive in terms of anticipating the kinds of services that would be of help to their customers. One example given repeatedly was the fact that, when new virus

33

detection software becomes available, computer services firms do not necessarily contact their customers in order to offer them upgrades. 3.7.6 Respondents also stated that service providers simply did not ask what their customers’ needs were and instead offered generic services not necessarily well-matched to needs. As with price considerations, there is not necessarily a shared vision of what the quality issues are that matter to customers. Customers and providers agreed that consultancy and training services needed to be better customized to meet customers’ needs, and that market research needed to be more sophisticated. However, there was not a similar agreement for accountancy, design, or distribution services (see Table 16).

Table 16 Leading Quality Factor Needing Improvement

Business Service Customers’ Choice Service Providers’ Choice Accountancy customization sophistication Consultancy customization customization Design/packaging sophistication + customization no errors Distribution logistics on-time delivery customization Market research sophistication sophistication Training customization customization 3.7.7 A number of respondents commented that business service firms needed to market their benefits to potential customers more clearly. A failure to market effectively not only results in a loss of revenues for the service providers but it also places an unnecessary burden on the client firm to be vigilant and assertive in getting their needs met. 3.7.8 Recommendations. In order for services to become more sophisticated, it is critical to expand the demand base and provide training in services marketing (including export and customization). The logical mechanism for expansion is to increase service exports, which would have the added advantage of exposing Vietnamese business service firms to international benchmarks. 3.8 Finding #7: The public sector dominates the provision of business services normally provided in the private sector. 3.8.1 In most economies, public sector provision of services is no more than one-quarter of all service provision (for an average of between 8-12 percent of GDP). While often in developing/transitional economies the public sector assumes a larger role, it is unusual for the majority of services to be purchased from public sector organizations as is the case in Vietnam. In this instance, for 70 percent of the business services surveyed, respondents purchase them primarily or exclusively from public enterprises (see Table C10).

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3.8.2 For the key business services researched, both private firms and public enterprises indicated some reliance on externally-purchased services. Public enterprises purchased all but computer services primarily from other government agencies (see Table 17). Private firms mainly rely on public providers for training and design services.

Table 17 Source of Purchase, by Ownership

(percent)

Public Enterprises Buy From: Private Firms Buy From: Business Service Public Private Public Private

Accountancy 100 0 13 87 Training 92 8 63 37 Consultancy 92 8 37 63 Distribution 83 17 36 64 Design/pack. 78 22 50 50 Market research 60 40 0 100 Computer services

45 55 35 65

[public enterprises = 65; private firms = 40] 3.8.3 The dominant role of the public sector in supplying services has several consequences. Such dominance can suppress the development of business services in general and private sector services in particular. Government suppliers operate in a subsidized environment, making the basis for competition between public and private firms unequal. In addition, government suppliers do not have the same vulnerability to market forces and so have less pressure to ensure top quality. Often success is equated with number of employees rather than with efficiences, especially in cases where managers are not able to keep or reinvest any profits made. 3.8.4 As Vietnam begins to meet its trade liberalization obligations within ASEAN and AFTA, as well as those planned under the WTO, it will face increasing pressure to allow competition into the service supply chain. It will also face the possibility of accelerated service imports if Vietnamese exporters are to compete successfully and if domestic service inputs are not of a competitive price and quality. By using its purchasing power (as other governments have done) to stimulate the development of high quality business services in the private sector, the government can take an important step towards ensuring Vietnam’s economic development success. 3.8.5 Recommendations: Since the public sector is so dominant in most of the business services studied (market research being the one exception), any changes in government’s approach to business services can have a significant difference. Government can play a positive role in ensuring the availability of cost-competitive high quality business services by stimulating the growth of private business service firms

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through (a) creating a legal framework that allows the entry of more private firms, and (b) the equitization of existing large state-owned service enterprises (particularly monopolies) to make them more efficient.

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SECTION 4 STRENGTHS AND CHALLENGES FORSEVEN KEY BUSINESS

SERVICES 4.1 Comparisons Across Key Business Services 4.1.1 As discussed in Section 2.3, seven key business services that are provided in the private sector and are critical to the competitiveness of Vietnamese private sector firms were selected for detailed study: accountancy, computer services, consultancy, design and packaging, distribution logistics, market research, and training. Whether or not respondents purchased these key business services, and from whom, varied significantly by business service (see Table 18). These differences mean that industry-specific strategies will be needed to strengthen particular business services. 4.1.2 Respondents buy some or all of the computer services, distribution support, and training services they use; but they usually provide their own accountancy, consultancy, and market research services internally. Those respondents purchasing business services primarily use private sector providers for computer services and market research; other business services are usually purchased from the public sector. This purchasing pattern makes it difficult for private sector accountants, consultants, design firms, distribution firms, and training firms to develop the economies of scale and scope needed to support specialized expertise. 4.1.3 Respondents were especially concerned about the lack of specialized expertise available in market research and training, as well as the difficulties they had in getting the specific assistance they needed from computer service firms and distribution firms. Many respondents commented that, while Vietnamese business service firms provided acceptable basic service, they were not highly skilled at identifying specific needs and customizing service delivery to address those needs.

Table 18 Comparison of Key Business Services

External purchase

Business service

Percent

Source

Specialized expertise

not available

Quality of services

Poor > 25%

Main improvement desired

Accountancy 22 G 25% customized Computer services

82

P

45%

B

customized

Consultancy 29 B 26% customized Design & packaging

42

G

15%

customized

Distribution logistics

76

G

41%

customized

Market research

16 P 60% B sophisticated

Training 74 G 59% customized

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Key: B = both public and private sector providers G = public sector providers P = private sector providers 4.1.4 With regard to the quality of services available, respondents were especially critical of computer services and market research, with more than 25 percent of both goods producers and service firms rating their quality as “poor” or “very poor.” To put these ratings in context, respondents generally rated their own service providers more positively than they rated business services overall. In other words, respondents would comment that, while the general quality of service might be low, they had found a provider who gave good quality service. The only exception to that pattern was for computer services and market research, where a number of respondents felt that there were no high quality options available in the market. Respondents’ comments about the need for more sophisticated, specialized services and their concerns about service quality reinforced three themes across the business services studied:

• There is a need for greater professionalism, including a clear set of professional standards and greater attention to the actual needs of customers.

• Service providers need to learn how to market their services proactively -

i.e., identifying and addressing customers’ needs rather than simply waiting for customers to ask for a particular service.

• Service firms need to have operational quality assurance systems so that

they can provide consistent quality, including on-time delivery and “zero defects.”

In general, service providers’ sense of their own performance coincided with that of their customers - i.e., basic services are available when needed, but critical specialized assistance is missing. 4.1.5 The business service firms studied differed in their degree of export orientation and need to satisfy international service delivery standards (see Table 19). Market research firms and consultancy firms depend on local foreign clients (e.g., international organizations or foreign investors) for their survival, while design service firms are the most dependent on domestic customers. It should be noted that, in addition to their potential for earning foreign exchange, the seven business services are also services whose quality and availability can make Vietnam a more attraction investment environment.

Table 19

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Distribution of Customers for Business Service Firms (percents)

Customer Base Service Industry % Sales Outside

Vietnam % Domestic % Foreign Total Accountancy 63 39 61 100 Training 60 61 39 100 Distribution 55 63 37 100 Design/package 50 74 26 100 Consultancy 34 26 74 100 Market research 18 27 73 100 [service firms = 64] 4.1.6 If one considers only domestic customers, design/packing and distribution logistics are particularly focused on the public sector with over half of their domestic customers being SOEs (see Table 20). Consultancy and market research firms, which are primarily privately owned, have predominantly private sector clients. Interestingly, the training firms, which are mainly SOEs, also have primarily private sector clients. Apparently, government training agencies are successfully reaching out beyond the government organizations of which they form a part.

Table 20 Types of Domestic Customers for Sample Service Firms

(percents)

Private Sector Firms Service Industry

Public Enterprises Goods Services Total

Accountancy 43 46 11 100 Consultancy 25 66 9 100 Design/package 56 31 13 100 Distribution 55 41 4 100 Market research 16 67 17 100 Training 35 61 4 100 [service firms = 64] 4.2 Accountancy Services 4.2.1 International context. Given the increased concern with accountability and the health of financial markets, the world market for accountancy services is growing rapidly. Socialist economies like Vietnam that are transitioning from a command economy to a market-based economy are recognizing the need to have value-added accounting information to support financial lending decisions, mergers and acquisitions, stock market development, privatization of state-owned enterprises, valuation of public assets, attraction of foreign direct investment, audit of foreign firms, and improved efficiency of tax collection. Also, accounting and audit systems form a critical “technical infrastructure” in order to attract investment into needed physical infrastructure projects.

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4.2.2 For developing/transitional economies like Vietnam interested in creating domestic capital markets (including stock exchanges), mandatory financial disclosures must be reliable, timely, verifiable, and comparable over time so that investors can identify trends and make informed decisions. Increasingly there is global pressure for auditing practices to conform to the commonly-accepted set of international accounting principles. The work of the International Auditing Practices Committee (IAPC) of the International Federation of Accountants (IFAC), which Vietnam has just joined in July 1998, on “Reporting on the Credibility of Information” has laid the groundwork for cross-border competition in areas of accounting practices traditionally restricted to domestic firms. Already companies with financial statements prepared outside the U.S.A. are becoming listed on the New York Stock Exchange provided those statements conform to international accounting principles. 4.2.3 Internationally, accountancy is expanding from its more narrow focus on audit and taxation to a wide range of assurance-related services such as corporate finance, business recovery and solvency, forensic accounting, litigation support, risk management, and corporate security business. In addition, the major accounting firms are earning as much or more from their associated practices in general business advisory and information technology services. Recent volatility in capital markets has increased the expectation that accounting firms provide early warnings of fraudulent practices or financial weaknesses. With accounting practices becoming increasingly complex and technology intensive, requirements for ongoing training and professional development are also rising. Firms are competing based on operational excellence (best price and trouble-free services), service leadership (best service and continual innovation), or customer intimacy (tailored solutions). 4.2.4 Development in Vietnam. At the present time, accounting services in Vietnam are dominated by joint ventures between the major international accounting firms and state-owned accounting and auditing firms and 100 percent foreign-owned subsidiaries of the major international accounting firms. The three biggest state-owned companies are Vietnam Auditing Company (VACO), Accounting and Auditing Service Company (AASC), and SaiGon Auditing Company. 4.2.5 The accountancy industry came into existence when Vietnam opened its doors to foreign investment in the late 1980s and foreign invested companies began to need such services. Thanks to the presence and substantial involvement of all major international accounting firms from the beginning, the level of service quality and availability has generally been good, though the service fees are still considered to be high by many local firms. The present clientele of this industry is primarily foreign investment firms with a growing number of large state-owned companies. Since managers of the state-owned companies are not necessarily expected to run a profitable organization, there has been little public sector pressure for cost accounting and managerial accounting; however, a number of managers recognize its growing importance. 4.2.6 Over the next few years, this demand picture is likely to change. First, Vietnam continues to need foreign investment in large infrastructure development projects. Foreign partners are likely to require the production of accurate and audited financial statements. Second, private sector firms in particular will need to

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use accounting information to control costs in order to survive in a more competitive environment. 4.2.7 Usage patterns. Manufacturers were clear that, without accurate accounting information, management would have no way to cost their products/services accurately or to exercise appropriate internal controls. In addition, they pointed out that business opportunities would be missed. Respondent firms reported devoting nine staff days on average each month to the internal provision of accounting services in addition to the external purchase of another five days per month. Manufacturers’ primary use of financial data is for internal cost control (60 percent). 4.2.8 Ninety percent of manufacturers provide accounting services internally, with a number of firms (52 percent) describing themselves as “hedging” against poor quality external accounting services through internal service provision. The remainder purchase their accountancy services primarily from public sector providers (68 percent), leaving little demand for private sector accountancy firms to address. 4.2.9 Service firms use accounting services differently. The majority (52 percent) reported “legal requirements” as their main reason for devoting resources to accounting, as compared with 47 percent of manufacturers. Only 31 percent of service firms saw value in using accounting data to understand their internal cost structure (as compared with 60 percent of manufacturers). The lack of interest in cost accounting may be because their cost structure appears simple and straightforward or perhaps because they have not had assistance from accountants able to add value through experience with managerial accounting for service firms. All of the service firms interviewed did their own accounting internally, citing a combination of confidentiality, quality control, and cost considerations for their rationale. Of the 16 percent who also contracted externally, 56 percent used public sector and 44 percent used private sector accountants. 4.2.10 Availability. Availability of specialized accounting expertise was another matter, with 24 percent reporting that what they needed was not available in Vietnam and another 28 percent stating that the quality of expertise was extremely variable. Of the respondents that purchase accounting services, two-thirds reported that they could get assistance when they requested it with no appreciable delay. 4.2.11 Relative price. Price does not appear to be a major issue in electing to purchase accountancy services. Almost seventy percent of respondents felt that the price of available services was “cheap” (8 percent) or “just right” (60 percent). The firms indicating that accountancy services were expensive and not good value for money spent were primarily in service industries, again perhaps because they did not have access to more than superficial expertise. 4.2.12 Quality. The vast majority of respondents rated accountancy services as “acceptable” (47 percent) or “good/very good” (53 percent). They were particularly satisfied with the quality of accountancy services from public agencies, with 53 percent rating such services as “good” or “very good.” The improvements in quality desired were primarily in relation to more customization of the services provided (40

41

percent), followed by a desire for better on-time delivery (27 percent) and more sophisticated services (20 percent). 4.2.13 If firms are to make use of external accounting services, they want to be sure they are getting quality service. They want international audit standards applied, by appropriately-trained auditors, at a reasonable cost. Contrary to common belief, a number of respondents expressed an interest in having cost accounting services provided. Several respondents emphasized the need for accounting firms to market their services more proactively and make customers aware of the value that they can provide. 4.2.14 Recommendations. The accountancy firms themselves want a clear legal framework, compatible with international accounting practices, that is enforced. They also want staff that have more sophisticated marketing skills. As one manager commented, “We are only providing one-tenth of the services for which we have expertise because my staff aren’t skilled at diagnosing clients’ needs and matching them to that expertise.” 4.2.15 The most critical need, in addition to finalizing the almost-completed legal framework, is to ensure an effective, autonomous professional accounting association that can serve as a vehicle for setting and enforcing professional ethics including international accounting standards. There is also a need for continuing education of regulators and the public about the role of auditing services, and the large international accounting firms can play a helpful role in providing such education. Therefore the following recommendations are offered:

• Finalize the legal framework and any associated enabling legislation to ensure that accounting practices in Vietnam conform to international accounting standards.

• Continue to pursue, under the auspices of the ASEAN Federation of

Accountants, the “twinning” of the newly-forming national Vietnamese accounting association with similar associations in the region in order to provide technical assistance in developing a national professional code of conduct and licensing regulations linked to continuing professional education, and complement such assistance with academic exchanges.

• Enlist the donor community in supporting the use of international accounting

standards by requiring their use for donor-funded projects. 4.3 Computer Services 4.3.1 International context. The global market for computer-related services, excluding the specific short-term demand for assistance with Year 2000 compliance, is already in excess of US$500 billion. The primary limitations on growth in demand are the sophistication of customers' installed computer hardware base, and the existing telecommunications infrastructure. The falling cost of hardware globally is allowing

42

businesses in areas with previous low information technology adoption rates to “leapfrog” and acquire relatively inexpensive but powerful systems. Current limitations in wired telecommunications systems may soon be addressed by cost-competitive wireless and satellite infrastructure as bandwidth pricing falls. 4.3.2 As the complexity of computer systems increases, opportunities in consulting continue to expand. There is a growing emphasis on sector-specific and function-specific expertise, and computer services firms are partnering with sector specialists to strengthen their competitiveness. As firms migrate from mainframe to client/server architectures and from one operating system to another, the resulting “change management” is one of the most critical areas where consulting expertise is sought. 4.3.3 The move to concentrate corporate assets on “core competencies” has fuelled rapid growth in the outsourcing of application maintenance, systems integration, data processing, and other support functions. For example, 30 percent of IBM’s revenues now come from such services, including a recent contract with Prudential Insurance for $200 million to provide application maintenance support for its health-care business. There has been a recent shift to outsource core infrastructure activities if they can be managed better externally than internally. For example, AT&T has a contract to manage MasterCard's network. As the unit cost of most support functions is decreasing by over 20 percent a year, those external providers (outsourcers) are being expected to provide additional benefits such as increased response time in customer service or reduced time between order taking and product shipment. Corporate users of outsourcing are looking increasingly to specialists (e.g., data centres, PC support services), or a “best-of-breed” consortia, rather than contracting with one vendor to meet all their computer-related needs. 4.3.4 Internet service providers are multiplying rapidly, spurred on by the technology changes that will support the low-cost provision of telephone services over the Internet, i.e., voice, data, and telephony. International alliances are on the rise to increase penetration in local markets, with three examples: U.S. Yahoo! Inc. with Pacific Internet in Singapore; AT&T with Samsung in Korea; and MCI Communications with British Telecom Ltd. and Nippon Telephone and Telegraph Data Communications Corp. in Japan. 4.3.5 A related growth area is the design and management of websites. In the U.S.A., for example, over half of the commercial websites are hosted at Internet service providers, systems integrators, advertising agencies, graphic design firms, and other website managers. Leading website designers often work for clients whom they have only met electronically. On the website management side, off-site hosting can offer savings on bandwidth and personnel, as well as much-needed security for corporation's own LANs. A new aspect of website management will be assistance in conducting electronic commerce. 4.3.6 Development in Vietnam. Computer services have developed rapidly over the past seven years. Computer service firms operate in all major cities and provinces of Vietnam, among which the largest include FPT, Thien Nam, 3C, Dong Nam, CITEC, SCITEC, and Hung Vuong. Competition in the industry is very strong, and customers have a wide choice of firms to meet their needs. However, the

43

level of service sophistication still leaves much to be desired, and there continue to be human resource constraints on further growth. 4.3.7 Only nine percent of sample firms (all of them manufacturers) indicated that computers are not used in their business. For the others, computers have become an essential part of their operations. The primary use is for word processing, followed by accounting (see Table 21). It is interesting to note that, although the Internet had only been locally accessible for one month at the time of this study, already over 20 percent reported use and another twelve percent were involved in developing websites. 4.3.8 Usage patterns. Over sixty percent of service firms reported providing computer services internally, primarily in order to have timely access to support (52 percent). On average, firms are devoting 11 staff days a month to servicing their computer systems themselves, plus paying for four days of time from a computer service firm. As one respondent indicated, “If the computers go down, we’re out of business till they are working again.” Firms less concerned about internal control reported that they had invested in backup systems or they were purposely not networked so that one part of their computer system was always functional.

Table 21 Computer Usage by Sector, for Respondents Using Computers

(percent) Goods Firms Services Firms Total Word processing 100 100 100 Accounting 96 92 94 Inventory 70 18 49 Project management 38 64 48 E-mail 28 70 45 Overheads 26 70 44 Mailing lists 35 56 44 CAD 45 26 37 Internet research 14 32 21 Website 10 16 12 4.3.9 Most of the respondents (82 percent) relied on external support for their computer systems, in addition to internal service provision, with 69 percent purchasing that support from private computer service firms. The primary reasons for purchasing computer services were to repair equipment (48 percent) or to install new hardware or software (40 percent). Only 24 percent saw computer service firms as able to help them use computer systems more efficiently in their business. 4.3.10 Availability. A significant portion of respondents (26 percent) indicated that there was usually some delay in being able to get help from computer service providers, which is worrisome given the time-sensitive nature of the assistance. Of even more concern, though, is the fact that 45 percent indicated they could not get

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the specialized help they needed from Vietnamese computer service firms and an additional 31 percent said the quality of specialty assistance they did receive was very variable. The lack of appropriate specialized skills was particularly true in public sector computer service providers (69 percent), whereas only 36 percent described private sector providers as not having the skills required. 4.3.11 Relative price. Over half of the respondents (58 percent) indicated that the price of purchased computer services was “just right.” The 27 percent who felt that the services were too expensive were divided evenly between publicly and privately owned firms. 4.3.12 Quality. With regard to quality of service, respondents were almost evenly distributed in their ratings, with 30 percent saying “poor/very poor,” 38 percent saying “acceptable,” and 32 percent saying “good/very good.” Of those rating computer services as “good/very good,” 69 percent were purchasing from private sector providers. 4.3.13 Recommendations. Customers would like to see a general improvement in service quality (error-free, on-time service) and increased sophistication and customization of the services offered by computer service firms. They would like assurance of technical knowledge beyond basic operations. They would also like computer service firms to be more proactive in identifying and addressing their needs, e.g., for virus file updates and acting as a consultant to their firms regarding their information technology needs. They would also like more timely preventive maintenance services, including better attention to back-up systems and data recovery capabilities. Regarding aftersales service, they would like more timely provision of software upgrades and better inventory stocking of spare parts. The following recommendations are offered:

• Provide computer services firms with training in services marketing, including needs identification and service customization.

• Develop a program of specialty skills training to be delivered through the

polytechnics in a distance delivery modality for country-wide access. 4.4 Consultancy Services 4.4.1 International context. As the commercial environment becomes more specialized and competitive, managers look to external experts for advice on management and strategic positioning. Two of the most common to provide such assistance are management consultants and consulting engineers. The international market for consultancy services is dominated by a combination of large consultancy firms (such as Booz Allen), the large accounting firms who offer “business advisory” services, and large engineering practices (such as A.T. Kearney). 4.4.2 The majority of consulting services continues to be delivered by a range of sole practitioners and small consulting firms. In competitive markets, these smaller players survive and thrive based on niche specialization that complements the more

45

generalized consulting assistance provided by the large market players. Many established consultants face pressure from officials outplaced from government agencies being downsized or privatized who then turn to consulting as way to become rapidly self-employed. 4.4.3 The International Council of Management Consulting Institutes has established a common body of knowledge regarding consulting and a commonly-accepted code of professional conduct (both based on the work of the Institute of Certified Management Consultants of Canada); however, the common body of knowledge and the code are still not well known. Few of the member institutes have the legal right to restrict the provision of management consulting services to accredited professionals, and the large multinational consulting firms vary in whether or not they expect their consultants to become certified. Many countries still lack business school or professional development training in the methods and ethics of consulting. For the moment, the institutes rely on educating the public to become informed consumers of consultancy services, lobbying for recognized training courses based on the common body of knowledge, and promoting the benefits of professional development and verification of competence to consultants themselves. 4.4.4 Development in Vietnam. Management consultancy is a very new industry in Vietnam with almost no firms operating exclusively as management consultants. Most local consulting firms (apart from specialized consulting units of each individual line ministry) began as providers of services to foreign companies who wanted to set up and develop their business ventures in the emerging market of Vietnam. Over the years, a few companies have diversified into management consultancy, taking advantage of their principals’ education and working background. Foreign accounting and audit firms are also involved in the provision of management consulting services, though mainly to foreign investment clients. 4.4.5 While 69 percent of respondents indicated that consultancy services were “very important” to their competitiveness, less than half of them felt they had access to the specific expertise they needed. Nonetheless, sample firms reported purchasing an average of 5 days of consultancy from external sources in addition to devoting on average 52 staff days each month to the internal provision of consultancy services. 4.4.6 Usage patterns. Respondents in general reported using consultancy services primarily for help with strategic planning (36 percent), increasing profitability (34 percent), and improving efficiency (34 percent). Service firms were also concerned about receiving assistance with quality assurance (33 percent), but this concern was much lower (17 percent) among manufacturers. Since quality control is critical to customer satisfaction with services, the focus on quality assurance as a primary area of consulting assistance is a positive sign. 4.4.7 The majority of respondents (64 percent) reported that their consultancy services were from internal sources. When one considers that “consultancy” is the provision of objective advice to management to help with decision-making, it is a bit problematic to not have more access to arms-length expertise. The main reason given for internal provision was better quality control (51 percent). For those using

46

external consultancy services, 53 percent purchased such services from public agencies. 4.4.8 Availability. Forty-four percent of firms were satisfied that they could get consultancy assistance when they needed it; however, only 16 percent reported that they could get the specific kind of specialized assistance they really needed. Most felt that the expertise available was rudimentary and unsophisticated, without the business experience needed to give insightful and relevant advice. The criticism was particularly strong for private sector consulting firms from whom respondents expected high quality expertise in return for the fees paid. 4.4.9 Relative price. With 59 percent indicating that the price of consultancy services is “just right” and another 17 percent indicating that such services are “cheap,” price is clearly not the issue in determining the purchase of external consulting services. 4.4.10 Quality. Overall, 43 percent of the respondents reported receiving “good” or “very good” consultancy services, with 52 indicating that the quality was “acceptable” and five percent that it was “poor.” Fifty-seven percent of those who indicated that the quality was “good” were purchasing services from private sector firms, whereas all of the respondents indicating “poor” quality were purchasing from public sector firms (see Table 22). Respondents indicated that the primary improvements they would like to see in the available consultancy services were increased customization of services to their needs (31.6 percent) and more sophisticated service delivery (26.3 percent).

Table 22 Quality of Consultancy Services by Source of Purchase

(percents) Source of Purchase Perceived Quality Public Private Poor/Very Poor 20 - Acceptable 73 43 Good/Very good 7 57 Total 100 100 4.4.11 Recommendations. Consultancy is a service where few standards exist in Vietnam. Within the academic environment, there appears to be little awareness of the common body of knowledge which management consultants should know. Similarly, there is no professional association to provide objective verification of credentials or enforce an ethical code of conduct. 4.4.12 Respondents were critical of the quality of staff in consulting firms and the kind of advice they were providing, indicating that it was impractical and showed a lack of experience with clients’ commercial realities and the international context. They felt it was important that the consulting services promised be more clearly defined so that customers would understand what they were getting - which is indeed

47

the “informed client” tenet in professional codes of conduct for management consulting. As well, respondents would like consulting firms to be more proactive in marketing and provide more specialized, customized services. The following recommendations are offered:

• Provide consultants with training in services marketing, including needs identification and service customization.

• Through the Canadian Department of Foreign Affairs and International

Trade (association PEMD program), arrange for technical assistance from one of the provincial Institutes of Certified Management Consultants (e.g., B.C.) to help set up a professional association of management consultants with a code of conduct, certification criteria, and a mentorship program between Canadian and Vietnamese management consultants.

4.5 Design and Packaging Services 4.5.1 International context. While the importance of fashion design is well recognized, industrial design is still in a maturation stage within developed economies. While industrial design and associated materials development will play critical roles in whether or not industrial products remain competitive in a globalized economy, the business case for industrial design has not been clearly enough articulated to generate sufficient business consumer (and particularly SME) demand. Competitive contributions by industrial design include the following:

• enhancing the functionality of a product • increasing the efficiency or ease of manufacture of a product (e.g., using

lower-cost materials or reducing the number of product components) • improving the ergonomic features of a product (i.e., offering a product that

is safe, reliable, intuitive, and easy to use and maintain) • contributing to the aesthetic appeal, style, and image of the product • differentiating the product from its competitors so that it appears unique

4.5.2 One of the driving forces in industrial design is the increased importance of USER (Universal, Socially, and Environmentally Responsible) design. Universal design is an approach that considers children, seniors, people with different physical characteristics, and those with varying abilities. Other factors include a growing emphasis on “psychonomics,” i.e., how a customer interacts with a product, and trends to design products environmentally “green” from the start to avoid the high costs of having to recall, re-design and re-manufacture a product because of a change in regulations. 4.5.3 In both fashion and industrial design, computer technologies are playing an expanding role. Skills in computer-aided design, as well as access to the latest graphics software, have become essential for success. So too is the ability to support

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“on-demand” production runs by utilizing real time customer feedback to modify designs. 4.5.4 Development in Vietnam. For decades, Vietnamese manufacturers did not have to think about design and packaging of their products as purchase was assured. Under the rationing system, packaging and design seemed to be a luxury. Most line ministries had their own research institute(s), responsible for designing products that they thought were good for customers rather than responding to customer preferences. 4.5.5 Since Doi Moi, with the influx of foreign goods (including imitation ones), customers have gotten used to attractive products. With increasing disposable income, local customers have also become more sophisticated in their purchase selection, forcing local firms to pay more attention to design and packaging. These new developments have resulted in the establishment of new packaging firms with more access to modern technology and awareness of international trends. However, the provision of design services is still very much limited to state-owned research institutes, which have not shown a great deal of improvement. In the meantime, some local advertising firms have diversified into the design industry. 4.5.6 Firms interviewed reported that high quality design services could lower their production costs. Interestingly, managers were not terribly concerned about the lack of quality design services as they felt their competitors had to deal with the same constraints. Of course, with trade liberalization, the present competitive standoff will shift. 4.5.7 Usage patterns. Manufacturers devote on average nine staff days a month to internal provision of design and packaging services. The primary reason given for using design/packaging services was to improve the attractiveness of products (64 percent), followed by assistance with improving product utility (34 percent) and meeting product standards (32 percent). Few firms consider design expertise as a resource for reducing operational expenses. 4.5.8 Internal provision of design and packaging services was common (70 percent), with the primary rationale being the need for timely access to the service (30 percent) and better quality control (28 percent). For those who purchase design services externally, 65 percent use public sector suppliers. 4.5.9 Availability. The majority of firms purchasing external services reported that they could get design assistance when they needed it (68 percent). Almost half of the firms said they could always get the expertise they needed (46 percent), with another 38 percent saying the specialized expertise available varied in quality. 4.5.10 Relative price. On the whole, respondents were satisfied with the value they received for money spent, with 60 percent saying the price was “just right.” Over 40 percent of private sector manufacturers, however, rated their suppliers as “expensive” or “very expensive.”

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4.5.11 Quality. Similarly, the majority of firms (63 percent) were satisfied that the quality of services available was “acceptable.” However, 13 percent of those purchasing services from private sector design firms reported the quality as being “poor” or “very poor.” The main quality improvement desired was increased customization to customers’ needs (55 percent). 4.5.12 Recommendations. The different design disciplines pose different, though related, challenges. For fashion design and graphics, the primary hurdle is training in international techniques and to international standards. Design firms expressed an eagerness to invest in staff training but felt that there were not adequate trainers in Vietnam at present. On the industrial design side, the main challenge appears to be a gap between the theoretical knowledge in the polytechnics and the skills needed on the shop floor. 4.5.13 Respondents felt that the key issue was to increase the supply of internationally sophisticated design firms able to provide customized services. In order to be competitive, they need access to designers competent in state-of-the-art technology and know-how so that they can automate their design function. 4.6 Distribution Logistics 4.6.1 International context. Distribution logistics services (including transportation, freight forwarding, and warehousing) represent the crucial link between producers and consumers. The level of efficiency in such services has a direct impact on profit margins and final prices, as well as on a range of consumer benefits such as accessibility to products and predictability of delivery. Failures in the distribution sector can lead to signification misallocation of resources and economic cost, as occurred in many centrally planned economies. Inefficiencies raise costs unnecessarily, drawing resources away from other critical areas of need. Movement of goods unrelated to actual demand cycles fails to provide manufacturers with the relevant demand information so that they can adjust to production to market conditions. 4.6.2 Market opening and enhanced competition in distribution services can work to the benefit of both providers and users of distribution services. In addition to the traditional services of transportation, freight forwarding, and warehousing, distribution service providers in industrialized countries have being branching out into ancillary services such as credit advance, inventory maintenance, advertising, and packaging as well as newer initiatives in quality assurance. With the support of information technologies, non-traditional players are entering the industry. For example, Federal Express (known as a courier service) now maintains and dispatches inventory from its major airport hubs for major manufacturing clients. 4.6.3 Development in Vietnam. Unlike many other business services, distribution logistics was among the first sectors to allow private participation in spite of the dominance of state-owned enterprises in this industry before Doi Moi. Many service companies have since come into operation and are involved in providing transportation, warehousing, and other logistics for firms in need. Like the computer

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services industry, competition is high, resulting in better quality services and more market-determined prices. However, this industry still lacks the level of sophistication that will be needed for firms to compete internationally and for support of a more sophisticated retail sector dependent on just-in-time deliveries. 4.6.4 Manufacturers report major inefficiencies within the distribution infrastructure, few of which are under the control of the service firms with whom they contract. Customs clearance inefficiencies are only one example, though the one cited most frequently. Distribution firms spend on average 30 staff days a month on internal provision of distribution services, and they purchase another 14 days externally. 4.6.5 Usage patterns. Manufacturers use transportation and warehousing services for a range of activities, the primary one being moving finished goods to market (87 percent). Three-quarters of the manufacturers purchase distribution logistics services externally, with 78 percent using public sector agencies as their suppliers. For the 71 percent of firms who supply distribution logistics services internally, half of them do so because it is more economical than contracting out and 35 percent do so in order to have better quality control. 4.6.6 Availability. Over three quarters of the firms purchasing distribution logistics services (77 percent) reported that basic services are available when they needed them. However, 31 percent indicated that the specialized services they need are not available in Vietnam (such as integrated door-to-door services or electronic data interchange), and an additional 33 percent said that the quality of the specialty services that are available vary significantly. 4.6.7 Relative price. Price does not appear to be an issue as 78 percent indicated that the price for services was “just right,” with only 19 percent finding services expensive (most of whom were public sector firms). 4.6.8 Quality. On the whole, manufacturers were satisfied with the quality of services available, with 60 percent indicating that the quality is “acceptable” and another 32 percent indicating that it is “good” or “very good.” Private sector logistics firms were rated as providing higher quality services (see Table 23). The quality improvements of most interest to respondents were “zero errors” delivery (25 percent), “on time” delivery (23 percent), and a better range of services offered (23 percent).

Table 23 Quality of Distribution Logistics, by Source of Purchase

(percent) Source of Purchase Perceived Quality Public Private Poor/Very Poor 9 - Acceptable 60 50 Good/Very good 31 50 Total 100 100

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4.6.9 Recommendations. Manufacturers would like access to integrated door-to-door distribution services. They report that procedural streamlining, coupled with reduced costs and improved delivery time, is critical in helping them meet their customers’ expectations reliably. Otherwise, they are likely to experience production delays, require workers to work later hours, and still lose customers and market share. Services also need to be damage free. Of particular urgency is the need to simplify customs procedures and improve the supporting infrastructure, including implementation of electronic data interchange (EDI) technologies for customs clearance. They see increased competition among distributors as helping to shorten delivery time and increase reliability of forwarding services. The following recommendations are offered:

• Address inefficiencies and corruption in customs clearance procedures by contracting with an international inspection firm to manage customs-related activities and achieve stated performance objectives.

• Help improve the quality of distribution services by introducing a quality

assurance initiative such as registration to ISO 9000. 4.7 Market Research 4.7.1 International context. Well-conducted market research can be invaluable to companies in charting their competitive strategies, whether domestic or international. The need to address international customers' concerns about the validity and reliability of research undertaken on their behalf has led to keen interest in disseminating and enforcing professional codes of conduct. As with industrial design, this is an industry in which professional credentialling and recognition is relatively new. 4.7.2 The market research industry globally is experiencing new sources of competitive pressure linked to changes in information technology. One source is that from related disciplines such as marketing and management consulting that are finding Internet-supported research increasingly easy to conduct on behalf of clients. Another source is self-service in research by former or potential clients using the Internet. Not only are firms able to research for competitive information and best practices on-line, but they can also use their websites to gather a wide range of customer information formerly only available through third-party customer research. For example, the on-line bookstore amazon.com has been a leader in utilizing electronic order information to track buying patterns and target promotional materials on the basis of revealed preferences. 4.7.3 Development in Vietnam. Market research is a very young industry in Vietnam, with few practitioners having more than five years of experience and most having no first-hand international exposure. The growth of market research has been fuelled by increased recognition by managers of marketing as one of the fundamental business functions. Industry growth began with the establishment of representative offices by foreign market research firms such as SRG in Vietnam, mainly to serve

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regional clients who now have operations in Vietnam. Some local market research companies have also been established, mainly to act as subcontractors for the representative offices of foreign firms that are restricted to servicing foreign clientele rather than the local market. Some universities, such as National Economics University in Hanoi and the Ho Chi Minh City Economics University, also have market research units that use their own foreign-trained faculty as researchers. Market research assistance is also provided by foreign investment consulting firms, mainly to foreign clients. 4.7.4 While expertise does exist, there is a credibility problem at the present in that many potential users are unaware of the actual capabilities of Vietnamese market research firms. Respondents frequently commented that market researchers were inexperienced, did not really understand their industry, and could not provide effective research. In terms of the services being provided, consumer rather than industrial market research seems to be the most popular and best understood. 4.7.5 Usage patterns. On average, firms spend nine hours a week of staff time on market research and do little contracting out. The primary reasons for conducting market research are to make sure that they are meeting customers’ needs (54 percent) and to identify new markets for products or services (38 percent). Only 19 percent invest in learning about their competitors’ strategies. 4.7.6 The vast majority (90 percent) of respondents conduct their own market research using internal resources to do so. The main reason given for internal provision was better quality control (36 percent). Only 16 percent purchase services from market research firms, of which 63 percent buy from private sector firms. 4.7.7 Availability. Only 16 percent of respondents make use of external suppliers, one-third of which reported that they could get services when they needed them. However, 60 percent of the users indicated that the specialized expertise they needed was not yet available in Vietnam to their knowledge. 4.7.8 Relative price. In comparison with the other business services studied, respondents seem the least happy with the value they receive for the price they pay to market research firms, with 31 percent indicating that the services were “expensive” or “very expensive.” For manufacturers specifically, the percent rating market research as “expensive” was 60 percent. 4.7.9 Quality. On the quality side, there are clear problems as 35 percent of users indicated that the quality they received was “poor” or “very poor.” The market research firms rated as providing good services were all private sector firms. Respondents were concerned about receiving more sophisticated services with more relevant analysis, particularly on international markets. 4.7.10 Recommendations. Respondents were aware that, without proper market research, they could not identify and target customer needs successfully and identify new opportunities. However, they expressed strong dissatisfaction with the quality and range of services presently available in Vietnam. Respondents want a sense of good value for money, particularly with regard to competitive trends in an

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international context. They want relevant, practical advice and assurance that the data provided are accurate. They want easy access to information on available services and how to assess their value. The following recommendations are offered:

• Arrange for technical assistance to establish a market research industry association in Vietnam with a professional code of conduct and certification criteria.

• In order to educate public sector officials about the value of market

research, include a module on market research in the proposed MPDF training for SOE managers.

4.8 Training Services 4.8.1 International context. As customer expectations rise and the speed of technological changes increases, the pressure for ongoing professional development and training also grows. Specialized expertise is becoming obsolete at an ever-increasing pace. For example, medical knowledge is said to have a half-life now of five years, meaning that half of what is learned in medical school becomes obsolete in five years. Internationally, this training need is being met by a mixture of public and private training institutions, including a growing number of private sector managed educational institutions (Mallea, 1997). 4.8.2 Within a growing number of occupations (medical, teaching, accounting, law, engineering, realty, insurance), there is a trend towards licensure and a requirement for annual continuing professional education (CPE) to maintain the license, i.e., re-certification. This requirement is extending from salaried positions to functions such as Emergency Medical Technician, Paramedic, and Fire Fighter that are often operated as volunteer positions. In addition, the increase in regulatory requirements regarding occupational health and safety and environmental health dictates that employees receive training in a growing range of activities such as handling hazardous materials, driving large trucks, operating heavy machinery, and administering first aid and cardiopulmonary resuscitation (CPR). 4.8.3 Expectations of lifelong learning are beginning to spread, especially in economies where primary schooling is mandatory. These expectations are accompanied by increasing demand for “continuing education” enrichment for both youth and adults. In addition, training is becoming more accessible outside of major urban areas as instructional media expand from face-to-face classroom and workplace delivery to computer-aided self-study, distance training/coaching, and Internet-based “virtual classrooms.” Competency-based testing and assessment of prior learning are emerging growth areas, often linked to development of personalized learning systems. 4.8.4 Industrial restructuring in many economies means that workers are being displaced from previously secure jobs in resource-based and manufacturing industries to service sector jobs for which they need different skill sets. Employment opportunities for workers without secondary school education are disappearing rapidly.

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Publicly-listed firms offering technology, computer, and self-management skills training are seeing annual growth in the range of 25 to 70 percent. 4.8.5 Economies where educational systems have emphasized rote learning (passive memorization) and factual recitation are recognizing that changes are needed to support continued economic progress. Malaysia, for example, has targeted the need to develop creative, innovative thinkers rather than the compliant students presently produced. Singapore has recently unveiled a Thinking Skills Programme to emphasize creative analysis. The Hong Kong government has created the Hong Kong Open Learning Institute, using television and computer technologies to provide distance education for adults wishing to enhance their skills. The Institute has over 20,000 registrants, making it the largest training institution in the country. In the emerging economies of the former Soviet Union and Eastern Europe, human resource development is seen as key to a stable transition to democracy and market-based economies. 4.8.6 Development in Vietnam. The training service industry in Vietnam can be characterized as very rich in number and “not that rich” in service quality. Under the former subsidy system, all training centers were owned by the State, with almost no private training institutions. As a result, curricula were strictly controlled by the Ministry of Education and its affiliated agencies. Since Doi Moi in Vietnam, more and more training institutions and centers started up, including state-private joint ventures and wholly private centers. Training is provided on a wide range of subjects, from basic business skills to mechanical engineering to more advanced business subjects. 4.8.7 The injection of foreign funding and technical assistance has helped improve the training available, both in curriculum and method; however, in a number of universities the quality of training is far from satisfactory. Demand is high, and training centers tend to focus on meeting the easy demand rather than on improving service quality, especially regarding the relevance and practicality of the content. 4.8.8 Training services ranked second after computer services in importance to respondents. On average, firms invest 3 days of internal staff time in training as well as contracting externally for an average of 16 days per month. Without proper training, workers are at risk and are not able to perform optimally. Service firms are not able to provide sophisticated, customized services. The shortage of skilled engineering staff and management officers is acute, and the solution of hiring expatriate staff is very expensive. 4.8.9 Usage patterns. The main purpose for using training services was for skills upgrading (63 percent), followed by time management (36 percent) and basic skills (27 percent). Most respondents (74 percent) made use of externally-provided training, of which 78 percent was provided by the public sector. Over half (57 percent) provide training services in-house, with the primary rationale being better quality control (57 percent). 4.8.10 Availability. The majority of firms that purchase external training indicated that they can get training when they need it (68 percent). However, 59 percent of the

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firms indicated that they were not able to get the training expertise they need in Vietnam, and another 31 percent said the quality of expertise that is available varies a great deal. Respondents were particularly critical of public sector training institutions, saying that two thirds of the time they do not provide the specialized expertise needed by their clients. 4.8.11 Relative price. While 58 percent felt that the price of training services was “just right,” another 29 percent felt that it was expensive. 4.8.12 Quality. With the caveat already mentioned, respondents were satisfied with the quality of training services that are available, with 58 percent saying it was “acceptable” and 26 percent that it was “good.” Respondents were particularly positive about private sector training, with 50 percent rating private training firms as providing “good” quality. The main quality improvement desired was more customization of training to the needs of the client (57 percent). 4.8.13 Recommendations. Respondents focused their recommendations primarily on the content of training presently available. They indicated that training content should be up-to-date, of international quality, and localized for the Vietnamese situation. Training should be carefully matched to customers’ needs, with both basic and advanced training options. The training itself needs to be practical, not theoretical. The method of instruction needs to be designed to ensure skills transfer from the classroom back to the workplace, which is generally not the case at the present time. 4.8.14 It is interesting to note that training firms themselves say there is a need for more relevant and practical content, better qualified trainers, and use of professional training methods. Service firms felt that part of the answer to improving training services lay in increasing the salaries of trainers and improving their qualifications. In addition, there is a need for better training facilities. The following recommendations are offered:

• Arrange for technical assistance from the American Society for Training and Development (ASTAD) to set up a professional association for trainers that can help set standards for training design and delivery as well as certification of trainers and objective verification of training outcomes.

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SECTION 5 PROPOSED VIETNAM BUSINESS SERVICES WORK PROGRAM

5.1 Rationale for a Vietnam Business Services Work Program 5.1.1 Normally a research study such as this one would simply offer discrete recommendations to address each of the main findings. In this instance, because business services are in their infancy in Vietnam, the challenges to be addressed are complex and do not lend themselves to a series of unconnected activities. Given the clear importance of business services to the growth and competitiveness of Vietnam’s SMEs and the negative consequences of business services inadequacy, it seems more appropriate to propose a series of interrelated activities that could comprise an initial Vietnam Business Services Work Program to strengthen the seven business services targeted in this study. 5.1.2 Resources are not available to launch a complete series of initiatives for each business service so an alternate strategy is proposed, i.e., to have each business service in turn serve as the lead sector for one of the suggested initiatives. Since the initiatives are relevant to all seven of the business services, lessons learned from a pilot with one business service can then be transferred to other business services. 5.1.3 Initiatives are conceptualized in three phases: raising awareness of the issues, skills building, and then recognition and reinforcement of the successes achieved. In support of the initiatives proposed, Appendix D describes a range of international sources of technical assistance that could be utilized if desired. In general, the “awareness” activities are ones that could be launched immediately or in the near term. Table 24 provides a summary chart of the ten proposed initiatives, indicating the major finding(s) to which each is linked, the proposed lead sector, and the main players to involve. 5.2 Summary of Proposed Initiatives 5.2.1 Reporting Out Seminar. Given the general lack of awareness of the critical role played by business services, a first step would be to hold a seminar with local enterprises, universities, business support organizations, government officials, and the donor community to report out the findings of this study and discuss specific actions that can be taken for its implementation. A positive outcome of such a seminar would be to form a Business Services Advisory Council to assist MPDF in implementing a Vietnam Business Services Work Program to strengthen business services. 5.2.2 Business Services Awareness Initiative. To raise awareness on the part of business managers about the role business services can play in enhancing their competitiveness and to address negative attitudes about contractingout, the following three activities are propsed with accountancy as the lead sector:

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a) Prepare a series of news articles on the benefits of contracting out for publication in

local newspapers. b) Prepare and distribute a flyer on the benefits of contracting out, which would also

contain information on how to select a service supplier and how to manage the working relationship.

c) Encourage foreign accountancy firms to continue providing a series of educational

presentations and articles on the benefits of contracting out for skilled professional assistance.

5.2.3 Services Marketing Skills Initiative. The marketing and managerial issues facing service firm managers differ in some significant ways from those of managers of manufacturing operations. To help service firms improve their marketing skills in particular, the following activities are proposed with training as the lead sector:

a) Develop and deliver a series of training workshops on services marketing using as a template the services marketing component of a three-day workshop on “Increasing Services Exports” that has already been delivered successfully by the International Trade Centre UNCTAD/WTO (ITC) in six African and Asian developing countries (see Appendix D).

b) Translate and distribute the two handbooks for developing country service

firms that are available free of charge from the ITC: Successful Services Exporting and Innovating for Services Export Success.

c) Develop in-country capability to provide more in-depth training in the

marketing of services by developing a train-the-trainer workshop. Again this could be based on the work done by the ITC on training “trade tutors” for professional service firms.

d) Pilot the train-the-trainer workshop with selected training enterprises and

make any revisions necessary. Successes resulting from the training and tools provided could be publicized in Vietnam, as well as on ITC’s Services Exporting Homepage if the success had an export dimension. 5.2.4 Service Quality Initiative. A two-pronged approach to addressing the pressing quality assurance issues is suggested: (a) encouraging registration to the international quality standard, ISO 9000; and (b) beginning to establish professional codes of conduct to support quality delivery. To move forward, a national quality initiative is needed, sponsored by the General Department for Standards, Measurement and Quality Control (GDSMQC). The following specific activities are recommended, with consultancy as the lead sector:

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a) Publicize the benefits of quality assurance and generate interest among business service firms in becoming registered to ISO 9000.

b) Translate and distribute ITC’s ISO 9000: A Workbook for Service Firms in

Developing Countries.

c) Provide an orientation session for GDSMQC officers on the application of ISO 9000 to service firms.

d) Train consultants in the process of successful ISO 9000 implementation (see

Appendix D for information on an existing Canadian course that could be adapted for Vietnam).

e) Pilot an “Introduction to Consulting” course to introduce consultants to

international professional standards of practice and pave the way for the adoption of professional standards of practice. Such a course could be offered through university schools of business, both to business students and as a distance-delivery continuing professional education offering for practicing consultants.

f) Launch an awards program for service excellence in order to recognize

improvements in quality, to include categories related to innovation, customer satisfaction, export success, etc.

5.2.5 Association Case Study. One of the difficulties in improving the quality of business services is legislative barriers to the development of autonomous service industry associations that can be self-regulating. In order to help find a model that is acceptable to government and effective for the private sector, a case study is recommended so that government can “learn by seeing.” Its terms of references would be to identify and resolve the various concerns and issues about setting up an industry association, so that its experience could serve as a model for association development in other service industries. The computer services industry is proposed as the lead sector for the establishment of an association, assisted by the Vietnam Chamber of Commerce and Industry. To provide technical assistance, twinning with the information technology association in Hong Kong could be helpful. 5.2.6 Technical Training Initiative. It is clear from the results that staff of business service firms do not have adequate technical skills for providing real assistance to their customers. Looking at design services, for example, manufacturing SMEs are particularly affected by present inadequacies in industrial and product design. The following activities are proposed with design as the lead sector:

a) Establish an Industrial Design Advisory Group comprised of major industrialists (who use industrial design), and leading industrial engineers and designers, and university trainers to review and revise the national

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training curriculum in industrial design. The aim would be to ensure that the curriculum was relevant to industrial needs.

b) Develop opportunities for apprenticeship and supervised field work for

industrial design trainees within the private sector.

c) Provide skills training on current design software packages and international design trends/techniques for product design.

d) Establish a certificate program for both industrial and product design

training. 5.2.7 Continuing Professional Education Initiative. To address the pressing need for specialized skills, the underlying issue is to develop a culture of continuing professional development. In order to make professional development training as accessible as possible, distance delivery (via computer-based training, Internet-based training, or teleconferencing) is suggested. The following activities are proposed with market research as the lead sector:

a) Survey market research firms to determine the specialty skills that they wish help in developing.

b) Develop and pilot a distance delivery module on a topic like researching

competitors’ strategies. 5.2.8 Regulatory Changes Initiative. Three areas of Vietnam’s regulatory framework need attention. Consultations with government are needed on creating (a) a level playing field between goods and services firms with regard to taxation policies, (b) creating a level playing field between SOEs and private service firms with regard to procurement practices, and (c) reducing the costs of international telecommunications and access to the Internet. In the latter case, it may be helpful to select a regional economy such as the Philippines against which to benchmark telecommunications charges. 5.2.9 Services Statistics Initiative. Business service industries will only gain recognition if their performance is measured and reported. There is a need to improve the collection and reporting of both domestic and trade statistics for service in general and business services in particular. Both the United Nations Statistical Office and the International Monetary Fund could provide technical assistance (see Appendix D). 5.3 Proposed Demonstration Investment Project 5.3.1 To ensure that the full potential of Vietnam’s private sector is developed, it is important to have a catalyst for change in expectations around service quality and level of expertise. The quality and range of local business services can be key both to domestic growth and attracting investment to Vietnam. The challenge is to create enough market

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demand, which is sensitive to quality, that Vietnamese business service providers will be motivated to improve their quality assurance and strengthen specialty expertise. One high growth “sector” that could provide a context for rapid improvement in service quality, as well as attractive employment options throughout the country, is “back office” investment. 5.3.2 The Rationale. The provision of administrative and customer support services by offshore “back office” operations has been growing globally at 15-20 percent per year as corporations in developed market economies strive to reduce fixed overhead by contracting out routine functions. Typical corporate investors in “captive” back office operations include airlines, brokerage firms, credit-card processing companies, financial institutions, insurance companies, marketing businesses, and any other businesses with high-volume transactions. 5.3.3 Given the information technology support available, any service that does not require face-to-face contact with customers can be provided in an offshore “back office” because it is “footloose,” i.e., not bound to a particular location. Examples include not only more traditional data capture and processing, but also electronic publishing, website design and management, customer call centres, medical records management, hotel reservations, credit-card authorizations, remote secretarial services, mailing list management, technical on-line support, indexing and abstracting services, research and technical writing, and technical transcription. In addition, manufacturers are increasingly contracting out product design, logistics management, research and development, and customer service support. 5.3.4 In order to justify the distance relationship and loss of direct administrative control, back office operations must offer at least a 30-40 percent cost savings from the distance delivery. Back office operations depend on lower rent and lower human resource costs in order to lower operating costs for their customers. Labour is typically 75 percent of the geographically variable cost, but the challenge is finding locations with low wage structures and highly skilled workers. Teleports (satellite earth stations that bypass public telephone networks) are emerging as a key enabling factor along with low-cost satellite leased lines. Successful back office operators are able to provide lower-cost skilled and multilingual workers; cost-efficient telecommunications connections; and incentives such as no/low corporate taxes, rebate on payroll taxes, tax-free telecommunications, subsidized leased line rates, universal freephone service, global toll-free numbers, wage subsidies for trainees, training grants, and subsidized office space. Third-party outsourcers can increase their competitiveness by adopting global standard systems and migrating from distance-metered telecommunications systems to flat-rate or time-metered global computer networks. Export success is directly linked to the ability to add value through specialized technical/industry knowledge and the provision of quality service in customers' language of choice 24 hours a day, 365 days a year. 5.3.5 Benefits to Vietnam. Vietnam is in a position to leverage its highly literate and computer-friendly work force, as well as its recent telecommunications investments, to capture a share of this lucrative market. Such an initiative could provide a positive

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motivation for the Vietnamese government to take several steps that would be of benefit to the entire private sector: (a) lower international telecommunication costs; (b) improve Internet access; and (c) review the regulatory framework for service operations. Back office operations, by their very nature, can be located throughout the country, thus supporting the viability of smaller communities. Such operations draw on other services (computer services, etc.) as inputs and thereby help to raise the quality standard of a range of business services. 5.3.6 Proposed First Steps. Because of the investment spinoffs, this could be an attractive project for MPDF to undertake. The first step would be to contract with a party knowledgeable in the global trends and indicators of success for back office operations, as well as the Vietnamese investment environment in order to conduct a feasibility study for this potential demonstration project.

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Table 24 Summary of Initiatives Proposed for a Vietnam Business Services Work Program

Initiative PhasesInitiative Awareness Skills Building Recognition

Major Findin

g

Proposed Lead Sector

Main Players

Reporting Out Seminar

Hold seminar, with a desired outcome of forming a Business Services Advisory Council to assist MPDF in implementing a work program to strengthen business services in Vietnam.

#1 G, D,O, U, F

Business Services Awareness Initiative

- Prepare news articles on benefits of contracting out - Develop flyers on how to select a service supplier & how to manage the working relationship - Engage foreign service firms in providing talks and seminars on benefits of auditing & cost accounting

- Publicize success stories in Vietnam and on ITC website

#1 #4

Accountancy D,F

Services Marketing Skills Initiative

-Initial workshops on services marketing (with ITC) - Translate & distribute ITC handbooks and tools

- Train trainers to deliver services marketing training - Pilot delivery of training

- Publicize success stories in Vietnam and on ITC website

#1 Training D,O,U,F

Service Quality Initiative

- Publicize the benefits of quality assurance - Distribute ISO 9000 Workbook - Provide orientation to GDSMQC on the

- Train consultants to work with firms to become registered to ISO 9000 - Pilot an Introduction to Consulting course to

- Launch an awards program for service excellence

#3 Consultancy D,G,O,F

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Major Findin

g


Main Players

application of ISO 9000 to service firms

introduce consulting standards

Association Case Study

- VCCI to work with computer services industry to set up an association and address any concerns, perhaps twinning with the IT association in Hong Kong

#5 Computerservices

D,O,F

Technical Training Initiative

- Establish an Industrial Design Advisory Group of industry leaders and university trainers to identify and address skills gaps

- Create apprenticeship opportunities within the private sector - Deliver skills training

- Certificate program #6 Design D,U,F

Continuing Professional Education Initiative

- Survey firms to determine specialty skills needed

- Develop and pilot a distance module on researching competitor strategies

- Publicize the results #6 Market research

D,U,F

Regulatory Changes Initiative

- Address level playing field between goods and services firms - Address level playing field between SOEs and private service firms - Reduce telecom and Internet costs

- Seek technical assistance from UNCTAD & WTO

#2#7

G

Services Statistics Initiative

- Conduct a review of measurement issues for

- Seek technical assistance from UNSO & IMF

G

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Major Findin

g


Main Players

domestic & traded services

Back Office Demonstration Investment Project

Using back office services as a demonstration case, meet with government & potential investors to launch the project concept and provide technical & quality assurance training for project participants

G,I,F

Key: D Donor agencies F Firms G Government I Investors O Organizations (such as VCCI) U Universities and polytechnics

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APPENDIX A SELECTED REFERENCES

Bacchetta, M.; Low, P.; Mattoo, A; Schuknecht, L; Wager, H.; & Wehrens, M.

(1998). Electronic commerce and the role of the WTO. Geneva: World Trade Organization (Special Studies 2).

Berthelot, Y. (1996). What aid is available for services in the transition economies?

In M. Kostecki & A. Fehérváry (eds.), Services in the transition economies: Business options for trade and investments, 29-52. Oxford: Pergamon.

Ghibutiu, A. (1998). Business services and Romania’s integration into the western

markets. Paper presented at the Progres Seminar, Geneva. Industry Commission. (1997). Exports of government services. Canberra: Australian

Government Publishing Services. Kigyóssy-Schmidt, E. (1998). Business services in the transitional economies of

central and eastern Europe: A cross-country approach. Berlin: A.C.E. Phare Programme Project No. P95-2224-R.

Kostecki, M. & Fehérváry, A. (eds.) (1996). Services in the transition economies:

Business options for trade and investments. Oxford: Pergamon. Mallea, J. (1997). Internationalisation of higher education and the professions.

Paris: OECD. Organisation for Economic Co-operation and Development. (1997). International

trade in professional services. Paris: OECD. Riddle, D.I. (1992). Service transnationals in developing countries. In C.R. Lehman

and R.M. Moore (eds.), Multinational culture: Social impacts of a global economy, 277-293. Westport: Greenwood Press.

Riddle, D.I. (1991a). Fostering the growth of new service exports from developing

countries. In UNCTAD, Services in Asia and the Pacific: Selected papers, Vol. II, 292-340. New York: United Nations. (UNCTAD/ITP/51 Vol II)

Riddle, D.I. (1991b). Global consolidation of producer services and its relevance to

service sector integration of Western and Eastern Europe. CIBS Discussion Paper (Dalhousie University).

66

Riddle, D.I. (1990). Key strategic decisions for service firms. In D.E. Bowen, R.B. Chase, T.G. Cummings, et al (eds.), Service management effectiveness: Balancing strategy, organization and human resources, operations, and marketing, 41-63. San Francisco: Jossey-Bass.

Riddle, D.I. (1989a). The role of producer services in development. In UNCTC,

Services and development: The role of foreign direct investment and trade, 67-70. New York: United Nations. (ST/CTC/95)

Riddle, D.I. (1989b). The role of services in economic development: Problems of

definition and measurement. In UNCTAD, Services and development potential: The Indian context, 33-45. New York: United Nations. (UNCTAD/ITP/22)

Riddle, D.I. (1987). The role of the service sector in economic development:

Similarities and differences by development category. In O. Giarini et al. (eds.), The emerging service economy, 83-104. New York: Pergammon.

Riddle, D.I. (1986). Service-led growth: The role of services in world development.

New York: Praeger. Riddle, D.I. (1985). Services: Parasitic or dynamic? Policy Studies Review, February,

4: 467-474. Riddle, D.I. (1984). Service industries as growth leaders in the Pacific Rim. Asia

Pacific Journal of Management, 1 (3): 190-199. Shelp, R.K. (1981). Beyond industrialization: Ascendency of the global service

economy. New York: Praeger. Singapore Ministry of Trade and Industry. (1986). The Singapore economy: New

directions. Singapore: Government of Singapore. Singelmann, J. (1978). From agriculture to services: The transformation of

industrial employment. Beverly Hills, CA: Sage Publications. UNCTAD. (1997). Telecommunications, business facilitation and trade efficiency.

Geneva: UNCTAD. (TD/B/COM.3/EM.3/2) UNCTAD. (1995a). Impact of progressive liberalization and of service imports on

the development of competitive services sectors, and the difficulties faced by developing countries which prevent them from increasing their participation in world trade in services. Geneva: UNCTAD. (TD/B/CN.4/43)

UNCTAD. (1995b). Review of the work programme of the Standing Committee on

Services. Geneva: UNCTAD. (TD/B/CN/4/44)

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UNCTAD. (1993). Fostering competitive services sectors: A comparative analysis of services sectors in developing countries. Geneva: UNCTAD. (TD/B/CN.4/23)

UNCTAD. (1989). Services in the world economy, UNCTAD/TDR/8 (offprint).

[summarizes the work presented in UNCTAD TD/B1008/Rev.1, TD/B/1100, TD/B/328/Rev.1, and TD/B/1162]

UNCTAD and The World Bank. (1994). Liberalizing international transactions in

services: A handbook. New York: United Nations. Zeman, K. (1998). The employment dilemma and the service economy in the Czech

economy. Paper presented at the Progres Seminar, Geneva. Zeman, K. (1996). Key problems of service sector transformation in the Czech Republic. Paper

presented at the Progres Seminar, Geneva.

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APPENDIX B DEMOGRAPHICS OF THE ENTERPRISES INTERVIEWED

Table B1: Percent of Goods Firms, by Industry and Years in Business

Industry Under 3 3-5 6-10 Over 10 Chemicals/plastics 6 28 16 50 Construction materials 8 25 25 42 Food processing 7 13 33 47 Electronics - 21 21 58 Garments/shoes 15 15 32 38 Metal working 8 - 15 77

AVERAGE PERCENT

7% 18% 23% 52%

Table B2: Percent of Service Firms, by Industry and Years in Business

Industry Under 3 3-5 6-10 Over 10 Accountancy - 38 62 - Consultancy services - 58 25 17 Design/packaging - 36 36 28 Distribution 17 50 33 - Market research 23 38 23 16 Training services - 50 30 20

AVERAGE PERCENT

7% 45% 33% 15%

Table B3: Percent of Goods Firms, by Industry and Number of Employees

Industry Under 30 30-49 50-99 100+ Chemicals/plastics 6 - 27 67 Construction materials 13 - 13 73 Food processing - 7 20 73 Electronics 7 26 7 60 Garments/shoes 8 - 23 69 Metal working - 8 23 69

AVERAGE PERCENT

6% 7% 19% 68%

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Table B4: Percent of Service Firms, by Industry and Number of Employees

Industry 10 or less 11-49 50-99 100+ Accountancy - 20 30 50 Consultancy services 9 25 33 33 Design/packaging - 50 20 30 Distribution - 50 10 40 Market research 27 18 46 9 Training services 10 50 20 20

AVERAGE PERCENT

8% 35% 27% 30%

Table B5: Percent of Goods Firms, by Industry, Ownership, Control, and Export Sales

Ownership

Industry Private Public %Vietnamese

Control % Export

Sales Chemicals/plastics 28 72 84 5 Construction materials 47 53 90 16 Food processing 20 80 95 26 Electronics 40 60 81 8 Garments/shoes 62 38 83 59 Metal working 15 85 94 16

AVERAGE PERCENT

35% 65% 88% 22%

Table B6: Percent of Service Firms, by Industry, Ownership, Control, and Export Sales

Ownership

Industry Private Public %Vietnamese

Control % Export

Sales Accountancy 30 70 55 63 Consultancy services 67 33 60 34 Design/packaging 50 50 80 50 Distribution 45 55 81 55 Market research 82 18 50 18 Training services 20 80 90 60

AVERAGE PERCENT

50% 50% 69% 47%

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APPENDIX C DATA TABLES

Table C1: Percent Purchasing Each Business Service, by Sector

Business Service Goods Firms Service Firms Total Firms Telecommunications 100 100 100 Banking 100 76 98 Courier services 88 90 89 Insurance 100 71 86 Training services 100 68 84 Computer services 83 81 82 Advertising 91 63 77 Equipment repair 89 61 76 Distribution logistics 95 na 49 Inspection and testing 75 16 46 Translation services 40 27 34 Equipment rental 32 34 33 Personnel services 35 21 28 Import/export services 51 na 26 Accountancy 34 15 24 Design/packaging 48 na 24 Consultancy 35 11 24 Trading houses 42 na 21 Environmental services 38 na 20 Security services 23 15 19 Market research 18 11 15 [goods firms = 65; service firms = 62]

Table C2: Perceived Price of Business Services, by Sector and Ownership

(percent)

Perceived Price of Business Services Ownership Cheap/Very


Expensive Totals

Goods Firms Private 4 44 52 100 Public 9 41 50 100

AVERAGE 7 42 51 100 Service Firms

Private 19 29 52 100 Public 32 49 19 100 Average 26 39 35 100

All Firms Private 12 36 52 100

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PUBLIC 17 44 39 100 AVERAGE 16 40 44 100

[goods firms = 85; service firms = 62]

Table C3: Perceived Price by Export Intensity (percent)

Perceived Price of Business Services Exports as

Percent of Sales

Cheap/Very Cheap

Just Right Expensive/Very Expensive

Totals

0% 12 29 26 67 1-49% 1 6 11 18 50+% 1 5 9 15 Total 14 40 46 100

Table C4: Primary Basis of Competition, by Sector and Ownership (percent)

Basis of Competition Ownership Price Quality Other Totals

Goods Firms Private 45 52 3 100 Public 34 57 9 100




PUBLIC 24 62 14 100 AVERAGE 26 63 11 100


Table C5: Perceived Price by Primary Basis of Competition, By Sector

(percent)

Perceived Price of Business Services Basis of Competition Cheap/Very


Expensive Totals

Goods Firms Price 6 33 61 100 Quality 4 36 60 100

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Service Firms Price 33 50 17 100 Quality 19 43 38 100

All Firms Price 13 37 50 100

QUALITY 12 40 48 100 [goods firms = 58; service firms = 44]

Table C6: Perceived Price of Specific Business Services Used (percent)

Perceived Price Business Service

Cheap/Very Cheap

Just Right

Expensive/Very Expensive

Totals

Accountancy 8 60 32 100 Computer services 15 58 27 100 Consultancy 17 59 24 100 Design services 24 60 16 100 Distribution 3 78 19 100 Market Research 15 54 31 100 Telecommunications - 11 89 100 Training 13 58 29 100 [goods firms = 61; service firms = 45]

Table C7: Perceived Quality of Business Services, by Sector and Ownership (percent)

Perceived Quality of Business Services Ownership Poor/Very Poor Acceptable Good/Very Good Totals

Goods Firms Private 38 62 - 100 Public 45 51 4 100




PUBLIC 45 44 11 100 AVERAGE 38 53 9 100


Table C8: Perceived Quality by Primary Basis of Competition, by Sector

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(percent)

Perceived Quality of Business Services Basis of Competition Poor/Very Poor Acceptable Good/Very Good Totals

Goods Firms Price 74 26 - 100 Quality 46 50 4 100

Service Firms Price 50 50 - 100 Quality 22 50 33 100

All Firms Price 70 30 - 100

QUALITY 32 50 18 100 [goods firms = 58; service firms = 44]

Table C9: Major Barriers to Providing Quality Service

(percent)

Barrier Percent Govt competition 32 No association 30 Ineligible for incentives 26 Higher tax rate 28 Lack of staff training 35 Lack of financing 32 Internet expensive 16 Low value awareness 40 Won’t pay for quality 60 Other 7 [service firms = 57] Table C10: Percent Purchasing Each Business Service, by Source of Purchase

Business Service Public Enterprises Private Firms

Telecommunications 100 - Inspection and testing 98 2 Import/export services 97 3 Environmental services 96 4 Insurance 93 7 Courier services 85 15 Banking 81 19 Advertising 79 21 Training 78 22 Distribution logistics 68 32 Personnel services 67 33

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Accountancy 65 35 Design and packaging 65 35 Security services 63 37 Consultancy 53 47 Equipment rental 43 57 Trading houses 37 63 Market research 37 63 Equipment repair 31 69 Computer services 31 69 Translation services 28 72 [goods firms = 65; service firms = 62]

Table C11: Availability of Services (percent)

Availability Is: Business Service On Request Delayed Fast If Pay Totals

Goods Firms Accountancy 78 17 5 100 Consultancy 77 23 0 100 DESIGN/PACK

. 68 32 0 100

DISTRIBUTION

77 23 0 100

MARKET RESEARCH

67 33 0 100

TRAINING 76 24 0 100 Service Firms

Accountancy 67 17 16 100 Computer 29 26 45 100 Consultancy 10 40 50 100 Market research 0 40 60 100 Training 60 33 7 100

All Firms Accountancy 72 17 11 100 Computer 29 26 45 100 Consultancy 44 31 25 100 Design/pack. 68 32 0 100 Distribution 77 23 0 100

MARKET RESEARCH

33 37 30 100

TRAINING 68 29 3 100 [goods firms = 84; service firms = 63]

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Table C12: Quality of Services (percent)

Perceived Quality of Business Services Business Service Poor/Very Poor Acceptable Good/Very Good Totals


. 13 62 25 100

DISTRIBUTION

8 60 32 100

MARKET RESEARCH

20 0 80 100




MARKET RESEARCH

35 25 40 100


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Table C13: Availability of Specialized Services (percent)

Specialized Services are: Business Service Available Variable

Quality Not Available Totals


. 46 38 16 100

DISTRIBUTION

36 33 31 100

MARKET RESEARCH

0 40 60 100




MARKET RESEARCH

0 40 60 100


Table C14: Main Purpose for Using Accountancy Services (percent)

Main Purpose Goods Firms Service Firms Total

Satisfy a regulatory requirement 47 52 49 Have better control over costs 60 31 48 Help manage cash flow 26 26 26 Help plan for expansion 21 17 19

Table C15: Main Purpose for Using Computer Services

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(percent)

Main Purpose Goods Firms Service Firms Total Repair computer systems NA 48 48 Install new software or hardware NA 40 40 Help with technology usage NA 24 24 Design/install local area network NA 20 20 Design/install a website NA 4 4

Table C16: Main Purpose for Using Consultancy Services (percent)

Main Purpose Goods Firms Service Firms Total Improve firm’s profitability 42 23 34 Improve firm’s efficiency 41 25 34 Help with strategic planning 39 33 36 Improve quality assurance 17 33 23 Resolve staff problems 8 8 8

Table C17: Main Purpose for Using Design/Packaging Services (percent)


Improve product attractiveness 64 NA 64 Improve product practicality 34 NA 34 Meet mandatory product standards 32 NA 32 Use less expensive materials 17 NA 17 Use environmentally-friendly materials 15 NA 15

Table C18: Main Purpose for Using Distribution Logistics (percent)


Move finished goods to market 87 NA 87 Transport equipment & supplies 50 NA 50 Move work-in-progress to storage 15 NA 15

Table C19: Main Purpose for Using Market Research Services (percent)


Meet your customers’ needs 53 56 54 Identify new market opportunities 38 38 38 Identify new target customers 27 20 24 Research export opportunities 30 11 22 Learn about competitors’ strategies 25 11 19

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Table C20: Main Purpose for Using Training Services (percent)


Upgrade staff’s technical skills 61 65 63 Improve staff’s time management skills 44 25 36 Provide basic skills 33 20 27 Improve ability to work as a team 10 4 7 Provide computer software training 5 8 6

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APPENDIX D SELECTED SOURCES OF TECHNICAL ASSISTANCE AVAILABLE

TO STRENGTHEN BUSINESS SERVICES Institute of Certified Management Consultants of Canada (ICMCC) As a member of the International Council of Management Consultant

Institutes, ICMCC has contributed the Uniform Code of Professional Conduct adopted in a number of countries and has provided technical assistance to associations in other countries wishing to establish a certification process for management consultants. The most recent such technical assistance was to China to help establish professional standards and a certification process.

ICMCC has also developed a 3-day training course on “ISO 9000

Implementation” to train consultants in how to help firms strengthen their internal quality assurance and become compliant with (or registered to) ISO 9000.

International Monetary Fund (IMF), Washington, D.C. In its latest guide for the preparation of the Current Account, the IMF has

expanded the categories for services trade reporting in order to provide better detail on the category of “other services.” Technical assistance is available for implementing this new reporting structure.

International Trade Centre UNCTAD/WTO (ITC), Geneva The ITC is the branch of the United Nations, sponsored jointly by UNCTAD

and WTO, that is charged with providing technical assistance to enterprises in developing countries. In particular, its Trade in Services Unit has the mandate to help increase trade in services from developing countries and economies in transition under the General Agreement on Trade in Services (GATS). Over the past two years, it has provided 3-day training workshops in Africa and Asia for enterprises, associations, and government trade officers on how to promote and export business services successfully. It has also developed the following in support of expanding services trade, which are available free of charge to governments, associations, and enterprises in developing and transitional economies:

The Services Exporting Homepage (http://www.intracen.org/servicexport):

A one-stop website for technical assistance to provide practical tips, identify and develop export opportunities, find strategic partners, exchange ideas, track services trade negotiations, and learn from international success stories.

Strategic Profiles on Global Trends in: ! Accountancy ! Back office services ! Business tourism ! Commercial education & training ! Computer services ! Environmental management

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! Health care services ! Industrial design ! Insurance ! Internet management services ! Temporary staff services ! Reinsurance

Handbooks:

! Successful Services Exporting: A Handbook for Firms, Associations and Governments

! ISO 9000: A Workbook for Service Firms in Developing Countries ! A Business Guide to the General Agreement on Trade in Services ! Innovation for Services Export Success ! Trade Secrets for Services ! Environmental Engineering and Support Services

Tools:

! Services Export Readiness Diagnostic diskette ! AServices Export Planning: A Guide for Service Firms@ ! "Using the Internet for Services Exporting: Tips for Service Firms ! "How to Leverage ITC’s Services Exporting Homepage: Strategies

for Associations" ! "Including Services in National Export Development Plans:

Strategies for Government Agencies@ Organisation for Economic Co-operation and Development (OECD), Paris The division responsible for professional services has had an extensive work

program, including helpful publications, to help governments ensure that domestic regulations support quality service delivery and consumer protection by means that are not more burdensome than necessary and that do not impede domestic competition.

United Nations Conference on Trade and Development (UNCTAD), Geneva The Services Division, in conjunction with UNDP, assists developing and

transitional economy governments improve policy frameworks in support of service sector growth. They conducted some of the early work in the mid-1980s on business (“producer”) services and economic development. At the present time, they have a work program to help developing countries prepare for the upcoming new round of services trade liberalization negotiations starting by 2000 as part of the General Agreement on Trade in Services.

United Nations Statistical Office (UNSO), New York In conjunction with the Voorburg Group, the UNSO has two relevant

initiatives under which it can provide technical assistance to governments:

a) The classification and measurement of services under the Central Product Classification (CPC) system, the business services portion of which is being led by the Standards Division of Statistics Canada.

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b) The development and deployment of “model surveys” to measure service sector activity in a standard way worldwide, for which Statistics Canada developed the first one on computer services.

The Voorburg Group itself is a voluntary group of statistical agencies,

chaired by Statistics Canada, that has been working for the past ten years to improve the measurement of domestic and trade statistics for services industries. It has produced a number of working papers that can be of assistance to national statistical offices.

World Trade Organization (WTO), Geneva The WTO Secretariat for the General Agreement on Trade in Services has a

negotiated commitment to provide technical assistance to developing countries to strengthen domestic service sector capabilities in support of competitive service exporting. Such assistance is being provided both to current WTO members and economies planning to acceed to the WTO.

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