📈 economics

Integrating the Engine: An Input-Output Analysis of Vietnam’s Manufacturing Linkages

Using an expanded Miyazawa input-output framework on Vietnam's 2012 and 2019 data, this study reveals that the manufacturing sector's economic weakness stems from value-added leakage and rising import intensity, particularly in IT equipment, necessitating policy shifts toward strengthening domestic linkages and enforcing stricter technology transfer and local content requirements for foreign investment.

Original authors: Trung Quang Dam, Huy Khanh Huy, Trinh Bui, Hung Duc Hoang

Published 2026-07-08

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CC BY 4.0

Original authors: Trung Quang Dam, Huy Khanh Huy, Trinh Bui, Hung Duc Hoang

Original paper licensed under CC BY 4.0 (https://creativecommons.org/licenses/by/4.0/). ✨ This is an AI-generated explanation of the paper below. It is not written or endorsed by the authors. For technical accuracy, refer to the original paper. Read full disclaimer

Imagine Vietnam's economy as a massive, bustling factory complex. For years, the "Manufacturing" department has been the star player, churning out huge amounts of products and driving the whole building forward. But this new study, titled "Integrating the Engine," takes a close look at the factory's blueprints (using a tool called Input-Output analysis) and discovers a hidden problem: while the factory is producing more, it's actually keeping less of the profit for itself.

Here is the breakdown of what the paper found, using simple analogies:

1. The "Ghost in the Machine" (The Core Problem)

Think of the manufacturing sector as a chef running a popular restaurant.

The Good News: The chef is cooking more meals than ever (output is high), and the restaurant is very popular (high "power of dispersion").
The Bad News: The chef isn't buying ingredients from the local farmer next door. Instead, they are ordering 90% of their meat, spices, and vegetables from a supplier in another country.
The Result: Every time a customer buys a meal, a huge chunk of the money leaves the local town immediately to pay the foreign supplier. The study calls this "value-added leakage." The economy grows in size, but the local people don't get as rich as they should because the money flows out the back door.

2. The Two Types of "Ripples"

The researchers used a special mathematical lens (based on the Miyazawa method) to separate two types of ripples caused by the manufacturing sector:

Internal Ripples (The Family Dinner): When the manufacturing sector buys from other Vietnamese factories. The study found these ripples are getting weaker. The factories are talking to each other less.
External Ripples (The Foreign Connection): When the manufacturing sector buys from outside Vietnam. These ripples are getting stronger. The sector is becoming more dependent on foreign parts.

3. The "Star Performers" vs. The "Struggling Stars"

The study looked at specific departments within the factory and found a split personality:

The Local Heroes (Seafood & Animal Feed):
Imagine a seafood processing team. They buy fish from local fishermen, use local trucks to transport them, and package them locally.
- The Finding: As they grew, they actually bought more from locals and less from abroad. They are successfully keeping the money inside the country.
The "Assembly Line" Strugglers (Textiles, Leather, and IT):
Imagine a high-tech electronics team (like making smartphones) or a shoe factory. They look impressive because they export millions of units.
- The Finding: They are like a sponge made of holes. For every dollar of product they sell, they have to import almost two dollars' worth of parts, chips, and leather from abroad.
- The IT Paradox: The electronics sector is the biggest example. It grew huge, but its ability to create local wealth dropped by half. It's essentially a "screwdriver factory" where the expensive parts are all shipped in, and only the cheap labor happens locally. The study calls this a "temporary anchoring"—it's just a stopover for assembly, not a deep-rooted industry.

4. The Infrastructure Warning

Even the "plumbing" of the economy (Electricity and Water) is showing signs of trouble.

The Finding: This sector used to be mostly self-sufficient. Now, it is buying more foreign equipment and fuel. This is like a house that used to fix its own pipes but now has to call a foreign specialist for every leak, sending money abroad just to keep the lights on.

5. The Proposed Solution

The authors argue that Vietnam needs to change its strategy.

Current Strategy: "Make as much as possible, no matter where the parts come from."
New Strategy: "Make sure the parts come from home."

They suggest that instead of just inviting any foreign company to set up shop, the government should be picky. They should only let in companies that promise to:

Teach the locals (technology transfer).
Buy from local suppliers (local content requirements).
Build the "supporting industries" (the local farmers and parts-makers) so the main factories don't have to look abroad for everything.

Summary

The paper concludes that Vietnam's manufacturing engine is running fast, but it's leaking fuel. It is currently built on a foundation of imported parts. To fix this, the country needs to stop just being a "final assembly station" for the world and start building the deep, local connections that keep the value (and the money) inside the country.

Technical Summary: Integrating the Engine: An Input-Output Analysis of Vietnam's Manufacturing Linkages

Problem Statement
While the manufacturing sector is widely recognized as the primary engine for industrialization and structural transformation in developing economies, aggregate output metrics often fail to capture the true structural efficiency or the quality of economic growth. In Vietnam, despite the manufacturing sector's large share of the economy, there is a growing concern regarding its reliance on imported intermediate inputs. This reliance creates a structural vulnerability where economic expansion may not translate into commensurate domestic value-added generation, leading to "value-added leakage" abroad. Existing literature often treats the manufacturing sector as a monolithic block, obscuring the heterogeneity of its sub-sectors and failing to explicitly distinguish between internal (intra-industry) multipliers and external (cross-sectoral) spillovers. This study addresses the gap in explicitly decomposing these internal and external multiplier matrices for disaggregated manufacturing sub-sectors within the Vietnamese context.

Methodology
The study employs an Input-Output (I-O) analysis framework utilizing official data from Vietnam's National Statistical Office (NSO) for the years 2012 and 2019. To ensure temporal consistency despite the expansion of sectoral detail in the raw data (from 164 to 171 sectors), the authors harmonized the data into two classification levels: a 5-sector aggregate and a 12-sector detailed framework.

The core analytical innovation involves adapting the Miyazawa (1966) interregional analysis framework to an inter-sectoral context. By mathematically disaggregating the economy into two primary groups—Sector 1 (Manufacturing) and Sector 2 (All other sectors)—the authors partition the domestic direct input coefficient matrix ( $A^d$ ) and the Leontief Inverse Matrix ( $B$ ) into four sub-matrices. This partitioning allows for the isolation of:

Intra-sectoral effects: Multipliers generated within the manufacturing sector itself.
Inter-sectoral spillovers: Effects transmitted between manufacturing and the rest of the economy.

Furthermore, the model integrates value-added coefficients and import coefficients into the matrix decomposition. This dual assessment quantifies both the capacity for domestic value creation and the degree of import leakage (dependency on foreign intermediate inputs) triggered by final demand.

Key Contributions

Methodological Application: This is the first empirical study to explicitly apply the Miyazawa framework to decompose internal and external multiplier matrices for disaggregated manufacturing sub-sectors in Vietnam.
Granular Sectoral Analysis: By breaking down manufacturing into eight specific sub-sectors (e.g., Information Technology Equipment, Seafood Processing, Textiles), the study moves beyond aggregate manufacturing trends to identify specific structural strengths and weaknesses.
Dual Metric Assessment: The research simultaneously tracks value-added multipliers and import multipliers, revealing the inverse relationship between domestic value retention and import dependence across different sub-sectors.

Results
The empirical analysis of the 2012–2019 period reveals three primary findings:

The "Output-Value" Paradox: While the manufacturing sector remains a "leading" sector with a power of dispersion on output above unity (1.13 in 2019), its ability to generate domestic value-added has deteriorated. The power of dispersion on value-added for manufacturing declined from 0.81 in 2012 to 0.74 in 2019. Conversely, the import multiplier increased from 1.43 to 1.46, indicating that output growth is increasingly driven by imported inputs rather than domestic value creation.
Structural Divergence Among Sub-Sectors:
- Positive Structural Shifts: Sub-sectors linked to domestic agricultural value chains, specifically Seafood Processing and Animal Feed Production, demonstrated improved value-added multipliers and reduced import dependence. These sectors show stronger domestic backward linkages. The Steel industry also showed modest improvements in localization.
- Negative Structural Trends: Labor-intensive export sectors (Textile/Garment and Leather/Footwear) and high-tech sectors (Information Technology Equipment Manufacturing) exhibited severe structural imbalances.
- The IT Equipment Case: The Information Technology Equipment Manufacturing sub-sector represents the most critical imbalance. Its value-added multiplier plummeted from 0.410 to 0.208, while its import multiplier surged to 1.981. This indicates that the sector's rapid export growth is almost entirely decoupled from domestic production networks, relying heavily on imported components and assembly.
Weakening Intra-Industry Linkages: The decomposition of spillover effects shows a marked decline in the manufacturing sector's internal value-added generation (dropping from 0.386 to 0.279). The expansion of production scale has failed to stimulate demand for domestic supporting enterprises, instead primarily driving demand for imported intermediate inputs.

Significance and Claims
The paper claims that Vietnam's manufacturing sector is facing a structural deficiency characterized by escalating import intensity and the progressive erosion of intra-industry linkages. The study argues that the current growth model, heavily reliant on low-cost labor and foreign direct investment (FDI) in downstream assembly, has reached the limits of its effectiveness in generating sustainable domestic value.

The authors assert that policy interventions must shift from merely expanding output scales to prioritizing the preservation and enhancement of domestic value-added. Specifically, the paper advocates for:

Cultivating core supporting industries to strengthen vertical and horizontal intra-industry linkages.
Adopting a selective FDI paradigm that mandates technology transfer and higher local content requirements.
Strategically transitioning labor-intensive sectors toward higher value-added segments to reduce resource leakage.

The study concludes that without addressing these structural bottlenecks, particularly in the IT and traditional export sectors, Vietnam risks continued vulnerability to external supply chain shocks and a failure to achieve deep, self-reliant industrialization.