framework conditions for small enterprise development in vietnam 1-4

Reading 1: Framework Conditions for Small Enterprise Development in Vietnam

Reading 1:

Framework Conditions for Small Enterprise Development in Vietnam

1. Background of the PaperSince 1989, the German Federation of Small Business (ZDH) and Technonet Asia (TA) are jointly implementing an institution-strengthening programme for the benefit of small and medium sized enterprises in several Asian developing countries. This programme – called Partnership Project – aims at assisting private sector institutions such as chambers and associations to become stronger advocates for the SME sector and to improve their service delivery toward SME members. The ZDH/TA Partnership Project is at present working directly with some more than 30 chambers, associations and federations in Bangladesh, China, Indonesia, Nepal, Philippines and Vietnam. The project is administered by the Foundation for Economic Development and Vocational Training (SEQUA). Bonn, Germany, and funded by the Federal Germany Ministry for Economic Cooperation and Development.

The paper forms part of the cooperation between the Vietnam Chamber of Commerce and Industry (Vietcochamber) and ZDH/Technonet Asia Partnership Project. Vietcochamber is the biggest business organization of Vietnam. Earlier, Vietcochamber was an organization of the state-owned enterprises focusing on foreign trade issues. With the introduction of economic reforms. Vietcochamber has opened up for members from the private small and medium-sized enterprise (SME) sector and is trying to diversify its services for responding to the needs of this new and important sector of the Vietnamese economy. In order to learn more about the framework conditions of the new emerging and fast growing SME sector. Vietcochamber and ZDH/TA have agreed to conduct a study on this topic. This study should act as a basic for initiating an intensive policy dialogue between Vietcochamber and the government on how to improve SME promotion in the country. At the same time, the results of the study will be used by Vietcochamber to enhance its own activities for the SME sector.

2. IntroductionVietnam has started an ambitious programme for transition from a centrally planned to a market-oriented economy. Small-scale enterprises play an important role in this process. They are a seedbed for new entrepreneurs, create new jobs in the private sector, decentralize economic structures and improve competition. But, as experience from other countries show, growth and development of small-scale enterprises will be unsatisfactory as long as economic policies discriminate against the sector.

In this context, the objective of this study is to examine the framework conditions of small enterprise development in Vietnam. The study tries to identify to what extent these regulations, economic policies, public administration procedures and promotion programmes hamper or influence the performance of small-scale enterprises in the country. Thus, the study wants to initiate a discussion on how to create a conducive the environment for the SME sector.

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This study is based on the available literature as well as on discussions with local experts and a fields survey on small enterprises conducted by the authors in December 94. The survey comprised 86 small-scale enterprises in Hanoi and Ho Chi Minh City. Two branches were covered, the one was woodworking (furniture making, doors, stairs, etc…the other was metal building (bars, window and door frames, etc.). This average number of workers – including the owner as well as family-workers - in the firms interviewed was 11.3. Enterpreneurs were interviewed according to a standardized questionnaire. Selection of enterprises took place at random by the two interview teams, each consisting of one Vietnamese and one German. The impression of the authors was that entrepreneurs answered frankly and without hesitation to the questions. Due to sample size and method, the survey is not representative, but gives a valuable insight especially into urban, manufacturing small-scale enterprises. It will assess framework conditions of small business in Vietnam, identify most significant problem areas of the sector and give recommendations for possible improvements.

The study starts with a short review on Vietnamese economic policies and an introduction on the role of small-scale enterprises in the country. The major chapter of the study deals with possible external constraints for small enterprises. Areas covered by respective sections are: financing, registration and public administration, taxation, business infrastructure, foreign trade, business linkages with public sector, public promotion, and assistance, and interest representation. The study will conclude with some recommendations regarding policy measures and activities for an improvement of small business development in Vietnam.

3. Short Review on Vietnamese Economic PoliciesWith a per capital income of around US $ 200 Vietnam is one of the poorest countries of the world. It is populated with 70 million people, mainly engaged in agriculture, which contributes one third of GDP and accounts for two thirds of employment. Population is concentrated in the Red-river delta in the North with the capital Hanoi and in the Mekong delta in the South with the country’s biggest city and commercial center Ho Chi Minh City. Despite of the country’s low income, most social indicators like infant mortality, life expectancy and literacy rate are quite good. Large regional imbalance exits with regard to basic industrial endowments. Compared to the North, the South has a bigger capital stock in manufacturing, larger entrepreneurial tradition, better infrastructure and easier access to capital from overseas Vietnamese.

From the mid-nineteenth’s century on, Vietnam was under French rule. Following the war against France, the country was divided into two parts in 1954. While the South adopted a capitalist economic policy highly influenced by the US Americans. The Democratic Republic of Vietnam in the North adopted a development strategy following the Soviet model. A central planning system was introduced including a promotion of heavy industry and collectivization of all economic sectors. Following reunification in 1976, the South economy was integrated with the economic system of the North. Vietnam was largely isolated from the Western world, with the Eastern bloc countries as major trading partners and sources of financial and other assistance.

Due to unsatisfying results of economic growth, the 6th Party Congress introduced a major change of Vietnamese economic policy in 1986. The reform measures, known under the name “doi moi”, striver for a more market-oriented development strategy and the establishment of a “multi-sector economy”. Measures started with a return to a family farming based on long-term leases. Agricultural production reacted with a strong increase in output and Vietnam, which was a rice importer before, became one of the largest rice exporting nations. Further important reform measures included a price reform removing virtually all price controls, a devaluation and



unification of the exchange rate, a fiscal reform consolidating the state budget and removal of most subsidies for state-owned enterprises which were released from central planning at the same time.

Private ownership and private entrepreneurship are protected by the new Vietnamese constitution. Major laws like the “law on private enterprise” were introduced in order to regulate the sector. Meanwhile, private business are allowed to engage in almost all sectors and branches of the economy and have the right to contract employees according to their needs. In general, there is no official discrimination between the state or cooperative sector and the private sector in Vietnam, today.

First results of the reform policy are promising; Vietnam achieved a strong average growth of about 7% during 1989 and 1993. Inflation was cut down to 5% in 1993 and the exchange rate remained stable. Growth started with the agricultural sector responding to price liberalization and strengthened property rights. With the rural incomes increasing, construction and service industries benefited next. The latest phase of economic growth is led by the industrial sector, especially the oil sector, light manufacturing and agroprocessing sector.

4. Small-scale Enterprises in VietnamWith regard to ownership, there are three economic sectors in Vietnam. The first one is the state enterprise sector accounting for around 25% of GDP and over half of total industrial value added. In 1990, there were around 12.000 state enterprises employing approximately 8% of the country’s labor force. While the 2.000 centrally managed state enterprises are foremost engaged in heavy industries, the other enterprises are under provincial or local control and engage foremost in light industries, construction transport and services. State enterprises are usually medium or large scale with an average number of workers between 140 and 280. The second one is the collective sector. Its major important its in agriculture, while the sector is of less important in urban areas. Furthermore, due to the economic liberalization measures, the collective sector has been declining significantly since the mid-1980s. The third one is the private sector. It has been growing rapidly since reform measures were introduced. Since 1988, employment in the private sector has tripled and accounts now for about 30% of total employment. Industrial production in the sector increased between 10 and 35% p.a. during the last years.

According to Vietnamese legislation, the private sector basically consists of two categories. Medium or bigger sized enterprises are registered as private enterprise, limited liability company or joint stock company, each regulated by a special law. The small units are registered as so-called household enterprise or company, the entrepreneur has to provide a specific minimum legal capital, whereby the limits are fixed by government for each specific brand. For a registration as household enterprise, such capital requirements are not necessary.

According to the statistics of 1994, the number of private enterprises and limited companies amounts to 11.000. With 1.64 million units the number of household enterprises is by far higher. A breakdown shows that the majority of 950.000 household enterprises are engaged in trade and services, small industries and handicrafts are ranking next with 550.000 units and finally 140.000 household enterprises are engaged in transport. The official statistics indicate that about 3.5 million people are employed in these private enterprises. However, due to a comprehensive survey of 1.000 non-state enterprises in Vietnam, there are an average number of additional 3.7 unpaid workers in each household enterprise. Therefore, there may be about 7.5 million people in Vietnam working in household enterprises. The overwhelming majority of household enterprises



can be classified as micro-enterprises and are really family-based. Therefore, household enterprises and small business or small-scale enterprises are more or less synonymous in Vietnam. But, especially in urban areas there are some household enterprises, which are more medium-sized, both in number of workers and capital invested.

While the private sector is dominated by trade and services, it also plays a role in production, contributing more than 50% of indigenous output in 1993. Main areas are handicraft production, small-scale food processing and light industries, such as garments and assembly productions. Due to continuing reform policies, it is expected that there will be a further increase of private sector importance in Vietnamese economy. Household enterprises as seedbeds and backbone of the private sector will play a most decisive role in this process. Up to now, their impressive growth and development happened in the niche of the transformation process. Small business benefited from their flexibility in a rapidly changing economic environment. In future, the structures of the market-oriented economy in Vietnam will be tightened, and for a stable growth it is important to establish an economic environment not discriminating against the private small-scale business sector. Therefore, the following chapters will screen the most relevant policy areas in order to evaluate existing framework conditions of small businesses in Vietnam.

5. External Constraints on Small Business Development: Literature and Survey Results

5.1. Financing:

The shortage of external financing is a major problem hampering small business development in many countries. As small-scale enterprises ask for low credit sums creating relatively high administrative costs and can usually not provide collateral, banks often hesitate to give credit to them. These size-specific problems are of general character and concern small-scale enterprises throughout the world. Additional problems can arise by policy induced constraints, meaning that government interferes in the credit allocation of the banking sector by fixing interest rates or channeling credits to certain sectors. Such policies tend to reduce the overall credit supply and discriminate against one or the other sector. In order to improve conditions of external financing for small-scale enterprises, a general recommendation is to eliminate such policy-induced constraints.

In Vietnam, the banking systems were traditionally organized to fulfill the capital allocation requirements of the centrally planned state economy. First reform measures were introduced in 1988 when four specialized, state-owned banks were established to take over commercial banking from the state bank of Vietnam. In 1990, these banks were allowed to operate in all sectors of the economy. Furthermore, with the “commercial bank ordinance”, a legal framework for a market-oriented banking system and the establishment of private banks was introduced. Operation of banks have been liberalized, and there are neither regulations on channeling credits to certain sectors or state-owned enterprises, nor any preferential interest rates outside of special government programmes. Up to early 1994, the number of institutions is the banking sector has grown significantly. The four state-owned commercial banks still account for 90% of total credit disbursed, slightly less than 1990, when the number was 97%. With regard to credit to the private sector, the baking system has improved its performance. While only about 2% of total credit went to the private sector in 1989/90, the figures jumped to 35% in 1992.Despite these developments showing liberalization and decentralization of the Vietnamese banking system, some serious problems remain. Vietnam has still only a relatively small number of banks when compared with other countries. A proper legal framework of regulations and



enforcement mechanisms to collateralize loans and to collect debts is missing. Under these circumstances, lending is very risky for the banks and most of them engage predominantly in short-term lending giving credits for 3 months or 1 year at most. Furthermore, financial institutions in Vietnam have problems to mobilize sufficient savings because of lacking confidence of the public following a collapse of some finance institutions in 1989/90. A further improvement and deepening of the financial sector reform seems to be necessary.

This holds especially true with regard to the results of the survey undertaken. Asked about problems of their business, financing and credit possibilities were the highest-ranking growth constraints for the entrepreneurs interviewed (cp. Table 1 ). While for only about 25% it was no problem, about 40% of the entrepreneurs interviewed stated that financing and credit is a major problem. Consequently, 75% of them said that credit and loan assistance should be a government measure of major importance, and 70% answered that they would expand their business when banking facilities and availability of credit are improved. Obviously, there is a need to improve access to credit for the sector. This demand is not satisfied by the formal credit market. Only 8 of 86 entrepreneurs interviewed have ever received a formal credit, 6 other entrepreneurs applied for a credit but did not receive it, and the remaining 72 entrepreneurs never tried to get formal credit. Vietnamese small-scale enterprises rely primarily on their own and family savings, with loans from friends and relatives as second important source of finance (cp. Table 4). Despite of the improvements of the banking system described above, the situation of external financing for small business has not changed. Like the survey undertaken for ILO in 1992, the survey results presented come to the conclusion that there is a glaring absence of formal credit as a source of capital for small-scale enterprise in Vietnam. Therefore, an improved access to external credit is a priority demand for enhancing small enterprise development in Vietnam.

5.2. Registration and Public Administration

In any country, administrative requirements such as registration, licensing and other regulations can be significant constraints for small enterprise development. In general, due to their limited information basic, management capacities and influence, small-scale enterprise suffer especially from bureaucratic requirements, cumbersome paperwork and lengthily procedures. Additionally, instransparent regulations broaden the scope for red tape or other harassment’s by public administration.

For establishing an enterprise in Vietnam, it is necessary to register. There are different registration procedures for household enterprises and private single entrepreneurs or limited companies. The survey conducted for this study covered almost exclusively household enterprises. For them, the registration process seems to be rather easy. Nearly 90% of the firms interviewed were officially registered. On average, registration took one month or less and not more than two visits to the registration authority were necessary. Only 10% of the entrepreneurs interviewed stated that they had to wait more than two months for registration. Asked about their judgment of the registration process, only 1.4% of the entrepreneurs interviewed found it very complicated, another 11.1% found it average complicated and for 87.5% of the entrepreneurs registration was easy. Usually, the entrepreneur only has to fill out an application form comprising two pages about name, purpose and location of his business. Business registration is done by the local People’s Committee which is the administration in Vietnam.

The situation is different for medium and bigger-sized private enterprises in Vietnam. These firms fall under the “law on private enterprise” and have to cope with a more complicated registration procedure. It is reported that they need on average 8 stamps from different authorities for application and that it takes some months to registrar.



Difficulties in registration is possible one of the reasons for “only” 11.000 enterprises in Vietnam registered under the law on private enterprises, but over 1 million units registered as household enterprises. The survey team met several household enterprises whose capital endowments have grown above the limits. Some were required by the People’s Committee to register under the law on private enterprises, but there was no enforcement. However, household enterprises can not directly export and have a weaker legal position as they regulated by a government decree and not by a law. Therefore, it should be easier for household enterprises to change their legal status and to register under the law on private enterprise.

With regard to other requirement of public administration, entrepreneurs do not have too many problems. Only 12.8% of the entrepreneurs interviewed stated that public administration is a major problem for their business. For 58.1% public administration is no problem at all (cp. Table 3). Asked about proposed government measures, removal of bureaucratic obstacles is not of very high priority for the entrepreneurs interviewed (cp. Table2). However, one complaint heard very often refers to problems with police officers. Because of limited space, many firms use the sidewalk in front of their workshop for production. Therefore, they are fined by the police. Fines are sometimes very high, up to 500.000 Dong per month. As most firms cannot avoid to use the walk, insecurity of the number of fines per month is a serious problem.

In summing up, the new policy on private entrepreneurship started in 1986/89 has proved the legal environment of private businesses remarkably. Different to many other countries, the policy changes in Vietnam have been implemented without many opposition by the lower ranking public authorities. Therefore, most entrepreneurs benefit directly from the new business climate and have only relatively few problems with public administration. However, behavior of government authorities seems too different from province to province with some regions being more restrictive than Hanoi and especially Ho Chi Minh City. Furthermore, a more uniform treatment of household and other private enterprises with regard to their rights and duties seems to be necessary.

5.3. Taxation

With regard to taxes, constraints for small businesses may arise from tax administration or the country’s tax structure. Tax administration may be complicated and time consuming including some harassment by the tax officer. Tax structure may discriminate against the private sector in general or small-scale enterprises in particular, by granting for example tax incentives only to certain sectors. For many small-scale enterprises, the indirect costs of taxes resulting from administrative requirements are more hampering than the direct costs of tax payments. Therefore, an easy and transparent tax system is recommended especially for small businesses.

In Vietnam, the tax system has been transformed substantially since 1989. Before, government revenues were dominated by transfers from state-owned enterprises, Then, the government decided to introduce a market-oriented tax system with the objective to broaden the tax base, to establish an uniform tax treatment of state and non-state enterprises and to improve tax administration. Most of the new tax laws were implemented in 1990 or 1991. With regard to small-scale enterprises, the revised tax system comprises the following taxes: The turnover tax, which is applied to all businesses except for those engaged in the

production of agriculture, export goods and products subject to excise taxes. The turnover tax is divided into two basic categories with rates of 1 to 10% and 30 to 40%. Most business activities and industries are taxed at the lower category with rates ranging form 1 to 6%.

The profit tax, which is fixed according to 3 categories: 30% for heavy industries, 40% for light industries and 50% for services. The tax computations based on gross sales, deducting labor,



material costs and depreciation. However, for small businesses the tax is estimated on the basic of average turnover sales.

The excise tax, which is a special consumption tax on 22 categories of domestic consumer goods.

The personal income tax, which covers personal incomes above 650.000 Dong per moth. The tax has a progressive of marginal rates rising from 10 to 50%.

Tax revenues are shared between the central government and the provincial and district levels. While exercise tax and personal income tax revenues are channeled to the central government, revenues from the profit tax are retained by the local authorities and revenues from the turnover tax are shared between local and central administration.

In general, the new tax system meets the demands of a market economy. It does not differentiate between state and non-state enterprises or small-scale enterprises. Nevertheless, improvements are possible. For example, the different profit tax rates for heavy industry, light industry and services discriminate to a certain extent against private small-scale enterprises, which are foremost engaged in light industry and services. Another example are the 11 different tax rates applied for the turnover tax. The rates for small-scale enterprises are not very high, but the variation in rates across branches is complicated and not very transparent for the single entrepreneur. Furthermore, the turnover tax distorts production and consumption decisions by its varying tax rates and by taxing domestically produced inputs twice or more.

However, taxation is up to now not one of the most striking problems for small businesses in Vietnam. Asked about problems with taxation, only 17.4 of the entrepreneurs interviewed answered that taxation is a major problem. 39.5% of them answered that taxation is an average problem, and for 43% of the entrepreneurs taxation is no problem at all (cp. Table3).

Differ to many other developing countries, most small-scale enterprises in Vietnam pay taxes. Based on the survey, more than 90% of the entrepreneurs interviewed pay taxes. The number might be lower in rural areas, but is confirmed by the results of the survey undertaken for the ILO study. The high number of tax paying firms is enforced by regular monthly or bi-monthly visits of tax officers employed by the local authority in order to collect tax payments.

As described above, the tax system is quite complicated with different categories and rate of taxed. But in practice, small-scale entrepreneurs interviewed answered that they pay a flat rate as fixed by the local authority. There is no different between profit, turnover and income tax. Thus, entrepreneurs interviewed were not informed about official tax rates or computation of taxes. Usually, the local tax authority fixes the monthly amount to pay once a year. The system of tax assessment was not clear and seems not to be uniform. Some entrepreneurs interviewed reported that tax officers visit their firms and guess the average turnover to fix taxes, others reported that the tax was fixed when they registered their enterprise and was increased every year.

Entrepreneurs were asked if it is possible to bargain with the tax authority about the amount of taxes to pay. An overwhelming majority of 80% of entrepreneurs answered that such a bargaining is not possible. Only 20% stated that bargaining is possible, and only a very few reported that they were successful is reducing taxes by providing side payments.

However, the amount of taxes paid by the entrepreneurs is reasonable and lower than the official rates indicate. More than 80% of the entrepreneurs interviewed paid less than 700.000 Dong per month, with the majority of firms paying between 100.000 and 500.000 Dong per month. Not all entrepreneurs were able or willing to answer the question about tax payments as percentage of business turnover. But, the results available indicate that tax payments amount to approx. 5% of



turnover. This result is in line with the ILO study which computed an average tax rate between 3.5% and 4% of turnover for private enterprise.

An interesting observation with regard to taxes is that entrepreneurs who are former state employees pay only a relatively smaller amount of taxes. This is in line with a decision of the 16, party congress, but distorts neutrality of the tax structure and is not justifiable from an economic viewpoint.

In summing up, taxation of small-scale enterprises in Vietnam is rather modest and not a major problem for enterprises. With most firms covered by the tax authority, tax administration is better than in many other developing countries. However, the tax system is still complicated with many different rates, and collection as well as assessment methods of taxation are neither transparent for the single entrepreneur nor uniform.

5.4. Business Infrastructure

In most developing countries, the general shortage of public utilities such as telecommunication, water and power supply as well as lacking infrastructure such as transport systems and suitable land and premises constitute major growth constraints for the economy. As larger industries have often privileged access to the facilities available, small-scale enterprises are suffering most from these constraints. Usually, city areas are by far better endowed with public utilities and infrastructure than rural areas. This has to be kept in mind when interpreting the results of the survey, which is based on firms in Hanoi and Ho Chi Minh City.

With regard to public utilities, the enterprises surveyed did not have major problems. Nearly all of them used electric power. Only one quarter of them reported about any problems, which were mostly high costs and sometimes erratic supply. However, only 7% of the entrepreneurs interviewed and answered that it is a major constraint. A somewhat bigger problem is water supply with about 40% of the entrepreneurs interviewed reporting problems. But, as permanent water supply is not necessary for the branches covered by the survey, shortage of water was not a major problem for most businesses interviewed. The same holds true for telecommunication. Many small firms do not have telephone, because it is not necessary at their state of business. Some entrepreneurs complained that costs are too high and that it takes a long time to get a connection, but again it is not a major problem. With regard to transport, most firms have local suppliers and clients and it is no problem to rent a tricycle or small truck for transportation. Nevertheless, some entrepreneurs, especially those located in the old part of Hanoi, complained that in their area it is forbidden to enter with bigger trucks. Therefore, they have a problem with the supply of raw material.

This links up to the problem of suitable land and premises which is a major constraint for small-scale enterprises in Vietnam. Behind the financing issue, supply of land and premises ranks as the second-most important growth constraint (cp. Table 1). 70.9% of them stated that they have problems with their business premises, mostly because it is not suitable (too small) and it is difficult and extremely expensive to find other premises. Most businesses are operated within the family residence with limited possibilities of expansion. More than 40% of the entrepreneurs interviewed stated that land and premises are a major growth constraint for their business.

These results are confirmed by other studies. The above mentioned ILO survey identified the lack of suitable premises as second-ranking constraint for establishing an enterprises. A third survey covering 1.000 small businesses in Hanoi identifies this problem as third-most important difficulty for small businesses following market and capital problems.



Obviously, there is at least in urban areas an urgent need to provide land and premises to small-scale enterprises.

5.5. Foreign Trade

Before starting the reform policy, Vietnamese foreign trade concentrated on the countries of the Council for Mutual Economic Assistance (CMEA) making up for three quarters of imports and two thirds of exports in the early 1980ies. Imports and exports were based on bilateral trade agreements including fixed quotas. Exchange rates were multiple and overvalued and the central state trade authorities monopolized all foreign commercial transactions.

Following doi-moi policy, the Vietnamese trade regime has been revised since 1989. Official exchange rates were unified and devalued to the level of the parallel foreign exchange market. Since then, the real exchange rate has been relatively stable, giving some incentives to exporters. Import and export quotas have been largely eliminated and replaced by tariffs. While tariffs for exports are mostly uniform with rates between 5 to 10% tariffs for imports are highly differentiated with rates between 0 and 150%. Firms engaged in foreign trade are still required to have a special license. The number of foreign trade permits granted to exporting firm increased from 30 in 1988 to more than 899 in the end of 1992, but as a minimum legal capital and other requirements are necessary, only larger enterprises have the possibility to engage in direct foreign trade. All other firms wanting to export have to go through authorized trading companies. More or less the same holds true for legal imports where a license is required and administrations complex. However, extensive cross-border smuggling makes Vietnam an almost open economy.

Results of the reforms have been encouraging. After the collapse of the CMEA trading system in 1990/91, Vietnam succeeded in finding new export markets. Total export rose from US$ 733 million in 1988 to US$ 2.850 million in 1993. Furthermore, the regional trade patterns changed completely. Today, Vietnam’s major trading partners are the Asian neighbor countries replacing CMEA countries. However, export success is mainly based on crude oil and agricultural surplus accounting together for nearly half of export revenues. In future, Vietnam will be able to increase industrial export, especially from the labor-intensive light manufacturing sector where mainly private and smaller firms are engaged. In order to make full use of this potential, it is necessary to directly improve the trading possibilities of this sector.

The survey undertaken concentrates on small enterprises with an average of about ten workers. The overwhelming majority of such enterprises in Vietnam does not have a potential for exporting. Therefore, the export issue was not part of the survey. More relevant for small-scale enterprises is the important issue, e.g. in terms of imported raw materials and machinery or in terms of increasing competition.

The above mentioned ILO survey from 1992 comes to the results that about 30% of urban non-state enterprises face difficulties with supply of raw materials. Furthermore, this survey identifies imported inputs as most important reason for this inadequate supply. Figures of the survey undertaken for this study indicate that raw material supply in general has been improved. It was only a major problem for 9.3% and an average problem for 14% of the enterpreneurs interviewed, while three quarters of them stated no problems with raw materials or machinery. Around 30% of them reported about problems which were mainly high prices, irregularities and difficulties in supply as well as lacking information. This figures do not indicate that firms working with imported raw materials have more difficulties than other firms, but document a clear potential for improvements. It can be expected that an easier and more liberal trade regime will improve supply



and access to imported inputs and reduce its prices. Therefore, it is not surprising that, asked about their opinion on a more liberal import regime, more than 75% of the entrepreneurs working with imported inputs answer that it is of major or average importance to them. While entrepreneurs producing without imported inputs do not pay to trade liberalization, with 45% stating a more liberal import regime is of no importance for them.

5.6. Business Linkages with the Public Sector

Basically, there are two different areas in which a private enterprise can have business linkages with the public sector. The one are state-owned enterprises and the other is public procurement.

Inherited from the central planning period, state enterprises still play a significant role in the Vietnamese economy. Actually, there are still about 7.000 state enterprises accounting for 25% of GDP and for half of total industrial value added. While most larger units are owned by the central government and administered by line ministries, the majority of smaller state-owned enterprises are managed by provincial and district governments. As mentioned in the previous chapters, operating subsidies to state enterprises were eliminated and a high degree of autonomy was given to the management of state-owned enterprises after 1989. State-owned enterprises are especially important in the industrial sector. They are dominant in heavy industry, large-scale light industrial establishments, construction as well as export and export processing industries. Therefore, behavior and performance of the state-owned enterprises will have some influence on the development of small businesses, both in their roles suppliers and in their role as clients of these firms.

The other area where small-scale enterprises have business linkages with the public sector is public procurement. In Vietnam, the public sector apart from state-owned enterprises accounts for 10% of GDP. This ratio is not high when compared to other countries. However, business relations with the public sector can be an important source of income for small-scale enterprises. As a matter of principle, public contracts should be given without any discrimination of one or the other sector.

From the enterprises interviewed, almost 60% stated that they have business linkages with state enterprises or government. This relatively high figure indicates a close inter-dependence between state and private enterprises. In this context, the ILO survey gives the additional information that backward linkages to the state sector are more important than forward linkages. Asked about special problems in doing business with the public sector, 45% of the enterpreneurs with business contracts reported about difficulties. Two major problem areas were mentioned. First, delayed payment of public sector units, which is hampering small-scale enterprises especially, as they do rely very much on cash. Second, difficulties with the middle man, meaning that small-scale enterprises often can only act as subcontractors of other firms or middle men, because most public orders are of bigger scale. These problems can be reduced by giving small-scale enterprises an easier direct access to public sector orders.

5.7. Public Promotion and Assistance

Usually, developed as well as developing countries provide a wide range of assistance and promotion measures for the private sector in general and small-scale enterprises in particular. The overall objective of such a policy is to spur economic growth of a country. With regard to small-scale enterprises an additional justification for assistance is given by specific size-induced constraints of the sector.



Up to now, Vietnam has only implemented very few promotion and assistance programmes for the private sector and small-scale enterprises. This is due to the obstruction of the sector before the introduction of reform policy. After 1986, reform measures concentrated first of all on eliminating the discrimination of private firms. As described in previous chapters, a legal basic for private enterprises was implemented , a no-discriminating tax system was established and preconditions were introduced to give equal access to credit and foreign trade for private and state-owned enterprises. Measures have been very successful and improved the framework conditions of private enterprises.

However, as the basic for a neutral and favorable busienss enviroment is established, it should be discussed whether direct assistance and promotion for the private sectors needed. Such promotion can include management and technical training, loan assessments, technology development, import and export promotion and others.

Some major promotion programmes relevant for small-scale enterprises in Vietnam should be mentioned. The first one is the National Employment Fund (NEF) established in order to cope with the huge employment problems in the country. One of its many components is small enterprise promotion by giving loans with subsidized interest rates. The second one is a small enterprise promotion programme launched by the Central Institute of Economic Management (CIEM) with the assistance from UNDP and ILO. Under this programme, 12 consultants are trained to provide management training courses to small-scale enterprises. More than 1000 enterprises participated in the courses. The programme was terminated in the end of 1992. The third and largest one is the European Community Programme for returning refugees, providing assistance for this group. The programme is now implementing a revolving loan programme disbursed through NGOs and banks to provide loans at commercial interest rate with a 50% rebate for loans which meet repayment schedules. Additionally, there are two support programmes for reintegretion of Vietnamese returnees implemented by the Incombank. The one is sponsored by the German and the other by the Czech government.

The overview shows that assistance for the sector is rather limited. The survey results confirm this view. About 30% of the entrepreneurs interviewed reported about public assistance received, which is a high figure at first glance. However, all of them received a tax exemption or reduction when they started their business, but no other assistance. Thus, apart from tax incentives the survey undertaken could not identify any other assistance or promotion given to the entrepreneurs interviewed. A similar result is reported in the survey undertaken for ILO. In this survey, more than half of the entrepreneurs interviewed received some help with registration and other formalities and some 20% received tax reductions. But, only 5% of the entrepreneurs interviewed received some assistance in obtaining credit or in improving management capacities.

Many other developing countries established special small business promotion bodies in order to coordinate and facilitate assistance for the sector. Results have not always been encouraging, as these bodies tend to work inefficiently and do not always meet the needs of the entrepreneurs. Vietnam should avoid to do the same mistakes. Nevertheless, there is some scope for improving public assistance to the sector, especially in fields like access (not subsidization) to credit, market information, provision of suitable premises and business training.

5.8. Interest Representation

With introduction of the reform policy, the private sector has assumed a new role in Vietnam. With the new constitution of 1992 and some other laws the sector is now officially recognized,



protected and encouraged. With regard to economic growth and development as well as creation of new employment, the private sector is already the leading sector in the Vietnamese economy.

Obviously, Vietnamese government is putting much emphasis on private sector development and will need more information about the sector in order to streamline its economic policies. Under these circumstance, the private sector has the chance to come forward with its needs and proposals for a better business environment. For initiating such a policy dialogue with government it is necessary to involve chambers and/or associations representing the business community and acting as its voice. This holds especially true for small-scale enterprises, which are usually marginalized and cannot draw attentions to their special needs. Another advantage of having chambers and associations is that they can act as self-help organizations of the business community and render services to the enterprises.

Results of the survey indicate that Vietnamese entrepreneurs are quite aware of the advantages and functions of such business organizations. While only about 25% of the entrepreneurs interviewed judged them as not important, 75% of the entrepreneurs stated that chambers and/or associations could be important for their business. Asked about desired activities of chambers and/or associations, market and technology information ranked first with 39 answers followed by credit assistance (16), training (9), interest representation (7) and others (11). Only two entrepreneurs asked for market or price regulations. Results are especially remarkable as this question was not guided by proposed answers.

Despite this remarkable awareness, only 30% of the enterpreneurs interviewed did know any chamber or association in Vietnam, and not one of them was a member. Although in other developing countries only a minority of small-scale enterprises is member in a chamber or association, this is an extremely low figure.

As these results indicate, the infrastructure of business organizations is still rather weak in Vietnam. A major role is performed by the Vietcochamber having more than 1200 members throughout the country. In former times, Vietcobank was a state-controlled organization focusing on foreign trade promotion. This changed considerably in 1992 with the introduction of new by-laws. Vietcochamber is now independent from government and open for private as well as state-owned enterprises. The chamber has successfully recruited new members and is striving to diversity its activities. Associations have been founded in Vietnam after introduction of reform policy. A successful example more than 1000 members. Other associations are still weak and mostly without an own office or secretariat.

In summing up, there is a considerable potential for Vietcochamber as well as other associations in Vietnam to increase their membership. Most of the entrepreneurs interviewed gave the impression that they are willing to join an organization offering activities as stated above. Up to now, inadequate interest representation of the private sector in general and small-scale enterprises in particular is one of the constraints for small business development in Vietnam.

6. Conclusion and RecommendationsIn the context of the transformation of the Vietnamese economy from a centrally planned system to a market-oriented system, the small-scale enterprise sector is of fast increasing importance, especially with regard to employment creation and the introduction of a competitive environment. In general terms, framework conditions for this sector have become quite favorable. However,



there is scope for improving the policy environment in order to make the small-scale enterprise sector a backbone of Vietnamese economy.

Based on the analysis of existing literature and the survey result, there are two major external growth constraints for the sector.

1. The most important constraint is the lacking access to credit. Due to the ongoing transformation of the banking system, Vietnamese small enterprises have considerably more difficulties in obtaining loans from the formal banking system than small enterprises in other Asian developing countries. However, Vietnam should not adopt credit policies of many countries form the region which tried to overcome shortage of external financing by introducing subsidized credit schemes for small enterprises. The experiences with this type of interventions were not satisfying. Many credit programmes broke down because of bad debts. Furthermore, these lending programmes did only reach the larger end of the small-scale sector. In summing up the experience from other countries, the bottleneck for SSE’s is rather the access to credit than the cost of credit. Generally, further financial liberation will improve the access of small entrepreneurs to formal credit as increased competition will force the baking sector to approach and serve the sector. Additionally, non-distortive measures such as credit guarantee schemes or revolving funds can be introduced to improve the access to credit. Naturally, there is only limited scope for activities of Vietcochamber as it is primarily a business organization and not a financial institution. However, ZDH/TA experience shows hat re-lending programmes can be introduced successfully by a chamber of commerce and industry. Thus, the Metro Angeles Chamber of Commerce and Industry, Philippines, is operating successful re-lending programmes which could be adopted by Vietcochamber. Furthermore, Vietcochamber could facilitate entrepreneur’s access to credit by offering consultation services including a screening of the entrepreneur’s application for loan as well as an introduction to the bank.

2. The second-most important group of constraints for Vietnamese small-scale enterprises in large urban areas is the limited possibility for expansion because of the lack of suitable land and premises. There is a urgent need to develop industrial estates for this sector. Vietcochamber could draw on the experience of Mahratta Chamber of Commerce and Industry, Pune, India, which is running three industrial parks for SSE’s.

Other growth constraints which could be partly relieved by activities of Vietcochamber are:

3. Delayed payments of public sector and difficulties in bidding for public orders: Vietcochamber could install an arbitration board supporting small-scale entrepreneurs in getting public payments in time. Additionally, Vietcochamber could lobby for a regulation giving small-scale enterprises the right to charge interests on delayed payments. Furthermore, Vietcochamber could organize joint biddings of SSE’s for public orders as these orders are mostly of bigger scale.

4. Lack of information on public promotion and assistance programmes: As described in the study, there are relatively few promotion programmes for small entrepreneurs offered by Vietnamese government and/or foreign donors. However, most entrepreneurs are not even familiar with these few programmes. Vietcochamber should inform members as well as no-members from the SSE sector on conditions of these programmes by producing a small brochure/guide.

5. Lack of interest representaiton of small-scale enterprise sector: Although there is a remarkable awareness of the entrepreneurs interviewed about the advocacy and service role



of business organizations like Vietcochamber, most of the entrepreneurs do not know any business organization and none of them is member of such an organization. There is a strong need for the SME department of Vietcochamber to promote its services for recruiting more members from the small enterprise sector.

7. Annex I: Some Characteristics of the Firms Interviewed1. Total Number of Interviews: 362. Location of Firms

a. Hanoi 36b. Ho Chi Minh City 50

3. Trade of Business: a. Metal 52b. Woodworks 34

4. Classification of Firmsa. Household Enterprises 81b. Private Enterprises 2c. Cooperative Enterprise 1d. Others 2

5. Year of Foundationa. 1994 –1991: 29b. 1990 – 1987: 25c. 1986 – 1983: 17d. 1982 – 1979: 7e. 1978 – 1975: 2f. before 1975: 1

6. Number of Workers including Owner and Family-workers:a. 1 – 5 workers 39b. 6 –10 workers 19c. 11 - 15 workers 14d. 16 - 20 workers 5e. 21- 100 workers 9

(average value: 11,3 means value 6,5)



8. Annex II: Some Survey Results

Table 1: Ranking of Growth Constraints on Small-scale Enterprises

Constraints Average Value of Index

Financing and credit possibilities

Supply of land and premises

Marketing facilities

Taxation

Behavior of Public Administration

Supply of new/appropriate technology

Supply of necessary raw materials

Supply of energy/power

1.87

1.97

2.26

2.26

2.45

2.58

2.67

2.70

1. Major problem 2. average problem 3. No problem

Table 2: Ranking of Proposed Government Measures

Government Measure Average Value of Index

Stabilize economic policies

Assistance in obtaining loans

Information on markets

Provision of premises/infrastructure

Removal of bureaucratic obstacles

Technical and managerial Training

More liberal import regime

1.10

1.34

1.35

1.51

1.62

1.78

2.09

1. Major problem 2. average problem 3. No problem

Table 3: Selected Growth Constraints

Major problem Average problem No problem

Supply of land an premise 36 17 33

Financing and credit possibilities 34 29 23

Taxation 15 34 37

Behavior of public administration 11 25 50

Supply of necessary raw materials 8 12 66



Table 4: Sources of Finance

Yes No

Own and family savings 79 7

Loans from friends and relatives 33 53

Loans from money lenders 10 76

Loans form banks/credit cooperatives 6 80

Workers contributions 3 83

Others 6 80


Reading 2: Institutional Support for SMEs; Some Trends and Issures

Reading 2:

Institutional Support for SMES;

Some Trends and Issues

Nilgun F. Tas- Chief Technical Adviser, USNIE/95/004

Why SMEs?

This presentation will not try to make an in-depth discussion of advantages of small and medium enterprises with respect to their employment creation potential, or their role in industrialization, redistribution of income, and contribution to human capital development which are all well-known. In the very short time available, it will look at the more basic issue of efficient use of scarce resources. As always, but more so in today's world, efficiency has become the major force driving our lives. As individuals we want to use our scarce resources efficiently. As nations we try to improve the efficiency of our economies to provide a better life for all citizens. Economically speaking, it is a well established fact that market mechanisms are the best, available tools for the use of resources. But how can. we make markets ? And how can we make markets work efficiently? Efficient markets are those where there is competition. How can we create competition? Competition is created by having as many actors in the field as possible. This very basic fact tells us that we want to have as many enterprises as possible. The answer is simple, by enabling the creation and development of small and enterprises.

This answer can be justified by looking at the neighbors of Vietnam. The list of countries in Table 1 includes both developed and developing economies.

Table 1. The Relative Importance of SMEs in East Esia, 1985Country Establishment (%) Employment (%) Output (%)Indonesia 88.0 32.0 35.5Malaysia 94.7 41.2 28.9Philippines 98.6 61.6 17.2Singapore 86.7 53.7 22.6Thailand 96.6 49.8 n.a.Republic of Korea 97.6 57.6 39.0Japan 99.1 72.2 52.0Source: Chee (1992)

At this point an obvious question is:



What is an SME ?

There is no universal answer to this question. The definition of an SME differs from country to country. There may even be different definitions used by different agencies in one country and definitions change over time. However, the criteria used in defining SMEs in almost all cases axe based on the size of the workforce which is an easily measured quantitative criteria. In addition, some countries use an indicator of business performance; such as turnover or some other financial criteria that characterize the business- such as fixed assets. In East Asia, in an advanced industrial economy as Japan, an SMEs will be a firm with a workforce of up to 300 and in a smaller industrial economy such as Vietnam, an SMEs may be defined as a firm with a workforce of up to 200. An accompanying financial criteria obviously need to depend on the actual average values of such criteria in the actual population of firms existing in that economy in defferent size categories with respect to workforce employed.

As economic cooperation between countries in regional economic blocs increases and as economies converge, definitions used for SMEs will probably converge, at least initially in the same economic bloc, too. In a recent attempt to eliminate inconsistencies and also to prevent distortions in competition between enterprises the European Union adopted a common definition for State aid to SMEs at the national level and for aid to SMEs programs at the Community level in 1996. This definition also illustrates the fact that SMEs are usually further divided into groups according to different size categories. According to the new European Union SNE definition enterprises are divided into the following categories:

Micro enterprise< 10 employees,Small enterprise < 50 employees; and

either an annual turnover <7 MECUor an annual balance sheet total<5 MECU

Medium enterprise < 250 employees; andeither an annual turnover <40 MECUor an annual balance sheet total < 27 MECU.

In addition, this new definition requires that SMEs are independent enterprises. An independent enterprise is defined as an enterprise which is not owned for 25% or more by an enterprise or a group of enterprises that fall out of the above definition of SMEs.

Why do we need an SME definition ?

Although SMEs play a very important role in job creation, and they are more flexible and adopt more easily to competition than larger enterprises; in fact we have said in the beginning that they create competition, and last but not least, they act as a driving force for 'innovation; in other words they participate actively in economic development and economic change, they are also more susceptible to mark-et failures than their large scale competitors.

As a result, Governments, in all types of economies, introduce specific measures to help SMEs overcome these difficulties. The definition of the SNE concept becomes vital at this point. If support policies are to reach their true target, enterprises which need particular assistance must be included in the target group, but those enterprises which do not need specific assistance should be excluded from the target group. Motivated by this reason, the European Union has decreased the upper limit of employment criteria for SMEs from 500 employees to 250



employees in its 1996 SME definition. At this point, we need to ask our next question which will also cover the topics that will be discussed here this afternoon.

What are some SMEs support measures ?

Initially, SMEs programs has had more of a paternalistic bias and a supply oriented delivery structure. Government have tried to supply SMEs with an array of services, finance and infrastructure based on assumed needs of SMEs. The protectionist orientions of Government has also found applications in SMEs support programs. This era has been characterized usually by the building of large bureaucratic structures for delivery of support services; especially in the absence of developed markets for industrial services that SMEs need to develop. The support programs in general has not been very efficient due to their supply oriented approach; but also due to a lack of interest in removing discriminatory aspect of development policy measures that adversely affect SMEs. For instance, providing fiscal incentives for investments of a certain minimum size or imposing lending rate ceilings often work against SMEs. Similarly, SMEs facing similar administrative procedures with large enterprises often have to bear higher operating costs with respect to larger enterprises. In most of the cases, programs have not been able to keep up with the changing needs of the enterprises in both content and mode of delivery. The inflexible nature of governmental bureaucratic services organizations coupled with pressures from various interest groups have resulted in inefficient use of resources.

In the last decade, most countries have started adopting approaches to improve the business environment for all enterprises, while in the meantime removing discrimination against SMEs. Governments have come to realize that protectionist approaches hindered rather than enhanced the competitiveness of sectors and enterprises. There is also a drive to scrutinize development policies to ensure that they do not discriminate against SMEs. The delivery of services have become more demand oriented, taking into account the needs of enterprises. This has resulted more and more in the involvement of representative associations of SMEs in the provision of services. Programs where Government contributed to the cost of service delivery, but where the actual delivery of the service was realized by SME associations have been very successful. This recent approach has started to take root due to more efficient and successful results it has yielded. A comparison of policy instruments in different regions shows that similar means to develop SMEs were used.

In the ASEAN region; most common Government initiatives have been: Financial assistance; in the form of subsidized credits and grants, guarantee funds for

collateral, and Technical assistance; in the form of training programs, marketing advisory and consultancy

services, business development and support services. Some of these services have been provided free of charge, and some with some amount of subsidy., And finally,

Regulation and coercion; where there have been preferential government procurement programs, with some, products being reserved for production by small firms and large firms and especially state enterprises have been coerced into subcontracting agreements. These programs have not been successful.

Outside the ASEAN, other Asian countries and especially India, for instance, in addition to the above measures, has applied very large government financed and operated industrial estate programs. These industrial estates have been built throughout the country. In an effort to improve the efficiency of their SME support programs, most countries have discontinued measures based on regulation and coercion. Financial support systems have been redesign to improve the access of SMEs to finance, rather than providing direct subsidies. Technical



assistance delivery has taken a "self-help" orientation, with the involvement of SME associations. More recently, providing, an enabling environment is taking precedence. An illustration can be found in the Japanese Government's stated objectives to develop SMEs in the following:

"The small and medium enterprise program to strengthen structures of enterprises intends to improve the environment in which small and medium enterprises can prosper through their own efforts taking part in the competitive market by correcting the disadvantages of small and medium enterprises.

Under this objective Japanese Government provides financial resources to differentprograms carried out by local governments and SME organizations and associations. Some examples are summarized below: Local governments receive funds from the State budget to provide consultancy services to

SMEs through specialized agencies and private sector consultants. Regional Information Centers organized in the form of public interest corporations (as

foundations or incorporated associations) receive funding, to enhance the utilization of information by SMEs as well as the more wide spread application of computers in business operations.

Training programs for SMEs and training of consultants that will service SMES receive funding from the State budget.

On the other side of the Pacific, in the United States, the Small Business Administration (SBA) is a funding agency that channels State resources into both financial and technical assistance programs. The most prominent financial assistance program has taken the form of SBA guaranteed loans, where the loans made through private lending institutions are guaranteed up to 85% of the principal loan up to a maximum loan guarantee limit. Technical assistance programs set up by universities, local administrations, chambers of commerce and industry receive cost subsidies from the Federal budget up to 50% of costs involved. Some technical assistance programsdirectly target disadvantaged groups such as unemployed, minorities, women, youthand the disabled. Individual small companies are encouraged to develop new technologies by grants of up to $100,000 made through various Federal agencies.

In the European area, the most common two instruments have been: Financial assistance; in the form of direct subsidies and grants, subsidized loans, and loan

guarantees, and Technical assistance similar in form and content to those implemented in the ASEAN region.

Table 2 below summarizes the instruments of policy for SMEs in 15 European countries as of 1994. These instruments have been used in the following 9 main areas;

Start ups and growth Investment Subcontracting Research and Development Exports Education Capital and finance Cooperation Job creation



The numbers in the table show the importance of each instrument in descending order in each field. For instance, in the field of encouraging, investments governments use subsidized loans as the most important instrument, together with grants to finance project development, and also provide loan Guarantees, and tax relief. In addition, a whole array of services for management and technical training, information and advice are available to entrepreneurs.

Table 2. Instruments of policy for SMEs by fields in the 15 Member States of the EU (1994)

Instruments/Fields R&D Investment Fin. & Capital

Start-ups Export Subcontracting

Education Cooperation Job Creation

1. Direct subsidies or grants

1 2 4 1 2 2 2 2 4

2. Subsidized loan 3 1 1 2 3 3 4 53. Loan

guarantee/participation

4 3 2 5 6 3 3

4. Tax relief 5 4 3 6 5 5 25. Service 2 5 3 1 1 1 16. Export Guarantee 47. Subsidized start

up loans for unemployed.

4

8. Subsidized personnel

6 7 1

9. Subsidized buildings, communication networks, sites, power stations

5 8

Source: European Network for SMEs Research, 1995

It is appropriate to say that last 40 years' efforts to develop SMEs both in developed and developing economies is full of examples that support the following inferences regarding the choice of SME support measures:

1. Establishing a favorable business environment for all businesses; small, medium and large, provides the best media for the development of SMEs.

2. Even in what might be called a favorable business environment, removing discrimination against SMEs must be a major objective for policy makers.

3. Although in the basic analyses market economic theories assume perfect markets, in reality there are market failures in the form of information gaps, noncompetitive market structures at play especially for SMEs due to their structural shortcomings. Therefore, SNM support programs aimed at correcting market failures will enable SMEs to exploit their full potential.

Small and Medium Enterprises in Viet Nam; Characteristics

The most recent comprehensive study about the characteristics of SMEs in Viet Nam was conducted by SIDA-ILO-ARTEP in cooperation with the Institute of Labour Studies and Social Affairs, Ministry of Labor, Invalids and Social Affairs, in 1991. The study covered 1008 private



and state owned SMEs, 89.5 % of which were manufactoring enterprises operating in both urban and rural settings in the three major growth areas of Viet Nam. The survey provides information on private enterprises with less than 50 employees and state enterprises with less than 200 employees. The following tables illustrate the main economic characteristics of urban enterprises by city and type of ownership for the year for which the data was collected.

1. Although it might be argued that the SME data presented below reflects conditions that are somewhat outdated, it might also be argued that as an economy still in transition, the business environment has not 'changed drastically in either direction and the information presented reflects at least the trends prevailing for the manufacturing SMEs of Viet Nam.

Table 4. Main economic charateristics of urban enterprises by type of ownership, 1990Household Private Partnerhsip Co-op State

Income, USD 11,586 48,456 40,297 66,855 1,897,080Value added, USD 3,592 12,590 11,774 13,420 360,364Wage bill, USD 364 5,137 4,138 6,848 20,050Profit, USD 2,838 5,725 6,140 4,816 30,482Total assets, USD 8,450 30,273 26,097 38,935 2,596,203Floating capital 1,127 10,646 5,922 8,166 1,382,028Debts, USD 52 2,549 1,147 2,165 55,173Employment 4.77 13.63 14.65 31.57 82.86Full time 3.59 11.98 11.77 24.66 68.48Wage workers 0.95 11.06 12.56 30.43 73.40Full time 0.94 11.04 9.96 24.24 61.90Value added/employed, USD 648 813 809 505 4,011Assets/employed, USD 1,501 2,188 1,802 1,332 23,909Valued added/USD assets 1.65 0.87 0.72 0.79 1.31Debt/assets, % 1.5 5.5 2.7 4.4 25.8Average wage, USD 344 402 313 255 290% wage workers 14 72 81 96 92Source: Ronna, P.1992, p.23

With the above qualification in mind, we can infer the following characteristics about the industrial SMEs in urban areas in Viet Nam:

1. The average number of employees in the urban non-state sector was 15.5 persons with half of the enterprises in the micro enterprise category with less than 10 employees and it was 82.9 persons in the state sector.

2. The average total assets in the non-state sector was 25,636 USD, while in the state sector it was 2,596,203 USD.

3. Only 3.6 % of the total capital was funded by external sources in the non-state sector and 25.8% of total capital was funded by external sources in the state sector.

Small and Medium Enterprises in Viet Nam; Constraints and Support Services

SME managers participating in the above mentioned survey have ranked shortage of capital as the major source of constraint to growth. Limited access to capital is also reflected by the low asset values, which in turn imply low levels of technology in SMES. The second largest group of constraints are related to lack of marketing and lack of transport facilities, coupled with constraints identified as limited current demand for products and too much competition. This



grouping together with lack of raw materials indicate highly localized and fragmented markets with limited backward and forward linkages.

Table 5. Main constraints (identified by enterprise managers) to the growth of enterprises (percentages)

Urban RuralShortage of capital 54.9 65.7Cannot afford to hire wage labor 3.8 2.2Lack of skilled workers 3.6 2.2Lack of technical know how 7.3 4.5Limited demand for current products 23.1 23.6Too much competition 16.0 13.2Lack of marketing/transport facilities 27.8 19.2Lack of raw materials 14.0 4.2Lack of energy 17.1 7.2Too much interference by local officials -0.7 3.7

These constraints point out to three major areas of development:

1. improving access to finance,2. upgrading of technologies, and3. providing marketing support.

Low importance placed on training by micro and small enterprise managers in Viet Nam portrays a common tendency shared by similar entrepreneurs elsewhere. This is due to the fact that investment in training, in a small enterprise where labor turnover rate is high is not perceived as a high priority by entrepreneur. Small entrepreneurs will be reluctant to invest their own capital resources in what may be perceived as ‘general', ‘transferable' or 'occupational' training. However, they will be more likely to invest in external, off-the-job training for more established staff (with over one year’s service) for developing skills specific to the particular needs of their enterprise. Therefore, although not perceived as a problem by SME managers, provision of training, to improve the transferable skills of the workforce will usually fall in the domain of Government intervention. In addition, provision of technical training, to the workforce for effective utilization of upgraded technologies and to SMEs managers to enable them to better utilize their resources would be the other main area of support.Obviously, upgrading of technologies is closely related to availability of capital because investments are governed by the availability of own capital. A well functioning, financial system which can be tapped by SMEs on a commercial basis will certainly contribute the most to the competitiveness of SMEs in Viet Nam. Improving access to capital by improving the financial management capabilities of SMEs will complement and enhance the utilization of resources. Therefore, provision of traininc, in the preparation of credit proposals, feasibility studies, and business plans, and imparting the SMEs with the necessary skills and systems for proper financial management of their businesses emerge as support services to be provided.

On the other hand, acquisition of new technologies by SMEs can not be a goal by itself, but a tool to achieve an objective. Entrepreneurs will only invest in new technologies if they can see a benefit in doing so. Research has shown that the 'push'of the market competition surpasses any other factor that may have a role in investments in technology. As a result, competitors, customers and other factors which provide information



about these two; such as the marketing/sales force of the enterprise itself, fairs and exhibitions which provide product, process, competitor and customer information, and suppliers are instrumental in effecting change in product and process technologies. Therefore, improving the access of SMEs to the available sources of technological and market information emerge as support services needed by SMES. In the absence of active provision of such non-nation services, viable business and related financial decision-making is also impaired.

The cycle from information to technology to financing to marketing can only be completed by provision of training, information, advice and consultancy in all of the above fields. As we have discussed in the previous sections, the more market-led the approach is and the more nearer these services can be delivered to the SMEs, the more efficient and the more effective they will be.

As will be explained in detail by Mr. Xuan, Director of Industry Department, MPI in the next presentation, the UNIDO-MPI Project "Assistance to SMEs in Viet Nam" will strive to achieve this objective by working toggether with SMEs, SME representative organizations and most importantly in cooperation with policy makers at the local and central Government levels.


Reading 3: Improving the Macroeconomic Policy and Reforming the Administrative Procedures to Promote the Development on the Small and Medium Enterprise in Vietnam

DraftREPORT SUMMARY ON

IMPROVING THE MACROECONOMIC POLICY AND

REFORMING THE ADMINISTRATIVE PROCEDURES TO

PROMOTE THE DEVELOPMENT ON THE SMALL

AND MEDIUM ENTERPRISES IN VIETNAM

Prepared by

CENTRAL INSTITUTE FOR

ECONOMIC MANAGEMENT

(CIEM)

Sponsored by MPT-UNIDO Project

Assistance to Industrial SMEs in Viet Nam

HANOI

November 1997



Introduction

In Vietnam and in many other countries all over the world, the small and medium enterprises (SMES) have great potential to contribute to economic development. The Following manifests the importance of SMES:

- They produce goods for domestic consumption, including capital goods such as machinery and equipment, tools, required by the industries producing consumer goods and handicrafts.

- They create jobs for a large number of workers. This is very important for those who are unemployed in urban areas or those who have come from rural areas in search jobs.

- They mobilize the savings of the people that may otherwise be idle, they use the domestically available raw materials or intermediate inputs, including the recyclable waste from consumption and production.

- They contribute to the development of industries in many different regions of the country, reducing the development gaps between the areas, and stimulating a balanced development of less developed regions in the country.

- They play a complementary role by providing inputs to the large industries and contribute to creating cooperation and competition thereby enhancing the overall competitiveness of the economy.

- They help in sustaining and developing professional villages and traditional handicraft occupations and by producing goods that characterize the national culture, they contribute to the preservation of national heritage.

At the present, the SMEs in Vietnam have not yet developed to a level that corresponds to their inherent potential. They face many difficulties in conducting their business activities. On one hand, a transparent legal framework for the SMEs to operate more efficiently is still not available. On other hand, government policies with appropriate promotional measures to effectively support SMEs are still missing. The current practices require a thorough evaluation of the development status of SMES. This evaluation should be based on a comprehensive analysis of the effects of the macroeconomic policies as well as the administrative procedures on SMEs and propose feasible recommendations to the government to gradually create a favorable business environment for these enterprises to operate.

economic reform and this has contributed substantially to the development of the private sector in Vietnam. The main pillars of the policy to transform the economy to a market orientation are threefold; business activities have been liberalized; the markets make the production and business decisions; the legal rights of enterprises are protected by the state.

One of the essential components of economic reform is manifested in the policy for multi-sectoral development that recognizes the permanent existence of all economic sectors and provides for equal treatment for all economic sectors by law.

In order for the new mechanism to work properly, the state has adopted a series of le-al documents in recent years. This plays a substantial role in transforming the economy into an intrinsically market one, creating the necessary conditions for mobilizing all resources for development.

The legal documents affecting enterprises can be divided into 2 types:- The first type is specific to each type of enterprises; and



- The second type is common to all types of enterprises.

From 1986 until now, the important achievements have been made in elaborating these le al documents and in creating the legal framework for enterprises to operate. It is possible to draw the following conclusions:

a. The state made great effort to create the legal framework necessary for all types of enterprises to operate. Up to the end of 1996, there were 44 laws (codes, laws and acts), 64 degrees and 251 resolutions.

b. Due to the lack of the experience in constructing the legal framework and because the legal documents have been issued at every hierarchical level, the validity of these documents is very different from each other.

Although the legal system is still not complete, it obviously has reached a development step higher than the one that existed before and this helps the economy to operate on a legal basis.

The issuance and implementation of the legal regulations in the last years display the following shortcomings:

- The legal environment for the different types of enterprises is different and this creates unequal grounds for enterprises to establish and operate. Many policies give a priority to enterprises based on their ownership origin Without tile supporting measures corresponding to the scale of enterprises; - The frequent changes in the legal regulations force enterprises to work in an unstable legal environment;

- The legal documents were usually issued in an untimely fashion, Without the synchronous issuance of sub-laws;

- Some legal documents are still void of a scientific basis that causes difficulties and problems to enterprises, also creating gaps for enterprises to abuse;

- The legal regulations are too complex and ambiguous. Information dissemination about legal documents is still limited and insufficient.Generally, no enterprise, especially an SME, is aware totally of these regulations.

1.2. The assessment of development status of SMEs in Vietnam1.2.1. The characteristics of SMEs

The number and the structure of SMEs

According to the capital criterion (the capital level below 5 billion VNDS), 88.2% of the total number of enterprises can be classified as small or medium enterprises. Among the number of enterprises operated purely with Vietnamese investment, 89.5% of enterprises have a capital level below 5 million VNDS. Among the number of enterprises with foreign investment, 33.6% of enterprises have a capital level below 5 million VNDS. Therefore, the SMEs operate mainly with the domestic investment.

If based on labor criterion with a number of employees less than 200, then 96% of the total number of enterprises (including the enterprises with foreign investment) can be classified as small or medium.

Therefore, the number of SMEs is ranging from 88% to 90%, if the calculation is based on both criteria: the number of employees below 200 and capital level less than 5 billion VNDS. The capital value of these SMEs accounts for only 20% of the total business capital value of all enterprises. The capital value of non-state SMEs accounts for 52% of the total capital value of non-state enterprises.

The number of SMEs participating in trade and repairing services is large relative to the total number of SMES. Their share is 46.2%. About 18% of the total number of SMEs in the country



are working in industry and construction. About 10% of the total number of SMEs are operating in transportation and warehouse service. The remaining small number of enterprises is participating in various other activities.

Among the industrial SMES, 37.3% are operating in food processing industry; I 1% are working in textile, garment and leather; 12.3% are participating in mechanical engineering, producing equipment, machinery, precision tools, and assembling motorcycles and transportation facilities.

The classification of SMEs by locations and regions

According to our calculation, above 55% of the total number of SMEs are located in two regions; South East and Mekong River Delta. These figures for the Red River Delta and North Central Coast are 18. 1 % and 10.1%, correspondingly.

The technology and equipment of SMEs

The technology level as well as equipment and machinery of SMEs is usually old, outdated and under maintained. Moreover, the rate of renovate is too low, approximately at the level of 10% of annual investment.

The qualifications of employees and managers in SMEs

The skills of laborers in SMEs do not meet the required standards, because the majority of laborers, especially the laborers in small businesses, did not attend any additional training courses while their educational level is too low. Only 5.13% of laborers in the non-state sector have a college degree.

The majority of the owners of non-state enterprises established in recent years did not attend any training course. Among the owners of non-state enterprises, 3 1.2% have a college or higher degree. However, the ratio of the owners of non-state enterprises having the knowledge about the market economies is very low.

1.2.2. The position and the role of SMEs in the socioeconomic development of Vietnam

In production of goods and services

In 1995, the share of value added produced by the non-state sector in GDP is 65%. The contribution share of non-state enterprises, including SMES, in GDP is approximately at 36.6%. Accordingly to our calculations, the share of capital value of SMEs in the total business capital value of all non-state enterprises is approximately at 52%. Therefore, it is possible to assume that the value added of SMEs in the total value added produced by non-state enterprises has a share of 52%, or is equivalent to 19% of GDP.

The share of value added produced by SOEs is equal to 25% of GDP. Assuming that the value added by the state SMEs is equal to 115 of value added of SOES, then the share of value added by state SMEs is equal approximately to 5% of GDP.Thus, the share of value added produced by all SMEs in the whole country (in all economic sectors) is approximately 24% of GDP.



In industrial production

The non-state sector is producing approximately 25% of the industrial gross output (based on data 1995-1996)3. The share contributed by all SMEs (including state SMEs and SMEs with foreign investment) to the total industrial gross output is estimated to be equal to 3 1 %.

Job creation and income generation

In the non-state sector in 1995, about 24.8 million laborers are working as the unregistered individuals or business groups in agriculture and forestry. The remaining part of 6.6 million laborers are mainly at the registered SMES, including business households and groups, or participating in other activities.

In the state sector in 1995, about 1.8 million laborers are working directly in the businesses, including SMES. Assuming that 70% of these laborers (about 1.2 million) are working in the state SMES, the total number of laborers in all SMEs of Vietnam is about 7.8 million persons, accounting for 22.5% of total labor force of the country. In other words, the share of laborers in all SMEs is equal to 79.2% of non-agricultural labor force (= 7.8 / (34.6 - 24-765)).

The majority of laborers in SMEs are participating in processing industry, construction, and trade and transportation services.

1.2.3. The development trends of SMEs in the last years

The development of SMEs in the last years has the following characteristics:- The number of non-state enterprises have increased very quickly and the number of enterprises

in the collective and state sectors have decreased. The number of private enterprises, excluding the business households or groups working below the limit of the legal capital, is increasing with the quickest rate. Only 5.73% of non-state enterprises were established before 19905.

- The average annual growth rate of the non-state sector consisting of the majority of SMEs in the last years is less than the average annual growth rate of the whole economy.

- The size of the registered capital of the newly established enterprises is decreasing.



Chapter 2

THE IMPACT OF MACROECONOMIC POLICIES ON THEDEVELOPMENT OF MEDIUM AND SMALL ENTERPRISES

2.1. The policy on trade and industry

The policy oil trade

The government has implemented a policy that relaxes restrictions on imports and exports. The administrative management mechanism regulating imports and exports has been replaced by market oriented policies.

From 1992 up to the present, exports and imports have grown over 20% annually. During the period 1990-1996, exports have increased more than 2.5 times in value and imports have increased more than 3 times in value. However, export and import activities of the majority of non-state enterprises have been trusted to the large SOEs that have obtained licenses for exporting and important. The number of trade licenses given to enterprises in the private sector accounts only for 15-20% of the total number of trade licenses.

a. The non-tariff barriers:* Restrictions that prohibit the items importedEach year the government regulates the list of prohibited import and export items. This list is changed very frequently, creating great uncertainties for private enterprises.

* Restrictions that impose quotas:As of 1997, Vietnam imposes export quotas only on rice, textiles, and garments. Selling and buying of quotas are relatively common.

* Restrictions imposed by licenses on exports and importsThe non-state enterprises have been allowed to export those commodities produced by then and to import the input factors necessary for their production. The non-state enterprises have to get the permission of the Prime Minister, if they want to participate in export and import activities. Since the beginning of 1997 the regulations on the exported commodities limited by licenses have been abandoned.

* Restrictions on the exporting and importing participantsFor rice, petroleum, fertilizer, black cement, cars, and motorcycles, a trade license is only given to some enterprises. Only 19 enterprises are allowed to export rice and 25 enterprises are allowed to import fertilizers. When the regulation that limits the number of exporting or importing companies is abandoned, the access to the domestic and international markets will become easier.

* Restrictions imposed by decrees of the Ministry of Trade and other ministries on exports and imports

Besides the export or import licenses, the Ministry of trade still has the right to give licenses related to the certain groups of exported or imported commodities. In addition, for some commodities, export or import licenses must be obtained from the line ministries.



b. The tariff barriers

The tariff system is extremely complicated, having many tariff lines; the nominal rates are high and the range of tariff rates is too wide. The system of tariff codes is not compatible with the system of product codes.

c. Other barriers

- The institutional support is still not available for export-import activities;- Export-import procedures have gradually improved, but the seeds causing trouble to enterprises such as cumbersome procedures have not been eliminated completely; - Effective measures to prevent a large inflow of smuggled goods are not available;- Some policy measures, such as the 90/CP or 91/CP decision, on establishment of the general corporations and the special preferential treatment to SOES though credit and export-import policies, are placing the SMEs in the private sector at a disadvantage.

The industrial policy* Protection of domestic industry: The current protection policy has distorted the domestic markets, thus the investors may not get the right signals from the market. The markets for cement, steel, sugar, and so on, are very typical examples. Because the protection policy is not related to the technology policy, the foreign and domestic investors only want to focus on protected products. By doing so, the export promotion policy is replaced by an import substitution policy. The Vietnamese industry after several years in economic reform is still not able to compete in the world markets.

In the industries protected effectively and strongly by the government, there is no room for the non-state SMEs to participate. In other industries protected less strongly by the government, the non-state enterprises can participate, but they are still under the strong pressure from the smuggled products.

* Selection of industriesVietnam still does not have a specific policy on industries that are selected for priority development. The non-state enterprises are rarely able to get any support, especially the technological support.

The government should encourage investment policies that help to enhance competitiveness in international markets. If such policies are implemented, they should be applied equally to all enterprises.

2.2. The financial and monetary policy

The policy on mobilizing the financial resources: The policy on mobilizing financial resources is implemented through the taxation policy, the interest policy, and the policy on promoting investments. Due to these policies, the domestic production has developed rapidly and the domestic savings and gross investments have increased quickly. During the 5 years from 1991 to 1995, the domestic private investment (mainly by SMES) accounts for 30% of total gross investment and is approximately equal to 6 billion USD. In 1995, the private investments contributed 1.5 billion USD to the total gross investment of 6.2 billion USD. The sources of capital mobilized by enterprises are from the formal domestic and international institutions as well as informal resources.

According to the survey of the research group, 55% of enterprises has had difficulty in mobilizing capital; 67.5% of enterprises had to borrow the relatives and friends; 25% of enterprises provided supplier credit by delivering materials in advance; only 42.5% of enterprises were able to borrow from the banks and 20% financial organizations.



Regarding the SMES, the surveys of government agencies and other relevant organizations also give similar results.

Some policies and regulations on capital mobilization still contain obstacles to SMES, namely:

- The majority of external resources (such as FDI and ODA) are allocated to the state sector.- Some irrational regulations are seriously hampering capital mobilization by SMES. For

example, the regulations on short-term credit issued by the State Bank still discriminate in favor of the state enterprises against the non-state ones. It is also unreasonable for instance to expect SMEs to buy insurance in advance for those assets to be financed by bank loans when such loans are not yet given by the banks and when the ownership documents related to the assets are not available. (This is defined in the Decision 367- Q§/NH on 21 December 1995 by the Governor of the State Bank and also in the Document 1798/NHNo-05 of the Agriculture Bank). The collateral for bank loans is only an obligation for non-state enterprises, while it is not an obligation for SOES. Until now, documents providing guidance on collateral procedures have not been issued.

According to the Decision 198/NH on 16 September 1994 by the State Bank and the Decision 217 on 17 August 1996, the maximum bank loan is defined to be equal to 70% of the value of collateral written in the loan contract. However, the enterprises are in fact given loans amounting to less than 50% of collateral, regardless of the fact that the asset values determined by the banks are usually different from the actual values.

- There are no financial institutions specialized in SME lending.The share of the excess bank loans allocated to the non-state enterprises has increased, but not in correspondence to their numbers and their contribution to GDP.

Tax policies

The reform in tax policies is reflected in the switch to a tax system uniform to all economic sectors. The State has issued a series of laws on various taxes and also regularly makes the necessary amendments to the irrational regulations in the tax policies. At the same time, policies on tax reduction are also applied to promote selected objectives.However, the following shortcomings should be overcome:- The tax regime is mainly based on high tax rates, but the tax base is too narrow. According to the Ministry of Finance, tax avoidance and tax evasion are very serious problems in the private sector. However, many of the private enterprise feel that they should stop doing business if they are to strictly follow the current tax regime.

- The tax regulations are ambiguous, cumbersome, and too complex;- The tax policies contain a bias towards some enterprises and against the other. For example, the tax rate on profits is defined at 25- 45% for domestic enterprises, but at 10-15% for enterprises with foreign investment;- The tax policies are not based on a uniform tax system;- Tax is collected repeatedly;- The mechanism for the determination, collection, and supervision of tax payments is not

transparent and at most times discretionary.

Many enterprises that have potential to benefit from tax exemptions or tax reductions tend to avoid or evade tax payments instead of applying for such preferential treatments. This situation may reduce the effectiveness of the tax reduction and exemption measures and, therefore, is less attractive to investors.

Monetary policies



Uniform interest rates are being applied to all economic sectors. However, some problems have to be resolved. For example, the ceiling interest rates determined by the State Bank are not compatible with the demand and supply relations in the capital market. In addition, the fixing of the spread in interest rates makes these transactions inflexible.

The relative price stability experienced in recent years has had positive effects on investment and business environment.

2.3. Investment and credit policies

Investment policies: The Law on Foreign Investment and the Law on Domestic Investment Promotion have contributed to accelerating investments.After the years of economic reform domestic savings have increased. The domestic savings rate from 7.4% of GDP in 1990 increased to 17.1% in 1995, of which the private saving rate is 11.9% and the government saving is 5.2%. However, the domestic savings are still at a low level.

After the year reasons, the fact that policies on domestic investment promotion are not complete, consistent and have not been issued in a timely fashion is an important factor. Measures supporting, promoting investment are given mainly to the remote and difficult areas where the infrastructure is poor and the rate of return to investment is potentially low. According to a Report of CIEM, by the end of 1996 the local authorities have given licenses to 313 domestic investment projects, but only 93 licenses (or 29.7%) have been given to non-state enterprises.

According to a survey, 40% of 7619 enterprises has had an increase in capital during 1995-1996 showing a relative increase when compared to previous years.

Some comments may be given as follows:- The increase in domestic saving and investment is only one of development factors. The

change in the mechanisms as well as policies may give the similar effect;- Despite the shortcomings, the economy has made an initial start towards motivating

competition.

Credit policies

The credits allocated to the non-state enterprises have been increasing rapidly. The structure of bank loans to these enterprises is as follows: 10.3% in 1990, 18.2% in 1992, 33.1% in 1993, 37.1% in 1994 and 50% in 1995.

However, still the demand for credit of the non-state enterprises has not been satisfied to a sufficient level. The financial system

2.4. Technology and training policies

The necessary conditions for the technology development are as follows:- Intrinsic competition should be created for enterprises to seek for new technologies and to

renovate the existing ones; - The economy should be opened to access and exchange of information;- Domestic capabilities to acquire and apply new technologies needs to be improved.

Presently, the majority of Vietnamese enterprises, especially SMEs are using obsolete technologies that lag 3 or 4 generations behind the world's average level. Their technological and technical capacity is limited; the capital level per laborer is low (it is only equal to 3% of the level achieved in the large industrial enterprises).



The majority of specialists in the surveyed government organizations recognize that the technology level in SMEs is too obsolete; the technology management skills are very weak; the product quality is low. At tile same time, the government support policies for accelerating technological advance are still not available. Among the 40 surveyed enterprises only 2 enterprises had an opportunity to get some support in a technology related field.

The State has made a great effort in establishing organizations to support enterprises in technology. However, support policies towards enhancing the technological level of SMEs have the following weaknesses:

- The Policies specific to SMEs are still not available (that is, specific policies on training and improving skills in management, technology, etc.).

- No research and development organization (R&D) is created specifically for the SMES;- The specialized organizations in science, technology, and training have not included in their

agenda the objectives of providing the required supporting and consulting services for SMES; - The existing promotion centers have not coordinated well enough to benefit efficiently from international assistance projects.

- A master plan or a national strategy for the development of SMEs in the country is still not available.



Chapter 3

ASSESSMENT OF MAJOR ADMINISTRATIVE AND LEGAL PROCEDURES ASSOCIATED WITH FORMATION AND DEVELOPMENT OF SMALL AND MEDIUM-SCALE

ENTERPRISES

During the process of their business activities, SMEs have to go through a lot of administrative procedures regulated by the State. According to the opinions of entrepreneurs and some foreign economists, the administrative procedures in Vietnam are too cumbersome and complicated. Below we will concentrate our analysis on administrative procedures in 4 fields that contain the most important obstacles to the process of establishment and business registration by enterprises, especially the SMES:

- The procedures for establishment and business registration;- The procedures on land lease;- The procedures on credit and bank loans;- The procedures on imports aid exports;

3.1. The procedure on establishment and business registration3.1.1. Procedures on establishment

Current regulationsTo start business activities, the private enterprises and companies have to get permission for establishment. The cooperatives only need to inform the relevant . Community People's Committee in writing about their willingness to start a business, their strategy and operational plan. After having received an approval from the Community People's Committee, the founding members may start taking the necessary steps to organize a meeting for establishment of their cooperative.In contrast, the persons who want to establish a private enterprise or a company have to submit an application for establishment. The following necessary conditions must be satisfied:

- The purpose and type of business activities should be specified clearly; the head office, the business or initial plan should be defined specifically.

- The investment or the charter capital should correspond with a specified level the type of business activity they want to do and should not be less than the legal required capital.

- The managers and executives must be well qualified in relevant professions, if the law requires such qualification for their type of business.

- The necessary documents should be provided to certify permanent residence, head office, well-mental status, and the personal curriculum vitae with a clear origin without criminal prosecution or subject to prosecution but nullified and certified by the District Police Office. Besides, for some business activities if required by laws, the professional certificates issued by the authorized provincial departments, the documents certifying the initial or charter capital in cash, exchange currencies, jewelry, or in-kind.

- All the above mentioned documents should be certified by the relevant notary office and are subject to a certain fee.

The comments on current regulations

1. The investors have to prepare a large number of documents; many government agencies are very bureaucratic and aggressive and this results in wasted time and money of the investors who want to establish the business.2. Some required documents in the application file should be abolished, namely:



a. the production and business plan;b. the approval of the Provincial Authorities where the applicant has permanent residence, for

cases where the applicant wants to establish the enterprise in another province;c. the certification of the local authorities about the personal curriculum vitae (because the

applicants have to be lawfully responsible for their statements);d. notary certification on capital values (because the regulations on legal capital are also

unnecessary).3. The division of functions among the different levels of government that consider and approve the application for establishment is still not consistent and reasonable.4. The Company Law is not compatible with the Law on Domestic Investment Promotion about the age allowed to establish an enterprise.

3.1.2.Business registrationCurrent regulations

1. As required by the Laws and Government Resolutions, a number of documents for business registration vary among the types of enterprises by ownership. Generally, the following documents are necessary: the charter of enterprise, the list of members in the Board of Management and inspectors, the business plan, and the certificate of the bank about capital value 2. After having prepared all necessary documents for business registration, the applicants have to send them to the authorized government agencies that are responsible for giving the certificate on business registration and have to pay a certain fee.

3. Upon receiving the certificate on business registration, the enterprise has to publish its main characteristics in daily local or central newspapers.

The comments on current regulations

1. Some documents for business registration are the same as those that are submitted for obtaining establishment permits. This is a formalistic requirement.

2. Even after adjustments, the maximum fee of 10 million VND for business registration is still too high.

3. It is not reasonable if 2 agencies are simultaneously responsible for business registration, namely the District People Committee for the cooperatives and the Provincial Department for Planning and Investment for private enterprise and companies. This may create difficulties in management within the same locality.

4. The business registrars only emphasize the "front steps" while ignoring the "behind steps", which leads to the inefficiencies in the whole procedure.

3.2. The procedures on land lease

As required by the laws, the procedure on land lease consists of the 5 following steps:

Step 1: Preparation of application documents, including an application for land lease, the copy of declaration of land use, the registration for rental payments, the extract of cadastral map, and other related documents;Step 2: The application documents should be submitted to the related functional institutions, including the Provincial People Committee, the provincial department for price and finance, and cadastral department;Step 3: The authorized agencies are responsible for examining the validity of the application documents;Step 4: The Provincial People's Committee is responsible for approving the land lease;Step 5: The contract on land lease is signed.



In Hanoi and Ho Chi Minh City, the procedures on land lease are very complicated and cumbersome. In Hanoi, the enterprises that want to have land leased have to go through I 1 steps. In Ho Chi Minh City, the land lease is not easier. Many enterprises spend much time and money, but fail to get land leased. The majority of non-state enterprises have to buy the land or to rent land possessed by individuals or SOES. Many profitable enterprises can not expand their production due to difficulties in access to land leases.

3.3. The procedures on credit and bank loans3.3.1. Short-term credits

As required by the Decision 04/NH-QS, the regulations on credit clearlv discriminate against non-state enterprises in the conditions on collateral.. Due to this discrimination, the access to short-term credits by the non-state enterprises is limited relative to that by the SOES.

3.3.2. Medium and long-term credits

The rules on medium and long-term credits were issued in conjunction with the Decision 367-QS/NH1 dated 21 December 1995 by the Governor of the State Bank and replaced the Decision 23-NH/QS dated 6 March 1991 by the Governor of the State Bank. The new decision also replaced the decision "On the promulgation of the rules on medium- and long-term credit", and the Decision 273-QS/NHI dated 8 December 1992 by the Governor of tile State Bank on the adjustments of the borrowing conditions.

According to the regulations by the State Bank, the conditions on the medium- and long-term credit do not distinguish between the SOEs and the non-state enterprises as much as the conditions on short-term credit. However, some problems result from the shortage of the own capital possessed by SMEs and from the obligations for buying the insurance to cover the assets formed by the bank loan. (It is unreasonable if the issuance has to be bought before the loan is given).

3.3.3. Preferential credit

The Law on Domestic Investment Promotion and the related documents specify the conditions that allow some enterprises to access preferential credits. However, the non-state enterprises can scarcely access these credits due to the lack of information and the complicated procedures.

3.3.4. Collateral and mortgage

Banks can easily accept real estate, if it is used as collateral for bank loans. However, the procedures on getting the legal documents related to house ownership and the rights on land use are very complicated and overlapped. Therefore, the use of real estate as collateral is very difficult for SMES.

3.4. The procedures on imports and exports

3.4.1. The procedures for applying for import or export licenses The conditions for import or export licenses are the following:a. the enterprises should be established according to the regulations of the laws;b. some of managers should be well qualified;c. the working capital should not be less than 200 thousand USD (for specialized trade enterprises);d. international markets for produced goods or the import demand should be specified clearly (for producer enterprises).

The procedures for getting the import or export license



The enterprises have to prepare a large number of related documents that have to be passed through many levels of bureaucracy with complicated procedures. Especially, non-state enterprises have to get the permission of the Prime Minister. (This is not specified in the Resolution 33/CP on issuance of the import or export licenses).

If the export license is removed, many of the above procedures will be abolished. By doing so, the enterprises are likely to have easier access to participation in exports.

3.4.2. The procedures on imports and exports

The procedures on imports and exports include all the services related to customs, warehousing and transportation. The procedures on customs services are common all over the country. However, due to the ambiguity and the frequent changes in the trade and tariff policies, the importers and exporters are facing many difficulties that are easily created by many customs officers. If the import and export licenses are removed together with the regime restricting the number of trade participants, all these difficulties will be completely overcome.



Chapter 4

SOLUTIONS FOR PROMOTING AND SUPPORTING THEDEVELOPMENT OF SMES IN VIETNAM

From the international experience, the empirical evidence, and the practical demand of SMES, the following solutions for promoting and supporting the development of SMEs are recommended:

1. Improving the legal framework for SMEs to operate;2. Continuing the reform in macroeconomic policies;3. Simplifying and improving, the administrative measures; and4. Renovating the state governance functions and promoting a network of service providers

for SMES.

4.1. Improving the legal framework for SMEs to operate;4.1.1. Issuing, adding, and amending the existing policies and regulationsrelated to SMEs

A recommendation is to remove the inherent conflicts and inconsistencies in the legal documents that cause difficulties to enterprises. The legal system should be revised, amended and new regulations should be added in a way that matches the economic circumstances and business environment o enterprises.

4.1.2.Strict compliance with the process of promulgating legal documents

The related guidance documents should be elaborated and issued together with the approved laws. By doing so, the laws may quickly come into effect without the delays experienced while waiting for related guidance documents.

Besides, the legal documents should be transparent, flexible but not, compromise the stability and consistency for long-run development. This should enable enterprises to feel secured when investing in production and business.

4.1.3. Promulgation of legal documents specific to SMEs

The State should continue the economic reform and improve the economic management mechanism while also elaborating and promulgating legal documents regarding SMES. The recommended 'directions are as follows:

The legal status of SMEs in relationship with the government agencies;The organization and operation of industrial SMES;The legal system towards the protection for industrial SMES;The system of policies on promoting and supporting the development of industrial SMES;The consideration on having a Law on SMEs and other necessary legal documents which also include matters on developing the villages for traditional handicrafts.

4.2. Continuing the reform in macroeconomic policies4.2.1. Renovating the policies on trade and industry

In order for SMEs to mobilize their full development potential and to facilitate rapid, stable and expected progress in this respect, more attention should be paid to the following basic issues.Firstly, a transparent and stable legal framework should be provided for trade activities in the markets.Secondly, preferential policies should be reasonable and fair to all enterprises in any economic sector.



Thirdly, the policies should be specific and should encourage the SMEs to actively participate in export activities.Fourthly, protection policy on domestic production should encourage the SMEs to actively increase a domestic market share while also helping the import substitution strategy to be replaced by the export promotion strategy.

- Regarding FDI, the encouragement needs to be given only to those FDI projects that have a certain exportable content.- The stronger measures should be taken to prevent smuggling, illegal imports, counterfeit goods, imitation of labels and trademarks.

Fifthly, more attention should be paid to providing the market information to SMEs and to expanding the availability of consulting, services.

With regard to imports and exports:- Removing import and export quotas on the commodities not subject to the list of items

prohibited by the State. The list of items restricted by quotas should be disseminated publicly to all enterprises. The auction regime on import or export quotas needs to be applied extensively.

- The direct export restrictions Should be relaxed; the restriction on the working capital at the level not less than 200 thousand USD should be abolished.

4.2.2. Renovating the policies on land leaseIn order for SMEs to efficiently mobilize their development potential, the government should pay more attention on solving the problems related to land policies.Firstly, it is necessary to facilitate easy access to SMEs to purchasing land use rights by simplifying procedures. The purpose of land use should be open to change, if the change follows the general architectural plan.Secondly, the SMEs should benefit from rights on land use under similar to those applicable to SOES.Thirdly,the economic integration and co-operation between SOEs and private enterprises should be strengthened extensively so as to take advantage of each participant, for example, by utilizing idle production capacities of SOEs.Fourthly, industrial zones should be constructed to attract the domestic and foreign investors.

4.2.3. Renovating the policies on finances and credit

The policies on finance and credit for SMEs need to be focused on the following issues:

Firstly, SMEs should be-treated equally with SOEs when borrowing from the banks.In order for the enterprises to be relieved of difficulties in access to capital and for the banks to secure funds for lending, the banks need to take effective measures against risk. This can be carried out by constructing the database about the current and potential customers and by strengthening the accounting and auditing system with the updated information.

Secondly,, the investment assistance funds should be established for medium and long-term loans.To do this, the provisions in the Law on Domestic Investment Promotion should aim to solve the essential problems, by clearly defining the objectives of the investment assistance funds should; clarifying the mechanisms for organization and operation of these funds and by identifying the conditions and beneficiary entities.

Thirdly, types of financial leasing allowed needs to be expanded.

Fourthly, the economic relationship, integration, and co-operation between SMEs and the large enterprises in all economic sectors, especially in state sector, should be widened.



To relieve the difficulties in accessing capital by SMEs, the following measures need to be implemented with the first priority:

- The banks specialized for SMEs should be allowed to operate;- The investment guarantee funds should be established for SMES;- The procedures on credit should be simplified.

Renovating the tax policies

Firstly, the tax policies must maintain the bud-et revenue while promoting development in production and business activities and assuring social equality.

Secondly, in May 1997 the National Assembly approved the Law on value-added tax and the Law on corporation tax. Necessary steps should be taken immediately to implement these laws.

Thirdly, preferential taxes should be according to criteria such as: the scale of enterprises, the business activities, the region, the process of business organization, the effect on socioeconomic problems (woman employment, the persons under the social policy, etc. ).Therefore, preferential taxes should not be used with a bias to favor an economic sector or the investment origin.

4.2.4. The policies on technology and trainingThe government should take the following promotion measures to assist technological renovation

Allowing accelerated depreciation, Increasing the period for tax exemption, reducing tax on the projects with renovated

technology, Expanding new financial transactions, Allowing the establishment of some "technology markets where seller and buyers of

technology can meet and do business".

Supporting the development of human resources by expanding the training network for SMEs

The necessary measures should be supported to train and re-train tile owners, managers of enterprises and to give the professional courses for workers by supporting existing training institutions or by providing support to the establishment of new professional centers.

4.3. Recommendations for reforming the administrative procedures4.3. 1. The procedures on establishment and business registration

The procedures on establishment: The current regulations related to procedures on establishment of private enterprises and companies should be removed.

The procedures on business registration All steps in the procedures on business registration should be concentrated at one

government management level; Apart from the function of business registration, the functions of monitoring and supervision

should be given to this management level so that all business activities and the duties specified in the registration documents are followed strictly.

The documents related to business registration should be the same for all enterprises or at least similar for all non-state enterprises.

The "one stop" registration regime needs to be. applied in the procedures on establishment and business registration of enterprises.

4.3.2. The procedures on land lease



Upon applying for land lease, all steps related to drilling, processing the foundation, preparation of a detailed infrastructure project should be postponed until the land lease contract is concluded. This is because these steps are very expensive and complicated.

The provincial cadastral department, on behalf of the government, should be able to complete all procedures on land lease.

The cities should have a master and specific plans to facilitate the business of individuals and organizations in dealing with the procedures on investment and land lease.

The cities need to concentrate on constructing industrial zones to centrally provide the necessary services for enterprises.

4.3.3. The procedures on credit The local authorities should be responsible for validating the value of production areas and

real estate of enterprises so that these assets can be used as collateral for bank loans. The financial transactions of enterprises should be carried out through the banks, so that the

financial status of enterprises can be defined exactly. It is necessary to have the credit guarantee funds based on the contribution of SMEs and the

support of the government and international institutions. It is necessary to establish specialized banks for SMES. The preferential policies on turnover and profit taxes (including tax exemption) should be

applied for SMES. The reserve funds for risk are necessary to be created from the profits earned from the above preferential policies.

4.3.4. The procedures on imports and exports

Import licenses on the majority of commodities have to be abolished. Restrictions on the number of importers should be removed. The competition in import or export activities needs to be encouraged. For the items restricted by the import or export quotas, the auction regime needs to be implemented after complete information has been given to all interested participants.

4.4. Renovating the management system and assistance network for SMEs

It is necessary to study the establishment of a Management Bureau for SMEs after the year 2000. Presently, in Vietnam there is no specialized government management organization for SMES. The government management functions related to SMEs at present are scattered at various Ministries and agencies. There is not an organization that is responsible on behalf of the government to coordinating the government management functions related to SMES.

The Vietnamese Government has decided to develop policies and strategy for the development of SMES. Therefore, it is necessary to consider the establishment of "a Management Bureau for SMES" to centralize the government management functions related to SMEs in the whole country.

The Management Bureau for SMEs should have a legal entity under the Government or a certain Ministry with existing central and local structural levels that can be mobilized. It should be an organization that helps the government to implement the development programs necessary to SMEs and to coordinate the other government functions on SMES.

Establishing the organizations to provide the necessary services to SMEs The establishment of the specialised organizations to provide the consulting information and other necessary services, is a new issue, but very essential to SMEs in Vietnam. The owners of SMEs have high demand on the consulting services, economic and market information, and "package" services, because they want to have more time for business tasks with a higher efficiency. This system can consist of the centers or companies created by the individuals or by the State. They should have a legal entity to provide the "package" or "one stop" services that are necessary for the owners to establish their enterprises, to sign the economic contracts to solve the commercial conflicts, to recruit the



employees, to collect the information about the markets, to perform the trade operations, and to inquiry the questions related to the legal regulations and economic and financial issues.

4.5. Action PlanA brief summary of the major solutions that are needed to promote the development of SMEs is given as follows.

The short-run solutions to be taken by the year 2000

1. The Ministry of Planning and Investment has to build immediately a development strategy for SMEs to submit to the Government. At the same time, a decree on the development of SMEs has to be prepared to submit to the Prime Minister for approval. In this decree, the criteria on Vietnamese SMEs should be specified clearly as an orientation basis for the supporting activities and other operations related to SMES. Also, the responsibilities of the central and local organizations in implementing the decree by the Prime Ministry should be defined clearly.

2. The existing centers on promoting and supporting SMEs should be strengthened; a more efficient coordinating mechanism should be applied. In the first stage, it is necessary to create the conditions for establishing a Unit under the MPI to coordinate the activities supporting the development of SMES. This unit should develop policies and strategies and coordinate the activities of existing supporting organizations. The Unit should work with existing business organizations and other service providers to evaluate and learn from their experience in providing services in information, advice and consultancy and training to SMES, so that these lessons may be the basis of nationwide implementation of SME support services.

3. The credit guarantee funds should be established to ease the access. To do this, it is necessary to appeal for the assistance of international institutions, the contribution of SMES, and the support of the government. The necessary conditions should be prepared to establish the specialized banks for SMES.

4. The localities, especially the big cities and industrial centers, have to issue immediately the regulations on land lease accordingly to the principle of "one stop" (or "one door, one stamp"). The Provincial Cadastral Department has to take the responsibility to implement this step. At the same time, it is necessary to validate as soon as possible the existing production platforms and real estate, so that these assets can be used comfortably as a collateral for the bank loans.

5. The import or export licenses should be abolished. The Ministry of Trade should be responsible for submitting to the Government the regulations on quota auction for the tradable commodities restricted by quotas.

6. To simplify the custom procedures, the general tax office should be responsible to considering a new system of tax rates that is simpler and corresponding to the international practices.

7. The Ministry of Education and Training should coordinate with other Ministries, agencies, and localities in examining the system of professional schools, so that the appropriate supporting measures, especially the supporting measures in training skilled workers for SMES, can be implemented.

8. The Ministry of Justice should be responsible for submitting to the National Assembly the steps from adjusting to abolishing the procedures on establishment. At the same time, the list of business activities restricted by the level of legal capital should be clearly defined.

The medium- and long-run solutions to be taken in the years beyond 2000



1. The Ministry of Planning and Investment should be responsible to submitting the Draft Law on SMEs to the National Assembly for approval based on the experiences of implementation of the Decree by the Prime Minister.

2. The Government's Personnel Bureau should be responsible to submitting the Government the decision on the establishment of a specialized organization for SMES.

3. The system of supporting organizations for SMEs should be strengthened and improved in order for SMEs to operate better.

4. The industrial zones for SMEs should be established in provinces and cities all over the country to remove completely the current shortage of production sites.

5. The macroeconomic policies should be improved to facilitate the operation of SMES. The development policies for SMEs should be promoted. The mechanism on coordinating the development relationship between SMEs and the large enterprises should be established.

6. The reform should be taken completely for SOES, so that SOEs become a strong reliance for SMEs to develop. In the long run, the SOEs should not be maintained in a small or medium scale. It is necessary to maintain only some strong SOEs with a large scale to perform the basic researches related to the technology advance, etc. that SMEs and private enterprises are not able to do.

7. The Ministry of Industry should be responsible for studying the development strategy regarding the industrial sector. The Ministry of Education and Training has to be responsible for studying the strategy on professional and management training. The Ministry of Science, Technology, and Environment needs to submit the promoting measures to the Government for approval, so that SMEs have the opportunity to study and apply the new technology.


document.doc: The concept of entrepreneurship

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Reading 4:

The concept of entrepreneurship

Objectives

An overview

Trait approaches to understanding entrepreneurship

The social psychological approach

Behaviourial approaches

Entrepreneurship as a Process

Entrepreneurial managers

Summary

Learning questions

Objectives

After reading this chapter, the reader will be familiar with a number of approaches to understanding the concept of entrepreneurship, and will have an appreciation of the significance of entrepreneurship in determining a context for management. The reader will also have an insight into the appropriate management response to the challenge of managing an entrepreneurial SME.

An overview

Entrepreneurship is about change and the roles people play to bring it about. It is about innovation and doing new things to improve the circumstances of enterprise. It is best understood as a pr ocess, the constituents of which are the entrepreneurs, their persistent search for opportunities and their efforts to marshall the resources needed to exploit them. It can occur in either a new venture start-up or within an established enterprise. Developments in the social, technological and economic circumstances in which the entrepreneurial enterprise operates have an impact on it. The lead entrepreneur is prompted as a consequence to instigate and carry through such changes in the enterprise as are necessary in response. We need to consider and understand what type of person might make that response and how. The entrepreneur is central to the entrepreneurial process, S/he is the driving force behind it. Without the entrepreneur's commitment, energy and ambition it would not happen. However, given the central role the entrepreneur plays in it, there is a notable lack of any agreed definition or clear understanding in the literature of who the entrepreneur is or what s/he does. It depends, it seems, on the individual



researchers personal perspective and approach as to how the entrepreneur and entrepreneurship are ultimately interpreted and defined.One approach, taken from psychology, is to develop an understanding of who the entrepreneur is by focusing on a set of personality traits and characteristics. Another approach is to consider the social context in which the entrepreneur is embedded and which will have an influence on her/his potential for success in venture creation an development. Entrepreneurship is not an activity conducted in isolation but is practised in the midst of an often dynamic environment which impacts on the entrepreneurial effort. The behavioural approach provides us with yet another way of understanding the entrepreneur and entrepreneurship. This approach views the entrepreneur in terms of a set of activities associated with venture creation and development. In this instance the focus is more on what entrepreneurial manager do than how well they do it.The debate on the supremacy of the different approaches continues and each approach has its champions. The position in this chapter is that all three approaches contribute significantly, in their own way, to enhancing our understanding of who the entrepreneur is and what S/he does. No one approach has the definitive answer, but together they bring us close to some greater degree of clarity. In the following sections we shall consider contributions from each approach to a definition of entrepreneurship. We shall conclude with a definition of entrepreneurial management.

Trait approaches to understanding entrepreneurship

Who is the entrepreneur?

The approaches offered by trait theorists to understanding entrepreneurship focus on the personality or psychological makeup of the individual entrepreneur. The presumption is that s/he projects a particular personality type.1) Researchers in the area have therefore sought to identify and extract those personality traits which might be considered to be uniquely entrepreneurial. They then seek to categorize and organize them like pieces of a jigsaw puzzle that comes together over a period and in a way that ultimately reveals a person who at first lance seems a larger-than-life character, a superhero, a 'do anything, go anywhere' type. They emerge as people who see what others cannot and do what others would not dare. Successive researchprojects, by applying personality theory, have sought to identify and measure the personality traits of entrepreneurs and have highlighted a number of factors as typically entrepreneurial. Factors such as a high need for achievement, beliefs about locus of control, a propensity to take calculated risks, a high tolerance of uncertainty and ambiguity in addition to other personal values such as honesty, integrity, duty and responsibility.2)

Table 4.1 lists some of the key characteristics of successful entrepreneurs taken from the growing literature in this area.

Table 4.1 Key characteristics of successful entrepreneurs

Personality traits

Calculated risk-taking and risk sharing propensityNeed for achievementLocus of controlPersonal values, integrity

1) Gartner, W. B. (1989) "'Who is the entrepreneur?" is the wrong question', Journal of Entrepreneurship Theory and Practice 13, (4), Summer, pp. 47-68.

2 ) Chell, E. and Haworth, J. M. (1992) 'The development of a research paradigm for the investigation of entrepreneurship: Some methodological issues', Proceedings of the UICI AMA Research SlImPosium on Marketing and EntrePreneurship, INSEAD, France, June, pp. I- 1 5 '



Need for powerNeed for affiliationCommitment, determination and perseveranceAssuming personal responsibilityA grip on realitvSense of burnoutTolerance of ambiguity, stress and uncertaintyDecisive, urgentTolerance of failure.

Limitations of trait approaches

A good deal of criticism has been levelled against trait approaches for a number of reasons. One problem is their apparent inability to differentiate clearly between entrepreneurial small business owners and equally successful professional executives in more established organizations. This latter group has demonstrated comparable levels of achievement motivation or risk-taking propensity, two apparently distinctive entrepreneurial traits. This raises questions about the value of trait approaches in identifying what is particularly entrepreneurial.A further criticism against trait theorists relates to the emphasis they have placed on identifying the supposed key trait that is most characteristic of the entrepreneur. The single trait approach seeks to identify and prioritize the aspects of a person's personality that are deemed to be particularly entrepreneurial.Third, it is suggested that trait theories need to recognize that entrepreneurship is a dynamic, constantly changing process. As the venture develops and grows over its lifecycle new challenges with attendant levels of instability and lack of predictability emerge. These have implications for the entrepreneurial personality. The entrepreneur will be required to adapt continuously and change his/her psychological frame of mind and outlook as the enterprise itself grows and changes. There is clearly a need to define and redefine entrepreneurial characteristics according to the stage of development the entrepreneur and the enterprise have reached.A further problem with the trait theorists' approach is the apparent implication that one either already has entrepreneurial traits or one has not, as a result of one's upbringing and a lifetime's influence from education, religion, socialization and culture. The argument appears to be that the fundamental building blocks of one's personality are formed during the early, more formative years of one's life. These values and attitudes remain constant during later life, even in the face of subsequent changes in circumstances. Having been inculcated in the individual over a lifetime it is unlikely that they can or will be developed at some later stage in any effective way.Part of the problem with trait approaches arises from how the entrepreneur and entrepreneurship are defined. In the first instance a focus only on the individual who establishes a new venture is arguably too narrow. It fails to recognize sufficiently the entrepreneurial potential of people who work to develop and grow established enterprises. In addition, there is the difficulty raised by the fact that entrepreneurs are not an easily identifiable, homogeneous group. Entrepreneurs, it appears, come in all shapes and sizes, from different backgrounds, with varying motivations and aspirations. They are variously represented and addressed in the literature as opportunists or craftworkers, technical entrepreneurs or so-called intrapreneurs.However, recognizing that entrepreneurs are a fundamentally heterogeneous population, coming from various backgrounds and circumstances, frees the researcher from the restrictions imposed in trying to define 'the entrepreneurial personality'.3) The view is emerging that psychological variables might be more usefully studied in clusters or constellations of traits. This does much to defuse some of the criticism-levelled at trait approaches and allows more people to be seen as potential entrepreneurs. Timmons4) offers an example of such clustering of what he calls 'desirable and acquirable attitudes and

3 ) Chell, E., Haworth, J. M. and Brearley, S. A, (1991) The Entrepreneurial Personality:Concepts, Cases and Categories, London: Routiedge. Irwin.

4 ) Timmons, J. A. (1990) New Venture Creation, 3rd edition, Chicago: Richard



behaviours' for entrepreneurs. They include commitment and determination, an opportunity focus, a tolerance of risk, ambiguity and uncertainty, creativity, self-reliance and adaptability, motivation to excel and leadership.A point of importance to note is that aspects of the entrepreneurial personality can be developed in order to improve the prospects of greater entrepreneurial success. One view is that personalities do continue to change and develop as a consequence of personal experiences and the changing nature of social relationships. It is recognized that basic traits may well be formed in early life, but it is also acknowledged that experiences in later life can play a role in shaping the personality and influencing a person's ideas and ambitions for an entrepreneurial career.The value of trait approaches, while the subject of continuing debate, must be recognized. It is clear that the psychological perspective of entrepreneurship research, in emphasizing the intrinsic personality characteristics of entrepreneurs, has made and continues to make valuable contributions to our current understanding of entrepreneurs and their distinct role in new venture creation.

The social psychological approach

The origins of the entrepreneur

The social psychological perspective defines those external factors that act as potential stimulants to entrepreneurial activity. This approach places entrepreneurship within the wider social environment. It acknowledges the influence of numerous social factors on the propensity of an individual to behave entrepreneurially and to do so continuously. Examples of such factors are family and social background, education, religion, culture, work and general life experiences. As a widening of the psychological perspective this approach sees the entrepreneur as being embedded in a complex set of social networks. These will either facilitate or hinder the potential of the individual to launch new ventures or further develop an existing one.They will do this in a number of ways. In the first instance the social background in which the individual is embedded will be a key determining factor of her/his personality as discussed earlier. In addition the social context of the entrepreneur provides the link between the entrepreneur, the opportunity identified and the resources needed to exploit it. This development of skills and use of social networking allows the entrepreneur to build an appropriate profile within society for the entrepreneurial role s/he wishes to play.Social marginality theory suggests that when inconsistency exists between an individual's personality and the role s/he plays in society, s/he may be prompted to act to resolve that inconsistency. The pull of assuming a more attractive role in society and the push to do something about the inconsistency acts like a catalyst. Such effort to acquire a desired profile or role in society, however, may well act ultimately as a brake on continued entrepreneurial effort. The possibility of compromising one's hard-earned standing in society may prompt the individual to adopt a style of entrepreneurship that is less growth-focused, with all the risk and uncertainty that attends it.An example in the literature which sees entrepreneurs very much as a product of their upbringing is offered by Kets de Vries.5) His entrepreneurial individual emerges as a deviant personality - rebellious, insecure, a person of low self-esteem, one who could not work in a structured environment, who resents authority and almost as an act of defiance establishes, by extraordinary effort and fear of failure, a commercial enterprise. As a product of her/his upbringing, s/he then runs this venture with great energy and determination and high self-reliance and thus low dependence on others. This approach can have a number of outcomes. Either the enterprise will continue to grow until it becomes too large to be managed effectively by one person, when it will ultimately collapse or be forcefully

5) Kets de Vries, M. F. R. (1977) 'The entrepreneurial personality: A person at the crossroads', Journal of Management Studies 14, pp. 34-57.



taken over by others. Or the entrepreneur will undergo what is in effect a difficult personality change and learn to trust and share.

Behavioural approaches

What the entrepreneur does

The third pillar to our understanding of the entrepreneur and entrepreneurship is outlined by the behaviourial approaches. In addition to having some idea of who the entrepreneur is and the factors in her/his background that influence her/his personal development and decisions, we need to ask: What do entrepreneurs do? We need some insight into how they think, what actions they take and how they go about creating and developing a new venture. The focus is on understanding how attitudes, behaviours, management skills and know-how, past experience, and so on, all combine in determining entrepreneurial success.Timmons suggests that successful entrepreneurs share a number of common behaviours and attitudes: they work extremely hard, apparently with unlimited energy- they work with commitment and determination; and they work with a competitive zeal and an ambition to excel and win. They thrive in situations of constant change, the more radical the better. It is after all in change that opportunities for new ideas are hidden for those with the vision to see their potential. They work to succeed, and in every setback there are lessons to be learned for the future. They move with the certainty of people who know that they are making the difference in the ultimate outcome of their ventures and the lives of those involved in it with them.So, successful entrepreneurs are individuals who have a flair for creativity and innovation and are primarily driven by opportunity and its attendant change. The ability to exploit opportunities and cope with change will depend on the entrepreneurs' ability to take decisions and to judge the value of these decisions. Consequently, entrepreneurs require a broad portfolio of general management competencies and access to a wide network of personal contacts. (Competencies and networking will be the subject of later chapters.)

Entrepreneurship as a process

The entrepreneurial process is an action-oriented way of thinking and behaving which determines the way in which individuals approach their jobs and response abilities, how they acquire resources, manage people, market their enterprise or produce products. It reflects the efforts and activities of the lead entrepreneur in any given venture somehow to make and manage a fit between an opportunity identified in the marketplace and the resources needed to exploit it.The background to this effort will be one of environmental turbulence and uncertainty, and this highlights the need for a particularly entrepreneurial type of management response.

Entrepreneurial managers

What managers do to become and remain successful as entrepreneurs is that they are consistently innovative and committed to change; they are opportunity-focused, constantly on the lookout for new ideas, they take well thought out, calculated risks; they give leadership, energizing people who work with them, building them into cohesive, motivated entrepreneurial teams; they negotiate and persuade those with the necessary resources (financial, capital and human) to support the opportunity that they have identified. However subconsciously, they are forever networking, gathering information, confirming decisions made.



The entrepreneurial manager as an innovator and change agent

The classical school of entrepreneurship is the essence of this approach. The focus is on creativity, innovation and the constant search for new product or process ideas. The focus is essentially on opportunities and their successful development and management through to implementation. As change is the ultimate outcome of such activity to do new things, the entrepreneur must be seen as one who deals in change and change episodes. This approach to understanding entrepreneurship highlights the entrepreneurs' role in bringing about change in what might be called 'the established order of things'. Whether establishing a new enterprise or renewing an existing one, they are challenging the status quo.

The entrepreneur as an opportunity-focused manager

A major constituent of the entrepreneurial process is the opportunity. An entrepreneurial manager will be steeped in and committed to the search for new ideas which have real potential for future development. In the dynamics of an entrepreneurial marketplace an opportunity might be a new market opened up or a new product identified. It might be a new production process developed or a more efficient source of supply of raw materials identified. It might even be the introduction of new structures into the enterprise as it grows and develops. What the entrepreneurial manager seeks is that one idea on which the window of opportunity is opening and which offers the prospects of a worth while return on effort and resources invested, for some time to come.We have considered entrepreneurial managers to be agents for change. The current entrepreneurial environment in which they operate may also be described as one of constant dynamic change. It is characterized by chaos, ambiguity, inconsistencies and substantial knowledge and information gaps. Entrepreneurial managers, though, will be steeped in the market for their chosen industry's goods and services. They will know (or make it their business to find out) what their customers want and what challenges the marketplace is likely to present to their ambitions. Entrepreneurs will combine their skill for creative thinking with their relatively keen vision for an opportunity which has its origins in what customers and the marketplace want. Successful entrepreneurial managers understand the marketplace as a source of opportunities and never forget it.

The entrepreneurial manager as a calculated risk-taker

Rapid changes in technology, in social and cultural norms, in economic circumstances, in people's lifestyles and the rapid emergence and decline of different markets and products create not only opportunity, but increasing levels of uncertainty in the environment. In the wake of such uncertainty comes what is for most of us unacceptable and debilitating levels of ambiguity and risk. For the action-oriented entrepreneurial manager, however, in such dynamic change lies opportunity. But the potential of those possibilities must be worked out or calculated, in a bid to keep that risk at a level that is acceptable to the entrepreneurial manager. Entrepreneurs demonstrate time and again a combination of a strong positive outlook with a higher tolerance of uncertainty, risk and ambiguity than most.Entrepreneurial managers rarely own the financial resources they invest in their enterprises. What they risk, primarily, is their personal standing and reputation - not only in their own eyes but in the eyes of their social peers. Entrepreneurial managers are drawn from and work in a social context that strongly influences, if not actually determines, the roles they play, their outlook and career. Building and maintaining a reputation demands a level of caution and a calculation of the risk element involved in entrepreneurial decision-making.

The entrepreneurial manager as an entrepreneurial team builder



Successful entrepreneurial managers compete with themselves, setting personal standards to achieve and excel. They drive themselves, managing the stresses and strains that appear to be endemic in entrepreneurial life, in pursuit of their own selfimposed standards and goals. They are energetic self-starters who, uncomfortably for some, seek as much energy and effort from those who work with them as they do of themselves.They know that they do not have all the knowledge and skills needed to run an entrepreneurial enterprise successfully. They appreciate their own strengths and weaknesses when it comes to managing the business and understand that its future prospects depend on their addressing the existing skills and knowledge deficit. Developing an entrepreneurial team as a means of doing so means finding and recruiting people into the enterprise, either on a full-time or part-time basis. In addition, they need to establish contacts with those outside the enterprise who can contribute, by their knowledge and skills, to the development of the venture. They recognize that if they are to build a successful entrepreneurial firm, they cannot do so alone. Building and developing the internal team requires leadership and vision.

The entrepreneurial manager as an entrepreneurial leader

The leadership style of the entrepreneurial SME will reflect the personality of the lead entrepreneur. Conventionally, it is seen as highly personalized, centralized, essentially autocratic. However, successful entrepreneurs know that if their small, potentially entrepreneurial firms are to develop and grow, they ultimately need to be able to recruit and retain people with the necessary skills and knowledge to help them to do it; people who, not unlike themselves, enjoy the prospect of and are competent in new ideas generation and change.Owner managers who would be successful as entrepreneurs will seek to adapt their style of leadership to encourage the creation of an environment within their enterprise that is and will remain broadly attractive to such people. Without surrendering ultimate authority (there must always be a lead entrepreneur), the emphasis will be on a greater degree of participation. The lead entrepreneur will seek to exercise influence rather than formal control or direction, on motivating and empowering people within the enterprise to excel, on selling a vision of how the firm might develop and grow, on conflict resolution through persuasion, mediation and negotiation, on making heroes out of people, on sharing credit for achievement. The facts are that any dictatorial and adversarial management style which seeks to dominate people in the enterprise will lead ultimately to difficulties which will rob it of access to people of high calibre who will make the difference between being truly entrepreneurial or not.

The entrepreneurial manager as a negotiator

Acquiring the necessary resources to exploit a potential opportunity is a key part of the entrepreneurial process. The successful exploitation of any opportunity, however, requires sufficient funding, materials, equipment and labour. Since entrepreneurs rarely own resources in adequate quantities, they need to build effective relationships with investors, creditors and suppliers. They also need to create a large network of direct and indirect contacts who will keep them informed of possible supplies of necessary resources. Persuading those who own those resources to make them available, though, requires that entrepreneurs be particularly skilful in negotiating. They may be selling an idea for an opportunity which may have no tangible characteristics beyond that of a business plan.

The entrepreneurial manager as a networker

The management of personal contact networks is developed in Chapter 14. However, its importance as a particularly entrepreneurial activity and competency deserves recognition here. The entrepreneurial small firm is characterized by its need continually to identify opportunities and its limited access to the necessary resources to exploit them. In circumstances of constant, often radical,



change, characterized by great risk and uncertainty, entrepreneurs must make decisions and take action, the consequences of which can have extremely lucrative or disastrous results for the enterprise. The importance of being able to gain access to rich supplies of focused, concise and current intelligence and be able, through good contacts, to confirm the validity of decisions made, preferably before implementation goes too far, could hardly be overstated. Such information and confirmation is possible through the peculiarly entrepreneurial activity of using personal contact networks.

Summary

Entrepreneurship is best understood as a process, an action-oriented way of thinking and behaving, the focus of which is innovation and change. Key constituents of the process are the entrepreneur, the opportunity and the acquisition and management of resources. The entrepreneur plays the central role in managing a good fit between the opportunity and the resources needed to exploit it.Understanding entrepreneurship is made difficult by the apparent lack of clarity about how the entrepreneur should be defined. Trait theorists, social psychologists and behaviourialists all have contributions to make. An effective understanding of the entrepreneur can be distilled from the contributions of all three.Managing the entrepreneurial process is the ultimate challenge confronting the entrepreneur. A consideration of this challenge gives us a brief insight into the profile of the entrepreneurial manager. The central core of entrepreneurial management is change and growth, and continuous commitment to it.

Learning questions

1. How might entrepreneurship be best understood?2. What is your understanding of the entrepreneurial process? What are its key constituents?3. What role does the entrepreneur play in the entrepreneurial process?4. Comment on the contributions of trait theorists, social psychologists and behaviouralists to our

understanding of the entrepreneur.5. What is a useful and workable definition of the entrepreneur?6. Discuss the implications for the entrepreneur of managing the entrepreneurial process



Further reading

Adam, E. and Chell, E. (1993) 'The successful international entrepreneur: A profile', The Proceedings of the European Foundation for Management Development's 23rd European Small Business Seminar, Northern Ireland, pp. 147-65.

Brockhaus, R. H. (1982) 'The psychology of the entrepreneur', in C. A. Kent, D. L. Sexton and K. H. Vesper (eds.), Encyclopaedia of Entrepreneurship, Englewood Cliffs, NJ: Prentice Hall, pp. 39-57.

Carsrud, A. L. and Johnson, R. N. (1989) 'Entrepreneurship: A social psychological perspective', journal of Entrepreneurshi@ and Regional Development, 1, pp. 21-3 1.

Chell, E. (1985) 'The entrepreneurial personality: A few ghosts laid to rest?' International Small Business _7ournal 3 (3), pp. 43-54.

Cromie, S. and Johns, S. (I 983) 'Irish entrepreneurs: some personal characteristics', journal of Occupational Behaviour, 4, pp. 317-24.

Cunningham, J. B. and Lischeron, J. (1991) 'Defining entrepreneurship', Journal of Small Business Management 29 (1), pp. 45-61.

Gibb, A. and Ritchie, J. (I 98 1) 'Influences on entrepreneurship: A study over time', in Bolton Ten Years On - Proceedings ofthe UK Small Business Research Conference, 20-21 Polytechnic of Central London.

Hornaday, J. A. (I 970) 'The nature of the entrepreneur', Personnel Psychology 23, pp. 47-5 4. Hornaday, J. A. and Aboud, J. (I 97 1) 'Characteristics of successful entrepreneurs', Personnel Psychology 24, pp. 141-53.

Lynn, R. (1969) 'Personality characteristics of a group of entrepreneurs', Occupational Psychology 43, pp. 151-2.

McClelland, D. C. (1961) The Achieving Society, Princeton, NJ: Van Nostrand.Stanworth, J. and Curran, J. (1973) 'Growth and the small firm - an alternative view', in Management Motivation in the Smaller Business, Aldershot: Gower Press, pp. 171-6.


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