performance and obstacles of smes in viet nam

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Performance and obstacles of SMEs in Viet Nam

Policy implications in near future

Nguyen Viet Long

International IT Policy Program (ITPP)

Seoul National University

37-412, San 56-1, Silim-dong, Gwanak-gu, Seoul Korea

Tel: 82-2-880-8890; Fax: 82-2-880-8389

Email:[email protected]

Abstract

This paper will examine the performance of SMEs in Viet Nam and their exogenous

constraints and obstacles with the analysis on data from various sources. Based on the findings,

the paper will give some conclusions and recommendations for SMEs policies in Viet Nam in

the near future with regard to the 2020 industrialization targets.

In order to find what the exact level of SMEs in Viet Nam is, how the Viet Nam policy

maker should improve the business environment for SMEs, the analyzing methodology of this

paper will mainly based on the comparison between Viet Nam with international level,

particularly with the kingdom of SMEs, Taiwan.

The final results of the paper show that there is still a big gap in performance between

SMEs in Viet Nam and international level. In spite of the establishment of policy frameworkfor SMEs in recent years, Viet Nam Government should continue to upgrade the SMEs policy

system followed the guideline of APEC, paying attention to measures for the country specific

issues in order to increase the performance of SMEs, releasing the constraints and obstacles

from business environment for development of SMEs that defined by Government as an

economic innovative driver.

Keyword: SMEs, innovation, performance, constraints and obstacles, policy recommendation

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mailto:[email protected]:[email protected]


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1. Introduction

Vietnam has made remarkable progress since 1986 with the renovation policy called Doi

moi. The economy doubled and the poverty was cut in half. These achievements reflect

continued progress in reforms and in integrating with the world economy. In the near future,

Viet Nam will step into new era. With the bilateral agreement marking the conclusion of

negotiations with the US regarding Viet Nams accession to the WTO being signed on 30, June,

2006, Viet Nam will become WTO member at the end of 2006. This will mark the fully

integration of Viet Nam into Global economy.

In this context, to implement the countrys strategy successfully toward the industrialization

target in 2020, Viet Nam government policy will keep economic growth on track, taking theadvantages of globalization, continue to restructure the economy with the lessons from two

successful Asian models of development: Korea with concentrated industry and Taiwan with

the success of small and medium size enterprises (SMEs). In the past few years, with the

development policy combined from these two models, Viet Nam has succeeded in establishing

some conglomerates in priority industries, pushing up the private SMEs with very high growth

rate, continuing to equitize the state-owned enterprises (SOEs).

As part of country development policy, SMEs have vital and undeniable roles in promotingeconomic and social development in Vietnam. They have made a significant contribution to

the countrys advancement and enhancing the efficiency and the flexibility of the economy.

This can be seen through the reduction in the unemployment rate, mobilization of capital from

domestic as well as international sources into business, promoting economic growth and so

forth.

Although SMEs play a vital role in triggering and sustaining economic growth and equitable

development in Vietnam, SME sector has not been able to effectively fulfill its roles due to aparticular set of issues it is currently facing. To find out the exact SMEs performance and

exogenous issues that make difficulties for SMEs is very important for Government to

strengthen its policy framework for SMEs in the near future when Viet Nam fully integrate

into global economy.

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The objective of this paper is to (1) examine the performance of SMEs in Viet Nam, finding

which level of SMEs compared to international level, (2) look into the current difficulties of

SMEs come from business environment, (3) analyze the international policy framework

experience, giving recommendations for Viet Nam government in order to strengthen the

SMEs contribution to the country economy.

This paper is organized as follows: The second section will give the definition of SMEs in Viet

Nam and in some other countries. The third section focuses on the performance of Viet Nam

SMEs including comparison with other countries. In section four, we will examine the

constraints and obstacles that SMEs sector is facing. And finally, based on the analyses gained

from the previous sections, the paper will give some recommendations to policy makers.

2. The definition of SMEs.

It is clear that the phrase small and medium enterprises is commonly used in the world as

well as in Vietnam. So what is a small and medium enterprise? This question seems simple but

has been defined differently in various countries and by different organizations. The only

similarity of SMEs definitions is to define a type of enterprise on given criteria of operation

scope and forms of ownership.

Defining a SME in the world is based on the two popular criteria: the quantitative andqualitative one

1. These criteria are very important and regularly used to define types of

enterprises by countries and organizations. However, these criteria are differently applied by

each country and organization. This can be clearly seen through the following definitions of

SMEs in some countries:

Table 1: Criteria to identify SMEs in some countries

Nation Criteria Employees Capital or Asset Revenue

USA All industries 1-500 N/A N/A

Manufacturing 1-300 < or =300M yen N/A

Wholesale 1-100 < or =100M yen N/A

Retail 1-50 < or =50M yen N/AJapan

Services 1-100 < or =50M yen N/A

1 Tran Thi Van Hoa, 2003, Tac dong cua cac chinh sach dieu tiet kinh te vi mo cua chinh phu den su phat triencua SMEs in Vietnam, (English equiv: the impact of the Government macroeconomic policy on the developmentof Vietnamese SMEs).

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Micro


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oHouseholders registered under Government Degree No 02/2000/ND-CP dated 2/2/2000.

Under this definition, any enterprise that meets the requirements of the two criteria: the

number of employees and the amount of capital are considered as SMEs. To define the SMEs

on the sizes regardless of the forms of ownership, SMEs thus can be private enterprises, state-owned enterprises or cooperatives. However, this definition does not reflect full characteristics

of each sector. Information technology sector is a symbolic example. This sector does not

require great size of laborers but a huge capital. Therefore, this definition relatively reflects the

characteristics of SMEs.

However, for convenience in assessing data and statistics of SMEs, this paper use the criteria

specified in Decision No 90/2001/ND-CP dated 23/11/2001 to define SMEs in Vietnam. This

study only focused on enterprises registered under the 1999 Laws on Enterprises and

cooperatives registered under the 1996 Law on Cooperative -- those are enterprises within the

formal sector, not on micro-enterprises such as households or individual small traders like

street sellers, cyclo drivers, or small artisans of which official statistic is of non-existence. In

addition, according to Ministry of Planning and Investment of Viet Nam (MPI), the

government body that is in charge of making policy framework for SMEs, 96,9% out of the

total of private enterprises are SMEs. Therefore, in this study, SMEs are mentioned as those of

private sector that are compared with state-owned enterprises (SOEs), and foreign invested

enterprises (FDI enterprises).

3. Performance of SMEs in Viet Nam

SMEs play an importance role in creating job, and in building dynamic, innovative, adaptable

base for increase national competitiveness. The performance of SMEs in terms of employment

creation, export growth, productivity, labor level, exit and survival rate, etc. is thus the matter

of fact for policy and regulation process. This section will examine the performance of SMEs

in Viet Nam in the comparison with international level and especially with Taiwan, a kingdom

of SMEs (Chris Hall). Based on that, we will find the answer for the question what is the

level of SMEs community in Viet Nam after nearly 20 years of reform process.

In this section, it is note that because of the divergence and variation of the data, the

comparison will be made based on only available ones that sometime are not correspondent to

each other in the meaning of time.

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Growth in the total population of SMEs

Net growth in the population of SMEs is a crude indication of the level of entrepreneurial

activity (Chris Hall).

Table 2: SMEs population of Viet Nam and Taiwan2

Year 1998 1999 2000 2001 2002 2003

Viet Nam N/A N/A 35004 44314 55236 64526

Growth rate N/A N/A N/A 26.60% 24.65% 16.82%

percentage N/A N/A 82.78 85.75 87.80 89.60

Taiwan 1045117 1060738 1070310 1078162 1104706 1146352

Growth rate 2.42% 1.49% 0.90% 0.73% 2.46% 3.77%

percentage 97.76 97.73 98.08 98.18 97.72 97.83

In the transition process, it is reported that the SMEs, the private sector in Viet Nam, have

continuously increased in the number as well as in the percentage over 4 years from 2000 to

2003. The number of SMEs only 35,004 and accounted for 82.8% of total enterprises in the

year 2000, but in the year 2003, these figures grew up to 64,526 and 16.82% respectively. It

could be said that such a strong growth is due to the change in Government Policy to

encourage the development of private sectors in the recent years.

However, to be compared to international level, the figure of Viet Nam SMEs3 development

still very low. As in the above table, it shows that the SMEs growth rate in Taiwan is not as

high as it in Viet Nam. The reason is that the percentage of SMEs in Taiwan is very high and it

remained stable during long period (more than 97 % during 1998 -2003). This means that in

spite of the recently outrageous increase, the level of SMEs development in Viet Nam is still

low, even compared to some developing countries other than Taiwan (see figure 1).

2Source: - Taiwan: Ministry of Finance Taxation Data center

- Viet Nam: General Statistics Office

3 This figure may not include the household ownership because this types often did not officially counted byGeneral Statistics Office

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97.9 98 99.4884

99 99.8 99 9982.8

70

88.3

66.21

12.17

84.370.2

60.6 59.4

29.4

0

20

40

60

80

100

SMEs popultion Contribution to total employment

Figure 1: SMEs population and employment in some developing countries4

In figure 1, the percentage of SMEs population in Viet Nam is the lowest among listed

developing countries. The figure in China is quite high (99%, in 1998) due to the booming of

China in the last two decade

5

.

Employment

The contribution of SMEs to employment is important in structural sense and in a dynamic

sense (Chris Hall and Charles Harvie): SMEs have provided vast bulk of all job in Viet Nam

during the last two decade. As can be seen the figure 2, in 2003, SMEs contribute to around

40% employment in Viet Nam (Data from General Statistics Office). In 2004, SMEs reached

the percentage of 56.3% of the countrys total regular employees and absorb the majority of

1.2 million people entering the labor market each year (Source: http://www.sme.com.vn ).

Despite the increasing contribution of SMEs to country employment, the job creation role of

Viet Nam SMEs still lagged behind it in other countries. Although the definition of SMEs is

quite different from country to country, causing an inaccuracy in comparison, but, relatively,

based on the official data published by country, it could give comparative evaluation on the

role of SMEs in creating job by each country. In figure 2, we can see the gap between the job

creation of SMEs in Viet Nam and Taiwan. While the job creation of SMEs in Taiwan is very

high and stable, it is relatively low in Viet Nam. Moreover, if compared to other developingcountries and transition economies, the role in employment of SMEs in Viet Nam is also

4 Source: International: Profile of SMEs and SME issues in APEC, 2002 & SMEs of OECD, 2000; Viet Nam:General StatisticsOffice.5China is mentioned here because Viet Nam applied the same transition model like China to transformits economy into market mechanism.

7
http://www.sme.com.vn/http://www.sme.com.vn/


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modest (see figure 16).

This low figure could be explained by the fact that the data from General Statistics Office of

Viet Nam does not cover the contribution in job creation of household, one of important factor

for employment percentage in Viet Nam (up to 2004 there were 2.4 million households GTZSME Promotion in Viet Nam- http://www.sme.com.vn). Thus, in reality, the contribution of

SMEs to job creation should be higher than that. But in this section, we will only make

analysis based on data source from General Statistics Office as official one.

Albeit the current low contribution to employment, fortunately the growth rate of Vietnamese

SMEs during 2000-2004 was very high. If keeping this rate, the contribution to job creation of

the sector in Viet Nam will be reaching the Taiwan level in 2007 7. This also means that the

future role of Viet Nam SMEs in job creation is very luminous.

Employed person working in SMEs as a % of the total

50.3%

29.4% 33.8%39.6%36.6%

77.2%77.6%77.9%77.7%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

2000 2001 2002 2003 2004

year

%VietNam

Taiwan

Figure 2: Employed person working in SMEs as % of the total8

6 The source of information is very out of date, almost countries numbers are before 1999. Among those countries,some developing countries like China, Indonesia obtained very sudden high number (84.3% and 88.3%respectively). Other updated data (around 2000-2002) of this is available in Taiwan white paper with the samenumber for developed countries, but it does include the number for China and Indonesia to for the exact update ofthese two countries.

7 Result from Author calculation by simply linear regression

8 Source: Taiwan: White paper on SMEs in Taiwan, 2005; Viet Nam: General Office Statistics

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Exit, survival rate and turbulence.

The survival and exit rate give another perspective of the corporate population and

performance of SMEs. Higher exit rate (meaning lower survivals) indicates that many firm

leaving the market. If this coupled with high startup rates then it is an indication of aturbulent economy, with a rapid rate of renewal. This renewal rate is then a crude indicator of

the ability of this economy to adapt to change by renewing its corporate base (Chris Hall and

Charle Havies). For example, it is very simple that if an economy has 10 % of its enterprise

died versus 10 % newly-established, then it will take only 10 years for renewing that economy.

In reality, because of the lack of data, it is very difficult to directly analyze that kind of

indicator. Indirectly, it can be estimated through the growth rate and the rate of survival.

According to the 2003 survey data base, while only 36 percent of the firms surveyed in 1990

survived until 1996, 470 of the 750 firms covered in 1996 were still active in 2002, yielding a

survival rate of 63 percent (Ari Kokko, p 17). In addition to this survival number, through the

very high average of 25 growth rate of period 1996-2002 9, it could be said that the exit rate

and the newly established rate of SMEs in Viet Nam is quite high. That means the Viet Nam

economy is very turbulent for SMEs. The main reason simply is that during the past ten years,

Viet Nam Government has changed the legal system as well as the business environment

dramatically to adapt the international integration requirements. These changes have positively

affected the operation and performance of SMEs as well as other firms, hence creating thedynamic environment for all business circles in Viet Nam.

Export involvement

The contribution of SMEs to exports, in some extent, relates to their capability for the

internationalization. It is also a critical factor measuring the international competitive

performance of firms.

9 Calculation of author on data from General Statistics Office.

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export

0

5

10

15

20

25

30

35

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

year

export

Figure 3: The export development during 1996-200510

SMEs involve to export mainly via two sources: direct and indirect (subcontracting with large

firm from state-own and FDI area). There is a difficulty to evaluate these two types of export

involvement of Viet Nam SMEs due to lack and divergence of data. In Viet Nam, despite the

high growth rate of export during the last few years, average of nearly 25 percent during 1996-

2002 (page 9), the ratio of export volume of SMEs out of the countrys total export is

relatively low.

According to the survey as part of a long-term collaboration project between the Institute of

Labor Sciences and Social Affairs (ILSSA) at the Ministry of Labor, Invalids, and SocialAffairs, Hanoi, and the Stockholm School of Economics (SSE) in 2003 and cover seven

provinces (among total 61 provinces), the notable observations are perhaps that the average

SME only exports 16 percent of its output, and that only three percent of the firms are

involved in any direct exports. However, according to the Ministry of Trade of Viet Nam

(MOT), the relative contribution of SMEs to export is 50%, but it is difficult to examine this

relative involvement percentage. It would be concluded that SMEs in Viet Nam is very limited

in direct export (see figure 4) compared to those in other countries in the region

10 Source: Ministry of Trade of Viet Nam

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0

10

20

30

40

50

60

Figure 4: International comparison of SMEs export involvement11

The limit in export involvement of SMEs is due to the following reasons: First, the scale of

private enterprises is often small therefore their business activities are only limited in theirregion. Second, they still lack of knowledge and experience on the international trade practices.

As such, most of the private enterprises are involved in exports by subcontracting for SOEs or

foreign invested enterprises (or FDI enterprises). Final reason for low export percentage might

come from that there is no statistic on indirect export of household area in production of the

handicraft products, processing aquatic and agricultural products for export while these

products keep high contribution to Viet Nam export volume. According to the statistics in GTZ

website http://www.sme.com.vn, up to 2004 there were 2,4 million households. So, in reality,

the contribution of SMEs to export is larger than the survey number and mostly through

indirect under subcontracting (both formal and informal), but it is very difficult to give the

exact number.

As a result, these above analyses suggest that the export involvement of Viet Nam SMEs is not

in line with the dramatics export growth of Viet Nam in the last decade as well as the potential

of SMEs in Viet Nam. On the other hand, it implies that supports for business and export

promotion from policy have been likely ineffective and has not reached by the SME

community.

11 Source: - Viet Nam based on survey as part of a long-term collaboration project between the Institute of LaborSciences and Social Affairs (ILSSA) at the Ministry of Labor, Invalids, and Social Affairs, Hanoi, and theStockholm School of Economics (SSE) in 2003 and cover seven provinces (among total 61 provinces)

- Other countries: White paper on SMEs in Taiwan, 2005, page 50.

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Loss ratio

The rate of loss is also an important index to evaluate the performance of SMEs. This figure

examines the capability of firms in line with the business environment.

0.00

10.00

20.00

30.00

40.00

50.00

60.00

%

year

SOEs

SMEs

FDI

SOEs 17.45 16.69 14.67

SMEs 18.20 18.77 20.44

FDI 54.03 49.88 49.83

2001 2002 2003

Figure 6: Loss percentage of all enterprises from 2001-2003 in Viet Nam12

As in figure 6, during three successive years, the SMEs rate of loss in has been always lower

than FDI enterprises. Moreover, among three ownership categories, the SOEs always has less

loss ratio than the others. These figures seem to be not in line with the contribution of FDI and

SMEs enterprises, and desire of Viet Nam government to reform and equitize the inefficient

SOEs sector. The explanation of these figures might come from some reasons. Firstly, the

business environment in Viet Nam is vibrant and turbulent. It creates high risks and also

opportunities for foreign investor (high growth rate of FDI versus high loss ratio) and also for

SMEs. Secondly, the business environment, especially, on access to credit, land usage

currently only benefit SOEs (see next section). Last but not least, the data of SOEs may not be

accurate due to the non-transparency in accounting and finance report system of SOEs13

Productivity

Improved productivity is an important outcome of innovation. SMEs are often regarded asinnovators. SME innovation is not necessarily at a basic research level, but more at a product

and process application level. Productivity, thus, gives some measures of the performance of

12 Source: General Statistics Office of Viet Nam13 SMEs and FDI enterprise use different system than SOEs. Vietnam is on the way to reform the SOEs

accounting and finance report system to adapt international standard.

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SMEs as innovators. Productivity is notoriously difficult to measure, interpret and compare

(Chris Hall and Charles Harvie). In this section, we will only examine the productivity of

SMEs based on the comparison with SOEs, FDI enterprises in Viet Nam. The international

comparison is not available because of lack of comparable data between Viet Nam and other

countries.

Poductivity comparison (2002)

275

214

327

137

43

247

0

50

100

150

200

250

300

350

1. SOEs 2. SMEs 3. FDI enterprises

millio

nVNDperemployee revenue per

employee

assets per

employee

Figure 5: Productivity comparison between ownership categories in Viet Nam14

Among three types of ownership as in figure 5, SMEs has the lowest number of average

revenue and assets per employee. The highest ones are belong to FDI enterprises.

These show that SMEs in Viet Nam has low level of productivity compared to SOEs and FDI

enterprises. Despite the high growth rate in the last decade, SMEs has been very limited in

their capabilities and productivity. This, partly, due to the reason that private sector in Viet

Nam has been recently developed under the market mechanism oriented reform of Viet Nam

government. The number in figure 5 also examines that the innovation and energy of Viet

Nam economy has derived from FDI enterprises, while the role of SMEs as innovators is not

strong as its nature in Taiwan or some other developed countries.

As a result, SMEs which exhibit low productivity often survive by avoiding direct competition

with the larger ones, which are more productive firms. They do business by entering small,niche markets or catering to a lower quality segment of the market. Low labor productivity

translates into lower revenue per employee (see figure 5).

14 Source: General Statistics Office of Viet Nam

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Labor and management skills

This section only concentrates on the survey results, giving some conclusions about the status

of labor and management skill in SMEs. There is not enough data available for comparison

with those in SOEs and FDI enterprises as well as international comparison.

It has been found that the main reason for low productivity of SMEs is due to low in

quality and education of their labors, especially in very small business. Laborers are mostly

trained by mouth. According to the survey done by MPDF15

in 1999 about SMEs in Vietnam,

74.8% laborers of SMEs did not complete high schools, only 5.3% of the laborers educated

from universities. In addition, laborers were not trained and improved professionally; As a

result, product is low in quality and output.

Table 3: Comparison between VN and Taiwan on education of hired employees

16

Education of hired employees Viet Nam (1999) Taiwan(2003)

Below high school level 74.8% 31%

Vocational level N/A 32%

College, university and above 5.3% 27%

The survey of MPDF also reflected the education of the enterprises owners. 42.7% of the

enterprises owners were the ones who used to work for state owned sector. More than 60%

were in the age of over 40 and 48.2% of the owners did not have certificates while only 31.2%

of such owners did have certificate from college, university and higher institutions. As a result,SMEs lack those persons who have management skills.

Professional and the management skills in SMEs are very low relative to the required demand.

A recent survey also shows that only 5.13% of total labors are graduates, concentrating mainly

on liability and share holding companies; more than 60% of total managers in SMEs are over

60 years old; about 48.4% of total managers are not trained professionally 17. This resulted

from (1) lack modern market-oriented management experience of the market economy, (2)

weakening vocational system and (3) heavily theoretical approach at school rather than a

practical problem solving approach.

In short, weakening laborers and management skills are big obstacles for SMEs development

15 MDPF-Mekong Private Sector Development Facility16 White paper on SMEs in Taiwan, 2005, p 86, Viet Nam: MPDF Survey in 1999 about SMEs in Vietnam17

Research Report On Improving Macroeconomic Policy and reforming Administrative Procedures to PromoteDevelopment of Small and Medium Enterprises in Vietnam, ibid, p. 26

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that requires much time and investment to improve. To promote SMEs, government should pay

attention to assist SMEs by vocational or special training programs.

4. Main exogenous constraints and obstacles faced by SMEs in Viet Nam

The previous section already examined the performance of SMEs Viet Nam, finding the level

of SMEs Viet Nam on its employment creation, productivity, labor and management skill

export capability, loss, exit and survival rate, loss ratio. To find more about the exogenous

impacts to SMEs, this section will show some present major exogenous constraints and

obstaclesto the development of SMEs in Viet Nam.

Access to credit

Obviously, financial resource including credit plays an important role in the establishment andoperation of enterprises. Enterprises can access to various sources of credit, which could be

from formal sources (i.e. loan from commercial, joint stock, or development banks, or form

assistant funds, etc) and informal sources (i.e. loan from family, relatives, friends, partners,

etc) (GTZ and CIEM).

Formal credit source

49%

15%

17%

11%

0% 10% 20% 30% 40% 50% 60%

State commercial bank

J oin stock banks

Assistance development fund

Others

63%

25%

22%

0% 10% 20% 30% 40% 50% 60% 70%

Loans fromfamily

and friends

Loans from

partners

Others

informal source

Figure 6: informal and formal credit access18

18 Source: GTZ survey in 2005 in 7 provinces in Viet Nam

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As in figure 6, for SMEs in Viet Nam, the finance source from family and friends (63%-

informal) and from state commercial banks (49%- formal) are the most popular sources that

SMEs have accessed successfully. That high percentage of getting loan from informal also

implies that access to formal credit is still a difficult approach for SMEs. Such difficulty of

access to the resources of organized credit facilities can be recognized as a major obstacle tothe operation and business expansion of the SMEs.

Difficulties

38%

62%

18%

15%

12%

0% 10% 20% 30% 40% 50% 60% 70%

Troublesome procedures

High interest rates/ fees

No collateral or low value colleteral

Unfair treatment compared with SOEs

Others

Figure 7: Difficulties in credit access19

A survey conducted by Vietnam Ministry of Labors, War Invalids and Social Affairs survey in

1999 Hanoi, Hai Phong and Dong Nai indicates that 69% of total medium enterprises and

47.9% % of total selected companies were facing capital shortage. Another survey of GTZ in

2005 has found that, after 6 years, the situation has been improved with only 37% SMEs

facing difficulties to credit resource. Of which 62 % complaint about the high interest rate,

38% about the troublesome procedure, 18% collateral and 15% about the unfair treatment

(with SOEs).

These complaints from SMEs shows that SMEs faced with the problems of high interest rate

mean high risks when they are getting loans from bank while the interest rate in Viet Nam is

not quite high. It could be explained that SMEs are not familiar with the habit to getting loanfrom bank. This also expressed by high complaints of SMEs about banking troublesome

procedures. In Viet Nam, almost very small/micro SMEs, especially household, have habit to

access investment funding via informal ways. Moreover, the low percentage of giving loan to

19 Source: GTZ survey in 2005 in 7 provinces in Viet Nam

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SMEs by private, joint stock banks compared to state - owned banks (15% versus 49%) show

that the bank systems is not dynamic, depending much on state owned banks20, the role of

private bank is still very limit.

Furthermore, the difficulties of SMEs in access to credit are also the same in some otheradvanced countries. But the reasons are somehow different. In Taiwan, according to 2004

Survey of Domestic Investment of Manufacturing Industry21, 32.59% of small and 31.29% of

medium enterprises have faced difficulties in acquiring funds. Of which, the reasons came;

from high interest rate is 47.73 % of small and 36.96% of medium; collateral is 43.37 % and

45.65 % respectively.

SMEs difficulties to access credit Taiwan Viet Nam

Collateral issues 43.37- 45.65% 18%

High interest rate 36.96 47.73% 62%

Table 4: SMEs difficulties to access credit22

Another problem for SMEs is that, they are unfairly treated compared to SOEs when trying to

access credit (15% responded by SMESs). This shows that although Viet Nam Government

has had some changes in the SOEs sector, it is not enough for innovation of economy. Without

continued reforms of the SOE sector, to reduce the privileges enjoyed by the leading state

firms, and without thorough reform of the financial system (state-owned ones), to raise the

share of long-term credits going to the private sector, it will be very difficult for Vietnamsdynamic SMEs to fulfill their potential as innovators for economy.

Land and land-use rights

Land for SME enterprise activities is lacking. Obtaining land use allocations or land leases for

SME offices and factories is fraught with many difficulties and, in many cases, is impossible

because means of acquiring and exercising land use rights are not clear and often not

recognized for SMEs. Especially in the case of industrial land, the rights to sell, buy, transfer,and mortgage land use rights for collateral are still not recognized for industrial land. Thus, in

a survey of 452 new investment projects in 2001, it was found that only 17 of the projects were

20 From 2005, Viet Nam started to equitize state-owned banks in order to improve the competitiveness of thesebanks (Vietcombank was the first large bank to start the equitization)21 White paper on SMEs in Taiwan, 2005, p 74.22 Source: White paper on SMEs in Taiwan, 2005, p 74; Viet Nam: GTZ Survey in 2005

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from the private sector. Although applications for land use allocations or land lease were

submitted by all 17 projects, only one of these projects was provided with land23.

Land-use rights are very important production means for SMEs; however, it causes a serious

problem in its legal status. The land-use rights problem results in higher land usage costs forSMEs. Land-use rights are a convenient form of collateral and so this problem results in higher

fund procurement costs for SMEs.

The land-use rights held by the SOEs were either allocated by the Government or are leased

under long-term leasing contracts. On the other hand, the non-state owned SMEs have very

limited access to land-use rights. It is very rare for them to have land-use rights allocated by

the Government. The most common cases are (1) the directors house also serves as the office

or production site, (2) leased from an individual, (3) leased from an SOEs, and (4) leased from

provincial Peoples Committee24.

The main problems for non-state owned SMEs involving in land-use rights are (1) lack of

information about the properties, (2) comparatively higher cost for land, and (3) increased fund

procurement costs. The first problem means that the SMEs have to shoulder additional costs in

searching for adequate properties for their production site while the SOEs are allowed to use

wide tracks of land in the cities and in many cases this land are not put to effective use. The

second major problem is that SMEs frequently have to lease their land-use rights from

individuals or SOEs, which means that the costs for their land-use rights are higher than thosepaid by the SOEs. There are three types of taxes on land-use rights: land use fees, land use tax

and land lease fees. The taxes on land-use rights allocated from the government are generally

the cheapest as payments are made based on the fixed rates. On the other hand, costs are

higher when land-use rights are leased from individuals or SOEs as the payments are based on

the prevailing market prices. Moreover, the leasing periods are usually short and so that the

SMEs have the risk of being forced from the land when the leases expires. The third problem

is that the land-use rights are the most effective means of collateral for receiving loans from a

bank. Accordingly, whether or not a company holds land-use rights will have a big impact on

its ability to procure funds. Legally the land-use rights leased from the Government can be

used as collateral. However, in the case of leases, the collateral value is set based on the lease

23 Research Report On Improving Macroeconomic Policy and reforming Administrative Procedures to PromoteDevelopment of Small and Medium Enterprises in Vietnam, ibid, pg 35-3624 Tran Thi Van Hoa, 2003, Tac dong cua cac chinh sach dieu tiet KT vi mo cua chinh phu den su phat trien cuaSMEs Vietnam, (English equiv: The impact of the Government macroeconomic policy on the development of

Vietnamese non-state owned SMEs)

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period paid in advance, and so if the lease period is long, the SMEs will need to have plenty of

capital to make the advance payment for the long lease period.

As a result of these difficulties in obtaining land, residences are also used for the production

and business purposes. Also as a result of the difficulties in obtaining land legally, there is asignificant land market operating unofficially and illegally.

Competitiveness and Access to International Markets

Access to both domestic and international markets is difficult for SMEs. Competitiveness of

SMEs remains at a very low level. Products of SMEs must compete with a large inflow of

smuggled imported goods with cheaper prices. The reasons for the above are:

- SMEs products quality often low compared to imports because the level of technology

is low, management skills are weak due to lack of training and modern management

experience, and Vietnam maintaining a protection policy which favors import

substitution which reduces the incentive to produce better quality goods and thereby

results in less competitive industries.

- Information about international market is very limited which results in poor

competitiveness and lost opportunities.

Most Vietnamese enterprises especially SMEs have difficulties maintaining competitiveness in

the global market because the costs of production are very high relative to other countries in

Southeast Asia including the following:

- High costs of internal shipping within the country possibly due to a lack of competition

among shipping companies and poor transportation infrastructure.

- High costs of Vietnamese management and professional personnel due to rates of

personal income tax on high income earners which are much higher than other

countries in the region.- Import duties on certain components which, cumulated together, are higher than for an

imported finished product.

- High transactions costs due to red tape such as complicated and time-consuming

bureaucratic procedures needed to obtain government approval for many business

transactions.

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- Costs of production in neighboring countries have declined relative to Vietnam due to

the greater devaluation of their currencies.

The tariff rates are so high that the profits from smuggling are enough to compensate for the

current risks of running afoul of enforcement measures. Vietnams high protective tariffscombined with lower production costs in nearby countries (Singapore, Thailand) have

created powerful incentives for smuggling resulting in a flood of cheaper smuggled goods into

the country.

SMEs information system.

Information about enterprises as a whole and SMEs in particular is very scattered, which

causes difficulties in the management of credit allocation and in State management of

enterprises and SMEs as a whole. Access to information about legal documents, markets,technological progress, etc is still limited. The reasons are:

- Registration records of enterprises are not opened to the public.

- Once registration is completed upon establishment of an enterprise, no regular

reports to the Company Registrar on a periodic basis are required. Thus, a

company may go out of business but remains registered for a long time.

- Vietnam does not have centralized; computerized register of all enterprises in the

country has not yet been established making it difficult for market actors to have

an easy way of knowing who they are dealing with.

The requirement for basic information has not become an essential part of the management

system for enterprises. Instead, a close relationship with relevant government officials and

politicians, as well as the rent-seeking behavior, is more important to enterprises.

5. Summery and policy recommendations

From the foregoing sections, we cansummarize that:

SMEs in Viet Nam has developed quickly in the last decade with the high growth rate

(average above 20% from 2001). SMEs is also subject to dynamics and turbulent

environment in the favorable condition that Viet Nam has strongly transformed its

economy into market mechanism with the target to join WTO in 2006. This marks the

promising environment for SMEs development in Viet Nam.

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Despite of the high growth rate, SMEs in Viet Nam also catch up at the low level in

performance compared to international level. There has been a big gap between SMEs

community in Vietnam and in other countries. Significantly contributing to the job

creation in the last ten years, but the employment percentage in SMEs sector has notreach the international average number (especially compared to other transition

economies). Just encouraged by reform process of Viet Nam in the last 20 years,

maturing in environment that favored SOEs, SMEs still lack of skilled labors,

managers, partially leading to low productivity, limit in export capability (both direct

and indirect) that means the low level of internationalization. This low performance

derived from many reasons but the important ones are from exogenous difficulties.

Although Viet Nam government in the last 10 years has changed dramatically the legalsystem toward promoting the economic development, encouraging the private, SMEs

sector, reforming and equitizing the state-owned enterprises, there have still some

obstacles that impact SMEs operation, these includes: Lack of funds and facilities to

access to formal credit, inefficient land legal framework, low level of competitiveness

and access to international market, lack of SMEs information system. These obstacles

vary in nature and have causal interaction. These are either directly or indirectly related

to the SMEs small capital size and poor ability to mobilize capital. Lack of credit and

capital, in general, leads to outdated technology, poor training and weak management

skills as well as the inability to obtain necessary information for business development.

Recommendations

Table 5 summarizes the SMEs policies mostly adopted in 20 APEC economies through the

survey in 2001. This is based on survey results drawn from research carried out for APEC

(Hall 2002) by one of the authors (Hall). It is based on the five broad policy areas: access to

information; finance; technology; human resource development (HRD); and market access. It

originally identified by the APEC SME Policy Level Group (PLG) as being of particularrelevance to the role of government in developing and implementing SME policy (Chris Hall

and Charles Harvie).

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Table 5: APEC policy survey for SMEs

Taiwan APEC %

GENERALAre policies designed in such a way as to NOT discriminate between SMEs and large firms?Are policies designed to discriminate in favor (or against) SMEs or specific groups (e.g. affirmative

action for minority or women entrepreneurs)Are any programs designed to meet special needs of SMEs (whether they discriminate or not)?

Are any programs targeted at any particular group of SMEs (e.g. SMEs as subcontractors tolarger firms, "picking winners", and export oriented SMEs, etc?)Aremost programs intended to provide or support a business environment which encourages

globally competitive SMEs?Is there a basic SME Act or "Magna Carta" which sets out obligations of govt to SMEs?Is there an agency or administration within govt with the primary responsibility for SMEs?

1

1

1

1

11

4060

90

70

90

4585

INFORMATION ACCESSIs there a single point where people can go for advice and referrals on where to get information

about govt regulations etc?Is there a single portal or entry point for people seeking advice on govt regulations and

requirements?Is there any govt support for providing firms (including SMEs) with access to intelligence and

information of a non govt nature (e.g. market research, technical information etc)

1

11

75

6080

FINANCE

Is there govt underwriting of credit guarantee for SMEs in domestic operations?Is there govt support (including credit guarantee) for SMEs engaged in exports?Is there govt support (tax concessions, pooled funds etc) for start-up and venture companies?Is there govt support (subsidized or regulated interest rates, etc) for SMEs or small business

generally?Is there any govt supported program in place to provide micro finance those (e.g. to ethnic or

minority groups) seeking to start a business?Are SMEs given any concessional or favorable tax rates (e.g. special exemptions on certain taxes,

reduced company tax rates etc)?

11111

1

4570705060

60

TECHNOLOGY

Does govt provide any support (tax concessions, access to public research institutions, publicincubators etc) for basic research

Does the govt provide support (incubators, underwriting, network or cluster support etc) for thecommercialization of innovations or start up of innovative companies?

Does the govt provide any programs to assist SMEs to adopt information technology and better

management systemsDoes the govt provide any programs to encourage the adoption of more efficient technology (e.g.pollution control, manufacturing processes etc)

1

1

1

1

85

85

85

85

HRDIs there govt support (e.g. part payment, loans, facilities, trainers, facilitators etc) for training or

consulting and advice to SMEs?Is there govt support (e.g. part payment, loans, advisors etc) for providing diagnostic services and

advice to SMEs?Is entrepreneurship or business a required subject in pre university schooling?

1

1

90

85

20

MARKET ACCESS

Are there export advisory services that are available to firms at less than full market cost?Is there govt support (e.g. part payment, loans, training etc) for networking or cluster start up or

cooperativesAre there business matching services provided by govt or supported by govt?

Is there any legal process or protection for SMEs suffering from unfair competition, predatoryactivity etc from large firms?

Is there reciprocal recognition of intellectual property rights (patents, licenses, copyright,trademarks etc) already established in another economy?

Are govt agencies required to procure a proportion from SMEs?Is there govt support for (financial support, infrastructure etc) for databases to allow large firms and

subcontractors to exchange information and opportunitiesAre non-domestic SMEs (i.e. not registered in that economy) able to access govt procurement or

govt sponsored networks (such as credit guarantee or subcontractor networks)?

1111

1

1

65707550

70

4055

25

Source: Hall (2002)

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The tables show a 1 in Taiwan column means there is a reasonably clear answer of yes to

the question/criterion indicated in the table. If it is blank, it indicates that the answer is no or

insufficient information to tell. The number in the APEC column gives the percentage of 20

APEC economies that responded yes to those questions/criterions (Chris Hall and Charles

Harvie).

This is the general picture of policy for SMEs adopted in APEC economies as well as in the

most popular one, Taiwan - the kingdom of SMEs.

Being APEC member, fully understanding the role of SMEs for economic and industrial

development, Viet Nam Government, based on APEC guideline, has been building the policies

for SMEs. However, in Viet Nam, the policies for SMEs have started to be motivated in recent

years. Begin with the general policy on small and medium size enterprises in Viet Nam - the

Decree number 90/2001/QD-TTg - issued by Government on 23/11/2000. In the same year,

the small and medium size enterprises management General Department also was established

under the Ministry of Planning and Investment. Up to now, a policy framework for SMEs has

established focus on general; finance; and partially on market access; human resource

development (HRD). All Viet Nam policies and government supports, up to this moment, can

be found at http://www.mpi.gov.vn. In addition, SMEs community in Viet Nam has received

the support from international donors projects such as those of World Bank, GTZ (Germany),

SIDA (Sweden), JICA (Japan) concentrated on human resource, information, market access.

Although all the policies of Viet Nam Government have followed the APEC guidelines and

contributed to improve the business environment for SMEs, but it has still some lacks

compared to table 5. Moreover, the lacks of legal transparency and detailed guidance of those

lead to some of legal documents could not be reached by SMEs community. Beside, thank to

Viet Nam is on the way of transforming its economy into market mechanism, there have some

other specific issues that can impact to SMEs operation like land right, state financing

system.

As analyses in the section three and section four about SMEs performance and exogenous

difficulties, it is recommended that Government should concentrate on following measures:

In order to build an environment that will enable SMEs to compete on a level playing

field, the Government agency (SMEs General Department) should examine and revise

those laws and regulations that create unfairness for SMEs, especially on land usage.

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Active Participation in International Economic Organizations (WTO, APEC), while

helping SMEs to respond to changes in the International Business Framework. In October

2006, Viet Nam will become the member of WTO. It is very important to help SMEs to

take advantages, avoid risks when Viet Nam joining WTO. It is necessary to continue to

issue more policies and government support programs in line with the APEC framework.

It is urgently necessary to create a transparent environment by legalizing more

specifically procedures in policy and regulation framework so that enterprises may know

exactly what they have to do, what they will benefit.

Upgrading the vocational training system: efficient vocational training system will help

SMEs in upgrading their labor skills, increasing their productivity.

Continue to create favorable condition for SMEs credit access: reforming the banking

system toward pushing up the equitization of state-owned banks; promoting the funding

habit of SMEs by training programs; setting up more local credit guarantee agencies;

developing new financing channels for start-ups in stead of current most favorable

informal channels such as loan from relatives, friends.

Pushing up the equitization of stateowned sectors, eradicating the conventional

advantages of SOEs compared to SMEs.

Consolidating the current policies to help the export involvement for SMEs (both direct

and subcontracting system).

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References

1.White Paper on SMEs in Taiwan, 2005, 2004,2003

2.The Internationalization of Vietnamese SMEs : Ari Kokko Fredrik Sjholm Working Paper

No 193 June 2004

3.APEC (1994), the APEC Survey on Small and Medium Enterprises, Chinese Taipei.

4.Hall, Chris, APEC (2002), Profile of SMEs and SME Issues 1990 - 2000, APEC, Singapore.

5.KOTRA (1999), a strategy for Internationalization of SMEs in the Asia Pacific Region:

Lessons form the empirical study on Korean and other APEC member economies, APEC,

Singapore.

6.Central Institute for Economic Management (CIEM), June 2002 Research Report On

Improving Macroeconomic Policy and reforming Administrative Procedures to Promote

Development of Small and Medium Enterprises in Vietnam

7.Stoyan Teney, Amanda Carlier, Omar Chaudry and Quynh Trang Nguyen. 2003. Informality

and the Playing Field in Vietnams business sector. IMF, World Bank and MPDF.

8.Tas, N. F., Oyen L. V., 1999-2000, Assistance to Industrial SMEs in Vietnam,

MPI/UNIDO project US/VIE/95/004, Unido publication.

9.Tran Thi Van Hoa, 2003, Tac dong cua cac chinh sach kinh te vi mo cua chinh phu vao su

phat trien cua DNV & N Vietnam, (English title: The impact of the Government

macroeconomic policy on the development of SMEs in Vietnam).

10.UNIDO, 1999, Research Report On Improving Macroeconomic Policy and reforming

administrative procedures to Promote Development of SMEs in Vietnam, Project

US/VIE/95/004.

11.Vu, Q.T, June 2000, Co che va chinh sach phat trine SMEs, (English title: Mechanism

and policy of SME development), speech in enterprise group study committee of Prime

Minister, Hanoi 1/6/2000

12.Webster, L., November 1999, SMEs in Vietnam: On The Road to Prosperity, Private

Sector Discussion Number 10, MPDF publication.

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13.Chris Hall and Charles Harvie, WP 03-05, May 2003, A comparison of the Performance

of SMEs in Korea and Taiwan: Policy implications for Turbulent Times.

14.MPDF, July 1999 Private Companies in Vietnam: A Survey of Public Perception, Private

Sector Discussion Number 9, MPDF publication

15.ILO/SIYB, Jan 2004, Entering a new market: Commercial banks and small enterprise

lending in Vietnam

16.Study Domestic investment: from business idea to reality baseline report, GTZ and

CIEM, Hanoi 2005

performance and obstacles of smes in viet nam

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