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: nvlong@mpt.gov.vn

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 framework for 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

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 the advantages 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 promoting economic 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 a particular 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.

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 and qualitative 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 USA Criteria All industries Manufacturing Japan Wholesale Retail Services Employees 1-500 1-300 1-100 1-50 1-100 Capital or Asset N/A < or =300M yen < or =100M yen < or =50M yen < or =50M yen Revenue N/A N/A N/A N/A N/A

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

Micro EU Small Medium Micro Australia Small Medium Manufacturing & transportation Korea Construction Commerce & services Singapore Manufacturing Services Manufacturing, construction Taiwan Commerce, Transport and other Services Manufacturing Thailand Malaysia Indonesia Wholesale Retail Manufacturing Small Medium Small Philippines Medium

<10 <50 <250 <5 5-19 20-199 <300 <200 <20 N/A <200 <200 <50 N/A N/A N/A <150 <20 <100 <100 <200

N/A N/A N/A N/A N/A N/A N/A N/A N/A < SIN $ 15M <SIN $ 15M < NT$80 M N/A <Baht 200M <Bah 100M t <Bah 60M t <Rgt 25M <$ 20,000 <$1M P $ 1.5M-15M P$ 15M-60M

N/A 7M EUR 27M EUR N/A N/A N/A N/A N/A N/A N/A N/A N/A < NT $100 M N/A N/A N/A <$US 6.6M <$ 100,000 <$5M N/A N/A

Source: Profile of SMEs and SME issues in APEC, 2002 & SMEs of OECD, 2000

Through the above table, different countries have different opinions about SMEs, but most of them based on the quantitative criterion to identify SMEs. Beside the number of employees at a given point of time, those countries also consider total assets, annual revenue as important criteria to classify SMEs. In addition, depending on the economic development and living standard, each country puts forward specific indices on the number of employees, legal capital or assets in identifying SMEs. Due to the technical characteristics, SMEs are defined differently in different industries and services. Definition in Viet Nam: The Decree 90/2001/ND-CP issued on 23rd November 2001 regarded a small and medium sized enterprise as the one whose equity capital is no more than VND 10 billion or is using no more 300 permanent workers. According to this Decree, the SMEs include: o Enterprises registered and operated under the Law on Enterprises in 1999 o Enterprises registered and operated under the Law on State-owned Enterprises o Enterprises registered by the Law on Cooperative in 1996.
4

o Householders 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, stateowned 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.

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 Taiwan 2 Year Viet Nam Growth rate percentage Taiwan Growth rate percentage 1998
N/A N/A N/A 1045117 2.42% 97.76

1999
N/A N/A N/A 1060738 1.49% 97.73

2000
35004 N/A 82.78 1070310 0.90% 98.08

2001
44314 26.60% 85.75 1078162 0.73% 98.18

2002
55236 24.65% 87.80 1104706 2.46% 97.72

2003
64526 16.82% 89.60 1146352 3.77% 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 SMEs 3 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).

Source:

- Taiwan: Ministry of Finance Taxation Data center - Viet Nam: General Statistics Office

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

100 80 60 40 20 0

97.9 70

98 88.3

99.48 84 66.21

99 84.3

99.8 70.2

99 60.6

99 82.8 59.4 29.4

12.17

SMEs popultion

Contribution to total employment

Figure 1: SMEs population and employment in some developing countries 4

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 developing countries and transition economies, the role in employment of SMEs in Viet Nam is also

Source: International: Profile of SMEs and SME issues in APEC, 2002 & SMEs of OECD, 2000; Viet Nam: General Statistics Office.

China is mentioned here because Viet Nam applied the same transition model like China to transform its economy into market mechanism.
7

modest (see figure 1 6 ). 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 GTZ SME 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 w orking in SMEs as a % of the total 90.0% 80.0% 70.0% 60.0% % 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 2000 2001 2002 year 2003 2004 29.4% 33.8% 36.6% 39.6% 50.3% VietNam Taiw an 77.7% 77.9% 77.6% 77.2%

Figure 2: Employed person working in SMEs as % of the total 8

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 same number for developed countries, but it does include the number for China and Indonesia to for the exact update of these two countries.

Result from Author calculation by simply linear regression

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

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 a turbulent 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 the dynamic 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.

Calculation of author on data from General Statistics Office.

export

35 30 25 20 15 10 5 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

export

year

Figure 3: The export development during 1996-2005 10

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 19962002 (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 Social Affairs, 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

10

60 50 40 30 20 10 0

Figure 4: International comparison of SMEs export involvement 11

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 their region. 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.

Source: - Viet Nam based on 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 Social Affairs, Hanoi, and the Stockholm 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.

11

11

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.
60.00
%

50.00 40.00 SOEs 30.00 20.00 10.00 0.00 SOEs SMEs FDI
year

SMEs FDI

2001 17.45 18.20 54.03

2002 16.69 18.77 49.88

2003 14.67 20.44 49.83

Figure 6: Loss percentage of all enterprises from 2001-2003 in Viet Nam 12

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 SOEs 13 Productivity Improved productivity is an important outcome of innovation. SMEs are often regarded as innovators. 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

13

Source: General Statistics Office of Viet Nam 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.

12

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)
350 327 275 247 250 200 150 100 50 0 1. SOEs 2. SMEs 3. FDI enterprises 43 137 214 revenue per employee assets per employee

million VND per employee

14

300

Figure 5: Productivity comparison between ownership categories in Viet Nam 14

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).

Source: General Statistics Office of Viet Nam

13

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 MPDF 15 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 Below high school level Vocational level College, university and above Viet Nam (1999) 74.8% N/A 5.3% Taiwan(2003) 31% 32% 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
MDPF-Mekong Private Sector Development Facility White paper on SMEs in Taiwan, 2005, p 86, Viet Nam: MPDF Survey in 1999 about SMEs in Vietnam 17 Research Report On Improving Macroeconomic Policy and reforming Administrative Procedures to Promote Development of Small and Medium Enterprises in Vietnam, ibid, p. 26
16

15

14

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 obstacles to the development of SMEs in Viet Nam.

Access to credit Obviously, financial resource including credit plays an important role in the establishment and operation 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

Others Assistance development fund Join stock banks State commercial bank 0%

11% 17% 15% 49% 10% 20% 30% 40% 50% 60%

Others Loans f rom partners Loans f rom f amily and f riends 0% 10% 20%

22%

25%

63% 30% 40% 50% 60% 70%

inf ormal source

Figure 6: informal and formal credit access 18

18

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

15

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 to the operation and business expansion of the SMEs.
Difficulties 12% 15% 18% 62% 38%

Others Unfair treatment compared w ith SOEs No collateral or low value colleteral High interest rates/ fees Troublesome procedures

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

Figure 7: Difficulties in credit access 19 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 loan from 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

16

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 banks 20 , the role of private bank is still very limit. Furthermore, the difficulties of SMEs in access to credit are also the same in some other advanced countries. But the reasons are somehow different. In Taiwan, according to 2004 Survey of Domestic Investment of Manufacturing Industry 21 , 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 Collateral issues High interest rate Taiwan 43.37- 45.65% 36.96 47.73% Table 4: SMEs difficulties to access credit 22 Viet Nam 18% 62%

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 Vietnams dynamic 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
From 2005, Viet Nam started to equitize state-owned banks in order to improve the competitiveness of these banks (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
20

17

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 land 23 . 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 for SMEs. 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 Committee 24 . 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 those paid 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
Research Report On Improving Macroeconomic Policy and reforming Administrative Procedures to Promote Development of Small and Medium Enterprises in Vietnam, ibid, pg 35-36 24 Tran Thi Van Hoa, 2003, Tac dong cua cac chinh sach dieu tiet KT vi mo cua chinh phu den su phat trien cua SMEs Vietnam, (English equiv: The impact of the Government macroeconomic policy on the development of Vietnamese non-state owned SMEs)
23

18

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 a significant 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.

19

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 tariffs combined 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 can summarize 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.
20

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 not reach 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 legal system 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 particular relevance to the role of government in developing and implementing SME policy (Chris Hall and Charles Harvie).

21

Table 5: APEC policy survey for SMEs

Taiwan GENERAL Are 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 to larger firms, "picking winners", and export oriented SMEs, etc?) Are most 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? APEC % 40 60 90 70 90 45 85

1 1 1 1 1 1

INFORMATION ACCESS Is 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) 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)? TECHNOLOGY Does govt provide any support (tax concessions, access to public research institutions, public incubators etc) for basic research Does the govt provide support (incubators, underwriting, network or cluster support etc) for the commercialization of innovations or start up of innovative companies? Does the govt provide any programs to assist SMEs to adopt information technology and better management systems Does the govt provide any programs to encourage the adoption of more efficient technology (e.g. pollution control, manufacturing processes etc) HRD Is 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 1

75 60 80

1 1 1 1 1 1

45 70 70 50 60 60

1 1 1 1

85 85 85 85

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 cooperatives Are there business matching services provided by govt or supported by govt? Is there any legal process or protection for SMEs suffering from unfair competition, predatory activity 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 opportunities Are 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)?

1 1 1 1 1 1

65 70 75 50 70 40 55 25

Source: Hall (2002)

22

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.

23

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).

24

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.

25

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

26