Vietnam: Promoting A Viable And Vigorous SME Sector

2005

Associate Professor Binh Tran-Nam

Economic reform since 1986 has produced impressive results in Vietnam. It has not only helped Vietnam to overcome its socio-economic crises in the 1980s but has also brought about rapid economic growth and poverty alleviation, solid macroeconomic stability, improved infrastructure and technology, and expanded international economic-political integration. Vietnam's economic performance has been publicly praised by prominent observers such as Professor Joseph Stiglitz, the 2001 winner of the Nobel Memorial Prize in economics, and Mr Jordan Ryan, the resident representative of UNDP in Vietnam.

Vietnam's economic growth is currently the fastest in Southeast Asia but it still trails China, South Korea, Taiwan and Thailand when these countries were at comparable stages of development. In order to achieve its target for the five-year planning period from 2001 to 2005, Vietnam must produce a real GDP growth rate of about 8 to 8.5 per cent in 2005. This is an ambitious target in view of economy's performance in recent years and the slowdown in FDI.

A closer examination reveals that Vietnam's economic growth is primarily attributable to the opening of the economy, particularly FDI, and the earnings of major export commodities such as crude oil, textiles and footwear. Vietnam's domestic market-building efforts in the aggregate do not match its performance in the external sector. In fact, unlike the experience of transition economies in Eastern Europe, the reported share of GDP by Vietnam's state sector has increased from about 33 per cent in 1991 to 40.1 per cent in 1995 and to 41.1 per cent in 2003. Although this partly reflects data problems and unrecorded activities in the informal sector, it nevertheless demonstrates the continuing dominance of state owned enterprises (SOEs) in Vietnam.

It is well known that Vietnam's SOEs are inefficient and making losses. Further, the establishment of conglomerates (t'ng cng ty) as a mechanism for capturing economies of scale has not worked. For example, among the 17 conglomerates in Vietnam, only five, namely oil and gas, post and telecommunication, electricity, rubber and shipbuilding, are profitable. The restructuring and equitization of SOEs have been slow and not as decisive as required. This indicates an urgent need for the complementary strategy of seeking to encourage the rapid development of the private sector, particularly small and medium sized enterprises (SMEs).

The concept of SME is unfamiliar to many Vietnamese despite the existence of a legal definition of an SME (less than 300 employees and about A$1 million registered capital) from a decree on support for development of the SME sector. SMEs are found in both the state and private sectors. Although no official statistics are available, it is estimated that 99 per cent of businesses in Vietnam meet this definition and thus qualify as SMEs.

As pointed out by economists, SMEs are important to the Vietnamese economy for several reasons. First, the sector has the ability to generate productive employment (due to its use of labour-intensive technologies) and to absorb workers made redundant by the reform of SOEs. Secondly, SMEs in the formal sector tend to perform well in terms of productivity. Thirdly, SMEs can create a flexible, resilient and interlinked industrial system and are, thus, a key agent of structural change. Finally, SMES are capable of achieving the broader social objectives of reducing income inequality and regional disparities.

Despite the significance of SMEs to the economy, its development in Vietnam has been slow and unstable. The real problems facing SMEs in Vietnam include: an incomplete legal and regulatory framework, lack of capital, low general level of technology, inadequacy of SME training system, poorly developed enterprise linkages, weak capacity to prepare business plans, high compliance costs arising from administrative red tape, official taxes and other charges, and inappropriate education and training of human resources.

In recent years, the Vietnamese government has officially acknowledged the important role of the SME. An example is Decree No 90/2001/ND-CP, issued on 23 November 2001. Chapter II of this decree spelt out the government's policies in support of SMEs with respect to investment, credit, production, marketing, export promotion and human resources training. A centre for assisting SMEs within the Ministry for Labour, War Invalids and Social Affairs has been moved and upgraded into a National SME Promotion Agency within the high profile Ministry of Planning and Development. There has also been international support, in particular funding from the UN Industrial Development Organization (UNIDO) and from Japan to the SME Partnership Group. These are positive developments in promoting SMEs as an engine of economic growth and mobilizing domestic investment. But further effort is still much needed to ensure a viable and vigorous SME sector in Vietnam.

WATCHPOINT: Vietnam's commitment to the promotion and support of SMEs will be tested by its ability to simplify the currently lengthy and complex administrative process for setting up businesses.

 

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