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Characteristics of the Vietnamese Business
Environment: Evidence from a SME Survey in 2015
John Rand, Smriti Sharma, Finn Tarp, and Neda Trifkovic
Hanoi, 9 November, 2016
Background, Sampling and Data
Background
• SME survey 2005, 2007, 2009, 2011, 2013 and now 2015
• Ten provinces
• Approximately 2,500 non-state manufacturing enterprises each year. Proportional sampling (Cochran, 1977). Representative at the province level.
• Four questionnaires:
• Main (firm level), Employee (sub-sample), Economic accounts and Exit
• This presentation is on key trends in the 2015 data.
• Joint effort of UNU-WIDER, CIEM, DoE (University of Copenhagen) and ILSSA.
Data (1)
Interviewed in 2015 Interviewed in 2013
Ha Noi 296 285
Phu Tho 254 259
Ha Tay 371 347
Hai Phong 219 190
Nghe An 340 347
Quang Nam 171 167
Khanh Hoa 99 90
Lam Dong 92 88
HCMC 653 622
Long An 133 136
Total 2,628 2,531
Note: The balanced panel includes 2,097 firm observations each year.
Data (2)
• 72 percent are microfirms (1-9 full time employees)
• …. and some of theseare informal.
Micro Small Medium Total Percent
Ha Noi 166 111 19 296 (11.3)
(56.1) (37.5) (6.4) (100.0)
Phu Tho 239 10 5 254 (9.7)
(94.1) (3.9) (2.0) (100.0)
Ha Tay 274 80 17 371 (14.1)
(73.9) (21.6) (4.6) (100.0)
Hai Phong 151 48 20 219 (8.3)
(68.9) (21.9) (9.1) (100.0)
Nghe An 288 39 13 340 (12.9)
(84.7) (11.5) (3.8) (100.0)
Quang Nam 146 20 5 171 (6.5)
(85.4) (11.7) (2.9) (100.0)
Khanh Hoa 72 19 8 99 (3.8)
(72.7) (19.2) (8.1) (100.0)
Lam Dong 69 20 3 92 (3.5)
(75.0) (21.7) (3.3) (100.0)
HCMC 377 207 69 653 (24.8)
(57.7) (31.7) (10.6) (100.0)
Long An 106 22 5 133 (5.1)
(79.7) (16.5) (3.8) (100.0)
Total 1,888 576 164 2,628 (100.0)
Percent (71.9) (21.9) (6.2) (100.0)
Note: Figures in number of firms and for each location the share of firms in each size category (group
percentages in parenthesis). Micro: 1-9 employees; Small: 10-49 employees; Medium: 50-299 employees
(World Bank definition).
Selected highlights
SME growth and dynamics
The link to formality
Perceived Constraints
0
5
10
15
20
25
Shortage ofcapital/credit
Current productshave limited
demand
Too muchcompetition
Inadequatepremises/land
No constraints
• The Usual Suspects: (i) Credit, (ii) Limited Demand and (iii) Competition• But improvements: Credit: 45% in 2011, 30% in 2013 and 24% in 2015
Firm Dynamics
• Micro likely to stay micro
• … but much more formalization
• … but has not yet materialized in increases in ”graduation” rates
Micro
15 Small 15
Medium
15 Total Percent
Micro 13 1,408 103 2 1,513 (72.2)
(93.1) (6.8) (0.1) (100.0)
Small 13 90 345 35 470 (22.4)
(19.1) (73.4) (7.4) (100.0)
Medium 13 1 23 90 114 (5.4)
(0.9) (20.2) (78.9) (100.0)
Total 1,499 471 127 2,097 (100.0)
Percent (71.5) (22.5) (6.1) (100.0)
Note: Percentage in parenthesis.
Employment Growth
• Increase in total employment of 5.2 per cent over the two-year period 2013-15.
• But not equally distributed along the firm size dimension
• Non-HH versus HH
• Formal versus Informal
HH enterprise
Non-HH
.75
1
1.25
1.5
Firm
Gro
wth
5 10 30 100Firm size (permanent full-time employees)
HH ent/Non-HH
Informal
Formal
.75
1
1.25
1.5
Firm
Gro
wth
5 10 30 100Firm size (permanent full-time employees)
kernel = epanechnikov, degree = 0, bandwidth = .8, pwidth = .6
Formal/Informal
Job Creation
• Job Creation
• The Role of Informal Firms?
• Initiatives
Job creation by firm size
Formal
Informal
-3
-2.5
-2
-1.5
-1
-.5
0
.5
1
1.5
2
2.5
3
Job
s g
en
era
ted
5 10 30Firm size (permanent full-time employees)
Growth and Job Creation, by Rural/Urban
• Job creation for mid-size firms especially in rural areas
Urban
Rural
-.5
0
.5
1
1.5
2
2.5
3
3.5
4
4.5
5
Job
s g
en
era
ted
5 10 30 100Firm size (permanent full-time employees)
Growth and Job Creation, by Sector
• Job creation especially within food processing
• However, effects highly firm size dependent.
.75
1
1.25
1.5
1.75
Gro
wth
5 10 30 100Firm size (permanent full-time employees)
Food Processing
.75
1
1.25
1.5
1.75G
row
th
5 10 30 100Firm size (permanent full-time employees)
Wood Processing
.75
1
1.25
1.5
1.75
Gro
wth
5 10 30 100Firm size (permanent full-time employees)
Fabricated Metals
.75
1
1.25
1.5
1.75
Gro
wth
5 10 30 100Firm size (permanent full-time employees)
Furniture
-2
-1.5
-1
-.5
0
.5
1
1.5
2
Jobs
gen
erat
ed
5 10 30Firm size (permanent full-time employees)
Food Processing
-2
-1.5
-1
-.5
0
.5
1
1.5
2
Jobs
gen
erat
ed
5 10 30Firm size (permanent full-time employees)
Fabricated Metals
Exit Probabilities, by Firm Size
• Annual exit rate of 8.2 per cent (lower than exit rates observed between 2009 and 2013).
• Non-HH vs. HH
• Formal vs. Informal
HH ent
Non-HH
0
.05
.1
.15
.2
.25
.3
Exi
t p
rob
ab
ility
5 10 30 100Firm size (permanent full-time employees)
HH ent/Non-HH
Formal
Informal
0
.05
.1
.15
.2
.25
.3
Exi
t p
rob
ab
ility
5 10 30Firm size (permanent full-time employees)
Formal/Informal
Exit by Location and Sector
Urban
Rural
0
.05
.1
.15
.2
.25
.3
Exit
pro
bab
ility
5 10 30 100 300Firm size (permanent full-time employees)
0
.05
.1
.15
.2
.25
.3
Exi
t p
rob
ab
ility
5 10 30 100Firm size (permanent full-time employees)
Food Processing
0
.05
.1
.15
.2
.25
.3
Exi
t p
rob
ab
ility
5 10 30 100Firm size (permanent full-time employees)
Wood Processing
0
.05
.1
.15
.2
.25
.3
Exi
t p
rob
ab
ility
5 10 30 100Firm size (permanent full-time employees)
Fabricated Metals
0
.05
.1
.15
.2
.25
.3
Exi
t p
rob
ab
ility
5 10 30 100Firm size (permanent full-time employees)
Furniture
Exit rates lower in rural than in urban areas (although not well-determined)Note also sector differences in exit rates: firms in food processing have lower exit rates (even conditional on other firm level attributes) than most other sectors. Very different dynamics compared to previous years.
Informality and informal payments
Distribution of firms by (in)formality
Per cent Number Per cent Number
Formal (total) 71.3 1,804 89.99 2,365
Formal (balanced) 70.5 1,479 97.09 2,036
• Astronomical increase in formality between 2013 and 2015.
• May be explained by Law on Investment and Law on Enterprises passed in November 2014.
• Over 90 percent of informal firms are micro firms, in both years.
Firm dynamics and formality
Firm growth Firm exit
Firm size -0.098*** -0.020**
(0.008) (0.008)
Formal 0.096*** 0.032
(0.018) (0.020)
Location controls Yes Yes
Sector controls Yes Yes
Observations 2,087 2,466
• Firm growth is positively associated with formal status.
• Formality does not matter for firm exit.
How many enterprises make informal
payments?2013 2015
All firms 936
(44.6)
896
(42.7)
Formal firms 792
(84.6)
877
(97.9)
Informal firms 144
(15.4)
19
(2.1)
• Small insignificant change in incidence of informal payments.
• Formal and larger firms more likely to make payments: in line with Rand and Tarp (2012) who find that the “bribes to hide” hypothesis is not confirmed in Vietnamese context.
• Approx. 70 percent of firms made such payments 2-5 times in the past year.
Reasons for informal payments
0
5
10
15
20
25
30
35
40
45
To get connected topublic services
To get licenses andpermits
To deal with tax and taxcollectors
To gain governmentcontracts
To deal with customs Other reasons
2013 2015
Informal payments, firm growth and firm
exit
• Informal payment is not significantly associated with either firm growth or firm exit.
Firm growth Firm exit
Firm size -0.102*** -0.020**
(0.009) (0.008)
Formal firm 0.090*** 0.028
(0.018) (0.020)
Informal payment 0.022 -0.011
(0.016) (0.016)
Location controls Yes Yes
Sector controls Yes Yes
Observations 2,087 2,466
Investments and credit access
Investments
• Higher share of investments compared to 2013
• 34% new and 64% repeated investments compared to 2013
• 725 firms (around 35% of the sample) did not make any investment in the past four years
• Increasing in enterprise size and location in rural and northern provinces
47
49
0
10
20
30
40
50
60
70
80
90
Micro Small Medium HH Non-HH Urban Rural South North All
2013 2015
How was the investment financed?
• Main source of finance for new investments are formal loans and retained earnings
• Higher share of new investments financed by own capital and lower share from informal loans
• Micro and household-owned firms more likely to use retained earnings or informal loans
• Larger firms finance investments through formal loans (69%)
• Slight increase in the value of investments in land, equipment and machinery, and buildings
0
10
20
30
40
50
60
Owncapital
Bank loanor otherformal
financing
Informalloans
Other
Pe
r ce
nt
2013 2015
Credit
2013
(Full sample)
2013
(Balanced sample)
2015
(Full sample)
2015
(Balanced sample)
Yes No Yes No Yes No Yes No
Enterprise
applied
for formal
loan
% 25.8 74.2 25.3 74.7 24.6 75.4 25.1 74.9
Obs. 652 1,878 74.7 1,567 646 1,982 527 1,570
Problems
getting
loan
% 23.9 76.1 23.5 76.5 15.0 85.0 14.6 85.4
Obs. 155 495 124 404 97 549 77 450
Source: Authors’ calculations based on SME data.
Why enterprises do not apply for loans?
0
10
20
30
40
50
60
Inadequatecollateral
Don’t want to incur debt
Process toodifficult
Didn’t need one
Interest ratetoo high
Alreadyheavily
indebted
Other
2013 2015
Formal and informal loans in 2015
• Informal loans are more common than formal (35% informal vs. 25% formal loans)
• 30% of firms have both types of loan
0 10 20 30 40 50 60 70 80 90
No
Yes
Overall
Form
al
Informal Formal Informal Yes Informal No
Production, technology, and labour
productivity
Diversification and innovation
• An average Vietnamese SME is specialised (only 11.6% of firms produced more than one product)
• New product development (Innovation 1) has largely increased but improvements of existing products (Innovation 2) have declined
• Firms from the food and fabricated metal sectors tend to diversify and innovate more than other sectors
Diversification
(More than one 4-digit
ISIC)
Innovation 1
(New product development)
Innovation 2
(Improvement of existing
product)
2013 2015 2011 2015 2013 2015
All 11.1 11.6 3.96 23.8 16.4 13.2
Micro 9.1 10.1 3.19 23.9 12.9 10.0
Small 16.4 14.6 4.71 22.0 24.0 19.4
Medium 15.8 18.3 8.00 28.0 30.2 28.7
Urban 9.9 8.3 5.14 18.8 19.0 15.1
Rural 12.1 14.2 3.07 27.7 14.4 11.8
Industrial zone 9.8 9.0 3.19 24.7 15.4 16.7
Not in the
industrial zone
12.2 13.6 4.51 23.0 17.2 10.5
New technology adoption
0
2
4
6
8
10
12
14
16
18
All Urban Rural Micro Small Medium
Pe
r ce
nt
2013 2015
Firm revenue and profits by
diversification and innovation status
05
10
15
Reve
nu
e (
ln)
0 100 200 300Firm size
Diversification
05
10
15
0 100 200 300Firm size
Innovation 1
05
10
15
0 100 200 300Firm size
Innovation 2-5
05
10
15
Pro
fit
(ln)
0 100 200 300Firm size
Yes No
Yes No
-50
510
15
0 100 200 300Firm size
Yes No
Yes No
-50
510
15
0 100 200 300Firm size
Yes No
Yes No
Labour productivity growth
0
5
10
15
20
25
All Micro Small Medium Urban Rural South North
Labour Productivity 1 Labour Productivity 2
• LP1 is real revenue per full-time employee and LP2 is real value added per full-time employee
• Larger urban enterprises show advantages over smaller ones, with higher values of both real revenue and value added per employee
• LP1 has higher growth than LP2
Certification and trade
Quality standards in 2015
3.7
12.6
0
10
20
30
40
50
60
70
80
90
100
All Micro Small Medium Exporting Notexporting
Non-HH HH
International certificate Domestic certificate
Do customers require that enterprises
certify standards?
International standards Domestic standards
2013 2015 2015
No. % No. % No. %
No 67 36.2 42 43.8 189 57.1
Yes 118 63.8 54 56.3 142 42.9
Total 185 100 96 100 331 100
Environmental Standards Certificate
(ESC)
16.413.2
0
10
20
30
40
50
60
70
All Micro Small Medium Household Private Cooperative LLC JSC
2013 2015
Firm performance and application of
international standards
05
10
15
Re
al r
eve
nu
e (
ln)
0 100 200 300Firm size
(a)
-20
24
68
Re
al p
rofit
pe
r e
mp
loye
e (
ln)
0 100 200 300Firm size
(b)0
51
0
Re
al l
ab
ou
r co
sts (
ln)
0 100 200 300Firm size
(c)
12
34
56
La
bo
ur
pro
du
ctiv
ity
(ln
)
0 100 200 300Firm size
(d)
No standards Standards
No standards Standards
Sales structure and certification
0 5 10 15 20 25 30 35 40 45
Same commune
Same district
Same province
Other province
ExportingInternational certificateDomestic certificate
Conclusion and summing-up
Selected Conclusions (1)
• The 2015 SME data confirm that a general improvement has taken place in several important dimensions in the business environment in Viet Nam.
• Formalization of business entities has increased significantly since 2013. Informal household firms do not bring the needed dynamics into the overall business environment.
– Job creation in a continuously vibrant business environment will have to come from formalized SMEs in the future.
– The government is therefore advised to continue and to the extent possible even intensify current formalization policies.
• Informal payments remains a feature of doing business in Vietnam, but distort natural creative destruction processes.
– Implies that government in collaboration with business associations have a key role to play in “breaking the vicious cycle”.
– Information campaigns and other concrete steps to combat existing bribe-paying practices are needed.
• Differential and limited credit access continue to pose difficulties for inclusive growth.
– The government needs to contribute to and deepen access to credit, on the one hand, and to intensify efforts to assist firms in generating bankable projects throughout the country, on the other hand. Both supply and demand matter.
• SMEs are often highly specialized.
– Critically important that enterprises do not get trapped into uncompetitive activities and products that are not developed
– The government needs to revisit existing technology initiatives and consider how they can be strengthened.
Selected Conclusions (2)• Employment growth has generally picked up to pre-crisis levels and firm exit rates have gone down.
– This is encouraging and is testament to the sensible macroeconomic policy stance Viet Nam has taken in response to the global financial crisis.
– However, although Viet Nam has so far done well in reaping growth from capital investment. In the years to come technology upgrading and improvement are going to be key if Viet Nam is to avoid being caught in what is sometimes referred to as a growth trap.
• Vietnamese SMEs do not appear to be very active in foreign markets. This is not only illustrated by low export rates, but also by a low prevalence of internationally recognized standards.
– Existing literature and experiences elsewhere in Asia points to strong development benefits from increased exports – in combination with agglomeration and the development of firm capabilities.
– Firms learn by exporting, and increased learning is an essential element of efficiency, technological upgrading and growth.
– Government must therefore pay increased attention to the need for further developing enterprise access to export markets, both directly and, maybe even more importantly, indirectly as suppliers of inputs to larger enterprises that export.
– This will have to involve both the provision of information and specific clauses in for example agreements with foreign companies that can play a key role in furthering access to global markets.
– Another area that is calling for attention is standards and quality control, which has a proven impact on firms’ abilities to export to demanding global markets.
• The present report has provided insights into the current circumstances under which SMEs operate, as well as the constraints and opportunities they face.
• The conclusions are certainly more positive than two years ago. At the same time, many challenges remain.
www.wider.unu.eduHelsinki, Finland