characteristics of the vietnamese business environment: evidence from a sme survey in 2015

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


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


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


Food Processing

.75

1

1.25

1.5

1.75G

row

th


Wood Processing

.75

1

1.25

1.5

1.75

Gro

wth


Fabricated Metals

.75

1

1.25

1.5

1.75

Gro

wth


Furniture

-2

-1.5

-1

-.5

0

.5

1

1.5

2

Jobs

gen

erat

ed


Food Processing

-2

-1.5

-1

-.5

0

.5

1

1.5

2

Jobs

gen

erat

ed


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


HH ent/Non-HH

Formal

Informal

0

.05

.1

.15

.2

.25

.3

Exi

t p

rob

ab

ility


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


Food Processing

0

.05

.1

.15

.2

.25

.3

Exi

t p

rob

ab

ility


Wood Processing

0

.05

.1

.15

.2

.25

.3

Exi

t p

rob

ab

ility


Fabricated Metals

0

.05

.1

.15

.2

.25

.3

Exi

t p

rob

ab

ility


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

characteristics of the vietnamese business environment: evidence from a sme survey in 2015

Economy & Finance