Keywords: Private economic sector, sustainable development of private sector.

1. Achievements and issues raised in the development of the private economy in Vietnam

The private economy in Vietnam has been identified as a type of economy outside the state-owned economic sector (excluding foreign-invested economy), including individuals, business households, and other types of private enterprises(1) based on private ownership of production means. Now, the types of the private sector in Vietnam can take diverse forms such as private enterprises, limited liability companies, private joint-stock companies or joint-stock companies with less than 50% of the state capital (referred to as private companies), and business household (non-agricultural and agricultural, forestry and fishery).

Thanks to the proper policies and guidelines of the Party and the State on the development of private sector, the number of private enterprises has gradually increased over the years. Between 2011 and 2019, there were nearly 900,000 newly registered private enterprises, and in the last 3 years (2017-2019), there were about 382,599 enterprises(2). The number of active enterprises also increased rapidly, from 321,416 enterprises in 2011 to 690,453 ones in 2019(3), an average annual increase of over 41,000 enterprises. In recent years, the private sector has contributed nearly 40% of the GDP, 40% of social investment capital, more than 35% of the state budget, over 25% of export turnover, over 30% of import turnover and is responsible for 85% of employment(4), contributing to economic restructuring and enhancing social security. However, with the objective of the private sector becoming an important driving force of the economy, and the goal of at least 1 million businesses by 2020, more than 1.5 million businesses by 2025 and 2 million by 2030; achieving higher growth than the average growth rate of the economy; contributing 50% of GDP in 2020, 55% in 2025, and 60-65% in 2030; 4-5% increase per year in labor productivity; narrow the gap in technology level; participating in the global production and value chains as stated in Resolution No. 10-NQ/TW in June 3, 2017, the sustainable development of private sector is facing the following issues.

First of all, the number of private enterprises has risen rapidly, but the rate of ceasing operations and dissolute businesses is also at a high level.

Although the number of private enterprises has increased rapidly over the years, accounting for a large proportion (nearly 97% of the total number of enterprises in the economy), the rate of bankruptcy and shutdown is also critical. In 2019, there was the highest number of newly registered private businesses in the past 9 years (138,100 businesses), and also a record number of suspending, dissolved and bankrupt businesses at the same time. Specifically, 28,700 businesses were suspended for a definite time (increase by 5.9% compared to 2018), and 43,700 businesses ceased their operation and were in progress for dissolution (increase by 41.7%). Among 16,800 officially dissolved businesses in 2019 (up 3.2% compared to 2018), 15,200 businesses (accounting for over 90%) had a capital size of less than 10 billion VND, and only 212 businesses (accounting for over 1%) had a capital of over 100 billion VND(5). Thus, the number of dissolved and ceased businesses accounted for 64.59% of the total number of newly-established businesses. This fact makes individual business households lack the motivation to develop into enterprises and makes it difficult to realize the goal of 1 million businesses by 2020 and 2 million by 2030.

Second, there is an absence of “economic leaders” to help the private economy join domestic and international production chains and value chains.

According to a report by the Ministry of Planning and Investment, only 1.7% of private companies are large-scale. The remaining more than 98% are medium, small, and micro-scale, of which micro businesses account for 78.2%. Most private enterprises are formed after a short period of accumulation, relying on their own capital, are less supported by the State and mainly operate in the field of real estate and services. Therefore, their management experiences, business models and relationships are limited. There were a few large-scaled private sector corporations, but they mainly operate in the field of finance, real estate, and consumer goods production. For non-agricultural individual business households, their average size of capital and labor is low, about 150.61 million VND with an average labor force of 1.69 people(6). Therefore, in general, the private sector is lacking “leading enterprises” that are strong enough to lead businesses to participate in domestic and international production chains and value chains. The Asian Development Bank’s Asian Development Prospect Report states that only 21% of Vietnamese private enterprises join the global supply chain, lower than Thailand (30%) and Malaysia (46%).

Third, the effectiveness of private sector is not high and the productivity of the private sector is lowest among economic sectors.

In the period of 2011-2017, the average labor productivity of private enterprises was only equivalent to 28.59% of state-owned enterprises and 58.62% of foreign-invested enterprises. In 2017, the productivity of the private enterprise went up and reached 228.4 million VND /labor, equal to 33.68% of state-owned enterprises and 69% of foreign-invested enterprises(7). The low productivity of private businesses has affected the overall productivity of the entire business sector. If we include business households, the productivity of the private sector is much lower, only equal to 17% of the state economic sector and 14.42% of the foreign-invested economic sector. The profitability of the private sector is also quite moderate. On average, during the period of 2011-2017, the return on assets of the private enterprise was only 3.8%, lower than the rate of all enterprises (nearly 6%). The same comparison is applied for the profit margin (1.7% versus 3.8%) and the return on capital (1.23% versus 2.63%)(8). Low profitability affects the accumulation and expansion of the private sector.

Fourth, the technological capability as well as the expertise of the owners and labors of private sector are limited.

Private enterprises are the most advanced in private sectors, but most private enterprises use outdated technology, in which 52% of private enterprises use outdated equipment, 38% use medium equipment, and only 10% use relatively modern equipment. With small scales and limited capital, most private businesses have not invested in the application of science and technology, especially core, pioneering technology, and have not paid much attention to innovation. Up to now, Vietnamese private enterprises have only spent 0.2-0.3% of revenue on Research and Development activities, while enterprises in India spend 5% and in South Korea 10%. Moreover, the expertise of business owners and workers is also limited: over 55% of the total number of small and medium-sized business owners are at vocational or lower levels, of which 43.3% only have qualification from primary to high school. Thus, seizing opportunities as well as implementing reforms that give the right vision for the development of private enterprises is limited. About 75% of the labor force in the private sector does not have adequate technical and professional training(9). For individual business households, the vast majority of laborers are unskilled workers. With these limitations, it is difficult to achieve the objectives of narrowing the technological gap, improving productivity, human resource quality and competitiveness of private enterprises among ASEAN-4 countries.

Fifth, the contribution of the private economy to economic growth tends to decrease and is mainly due to the informal sector.

Although the regulations, legal system, and policies to support private sector development, as well as the investment and business environment has been gradually improved towards more open and favorable conditions, unfortunately the contribution of the private sector to our country’s economic growth in recent years has decreased. In the period from 2011-2018, the proportion of the private sector’s contribution to our country’s economic growth decreased from 39.89% in 2011 to 38.25% in 2018 (a decrease of 1.64%). On average, the whole private sector contributed nearly 39% to GDP growth in this period, decreased by over 4% compared to the period from 2006-2010 (43% versus 39%)(10). Particularly, the private sector contributes only over 8%, while the small and informal economic sector (individual economy) contributes over 30% to the GDP. This means the private sector development still has many bottlenecks and has not created a breakthrough for the economy. The private sector has many limitations and weaknesses, so it has not contributed adequately with its potential and the role as an important driving force of the economy.

Sixth, the violation of laws and unfair competition is still common, and most private enterprises have no brand name.

The situation of private-sector production and business establishments causing environmental pollution is surprisingly common. According to data from the Environmental Police Department, the number of environmental laws violations is increasing, in which most of them belong to the private sector. In the years from 2011-2014, there were 44,991 cases (with an average of 11,247 cases/year). In the year 2018 alone, there were 13,929 cases(11). Furthermore, there is the fact that many private enterprises only focus on making a profit and disregard business ethics, conduct commercial fraud, avoid tax payment obligations, and violate the Competition Law, affecting the business environment and people’s lives. Besides, there are still many private businesses that do not assure the interests of workers, with 50% of businesses not yet participating in social insurance for their labors and many businesses owing thousands of billions of VND in insurance obligations(12). Many private enterprises report dishonest financial statements, overdue bank debts, and evade and prolong tax obligations, causing negative socio-economic consequences and weakening the confidence of the people and the authorities in the private sector.

2. Solutions for sustainable development of the private economy

2.1. Suggestion for the private sector

First, private businesses need to improve their corporate governance capacity. The owner of the private enterprises, especially the small, medium and micro-sized enterprises, and the senior personnel must proactively improve their knowledge about the market economy, governance, and business law, follow the Party and the State’s guideline, be active in seizing opportunities to construct business strategies following market requirements and their resources, control legal risks and production linkage, etc. Only by doing so can private businesses survive, adapt, and develop sustainably.

Second, they need to concentrate on innovation, improving technological levels, and raising labor standards. Investment in technology improves quality and diversification of products and enhances business productivity and efficiency, thereby increasing competitiveness for the private sector. Due to the unique characteristics, each type of private sector needs to implement different solutions accordingly:

For large and medium-sized private enterprises: Businesses should increase the investment in research and development, promoting application of technological advancement in production and operation. Also, businesses should carefully study and have an appropriate roadmap to conduct research and deployment (can be self-developed or associating with other businesses, taking advantage of opportunities from the State). They should promote technological innovation and equipment modernization. At the same time, it is necessary to focus on improving the qualifications of the labor force, especially the direct labor force. Enterprises need to set requirements or pressure for workers to improve self-study or take part in training courses; they should also have mechanisms to encourage, attract, and motivate them to improve their skills through salary and bonuses.

For small and micro enterprises: These enterprises have limited financial capacity and access to external resources. Thus, it is necessary to focus on improving on the ability to receive technology transfer, such as improving labor standards and actively receiving new technologies into production.

For household businesses: Their limited resources and access to external resources requires them to focus on the application of technological advances, optimizing production and operation processes.

Third, private enterprises and individual household businesses have to be conscious of building business culture and having integrity towards customers, as well as being aware of their social responsibility, ensuring benefits for workers and consumers. They should focus on improving product quality and product diversification, and should consistently implement these measures to create trust for partners and maintain credibility with the State, the community, customers, shareholders and employees.

2.2. Suggestion for the State

- Drastically and effectively implement the tasks and solutions set out in Resolution 10-NQ/TW of the 5th Plenum of the Party Central Committee (Tenure 12th).

Focus on removing barriers, creating a favorable investment and business environment for private sector development. The ministries, departments, and localities shall increasingly implement e-government and continue reviewing and abolishing unsuitable business conditions, as well as supporting education and training to improve the business knowledge and the management capability of business owners and workers in the private sector.

The State should have mechanisms and policies to encourage the establishment of private enterprises, such as reducing conditional business areas, eliminating sub-licenses, and encouraging household businesses to expand their scale, raise their operational efficiency, and voluntarily convert from household to enterprise model.

The State should also ensure the implementation of policies to support small and medium-sized enterprises and startups and create an environment and conditions for these small and medium-sized enterprises to grow fast, creating the premise to form large-scale private enterprises and private-owned economic corporations with strong potential, competitive advantages, and the chance to participate in regional, global production and value chains in agriculture, processing and manufacturing industries.

- Create opportunities and conditions for the private sector to utilize and use national resources for economic development.

To excessively transform the economic growth model from width to depth, restructure the economy in the direction of shifting from developing fields of natural resource exploitation and real estate to the fields of agriculture, industry, and services in which our country has competitive advantages. It is necessary to create conditions for the private sector to participate in the process of restructuring the economy and the equitization process of state-owned enterprises, enjoying preferences in interest rates, loans, training, land leases, and administrative procedures when participating in new areas of production and business.

Promote the equitization of state-owned enterprises. Equitization and divestment will create opportunities for the private sector to exploit and use the resources of withdrawal from the state economic sector (industry, business sector, capital, resources, human resources, market...), replacing state-owned enterprises investing in industries and sectors that are not prohibited by law.

Develop infrastructure and labor forces to improve technology readiness for the private sector. Develop the main infrastructure system in service of economic development, such as information network, internet, and transportation, and build quality test centers and support systems for branding and product certification for the private sector. Besides, fundamentally renovate the education and training system, connect education and training with market demands, and pay special attention to vocational and talent training.

- Publicity, transparency, fairness of opportunities for the private sector in accessing resources (industries, business sectors, capital, land, natural resources, markets, projects, human resources, etc.). Increase integrity in state management and in policy implementation. Strengthen supervision and strict sanctions to ensure opportunities and conditions for the private sector in accessing and using resources. Implement policies for sustainable development of the private sector and for the private sector to become an important driving force in the economy.

- Enhance the effectiveness of the State’s management, inspection, and supervision of the implementation of guidelines and policies on private sector development as well as for enterprise production and business activities. Thereby, promptly recognize inappropriate mechanisms, policies, and solutions to serve the development of the private sector, then adjust and magnify reasonable mechanisms and policies. Strictly handle acts of law violations that affect business and production activities of the private sector.

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Endnotes:

(1) Resolution No.14-NQ/TW on March 18, 2002 of the 5th Plenum of the Party Central Committee (Tenure 12th) on the renewal of mechanisms and policies to encourage and facilitate private economic development.

(2) Calculation from data of the Business Registration Department (2017-2019).

(3) General Statistics Office (2011-2017), Department of Business Registration 2019.

(4) Central Economic Board (2019): Vietnam private economic forum.

(5) General Statistics Office: Socio-economic situation in the 4th quarter and the year 2019.

(6) General Statistics Office: 2017 Economic Census, Statistical Publishing House 2018, p.29.

(7) Ministry of Planning and Investment (2019): Conference on “Improving national labor productivity”.

(8) General Statistic Office.

(9) Vinh Chi: Vietnamese large enterprises are only equal to Philippines small businesses, https://vietnamfinance.vn, on December 23, 2019.

(10) Calculated from the General Statistics Office data.

(11) Vietnam and the World economy in 2018-2019, p. 118.

(12) Enterprises owe social insurance debts: Why is it difficult to handle? https://tapchitaichinh.vn, November 21, 2019.

Dr. Nguyen Thi Mien

Institute of Economics,

Ho Chi Minh National Academy of Politics