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Improvement of Vietnamese small and medium enterprises competitiveness in international integration

(LLCT) - In recent years, small and medium enterprises in Vietnam have made important contributions to the economic development of the country. In particular, they account for over 40% of GDP, creating jobs for 62% of the total national labor force etc. However, they still retain limitations, such as low capital, low level of management, use of manual laborers, outdated production technology lines, or lack of competitiveness. Therefore, to enhance their competitiveness, it is necessary to create a favorable business and investment environment; support them in innovation, creation, modernization of technology and development of human resources; boost labor productivity; improve the effectiveness and efficiency of State management, and so on

Keywords: small and medium enterprises, competitiveness, international integration.

1. Concept of small and medium enterprises 

Small and medium enterprises (SMEs), are small-scaled enterprises in terms of capital, labor and revenue. Based on scale, they may be divided into three types: micro, small and medium enterprises. Under the World Bank’s criteria, micro enterprises have less than 10 employees; small enterprises having from 10 to 200 employees with capital less than VND 20 billion; and medium enterprises having from 200 to 300 employees with capital from VND 20 to 100 billion.

According to the Government’s Decree No. 90/2001-ND/CP dated November 23, 2001 on supporting the development of small and medium enterprises, given the criteria where the legal capital size is less than VND 10 billion and the number of employed laborers less than 300 per year, up to 97% of existing Vietnamese businesses fall into the category of SMEs, mainly in the private sector. This is consistent with the current level of economic development in Vietnam, especially in the first phase of the process of building a socialist-oriented market economy. In regard to business activities, most SMEs (accounting for 81%) operate in trade and service, while the rest in industry and construction.

At the Third National Congress of the Vietnam Association of Small and Medium Enterprises, 2016-2021 term, it was reported that Vietnamese SMEs have contributed significantly to Vietnam’s economic development, accounting for over 40% of GDP, 31% of export value, over 29% of contribution to State budget, creating jobs for 62% of the total national labor force.

However, of the total SMEs in Vietnam, 69% are micro enterprises, 29% are small businesses. Vietnamese SMEs are mostly private enterprises having low capital, low level of management, manual labor and lack of competitiveness in the market. Many domestic enterprises, especially small and medium ones, use outdated technology, including 76% of imported equipment and technology lines dating back to the 1960s - 1970s, of which 75% have been fully depreciated.

At the Second Private Sector Economic Forum held in Hanoi on July 31, 2017 to implement Resolution No. 10-NQ/TW dated June 3, 2017 of the 5th Plenum of the Party Central Committee (12th tenure), on “Developing Vietnam’s private economy to become an important driving force of the socialist-oriented market economy,” Prime Minister Nguyen Xuan Phuc emphasized: Although the private economy has recorded important developments in recent years, accounting for 40-43% of the current GDP, attracting about 85% of the labor force of the economy, Vietnamese small and medium enterprises still have many limitations. In addition, they have failed to develop strongly while facing with many difficulties in internal forces and starting points, production and business environment, psychosocial environment, policies and mechanisms, State management, and big challenges in international integration.

2. The Party’s view on the development of small and medium enterprises in the renovation period

During the renovation period, the Party’s thinking on the socialist-oriented market economy, the development of the private economic sector, and small and medium enterprises has developed and gradually improved through its Party Congresses.

The 12th Congress of the Party affirmed: “VietNam’s socialist-oriented market economy has progressive relations of production suitable for the level of development of its productive forces. It has various forms of ownership and different economic sectors with the state sector playing the leading role and the private sector being an important driving force of the economy. Economic entities, whatever sector they belong to, are equal to each other and cooperate and compete with each other according to the law”(1).

This is a new awareness of the Party regarding the position, role and importance of the private economy in general, small and medium enterprises in particular during the transitional period to socialism in order to promote socio-economic development and proactive international integration. The 12th Party Congress emphasized: “Perfect mechanisms and policies on encouraging and facilitating the private economy in most industries and economic fields, and making them an important driving forces of the economy; perfect policies aimed at supporting small-and medium-sized enterprises and start-ups”(2).

On the basic of summarizing 15 years (2002 - 2017) of implementing the Resolution of the 5th Plenum of the Party Central Committee (9th tenure) on “Continuing to reform the policies and mechanisms, encouraging and facilitating the development of the private economy”, the 5th Plenum of the Party Central Committee (12th tenure) issued Resolution No. 10-NQ/TW dated June 3, 2017, on “Developing the private economy to be an important driving force of the socialist-oriented market economy”. This resolution has created a new impetus for the development of VietNam’s SMEs in the new context.

3. Achievements and shortcomings during the development of Vietnamese small and medium enterprises

Achievements

Over 30 years of renewal, Vietnamese SMEs have developed rapidly (especially after the Enterprise Law came into effect), contributing significantly to national socio-economic development, resolving employment issue, attracting surplus labour, idle capital, making use of social resources to serve economic growth and solve social problems.

Small and medium enterprises have increasingly promoted VietNam’s resources and potentials. After nearly five years of implementing the Law on Enterprises (2005), there are nearly 108.3 thousand newly registered enterprises nationwide, increasing the total number of registered enterprises to about 150 thousand, nearly 2 times higher than the period of 1991-1999. Total registered capital reached more than VND 302.25 billion (equivalent to USD 18 billion, higher than the registered foreign investment capital in the same period).

In particular, the new wave of start-ups was formed after the new Law on Enterprises (2014) and the Investment Law (2014) went into effect and the Prime Minister’s commitment to build an incorruptible, constructive government with resolute actions (2016). New impetus was created for the development of the private economy. The number of newly registered enterprises increased impressively, more than 110 thousand enterprises in 2016(3), and 127 thousand in 2017(4).

The largest and most important contribution of SMEs is to create jobs and contribute to social labour restructuring. Their sector has attracted 49% of non-agricultural jobs in rural areas, approximately 25-26% of the labour force nationwide. Overall, Vietnamese SMEs attract about 62% of the economy’s labour force, contributing over 40% of national GDP. According to statistics, most of these contributions come from the sector of individual economy (30%) and only about 9-10% of GDP come from private enterprises.

Shortcomings

Vietnam is increasingly integrating into the regional and world economies, bringing about many opportunities for the economy as well as revealing its limitations. In addition to their important achievements, Vietnamese SMEs are facing major difficulties and challenges in the current context.

The biggest challenge to the international economic integration process of Vietnam is that the competitiveness of enterprises is limited generally. For years, Vietnam’s economic competitiveness has been downgraded, or failed to improve much compared to other countries in the world. Although many changes have been made, the investment and business environment in Vietnam still expose many difficulties and slow improvements. According to the Vietnam Chamber of Commerce and Industry (VCCI), there are still many types of business licenses with low management effect, unclear objectives that create chances for abuse of power and increase of many unofficial expenses for enterprises. There remain ministries with large number of licenses, topping the list is the Ministry of Industry and Trade, with more than 1,200 licenses. The Ministry of Construction has the lowest number of 106 licenses. The total number of administrative procedures of ministries is 5,719(5).

According to statistics, Vietnam is now the country where enterprises have to pay the highest cost for market entry in the ASEAN region(6).

For a business to establish and come into operation, there are many procedures such as applying for a tax code, installation of water, electricity, telephone and fire protection, factory building permits, and environmental certificates. Therefore, for some SMEs, the “sweetener” to the government apparatus is greater than the payable taxes. These costs plus difficulties in the production and business process constitute the main reasons that push up product prices, reduce the competitiveness of businesses in international economic integration. Therefore, the Vietnamese Government considered 2017 as the year for cutting down business costs in which sub-licenses and fees are the two main targets to be dealt with.

Besides, in the operation of the private economy, SMEs of Vietnam, there are many “ghost” enterprises which are established just to use value-added invoices, thus doing considerable harm to the national socio-economic activities. The situation of unfair competition, speculation, smuggling, cornering the market and tax evasion are posing many problems that state management authority should continue to settle.

The growth rate of SMEs in Vietnam tends to have decreased in recent years. Most businesses have small scale, outdated technology and slow innovation. Their management level, financial capacity, labour productivity, business efficiency are weak, product quality and competitiveness are not yet high. They involve mainly in low-added-value market segmentation. Besides, the situation of law violations, trade frauds, environmental pollution, failing to ensure food hygiene and safety, regardless of workers’ interests, etc. develop complicatedly and tend to be increasing.

The major obstacle to the development of Vietnamese SMEs is that the legal environment is not synchronized and complete. There are many complicated and overlapping, incomplete, inconsistent and unclear regulations, resulting in difficulties for execution agencies and businesses in law observation. Delay in issuing guiding documents (e.g. on conditional business lines in the overall planning orientation, specific regulations on legal capital of a number of industries) by some ministries and sectors have caused difficulties for the registration and operation of the private sector. It appears that many individual business households do not want to convert into businesses because of the fear of administrative procedures in business establishment and operation.

In spite of contributing up to 40% of GDP, attracting about 62% of the economy’s labour force, SMEs still face inequalities compared to State-owned and foreign direct investment (FDI) enterprises in accessing business premises, bank loans, information, or tax and financial incentives.

The limitations and weaknesses of Vietnamese SMEs come from multiple causes. The primary reason is that there is no high consensus on the theory and awareness of private economic development, SMEs of Vietnam; there remain many shortcomings in institutions for business and entrepreneur development; breakthrough in innovation, improving economic institutions and the investment and business environment have been not yet made. The implementation of many guidelines and policies of the Party and the State’s law on the development of Vietnamese SMEs has not been effective nor synchronous. On the other hand, the starting point and internal capacity of Vietnamese SMEs are low, not sensitive to the requirements for a socialist-oriented market economy and international integration.

4. Objectives and solutions for developing Vietnamese small and medium enterprises  

Overall objectives

Developing Vietnamese SMEs in terms of quantity, size and quality to truly be an important part of the socialist-oriented market economy, contributing to improve the people’s life, promoting social progress and justice, ensuring national defense and security to quickly turn our country into a modern industrialized country.

Specifically, attention should be paid to improving the business quality and efficiency of SMEs, increasing the number of businesses; striving to increase their annual proportion of contribution to GDP; increasing labour productivity by about 4-5%/year; narrowing the gap in technology level, quality of human resources and competitiveness of enterprises compared to those of other countries; promoting innovation, creativity; participating in domestic, regional and global production network and value chain.

Development solutions 

In the coming time, to develop SMEs, thus making the private economy an important driving force of the socialist-oriented market economy and international integration, the following solutions should be boosted:

Firstly, reaching high consensus on awareness, ideology and action in implementing the Party’s guidelines and resolutions on the development of the private economy and SMEs.

Raising awareness of the political system and social strata; creating high consensus in society to encourage and facilitate the development of the Vietnamese private economy, SMEs in the modern and integrated market economy.

Secondly, creating a favorable business and investment environment for SMEs.

Completing mechanisms and policies to attract private investment and ensure the operation of Vietnamese SMEs according to the market mechanism; fully institutionalizing and ensuring strict implementation of the right to freedom of business, property ownership, civil rights and obligations of organizations and individuals in accordance with law; building mechanisms and policies to encourage the establishment of SMEs; narrowing the conditional business areas; creating favorable conditions for the private economy to invest in production and business among industries, fields and geographical areas that are not banned by law, in accordance with the socio-economic development strategy of each period.

Encouraging and creating favorable conditions for business households to expand their size, improve operational efficiency, voluntarily link to devise types of cooperation or transformation into business activities in accordance with the model of enterprises through such policies as exemption and reduction of corporate income tax, land use fees in the first years of operation; consultancy and guiding of procedures for establishing businesses and building business and production plans, organizing financial and accounting work; provision of information, guidance on corporate governance and legal advice.

Completing and ensuring transparency and effectiveness of incentive policies to support SMEs, start-ups and innovation movement.

Ensuring mechanisms and policies to support the development of SMEs suitable to the market mechanism and promoting their autonomy and competitiveness.

Thirdly, encouraging Vietnamese SMEs to innovate and modernize technology, develop human resources, and improve labour productivity.

Encouraging and supporting Vietnamese SMEs to invest in research and development activities, application and transfer of advanced technology; completing and ensuring effective enforcement of the intellectual property law; developing funds to support technology innovation and application; applying tax and financial incentive policies; accessing preferential capital sources suitable to technology research, innovation and modernization activities.

Accelerating the implementation of the national strategy on human resource development; fundamentally and comprehensively innovating and improving the quality of education and training, especially vocational training, training of high quality human resources to meet the quantitative and qualitative demand of human resources for private economic development.

Continuing to develop and promote the promotion of the role of Vietnamese entrepreneurs in the period of intensified industrialization, modernization and international integration; encouraging entrepreneurship spirit, start-up will and innovation in society, especially in the business community; promoting communication and education of business and start-up knowledge in society.

Finally, improving the effectiveness and efficiency of state management.

Enhancing the capacity of building and organizing effective implementation of policies, laws, plans and developmental strategies; creating a favorable and safe investment and business environment for businesses to develop in a healthy manner.

Promoting administrative reforms with a focus on creating breakthrough in administrative procedure reform; simplifying, shortening the time to handle administrative procedures, especially in business establishment, business registration, licensing, taxation, import - export, or dispute resolution.

Improving the capacity and effectiveness of coordination of State management by sector, field and locality for Vietnamese SMEs together with ensuring the effectiveness of state management for socio-professional organizations.

_______________________

Endnotes:

(1), (2) CPV: Document of 12th National Congress, Office of the Party Central Committee, Hanoi, 2016, p.102-103, 107-108.

(3) Vietnam Economic Times: Start-up Spring 2017, Issue 20-30, January 24-February 4, 2017, p.4.

(4) Vietnam Economic Times: Try to achieve the growth goal, Issue 185+186, August 4-5, 2017, p.5.

(5) Tuổi Trẻ (Youth) Newspaper: Let’s sparkle the fire, August 4, 2017, tr.2.

(6) Vietnam Economic Times: To reduce comprehensively types of fees, Issue 190, 10 August 2017, p.3.

AssoC. Prof., Dr. Tran Nguyen Tuyen

Central Theoretical Council

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