Characteristics of the Vietnamese Business
Environment:
Evidence from the 2007
Small and Medium Enterprise (SME) Survey
Key Results, Policy Implications and Next Steps
Finn Tarp
Simon McCoy
Hanoi, 15th January 2009
Key Results
2
1. Enterprise Dynamics
2. Bureaucracy, Informality, Tax Evasion
and Bribes
3. Employment, Education and Social
Insurance
4. Production and Technology
5. Investment and Access to Finance
6. Environment
3
Most Important Constraints to Growth as
Perceived by Enterprises
45
40
35
Percent
30
2002
25
2005
20
2007
15
10
5
0
Shortage of
capital/credit
•
•
Current products
have limited
demand
Too much
competition
Inadequate
premises/land
No constraints
Access to finance remains the key problem, though less so in 2007;
Fall in perceived competition;
– Age of firm a factor here?
•
Overall improvement in business environment observed.
4
Employment Growth
%
Micro 07
Small 07
Medium 07
Total
Micro 05
93.2
6.8
0.0
100.0
Small 05
26.5
67.9
5.6
100.0
Medium 05
3.8
32.9
63.3
100.0
Total
67.1
26.7
6.3
100.0
•
Limited employment growth of ‘micro’ enterprises
• Vast majority remain micro in 2007
• Those that did graduate moved only to small category
•
More than ¼ of small enterprises in 2005 fell to micro category two years later
5
Registration Dynamics
PANEL A
Registered to not registered
From non-HH enterprise to non-registered HH firm
From registered HH firm to non-registered HH firm
From not registered to registered
From not registered HH firm to registered HH firm
From not registered HH firm to non-HH enterprise
Number of Firms
179
5
174
101
93
8
= 8.4% of
total firms
= 5% of
total firms
PANEL B
From registered HH firm to non-HH enterprise
From not registered HH firm to non-HH enterprise
From non-HH enterprise to registered HH enterprise
From non-HH enterprise to non-registered HH enterprise
Number of Firms
71
8
51
5
79 HH firms
graduated
to other
legal forms
Under EL
6
1. Enterprise Dynamics
2. Bureaucracy, Informality, Tax
Evasion and Bribes
3. Employment, Education and Social
Insurance
4. Production and Technology
5. Investment and Access to Finance
6. Environment
7
SME Knowledge of Laws and Regulations
Proportion of firms who have poor or no knowledge of specific laws or government regulations:
100
90
80
Percent
70
60
50
2005
2007
40
30
20
10
0
•
•
General lack of knowledge observed, with a worsening from 2005 to 2007;
For Household Enterprises, ’formalization’ is associated with performing well
economically and firm survival.
8
Burden of Bureaucratic Procedures
Business Registration License
Tax Code Registration Certificate
Social Insurance Registration Certificate
Investment Certificate
Environmental Standards Certificate
Fire Prevention Certificate
Technology Transfer Certificate
Seal Engraving Permit
Remittances Transfer Permit
License to Operate Overseas Accounts
Percent (a)
70.2
86.4
70.0
54.2
70.0
78.9
61.8
85.3
93.7
86.1
Low Performer
Lam Dong
Ha Noi
Lam Dong
Nghe An
Ha Tay
Lam Dong
Hai Phong
Lam Dong
..
..
High Performer
Khanh Hoa
Khanh Hoa
Phu Tho
Phu Tho
Hai Phong
Khanh Hoa
Phu Tho
Quang Nam
ALL
ALL
(a) Percentage of firms indicating that license was obtained within 15 days from the date of application
• Bureaucratic burden quite low in Vietnam (in confirmation of WB
‘Doing Business’ 2008);
• Consistent Provincial discrepancies (Lam Dong vs Khanh Hoa).
9
Taxation
Total
Household establishment
Private/sole proprietorship
Partnership/Collective/Cooperative
Limited liability company
Joint stock company
Total fees and taxes
(percent of total value added)
2005
2007
8.2
7.0
6.2
5.0
12.0
10.3
12.3
10.5
11.7
11.3
16.7
13.5
Share paying zero taxes
2005
2007
9.8
8.1
13.5
11.9
4.3
0
1.8
1.5
0.4
0.7
0.0
0.0
Note: The analysis is restricted to data where we have data in both 2005 and 2007
• Low economic tax burden among surveyed firms;
• Comparison with Mozambique;
• Majority of non-taxpaying firms are not formally registered;
• Primary taxes paid are Revenue Tax, VAT, and Stamp Duties
(Figure 4.2).
10
Payment of Bribes
45
2007
Firms paying bribes
41.2
26.5
How much did you pay?
(as % of total revenue)
0.50
0.67
40
35
30
Percent
2005
25
2005
2007
20
15
10
5
Oth er
Custo ms
Gain Govt
Co n tracts
/ Public
Pro curem
en t
Deal with
Taxes /
Tax
Co llectors
Obtain
Licen ses /
Permits
0
Co n nect
to Public
Services
• Large fall in number of
firms paying bribes;
• Bribes are small in
relation to total revenue.
11
1. Enterprise Dynamics
2. Bureaucracy, Informality, Tax Evasion
and Bribes
3. Employment, Education and Social
Insurance
4. Production and Technology
5. Investment and Access to Finance
6. Environment
12
Labour Constraint
%
Yes
No
Did not need to recruit
Enterprise experienced difficulties in recruiting workers with appropriate skills?
All
Micro
Small
Medium Urban
Rural
18.8
10.7
30.8
49.4
25.1
13.9
38.8
32.8
52
45.8
41.6
36.6
42.5
56.7
17.6
4.8
33.3
49.5
• Significant labour constraint observed;
• Increases with size of enterprise;
• Urban businesses more constrained than Rural.
13
Fringe Benefits
All
Male
Female
Pay contribution to social and health insurance
18.8
18.2
20.0
Compensate workforce directly for accidents and illness
34.1
32.1
38.2
31.4
29.7
34.9
87.5
86.9
88.5
21.0
19.7
23.8
69.6
70.7
67.8
28.0
27.8
28.2
37.6
34.8
43.4
21.8
20.6
24.4
93.0
93.0
93.2
76.0
74.9
78.2
99.0
99.0
98.9
Have
Sick leave with regulation
pay
Follow
regulation
Have
Paid maternity regulation
leave
Follow
regulation
Have
Employees enjoy any of the No paid
regulation
following benefits (directly maternity
Follow
from Govt)
leave
regulation
Have
Annual leave regulation
with pay
Follow
regulation
Have
regulation
Others
Follow
regulation
Consistent
gender
difference
14
1. Enterprise Dynamics
2. Bureaucracy, Informality, Tax Evasion
and Bribes
3. Employment, Education and Social
Insurance
4. Production and Technology
5. Investment and Access to Finance
6. Environment
15
Diversification and Innovation
Diversify
Introduced new product
Improved existing
product
2005
11.1
40.8
61.8
2007
8.8
4.9
44.1
%
Note: Since last survey means a 3 year period for 2005 data and 2 year period for 2007 data.
• High, and rising, degree of specialization among SMEs;
• Sharp decline in innovation rates;
• Improvement of existing products appears to be most
important area of activity.
16
Technology Characteristics
Level of technology
Age of technology
New or second hand
Only hand tools only
Manually operated machinery only
Power driven machinery only
All of the above
Under 3 years old
Between 3 and 5 years old
between 6 and 10 years old
Between 11 and 20 years old
More than 20 years old
New
Used
Self-constructed
Note: Figures in percentages
2005
2007
10.3
3.5
24.6
61.6
22.9
34.9
30.4
9.5
2.3
61.1
34.1
4.8
7.7
5.0
27.5
59.8
22.0
36.5
27.5
12.5
1.5
71.7
24.4
3.9
•
Rising level of technology
used in production
process;
•
Over 85% of technology
used is under 10 years
old;
•
Purchase of new
equipment becoming
more common;
•
•
Firms less credit
constrained?
Introduction of new
technology positively and
significantly associated
with employment growth
and firm survival (Table
6.5).
17
Capacity Utilization
By how much would you be able to increase production from current levels
using only existing equipment / machinery?
Total
Size
All
Micro
Small
Medium
By no more By between 10 By between 25 By between 50
than 10
and 25
and 50
and 100 By more than
percent
percent
percent
percent
100 percent
Year
Not at all
2005
16.8
21.7
29.1
20.8
7.7
3.9
2007
18.1
18.5
28.4
18.4
12.1
4.5
2005
17.7
22.2
28.2
19.5
8.3
4.0
2007
17.7
19.6
27.8
17.8
12.5
4.6
2005
16.1
20.1
29.9
24.0
6.8
3.3
2007
19.3
17.6
29.0
19.0
11.3
4.0
2005
11.9
23.8
34.3
17.6
7.1
5.3
2007
16.9
11.0
32.5
22.7
11.7
5.2
High capacity
utilization
18
Determinants of Labour Productivity
Real Revenue per FT
employee (log)
Firm Size
Number of employees (log)
•
Larger firms have
lower labour
productivity;
•
Household
Establishments are
less productive;
•
Firms in HCMC are
more productive than
those in other
provinces;
•
Introducing a new
technology is
positively associated
with labour
productivity.
-0.101***
-2.83
Location
HCMC (yes = 1, no = 0)
0.295***
-3.44
Ownership structure
Household establishment
-0.420***
-4.19
Partnership/ Collective/ Cooperative
-0.339***
-2.6
Limited liability company
0.233***
-2.78
Joint stock company
0.182
-0.81
New Technology introduced (yes = 1, no = 0)
0.125**
-2.52
Sector dummies included
Yes
Weights used
No
Observation
1908
R-squared
0.17
Note: OLS. Cluster robust standard errors. *, **, *** indicates significance at a 10%, 5% and 1%
level, respectively. Base: Food processing (ISIC 15). All regressions included a constant.
19
1. Enterprise Dynamics
2. Bureaucracy, Informality, Tax Evasion
and Bribes
3. Employment, Education and Social
Insurance
4. Production and Technology
5. Investment and Access to Finance
6. Environment
20
New Investments and their Financing
• High levels of new
investment;
Percent of enterprises that has made Percent financed by own capital/
investments since last survey
retained earnings
All
Micro
Small
Medium
Urban
Rural
2005
2007
2005
2007
62.2
55.5
72.4
76.7
56.5
66.6
42.4
34.2
56.3
69.4
38.6
45.2
66.9
67.3
69.3
57.1
71.2
64.0
74.0
77.9
71.8
61.2
70.1
76.5
Note: Since last survey means a 3 year period for 2005 data and 2 year period for 2007
data.
• But falling level;
• Increases by firm
size;
• Retained earnings
remain a major
source of investment
financing;
• Easier access to
credit for larger
urban firms?
21
Access to Credit I
2005
Yes
(1069)
39.0
Enterprise applied for formal loan
Problems getting loans
Are you still in need of a loan
Yes
(201)
18.8
82.1
2007
No
(1670)
61.0
No
(868)
78.2
60.4
Yes
(903)
36.2
Yes
(188)
20.8
79.8
No
(1589)
63.8
No
(715)
79.2
54.4
Note: All numbers in percentages (observations in parenthesis)
• Approximately 7.5% of firms in 2007 are clearly ‘credit constrained’;
• And taking into account those firms wanting more, the proportion
rises to over 23% of the sample;
•
This represents a slight fall since 2005.
22
Access to Credit II
• Why don’t Enterprises apply for loans?
60
50
Percent
40
2005
30
2007
20
10
0
Inadequate
collateral
Don't want to incur
debt
Process too
difficult
Didn't need a loan Interest rate too
high
Already heavily
indebted
other
23
Structure
1. Enterprise Dynamics
2. Bureaucracy, Informality, Tax Evasion
and Bribes
3. Employment, Education and Social
Insurance
4. Production and Technology
5. Investment and Access to Finance
6. Environment
24
Environmental Certificates
All
Province
Size
Ha Noi
Phu Tho
Ha Tay
Hai Phong
Nghe An
Quang Nam
Khanh Hoa
Lam Dong
HCMC
Long An
Micro
Small
Medium
No
91.3
91.8
87.2
97.4
85.6
92.8
96.7
97.7
91.4
87.9
90.3
95.1
87.8
66.9
Yes
8.7
8.2
12.8
2.6
14.4
7.2
3.3
2.3
8.6
12.1
9.7
4.9
12.2
33.1
• Under 10% of sample
have obtained an
Environmental
Certificate;
• Significant Provincial
variation;
• Larger firms more
likely to comply.
25
Water: Use, Conservation, and Discharge
Main water use
Input in production process
Equipment cleaning
Cooling/heating process
Other production use
Made investments to save water?
No
Yes
Implemented other measures to save water ?
No
Yes
Frequency Percent
619
276
106
904
32.5
14.5
5.6
47.4
1,890
15
99.2
0.8
1,897
8
99.6
0.4
Frequency Percent
Where does enterprise discharge the water?
Public sewage
River
Lake
Ocean
Nearby grounds
Other
Does the enterprise or authorities
measure the quantity of water discharged?
No
Yes
Measure the pollution concentration?
No
Yes
Don't know
Is the water treated before discharge?
No
Yes
Missing info
1,364
225
18
2
215
81
71.6
11.8
0.9
0.1
11.3
4.2
1,869
36
98.1
1.9
1,412
31
462
74.1
1.6
24.3
1,578
43
284
82.8
2.3
14.9
26
Concluding Remarks,
Policy Implications,
and Next Steps
27
Point of Departure and Perspective
• Key goals:
•
•
•
•
• Capacity building
• Collaborative research
• Contribute to science/evidence based policy making
Complementary scientific approaches
• Qualitative/stories
• Quantitative/data
Time series versus cross-sectional
Association versus causality (omitted variables and reverse
causation)
Make descriptive and suggestive observations and raise
questions in analytical perspective: some selected examples
(following outline in Report) – see report for much more
28
1. Enterprise Dynamics
• Average annual employment growth 7.1% among surveyed firms;
• Household Enterprises did not, on average, grow as fast (we don’t see
dramatic increase).
 Are SMEs the key to addressing the employment challenge in
Vietnam? (policy: get priorities right)
• Formal Registration
• Process has been neither simple nor linear (as in modernisation theory);
• Some ’backtracking’ among surveyed firms;
• For Household Enterprises, formalization is associated with performing
well economically and firm survival.
 There are both costs and benefits to registration under the
Enterprise Law… focus policy on firm incentives to register (increase
benefits – reduce costs)
29
2. Bureaucracy, Informality, Tax Evasion and Bribes
• Key reason for perceived bureaucratic burden appears to be lack of
knowledge of Laws and Regulations; High proportion of firms actually
obtain required documentation within 15 days;
• Informal charges remain part of day-to-day life for a Vietnamese SME;
can provide disincentive to formalize.
 Focus policy on information/education of firms (One Stop Shops) and
simplify bureaucratic/legal context in which SMEs operate
(transparency)
• Low Tax Burden
• Firms not formally registered less likely to pay tax;
• Comparison with other countries: SMEs in Vietnam paying
disproportionately low share of total taxes.
 SME sector is a potentially very significant tax revenue source in
Vietnam – tax reform policy measures critical
30
3. Employment, Education and Social Insurance
• Labour constraint in SMEs is large and becoming larger;
• Shortage of skilled labour increasingly an issue.
 Much to suggest that phase of unlimited labour supply (and “easy”
growth) in Vietnam coming to an end – focus policy on education
(quality not quantity), vocational training and quality of capital
investment
• Clear and consistent gender difference in provision of ’fringe benefits’
to employees;
 Policy: formalization key to extend fringe benefits, but gender policy
can indirectly help increase/broaden social benefits – so not only a
matter of equity:
 More fringe benefits may help reduce excessive labour turnover (flexibility
important, but in a modern economy in service skills are important)
31
4. Production and Technology
• High degree of specialization; Firms appear less willing than before to
innovate (seem not to capture benefits);
• Larger firms found to be more innovative and diversified.
 Policy: create incentives to innovate and invest in R&D
 Intellectual Property Rights: Patents, Copyrights (competition
important – but market failures must be addressed)
•
•
Technological upgrading is happening; and has positive impacts on
labour productivity;
Capacity utilization of existing technology is high.
 Policy: “no free lunches” – capacity constraints are starting to bind:
how expand capital and ensure access to new machinery/equipment
is key.
32
5. Investment and Access to Finance
• Despite recent expansion in supply of credit, excess demand
remains;
• Lack of access to finance remains the key perceived constraint in
survey;
• High proportion of surveyed firms are credit constrained;
• Retained earnings remains significant source of financing.
 Policy 1: Expansion of formal credit is needed
 But quality of supply must be ensured: e.g Credit Rating Schemes;
 And risk management and loan appraisal mechanisms need to be
introduced / improved;
 Policy 2: Training of SMEs to formulate and present coherent loan
applications (organized accounts and business plan).
33
6. Environment (exploratory)
• Compliance with environmental regulations remains weak;
• Environmental Certificate not mandatory.
 Policy 1: One might expect demand for compliance to increase
over time (exports, domestic consumer driven demand etc. but
more should be done);
 Policy 2: Environmental legislation in concert with tax policy (to
affect incentives/assessment of costs and benefits) (but
remember institutional constraints)
34
Next Steps
• Hope you will enjoy reading report (much more there).
• In-depth collaborative research studies and policy briefs
considering selected key issues arising from 2007 database.
• New Survey to be implemented in 2009 with ILSSA, CIEM
and DoE;
• Same firms to be interviewed (panel database);
• Only small modifications to the questionnaire;
• Additional module to be incorporated (Environment in 2007)?
• Report to be published in 2010.
35
•
Thank you for
your attention
36