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Framework Conditions for Small Enterprise Development in Vietnam 1-4

Framework Conditions for Small Enterprise Development in Vietnam 1-4

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Reading 1: Framework Conditions for Small Enterprise Development in Vietnam
Reading 1:
Framework Conditions for Small EnterpriseDevelopment in Vietnam
Background of the Paper 
Since 1989, the German Federation of Small Business (ZDH) and Technonet Asia (TA) are jointlyimplementing an institution-strengthening programme for the benefit of small and medium sizedenterprises in several Asian developing countries. This programme – called Partnership Project –aims at assisting private sector institutions such as chambers and associations to becomestronger advocates for the SME sector and to improve their service delivery toward SMEmembers. The ZDH/TA Partnership Project is at present working directly with some more than 30chambers, associations and federations in Bangladesh, China, Indonesia, Nepal, Philippines andVietnam. The project is administered by the Foundation for Economic Development andVocational Training (SEQUA). Bonn, Germany, and funded by the Federal Germany Ministry for Economic Cooperation and Development.The paper forms part of the cooperation between the Vietnam Chamber of Commerce andIndustry (Vietcochamber) and ZDH/Technonet Asia Partnership Project. Vietcochamber is thebiggest business organization of Vietnam. Earlier, Vietcochamber was an organization of thestate-owned enterprises focusing on foreign trade issues. With the introduction of economicreforms. Vietcochamber has opened up for members from the private small and medium-sizedenterprise (SME) sector and is trying to diversify its services for responding to the needs of thisnew and important sector of the Vietnamese economy. In order to learn more about theframework conditions of the new emerging and fast growing SME sector. Vietcochamber andZDH/TA have agreed to conduct a study on this topic. This study should act as a basic for initiating an intensive policy dialogue between Vietcochamber and the government on how toimprove SME promotion in the country. At the same time, the results of the study will be used byVietcochamber to enhance its own activities for the SME sector.
Introduction
Vietnam has started an ambitious programme for transition from a centrally planned to a market-oriented economy. Small-scale enterprises play an important role in this process. They are aseedbed for new entrepreneurs, create new jobs in the private sector, decentralize economicstructures and improve competition. But, as experience from other countries show, growth anddevelopment of small-scale enterprises will be unsatisfactory as long as economic policiesdiscriminate against the sector.In this context, the objective of this study is to examine the framework conditions of smallenterprise development in Vietnam. The study tries to identify to what extent these regulations,economic policies, public administration procedures and promotion programmes hamper or influence the performance of small-scale enterprises in the country. Thus, the study wants toinitiate a discussion on how to create a conducive the environment for the SME sector.
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Reading 1: Framework Conditions for Small Enterprise Development in Vietnam
This study is based on the available literature as well as on discussions with local experts and afields survey on small enterprises conducted by the authors in December 94. The surveycomprised 86 small-scale enterprises in Hanoi and Ho Chi Minh City. Two branches werecovered, the one was woodworking (furniture making, doors, stairs, etc…the other was metalbuilding (bars, window and door frames, etc.). This average number of workers – including theowner as well as family-workers - in the firms interviewed was 11.3. Enterpreneurs wereinterviewed according to a standardized questionnaire. Selection of enterprises took place atrandom by the two interview teams, each consisting of one Vietnamese and one German. Theimpression of the authors was that entrepreneurs answered frankly and without hesitation to thequestions. Due to sample size and method, the survey is not representative, but gives a valuableinsight especially into urban, manufacturing small-scale enterprises. It will assess frameworkconditions of small business in Vietnam, identify most significant problem areas of the sector andgive recommendations for possible improvements.The study starts with a short review on Vietnamese economic policies and an introduction on therole of small-scale enterprises in the country. The major chapter of the study deals with possibleexternal constraints for small enterprises. Areas covered by respective sections are: financing,registration and public administration, taxation, business infrastructure, foreign trade, businesslinkages with public sector, public promotion, and assistance, and interest representation. Thestudy will conclude with some recommendations regarding policy measures and activities for animprovement of small business development in Vietnam.
Short Review on Vietnamese Economic Policies
With a per capital income of around US $ 200 Vietnam is one of the poorest countries of theworld. It is populated with 70 million people, mainly engaged in agriculture, which contributes onethird of GDP and accounts for two thirds of employment. Population is concentrated in the Red-river delta in the North with the capital Hanoi and in the Mekong delta in the South with thecountry’s biggest city and commercial center Ho Chi Minh City. Despite of the country’s lowincome, most social indicators like infant mortality, life expectancy and literacy rate are quitegood. Large regional imbalance exits with regard to basic industrial endowments. Compared tothe North, the South has a bigger capital stock in manufacturing, larger entrepreneurial tradition,better infrastructure and easier access to capital from overseas Vietnamese.From the mid-nineteenth’s century on, Vietnam was under French rule. Following the war againstFrance, the country was divided into two parts in 1954. While the South adopted a capitalisteconomic policy highly influenced by the US Americans. The Democratic Republic of Vietnam inthe North adopted a development strategy following the Soviet model. A central planning systemwas introduced including a promotion of heavy industry and collectivization of all economicsectors. Following reunification in 1976, the South economy was integrated with the economicsystem of the North. Vietnam was largely isolated from the Western world, with the Eastern bloccountries as major trading partners and sources of financial and other assistance.Due to unsatisfying results of economic growth, the 6
th
Party Congress introduced a major changeof Vietnamese economic policy in 1986. The reform measures, known under the name “doi moi”,striver for a more market-oriented development strategy and the establishment of a “multi-sector economy”. Measures started with a return to a family farming based on long-term leases.Agricultural production reacted with a strong increase in output and Vietnam, which was a riceimporter before, became one of the largest rice exporting nations. Further important reformmeasures included a price reform removing virtually all price controls, a devaluation and
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Reading 1: Framework Conditions for Small Enterprise Development in Vietnam
unification of the exchange rate, a fiscal reform consolidating the state budget and removal of most subsidies for state-owned enterprises which were released from central planning at thesame time.Private ownership and private entrepreneurship are protected by the new Vietnameseconstitution. Major laws like the “law on private enterprise” were introduced in order to regulatethe sector. Meanwhile, private business are allowed to engage in almost all sectors and branchesof the economy and have the right to contract employees according to their needs. In general,there is no official discrimination between the state or cooperative sector and the private sector inVietnam, today.First results of the reform policy are promising; Vietnam achieved a strong average growth of about 7% during 1989 and 1993. Inflation was cut down to 5% in 1993 and the exchange rateremained stable. Growth started with the agricultural sector responding to price liberalization andstrengthened property rights. With the rural incomes increasing, construction and serviceindustries benefited next. The latest phase of economic growth is led by the industrial sector,especially the oil sector, light manufacturing and agroprocessing sector.
Small-scale Enterprises in Vietnam
With regard to ownership, there are three economic sectors in Vietnam. The first one is the stateenterprise sector accounting for around 25% of GDP and over half of total industrial value added.In 1990, there were around 12.000 state enterprises employing approximately 8% of the country’slabor force. While the 2.000 centrally managed state enterprises are foremost engaged in heavyindustries, the other enterprises are under provincial or local control and engage foremost in lightindustries, construction transport and services. State enterprises are usually medium or largescale with an average number of workers between 140 and 280. The second one is the collectivesector. Its major important its in agriculture, while the sector is of less important in urban areas.Furthermore, due to the economic liberalization measures, the collective sector has beendeclining significantly since the mid-1980s. The third one is the private sector. It has been growingrapidly since reform measures were introduced. Since 1988, employment in the private sector hastripled and accounts now for about 30% of total employment. Industrial production in the sector increased between 10 and 35% p.a. during the last years.According to Vietnamese legislation, the private sector basically consists of two categories.Medium or bigger sized enterprises are registered as private enterprise, limited liability companyor joint stock company, each regulated by a special law. The small units are registered as so-called household enterprise or company, the entrepreneur has to provide a specific minimumlegal capital, whereby the limits are fixed by government for each specific brand. For a registrationas household enterprise, such capital requirements are not necessary.According to the statistics of 1994, the number of private enterprises and limited companiesamounts to 11.000. With 1.64 million units the number of household enterprises is by far higher. Abreakdown shows that the majority of 950.000 household enterprises are engaged in trade andservices, small industries and handicrafts are ranking next with 550.000 units and finally 140.000household enterprises are engaged in transport. The official statistics indicate that about 3.5million people are employed in these private enterprises. However, due to a comprehensivesurvey of 1.000 non-state enterprises in Vietnam, there are an average number of additional 3.7unpaid workers in each household enterprise. Therefore, there may be about 7.5 million people inVietnam working in household enterprises. The overwhelming majority of household enterprises
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