An Examination of SMEs in Vietnam

1. Definition of SME

Nowadays in Vietnam, developing small and medium enterprises (SMEs) is highly concerned by the government because a country prosperity depends lots on the health of the economy and enterprises. At the beginning of developing a market-oriented economy especially, SMEs play a key role because they take up most of enterprises in the economy, let alone creating the most of the labor force. However, up until now, there not yet exists a widely-used, complete definition on SMEs. The definition of SME is going through a process of dynamic change in parallel with the transformation from the centrally planned to market economy. Many of the definitions contained in the previous UNECE document OPA/AC.12/1 are no longer valid. The associated central and eastern European countries are gradually adapting their definitions the recommendation of the EU. The SME definition that is currently in use in the EU, is based on the Commission Recommendation 96/280/EC. Normally, to precisely define which components make up a SME, we need to focus on the following criteria.

In terms of qualitative measurement, there are quite a few criteria to define an SME, such as: low level of specialization, decentralization, simple administration requirements… These criteria correctly reflect the nature of SME but simultaneously hard to reconcile. That is why these criteria has referential value only and rarely used in practice.

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In terms of quantitative measurement, the criteria are more specific and applicable. The most commonly used one is the number of people employed by the business. The second common criterion deals with finance – either the turnover or income, or asset value of the business. The third criterion relates to the independency of the SME from other business entity. This thesis will mainly deal with SME definition quantitatively since it shows clear advantage over the other, which are easy to measure and clear in scope.

Since there is not yet a specific and widely-used definition for SME, it is important to take a look at different points of view and decide an overall acceptable concept in this thesis. It affects the analyses in different parts of this thesis.

According to EU Commission, the main factors to determine whether an entity is a SME are labor force and either turnover or balance sheet total. Based on the commission staff working document by EU Commission, 2009 edition, the specific benchmark is as follow

These ceilings apply for individual firms only. A firm which is a part of larger grouping may need to include related information from that grouping too. This definition use various sources to measure, hence, it covers most of the SME situation. Moreover, these three factors are clear in nature and easy to apply, which helps the firms as well as the government to follow and concept and apply relevant measurements. In 2010, enterprises with less than 250 employees are estimated to have accounted for 99.8% of the total number of enterprises across Europe, 66.9% of employment, 57% of turnover and 58% of value-added. Obviously, without such a clear definition, it would be so hard to statistically compute those figures and the government may neglect the mass number of SMEs in their countries.

However, there still exists drawbacks concerning this concept, the most important of which is that it is not suitable for a developing country like Vietnam. For a micro enterprise in Vietnam, for example, it is almost impossible for it to own turnover or balance sheet total of 45 billion VND. Therefore, although EU has developed some reasonable criteria that we can learn to establish our own definition, it is essential for developing countries like ours to come up with one of our own.

For Korea, the subject of this thesis, the government has issued legislation regarding SMEs, in which criteria are clearly stated in able to assist policy makers to identify SMEs. These criteria are divided upon specific fields. For example, in construction business, an SME entity has to have fewer than 300 frequent labors and have total investment capital of less than USD 600.000. In trading area, enterprises with less than 20 frequent labor and revenue less than USD 500.000 per year (retailers) or less than USD 250.000 per year (wholesalers) are considered SMEs. In this pool, small enterprises are those that have less than 5 frequent employees. These criteria are established in the 70s, up until now, the number of employees has increased 2 to 3 times and capital has been raised more than 10 times.

This definition seems to fit more with Vietnam’s situation as Korea is also an Asia country and has similar economic background to us. It also uses the two most common indicators as labor force and capital to determine an SME. However, this definition is already outdated and adjusted to suit the current situation more. This practice makes the concept no longer appropriate to Vietnam as the economic situation between the two countries now differs quite a lot, which urges the need to develop a concept of our own, depending on the knowledge learned from other countries in the world.

In our country, although there are not yet any fixed criteria to clearly define an SME, some organizations have developed their own concept to further support their activities. According to Doc 681/CP – KNT, enterprises with less than VND 5 billion in charter capital and average labor of less than 200 people per year are considered SMEs. Below are some organizations and their own definition

Source: Ministry of Planning & Investment

However, these figures are temporarily just administration-oriented criteria to create supporting policies for SMEs. The fact that non -governmental organizations or governmental – organizations develop their own concept is acceptable because they have different objectives and practices. On the other hand, such various opinions on SMEs are only referential in quality because they not yet come to a sufficient conclusion on whether an entity is or is not an SME. Therefore, the majority of intellectuals on this issue has raised to make clear this definition as an entity which has investment certificate, regardless of business type, and has capital as well as labor size that can satisfy government regulations on specific fields or through different times. From this standpoint, our government has finally come up with an official document on this matter. The Vietnamese government, defines SMEs by Decree 56/2009/ ND – CP as follow:

“Small and medium-sized enterprises are business establishments that have registered their business according to law and are divided into three levels: very small, small and medium according to the sizes of their total capital (equivalent to the total assets identified in an enterprise’s accounting balance sheet) or the average annual number of laborers (total capital is the priority criterion), concretely as follows”:

Table: by Business-in-Asia.com

This definition sticks to criteria that have been used by EU and Korea, but tailored to fit with our economic situation. Furthermore, it divides the economy into different business sectors because of their distinctive characteristics. This definition is established using multiple statistical methods and surveys. Therefore, it is prestigious and practical enough to be used throughout this thesis

2. Roles of SMEs

Despite some disadvantages as being an SME, it still bring clear benefits and economic-social impacts due to its distinctive features

SMEs considerably contribute to the government budget

The contribution of SMEs into both government and local budget is considerable and on the increasing trend. The corporate survey report in 2011 showed that SMEs accounted for more than 97.6% the total number of enterprises in Vietnam, which made it the major tool to create jobs and generate income for the government budget. Income from corporate tax made 103.6% target and increased by 13% compared to the previous year in 2002. In 2003, income from SMEs took up around 15% total income, increasing 29.5% compared to the same quarters of the previous years. In 2004, income from private sector was 13.100 billion VND, occupying 7.8% budget.

However, compared to government budget, the contribution of SMEs to local budget is much higher. For example, in Ho Chi Minh City, the private sector accounts for approximately 15%, 24% in Kien Giang, 16% in Dong Thap, 22% in Gia Lai, 19% in Ninh Binh, 16% in Yen Bai, 17% in Thai Nguyen, 22% in Quang Nam, 33% in Binh Dinh…

SMEs generate jobs and income for the labor force

Due to estimation from some prestigious authorization, SMEs create 49% of non-agriculture jobs in the rural areas, which is about 25-26% of the overall labor force in Vietnam. For business sector, because of the increasing number of SMEs every year, they attracts around 45 million employees with the average income of 1.5 million VND per month. This fact means a lot in the fight to prevent unemployment and stabilize the society nowadays.

The average proportion for a corporation to invest in a job vacancy is 70 to 100 million VND; meanwhile, for an SME, the number is only 210 to 280 million VND (around 3 times higher). Due to such a high level of investment, private sector is the main area attracting new employees ever year and redundant employees resulting from administration re-allocation or substantive change in the economic structure. This practice has helped stabilize and enhance the lives of the labor force.

To date, more than 7 million people are now working in the private sector. This is such a positive contribution to social-economic stabilization, poverty reduction and awareness improvement.

SMEs greatly contribute into the exporting activities

In recent years, in line with our government policies about expanding and encouraging international trade, as well as creating the environment for all business sectors to participate in import and export activities, SMEs, especially the crafts, agriculture, aquatic industry have implemented dynamic investment into potential businesses. In specific, they actively seek for and exploit international markets, which helps a great deal in pushing export and tracking down foreign currency for the country.

Up until 31/10/2014, the number of SMEs participating in exporting and importing activities takes up 80.6% and 84.2% respectively. The total exporting volume of SMEs in 2012 reached 4.108 million USD, accounting for 24.6%. For importing volume, the number was 4.789 million USD, accounting for 23.3% compared to the total export – import volume of the economy as a whole. The most remarkable thing is that SMEs in private sector has thrived to become the leading sector in exporting marine products, at around 740 million USD, accounting for 39% the total volume of this business sector. The story goes the same for almonds, at 141 million USD, taking up 42% of the total volume. With this increasing trend as these figures, SMEs will soon become the leading sector in obtaining foreign currency for the country.

SMEs participate in the process of creating connection with big corporations

SMEs, in the recent years, have strong connection with big corporations in supplying raw materials, implementing contracts, gradually generating supporting industries network and products distribution network especially. This is a two-way relationship, which both sides tie and support each other. The big corporations ensure markets, finance, technology and administration experience for SMEs. On the other hand, SMEs support big corporations in supporting industries and products distribution network.

SMEs nurture startup spirit

With relatively low investment cost, as well as limited size and business environment, individuals have room to experience and nurture ideas. The increasing number of SMEs both create fairly competitive environment and prevent monopoly in business, which brings clear advantages for new ideas. That is why SMEs are places for startups. SMEs are also the perfect places to train inexperienced staff and future leaders to prepare themselves for larger competitive markets. The great success always start from small steps, so SMEs are considered the stepping stones for a successful career.

In reality, in many countries, many well-known multi-national corporations with hundreds of employees used to start as startups or small enterprises, with a few people with the same determination and business idea. Many SMEs all over the world were born in tough and flexible business environment. Later, they thrived and rapidly launched their idea into the commercial world. Many economists compare SMEs as a new breeze into the economy, bringing new business value, even in the biggest economy in the world – USA, especially in technology, communication, finance and banking. Starting with a simple idea and a small business size does not mean you stay there forever. Thriving to a successful and stable stage is always what SMEs aim for.

SMEs contribute greatly in stabilization and economic restructuring by territory

Normally, big corporations are often located in big cities, which exude developed infrastructure. This fact can lead to serious imbalance in economic, cultural and social development level between rural and urban areas. SMEs can greatly contribute to distribute industrial zone to different places, so the development gap among those areas can be narrowed down. The expansion of SMEs has been an essential part in creating the balance among the areas, helping them to identify potential and strength. The results are bright as those provinces can develop their own products and services, which creates industrialized and modernized economic restructuring.

It can be stated that the existence of SMEs is the factor that brightens the economic picture of local areas. SMEs are the perfect complementary for the corporations network of the country, as well as those who utilize slight opportunities that big corporations often overlook. That is why SMEs are considered a vital policy tool to achieve development targets, in which is developing rural and remote areas.