The strategic importance of small and medium enterprises to the national economy and vietnamese smes encountrered difficulties facts and solutions,graduation thesis

Rationale of the thesis

Numerous studies highlight the significant impact of entrepreneurship on economic development, particularly in Vietnam, which faces both opportunities and challenges due to its transitional economy and relatively low-level human resources Understanding the contribution of small and medium-sized enterprises (SMEs) to the national economy over recent decades is crucial, as is identifying the main obstacles that hinder new business start-ups To eliminate these barriers and foster the growth of small businesses, it is essential to implement effective policy measures that support the development of entrepreneurship in Vietnam.

Research objectives and questions

This thesis provides a comprehensive analysis of small and medium-sized enterprises (SMEs) and their significant impact on economic development It evaluates how SMEs contribute to job creation, add value to the economy, and influence national growth rates Additionally, the study seeks to identify practical solutions to address the current challenges faced by SMEs and offers policy recommendations for their sustainable long-term development.

It seeks to clarify the three main following points around SMEs:

 How significant small and medium-scale businesses mean to a country‟s national economy and explain why Vietnam should put due attention to this economic sector?

 What are chief obstacles that Vietnam‟s SMEs are faced with since their first emergence and especially the present situation on the context of downward economic trend nationwide?

Le Thuy Lan – ATCA/K12 Page 2

To address the existing inadequacies and shortcomings in the private sector, it is essential to implement strategic reforms that promote the well-being of small and medium-sized enterprises (SMEs) Learning from the successful practices of advanced economies, policymakers should focus on enhancing access to financing, providing targeted support services, and fostering innovation By creating a conducive environment for growth and development, SMEs can thrive and contribute significantly to economic stability and job creation.

Scope of study

This article explores the history of Vietnam's small and medium-sized enterprises (SMEs), beginning with the implementation of the Law on Enterprise in 2005 It also examines the early development stages of SMEs in various countries The primary focus shifts to the period from 2010 to the present, providing insights and projections for the next five years.

Research methodology

This paper primarily utilizes secondary data sources, supplemented by some primary data collected from various channels, including the Internet, newspapers, public research, journals, statistical and financial reports, and internal documents Empirical evidence was gathered through face-to-face surveys with small business owners during an internship, focusing on the obstacles that hinder the endurance and growth of small and medium-sized enterprises (SMEs) The data was meticulously selected, synthesized, and organized into relevant sections of the thesis The findings emphasize the policy implications necessary to support SMEs, aiming to enhance new firm formation rates, reduce dissolution rates and turbulence, and ultimately boost their contribution to regional economic development.

Chapter 1 explores the theoretical framework surrounding small and medium enterprises (SMEs), highlighting their fundamental characteristics and the varying classification criteria used by different countries It also discusses the key competitive advantages that SMEs possess in the global market.

Le Thuy Lan – ATCA/K12 Page 3 to other economic sectors and a generalization of weaknesses that deter the normal business operation and the enlargement of business scale

Chapter 2: This section highlights the strategic importance of SMEs in terms of socio- economic contributions as one of accelerator of the economy and stabilizer of the society

Chapter 3 : Difficulties faced by SMEs and explanations from different perspectives provide a comprehensive background on the necessity of forming pragmatic solutions to change the present situation for the better

Chapter 4 : Some recommendations on state policies and SMEs including policy implications and advice for private entrepreneurs will be introduced in this section

Based on the results of analysis, the thesis will conclude with a short conclusion of contents that have been clearly presented previously

THEORETICAL FRAMEWORK ON SMALL AND MEDIUM-

What is an SME? Definition and classification criteria

According to European Commission‟s SME definition which took effect on January 1,

In 2005, micro, small, and medium-sized enterprises (MSMEs) were defined as businesses employing fewer than 250 individuals, with an annual turnover not exceeding 50 million euros or a balance sheet total not exceeding 43 million euros.

Figure 1: SME definition by European Commission

Definition in Vietnam: It is promulgated in Decree 90/2011/ND-CP issued on November

Small and medium-sized enterprises (SMEs) are independent business entities that register in accordance with legal regulations, characterized by having a registered capital of no more than VND 10 billion or an annual workforce of up to 300 employees.

Based on the specific socio-economic conditions of each sector or region, the implementation of support measures and programs can flexibly apply one or both of the criteria related to capital and labor.

This Decree is applicable to small and medium-sized enterprises (SMEs), which include businesses established under the Law on Enterprise, those operating under the Law on State-owned Enterprises, cooperatives formed under the Law on Cooperative, and registered business households as per Government Decree No 02/2000/ND-CP dated February 2, 2000.

The Government Decree No 56/2009 ND-CP promulgated on June 30, 2009 stipulates that:

Small-sized enterprises Medium-sized enterprises

There is a lack of a unified definition for small and medium-sized enterprises (SMEs) on both regional and global scales, with significant variations in definitions from one country to another.

Classifying small and medium-sized enterprises (SMEs) is challenging due to the lack of a universally accepted definition Generally, SMEs are characterized by a combination of quantitative and qualitative criteria The qualitative aspects include four key elements: a commonality between ownership and management, a straightforward organizational structure, a typically non-dominant market position, and a strong dependence on self-financing for entrepreneurial growth.

2010) With regards to the quantitative classification parameters, primarily the following ones should be mentioned: staff headcount, annual turnover, invested capital, market share and value added In details:

The staff headcount is a vital factor in classifying a business as a Small or Medium-sized Enterprise (SME) It encompasses all employees, including owner-managers and partners actively working within the company, as defined by national law However, individuals such as apprentices, students in vocational training, and employees on parental or maternity leave are excluded from this count.

The annual turnover is calculated by summing the income generated from sales and services after deducting any rebates, excluding value added tax (VAT) and other direct taxes Meanwhile, the annual balance sheet total reflects the value of a company's primary assets.

Table 2: SME classification criteria in some countries

Nation Criteria Employees Capital/Asset Revenue

Manufacturing 1-300 < or 00M yen N/A Wholesale 1-100 < or 0M yen N/A

Source: Profile of SMEs and SME issues in APEC, 2002 & SMEs of OECD, 2000

However, classification by scale also depends on other factors:

The economic development levels among countries vary significantly, with advanced economies setting high standards for business classifications For example, in the United States, a company with 500 employees qualifies as a small and medium-sized enterprise (SME), while in Vietnam, the threshold is capped at 300 employees Additionally, underdeveloped and developing nations typically have lower capital and revenue requirements compared to their developed counterparts.

 Specific industries have different characteristics: some industries are labor- intensive while others are capital-intensive and require less labor force In reality,

Le Thuy Lan – ATCA/K12 Page 8 many countries set up SME classification criteria separately for different industries such as agriculture, manufacturing, service…

What makes competitive advantages of SMEs?

2.1 Small in size, big in power

Small and medium-sized enterprises (SMEs) typically require less capital and have lower operating costs, enabling them to produce goods more quickly and affordably Their smaller scale allows for rapid decision-making and adaptability to changing circumstances, fostering a culture of flexibility and innovation that provides a competitive edge By closely monitoring market trends and customer needs, SMEs can effectively integrate technological advancements and maintain strong relationships with employees, making them more responsive in manufacturing, marketing, and service compared to larger firms While larger corporations struggle to reduce costs, SMEs continuously offer a diverse range of products at various price points, catering to a broader audience This high consumption value compensates for their lower profit margins, ultimately positioning SMEs as highly profitable and gaining significant market share.

2.2 Efficiency maximization and waste reduction

Small and medium-sized enterprises (SMEs) prioritize efficiency, driving them to actively compete on price and quality Their simple and flexible management structures offer significant advantages over complex systems burdened by time-consuming administrative procedures and inefficiencies Unlike state-funded enterprises, SMEs rely on personal capital, motivating them to operate effectively and maximize profits Business owners, board members, and employees are often willing to work overtime to complete projects, demonstrating their commitment to success.

Overheads, administrative expenses are calculated and allocated properly while all efforts are put to minimize waste as well as maximize efficiency.

General theories on limitations and restrictions of SMEs compared to

While the strengths of small and medium-sized enterprises (SMEs) contribute significantly to a country's economic development, they also face traditional limitations that hinder their competitiveness against larger companies These challenges include difficulties in securing adequate capital for startup costs and business expansion, as banks often provide loans to SMEs under unfavorable terms due to high transaction costs Additionally, SMEs struggle with a shortage of skilled workforce and face greater risks of failure stemming from poor corporate governance, largely due to the limited business experience and education of their directors.

Marketing Ability to react quickly to keep abreast of fast-changing market requirements

Comprehensive distribution and servicing facilities High degree of market power with existing products.

Management Lack of bureaucracy Dynamic, entrepreneurial managers react quickly to take advantage of new opportunities and are more willing to accept risk

Professional managers able to control complex organisations and to establish corporate strategies

Efficient and informal internal communication networks Affords a fast response to internal problem-solving: provides ability to recognise rapidly to adapt to change in the external environment

Internal communications often cumbersome: this can lead to slow reaction to external threats & opportunities

Frequent lack of suitably qualified technical specialists Often unable to support a formal R&D effort on an appreciable scale

Ability to attract highly-skilled technical specialists Can support the establishment of a large R&D laboratory

Frequent lack of time or resources to identify and use important external sources of scientific and technological expertise

Ability to plug into external sources of scientific and technological expertise Can afford library and information services Can buy crucial technical information and technology

Finance Great difficulty in attracting capital, especially risk capital Innovation can represent a disproportionately large financial risk

Ability to borrow on capital market Ability to spread risk over a portfolio of projects Better able to fund diversification into new technologies and new markets

In some areas scale economies of form substantial entry barriers to small firms

Inability to offer integrated product lines or systems

Ability to gain scale economies in R&D, production and marketing

Ability to offer a range of complementary products

Can experience difficulty in acquiring external capital necessary for rapid growth

Ability to finance expansion of production base Ability to fund growth via diversification and acquisition

Can experience problems in coping with the patent system Cannot afford time and costs involved in patent litigation

Ability to employ patent specialists Can afford to litigate to defend patents against infringement

Often cannot cope with complex regulations Unit costs of compliance for small firms often high

Ability to fund legal services to cope with complex regulatory requirements Can spread regulatory costs Able to fund R&D necessary for compliance

Table 3: Comparisons between small and large enterprises

SMEs throughout the world

Taiwan has undergone remarkable economic transformation from a traditional agricultural society to a modern industrial and service-oriented economy, significantly enhancing living standards across education, transportation, and housing Small- and medium-sized enterprises (SMEs) play a crucial role in this development, accounting for nearly 98% of the 1.2 million enterprises in 2003, generating 31.5% of total sales, and employing 77.5% of the workforce By 2009, SMEs contributed over 75% of private sector employment, fostering job security and stimulating local economies despite a survival rate of only 30% beyond five years The resilience and adaptability of Taiwan's SME sector underscore its importance, as continuous innovation from new entrants enriches the business landscape and drives economic growth.

4.2 American entrepreneurship and small business

Successful small businesses are critical to maintaining a robust U.S economy (Leebaert) The numbers almost speak for themselves:

 99 percent of all American businesses are small

 Small businesses provide approximately 75 percent of the net new jobs added to the US Economy every year;

 Small businesses represent 99.7 percent of all employers;

 Small businesses employ 50.1 percent of the private workforce;

 Small businesses provide 40.9 percent of private sales in the country

American SMEs play a vital role in the national economy and society, contributing more than just revenues and profits Their flexibility and innovation allow them to respond effectively to the ever-changing needs of customers, creating job opportunities for women and minorities while addressing high unemployment rates Entrepreneurship thrives across the country, supported by the U.S Government's efforts to foster a conducive environment for business growth The innovation, resilience, and determination of small-business owners are central to the American economy, as these enterprises enhance societal participation, generate jobs, decentralize economic power, and empower individuals to invest in their future.

THE ROLE OF SMES IN NATIONAL ECONOMY

As one of the accelerators of economic wheel

1.1 A contributor to national economic growth

Small businesses are essential to the economy, offering significant benefits that extend beyond mere profits They contribute to national output by providing diverse goods and services, creating job opportunities, and fostering regional economic development Additionally, small businesses enhance market competition and drive innovation, playing a vital role in the overall health of society.

Small businesses play a crucial role in the U.S economy, accounting for 50% of non-farm output and employing nearly half of the American workforce outside of government jobs They are responsible for generating 60 to 80% of net new jobs annually Similarly, in Canada, small and medium-sized enterprises, including unincorporated businesses, contributed to 54.3% of the GDP in the business sector as of 2005.

Size of firm $M % of GDP

Table 4: SME GDP Contribution in Canada (2005)

Source: Business Development Bank of Canada

As of Spring 2011, Vietnam is home to nearly 400,000 small and medium-sized enterprises (SMEs), which account for 99% of the country's businesses These SMEs contribute over 40% of Vietnam's GDP, surpassing both the public sector and the foreign direct investment (FDI) sector by 2.5 times Consequently, SMEs serve as a crucial engine of growth for the Vietnamese economy, mirroring the vital role of small businesses globally.

Le Thuy Lan – ATCA/K12 Page 14 developed markets like the U.S In Vietnam, SMEs in Vietnam; on average, have seen their profits grow approximately 20 percent each year for the immediate past

Figure 2: Private Sector Contribution to Vietnam's GDP in comparison with Public Sector and FDI

Source: Business-in-Asia.com

1.2 An initiator of economic dynamism and effectiveness

Small and medium-sized enterprises (SMEs) play a crucial role in economic stabilization, often serving as shock absorbers for the economy Acting as subcontractors for larger firms, they contribute significantly to the supply chain by specializing in specific components of products SMEs are predominantly found in the manufacturing, distribution, and services industries, where they enhance productivity and foster innovation.

According to UNIDO 2003, subcontracting can be defined as an economic relationship where one entity (the main contractor) requests another independent entity (the

Le Thuy Lan – ATCA/K12 Page 15 highlights the role of subcontractors in producing parts, components, and sub-assemblies, as well as providing essential services required for the completion of the main contractor's final product, all while adhering to the main contractor's specifications.

The manufacturing industry relies on historically developed skills and knowledge to produce goods, utilizing raw materials that are often limited in their transferability, such as food products This sector encompasses various processing and manufacturing methods, where economic efficiency can be improved through specialization in specific areas, like automotive parts and home appliances Additionally, it caters to niche markets that are too small for large corporations, fostering an environment where innovative entrepreneurs can take risks, commercialize new technologies, and drive business development.

The distribution industry plays a crucial role in efficiently delivering a diverse range of goods from manufacturers to consumers The presence of numerous small and medium-sized enterprises (SMEs) with business partnerships is vital for enhancing this distribution process.

The services industry caters to both businesses and individuals, necessitating a significant number of SMEs to meet the demands created by time and distance constraints.

Small and medium-sized enterprises (SMEs) excel in versatility and flexibility, allowing them to quickly adapt to market changes In times of sudden market shifts or economic downturns, large corporations often resort to downsizing their workforce to cut costs amid oversupply In contrast, SMEs effectively leverage their resources and navigate challenges due to their streamlined administrative structures, where leadership is motivated to protect the company and its employees.

As a socio-economic stabilizer

2.1 Labor absorption, poverty alleviation and revenue generation

Small and medium-sized enterprises (SMEs) play a vital role in local job creation, serving as a stabilizing force in society By utilizing more labor-intensive production methods compared to larger companies, SMEs significantly enhance productive employment opportunities, generate income, and contribute to poverty reduction (Kongolo, 2010).

Table 5: Share of SMEs in some countries (%) (2004)

Small and medium-sized enterprises (SMEs) make up over 95% of businesses worldwide, significantly contributing to economies by generating 40-80% of employment and accounting for 30-70% of gross national product across various countries.

USA Germany Japan France England Korea India Turkey

Table 6: Share of SMEs in global economy

The significant presence of SMEs across the country has enabled previously unemployed individuals, particularly low-skilled workers in rural, mountainous, and underdeveloped areas, to actively participate in the local labor force This development positively impacts both regional and national economies.

In the European Union, 99% of the 19.3 million enterprises are classified as small and medium-sized enterprises (SMEs), employing approximately 75 million individuals While there are only 35,000 businesses with over 250 employees, a significant majority—18 million—are micro-enterprises with fewer than 10 employees On average, each European business employs four people, including the owner or manager, and generates an average turnover of 500,000 euros.

Small and medium-sized enterprises (SMEs) make up over 95% of businesses worldwide and account for more than half of private sector jobs Recognizing the challenges SMEs face—such as access to financing, technology, and international markets—governments in OECD countries actively support entrepreneurship through various policies and programs For instance, South Korea offers tax incentives and low-interest loans to encourage the establishment of new businesses in rural regions.

Latin American politicians are shifting their focus from large investments and attracting multinationals to recognizing the vital role of SMEs as the primary job creators and key players in technology supply chains Approximately 80-90% of companies in the region are micro enterprises, prompting governments to significantly reduce red tape to promptly address the needs of SMEs While most major regional economies, with the exception of Argentina, have seen these businesses thrive, Brazil and Mexico stand out for their robust support of SMEs.

Some of the world's top-performing economies, such as Taiwan and Hong Kong, heavily rely on small enterprises In Japan, 81% of employment is within small and medium-sized enterprises (SMEs), with an average of nine employees per enterprise, compared to just four in the European Union.

The share of employment located in the micro, small and medium sectors taken together is high – estimated recently at 60% while the sector generated about 40% of output

The decreasing unemployment rate and reduced migration to major cities for jobs are alleviating significant concerns, including urban over-pollution and social issues stemming from idleness.

2.2 Promotes stability and development of regional economies

Small and medium-sized enterprises (SMEs) play a crucial role in providing job opportunities and utilizing local resources to foster growth in provincial areas Many economies include underdeveloped regions such as border provinces and rural areas, which face challenges like inadequate infrastructure and poor transportation SMEs serve as a vital source of materials, ideas, and services that larger corporations often overlook due to their focus on economies of scale This focus can lead to an imbalance in regional development, as large enterprises may underestimate potential profits in these areas, resulting in wasted resources and negative impacts on the overall economy In contrast, regional SMEs are more inclined to invest in local markets, and with supportive policies from local authorities, they can significantly enhance provincial economies.

2.2.2 Local SMEs: traditional handicraft village development

Traditional craft villages are vital to the socio-economic development of rural areas in Vietnam, contributing significantly to the preservation of the country's long-established trades Despite being primarily agricultural, the skilled artisans in these villages produce intricate and sophisticated handicrafts Vietnam is home to approximately 300 traditional handicraft villages, specializing in various crafts such as carpentry, bamboo weaving, lacquer, embroidery, paper making, and pottery.

Le Thuy Lan – ATCA/K12 Page 19 highlights the significance of villages in the handicraft industry, where techniques were traditionally passed down to relatives and fellow villagers These communities have become essential institutions, with their names serving as trademarks for locally made handicraft products By fostering and supporting local small businesses, we can enhance provincial prosperity while simultaneously preserving Vietnam's traditional trades.

As the beginning of any big companies

SMEs are the starting point of development in the economies towards industrialization Most of the current larger enterprises have their origin in small and medium enterprises

The significant growth in industrialized countries over recent years can largely be attributed to the rise of small and medium-sized enterprises (SMEs) There is an increasing acknowledgment that a thriving market economy begins with the establishment of SMEs, which are crucial for dynamic economic development Entrepreneurs play a vital role by starting businesses, acquiring and managing resources, and expanding their operations The activities of SMEs serve as a major driving force behind national economic growth.

High-tech companies in both developed and developing countries exemplify rapid growth and innovation In Silicon Valley, for instance, firms like Apple and Microsoft began as small ventures founded by passionate individuals—Apple was established in 1976 by members of the Homebrew Computer Club, while Microsoft was created by Harvard student Bill Gates at just 20 years old Today, these companies have evolved into major multinational corporations, significantly contributing to increased competition and economic growth in the United States.

Following World War II, many global companies in Japan began as small and medium-sized enterprises founded by engineers Over time, these businesses evolved into major international corporations, with notable examples including Sony, Panasonic, and Honda.

Taiwan's remarkable achievements highlight the significant impact of small and medium-sized enterprises (SMEs) on a nation's economy, particularly in the context of limited natural resources Over the past decade, Taiwan has emerged as a leading global supplier of electronic hardware products, with SMEs playing a crucial role in this success In 1993, SMEs represented 96% of all companies, contributed to 69% of total employment, and accounted for 55% of Taiwan's manufacturing exports Notably, many of Taiwan's current 400 electronic firms began as small businesses, underscoring the vital role of SMEs in the country's economic landscape.

Small businesses serve as essential training grounds for young, inexperienced employees, allowing them to gain valuable knowledge and enhance their occupational experience This foundational experience is crucial for those aiming to pursue professional careers in larger corporations, where managerial skills acquired in small business settings are highly valued.

DIFFICULTIES ENCOUNTERED BY VIETNAM’S SMES

A snapshot of SMEs in Vietnam: three decades of Vietnam’s private

Since the implementation of the "Doi Moi" renovation policy in 1986, Vietnam has made remarkable strides in revitalizing its economy by embracing a multi-stakeholder approach, revising the 1992 Constitution to recognize the private sector, and committing to protect private ownership while restructuring state-owned enterprises (SOEs) The enactment of the Law on Enterprise in 1999 marked a significant turning point for private sector development, establishing crucial pro-private sector institutions The entry of foreign-invested banks such as ANZ and Bangkok Bank paved the way for the emergence of Vietnam's first private commercial bank, VP Bank, in 1993 Following the normalization of relations with the U.S in 1994 and Vietnam's accession to ASEAN in 1995, the nation saw a rapid increase in private enterprises, particularly in Saigon, with notable companies like My Hao, Kinh Do Bakery, and Biti's leading the charge Vietnam has continued to implement deeper reforms since joining the WTO in 2006, fostering fairer competition among economic stakeholders Many small and medium-sized enterprises (SMEs), such as Nutifood, THP Beverage, and Masanfood, have evolved from modest beginnings to become significant national and regional players However, these SMEs often struggle to secure adequate funding, leading many to seek support from investment funds for financial and management assistance.

Figure 3: Number of new SMEs in Vietnam from 2000 to 2010

Source: Business-in-Asia.com

Fact findings: the situation of Vietnam’s SMEs

2.1 Business establishment, cessation, and dissolution

Since the implementation of the Law on Enterprise in Vietnam in 2005, the SME sector has experienced significant quantitative and qualitative growth By April 1, 2012, the number of registered businesses soared to over 694,000, a substantial increase from just 63,000.

According to the annual report from the Vietnam Chamber of Commerce and Industry (VCCI) in 2002, the number of operating enterprises significantly declined by December 31, 2012, dropping to just 312,600 This reduction means that two-thirds of these businesses were experiencing contraction rather than growth The economy struggled with rising inventories and declining consumer purchasing power, forcing hundreds of thousands of small and medium-sized enterprises (SMEs) to shut down, dissolve, or lay off workers to cut costs.

Annual statistics by VCCI reveals that business situation has turned gloomier than ever over the past few years At the end of financial year of 2011, as many as approximately

79 thousands Vietnamese businesses made losses and ended up being dissolved The rate

Le Thuy Lan – ATCA/K12 Page 23 was 58.128 in 2012 with the number in four quarters being 14.108, 10.930, 15.152 and 17.938, respectively

Quarter I Quarter II Quarter III Quarter IV/2012

Figure 4: The number of dissolved enterprises in 2012

In the first quarter of 2013, the Ministry of Planning and Investment reported a decline in new business registrations, which fell by 6.8 percent compared to the same period in the previous year.

In recent years, traditional business sectors have experienced a significant rise in the number of companies ceasing operations compared to 2012 Notably, the retail sector saw 5,970 businesses shut down, marking an 11.5% increase The construction industry faced 2,296 closures, reflecting a 17.6% rise, while the service sector recorded 942 companies going out of business.

(22.3%), real estate (47.6%), banking-finance-insurance (134.4%), recreation (548%)

In Vietnam, major cities like Ho Chi Minh City, Hanoi, Da Nang, and Hai Phong are experiencing significant business closures, with Ho Chi Minh City accounting for nearly 30% of the 15,200 dissolved enterprises Following HCMC, Hanoi, Hai Phong, and Da Nang also contribute to the high cessation rates of businesses in the country.

On the way to complete deregistration procedures

Table 7: The number of dissolved enterprises in 2013

Figure 5: Business Cessation Data in some major cities

Over a decade, only 8.74% of small businesses evolved into mid-sized companies and 6.55% became large enterprises, while a significant 44.7% remained small Alarmingly, 18.2% regressed to micro-enterprise status, highlighting a concerning trend of negative growth in the sector.

The outlook for medium-sized businesses appears bleak, with 38.7% reverting to small-scale operations and 5.12% downsizing to micro-scale.

The average size of employees in Vietnamese SMEs has significantly decreased, with the headcount dropping from 74 employees per enterprise in 2002 to just 34 in 2011.

Explanations to the status quo: constrains, obstacles, and difficulties

Vietnam's SMEs face significant challenges from multiple fronts, stemming from a combination of external and internal factors This current bleak scenario is influenced by macroeconomic instability, an unfavorable business environment, and an incomplete legal framework.

Credit plays a crucial role in the startup, operation, and growth of small and medium-sized enterprises (SMEs) It provides the necessary funds for smooth operations and covers essential startup costs such as premises, equipment, and infrastructure upgrades SMEs also require capital for research and development and technological advancements Credit sources include formal options like loans from commercial and development banks, which accounted for 50% of borrowing in May 2012, along with informal loans from family and friends However, many small businesses in Vietnam face chronic underfunding and struggle to secure bank credit, posing significant challenges to their operations and growth potential.

Small and Medium Enterprises (SMEs) face significant challenges in securing bank credit, primarily due to high lending interest rates, with 43% of businesses in 2005 citing them as a barrier, a concern that persisted with 38% in 2012 Additionally, complex requirements, uncooperative lending procedures, and issues related to collateral, such as insufficient or low-value assets, further complicate the borrowing process for SMEs.

Figure 6: SMEs’ difficulties in credit access in 2005 and 2012

Sky-high interest rates are severely impacting SMEs, making it crucial for governments and central banks to maintain low and stable interest rates over the long term This stability enables both domestic business owners and foreign investors to plan for normal operations and company expansion According to World Bank data, Vietnamese enterprises face significantly higher interest rates compared to their global counterparts, highlighting the need for policy adjustments to foster a more favorable business environment.

No collateral or collateral of low value

Small businesses play an indispensable role in national economies, particularly during periods of low interest rates, such as the 2% rates observed from 2008 to 2011 The emerging tiger economies of Singapore and Hong Kong are renowned for their stable business environments, maintaining interest rates at 5.4% and 5%, respectively In contrast, Malaysia and the United States successfully reduced their rates to 4.9% and 3.3% in 2011, down from 6.1% and 5.1% in 2008 However, Vietnam's official rates were significantly higher, nearly seven times Japan's and three times those of other surveyed countries By the first half of 2012, the General Statistics Office reported that 78.5% of companies in Vietnam faced interest rates exceeding 16%, with over half borrowing at rates of 18%.

Table 8: Annual interest rates in some countries

Source: World Bank 3.2.1 Land and land-use rights

Many small and medium-sized enterprises (SMEs) in Vietnam struggle to secure land or premises, often relying on leasing facilities that are no longer utilized by state-owned enterprises The process of obtaining land use allocations or leases for offices and factories is challenging, with unclear regulations that frequently overlook the needs of SMEs As a result, navigating the complex procedures for acquiring and exercising land use rights can be both tedious and, in many instances, unfeasible.

In Hanoi, the application processing time for land-use rights can take approximately 325 days, while in Ho Chi Minh City, Da Nang, Binh Duong, and Hue, it averages 418, 309, 64, and 82 days respectively The high costs associated with changing land-use purposes and compensation pose significant financial burdens on SMEs, hindering their operational capabilities and investment strategies.

Non-state-owned SMEs face significant challenges in accessing land-use rights, with rare instances of being permitted to use state-allocated land Typically, these businesses operate from the director's residence, lease offices from individuals, or rent spaces from state-owned enterprises (SOEs) or provincial People's Committees In contrast, SOEs benefit from direct land allocation or long-term leases from the government Land-use rights are subject to three types of taxes: land-use fees, land-use tax, and land-lease fees The taxes for state-allocated land are generally lower, as they are based on fixed rates, while SMEs leasing land from SOEs or individuals incur much higher costs, reflecting current market prices.

Effective June 6, 2013, Decree 34/2013/ND-CP on land-use rights is anticipated to significantly increase the selling price of state-owned land by 3-4 times, while land leasing costs are also expected to rise sharply Coupled with the recent surge in utility prices and essential commodities, small and medium-sized enterprises (SMEs) are facing escalating input costs, exacerbating their financial challenges.

National power relies heavily on domestic enterprises, yet a crucial pillar is deteriorating As highlighted in section III.1, hundreds of thousands of Vietnamese SMEs have either dissolved or ceased operations, with two-thirds failing to expand and instead shrinking in scale Only one-third of small and mid-sized companies are achieving growth, resulting in a decline in average headcount from 74 employees per enterprise in 2011 to just 34 in 2002.

Le Thuy Lan notes a significant increase in state sector employment, rising from 421 in 2002 to 490 in 2011 Economist Pham Chi Lan highlights that resources have been disproportionately allocated to state-owned enterprises (SOEs) and economic groups (SEGs), leaving small and medium-sized enterprises (SMEs) struggling to secure capital and government support As a result, SMEs are facing severe challenges and diminishing prospects The growth of SOEs and SEGs primarily relies on the exploitation of natural resources, such as those managed by Petro Vietnam and VINACOMIN, or on monopolistic practices seen in companies like EVN Telecom and Vietnam Railways Furthermore, while the foreign direct investment (FDI) sector significantly contributes to national exports, it remains largely disconnected from the domestic market.

State policies favoring SMEs primarily focus on land and credit support Leasing high-priced, unused land to SMEs generates significant revenue for state-funded enterprises, offsetting losses and funding other activities Additionally, state-owned enterprises (SOEs) benefit from lower interest rates on capital sourced from bank credit, state budgets, and Official Development Assistance (ODA), while leveraging real estate and assets as collateral to meet lending requirements Despite these advantages, SMEs struggle to access government bailout packages, relying solely on their resources, while state-funded enterprises receive preferential treatment A notable example is VINASHIN, which burdens the state with debt through state-backed bonds, highlighting the misallocation of resources and the disparity in support between SOEs and SMEs.

Le Thuy Lan – ATCA/K12 highlights ongoing debates regarding the government's proposal to allocate approximately VND 30,000 billion to rescue the struggling real estate market Despite the significant contributions of various economic sectors, particularly manufacturing and exports, which remain underfunded, the real estate sector only accounted for 0.1% of GDP from 2008 to 2012 Consequently, it is essential for the government to thoroughly consider all aspects of each policy before making a final decision, ensuring fairness to all economic sectors.

The influences of macroeconomic instabilities

Inflationary pressures and tightened monetary policies have created challenges for SMEs, with sharply rising interest rates leading to increased bad debts and a weakening banking system.

Figure 7: Inflation rate in Vietnam from 2011 – 2013

Rising inflation leads to significant repercussions, prompting the government to tighten monetary policy and increase interest rates to combat the issue As a result, small and medium-sized enterprises (SMEs) can no longer rely on cheap labor as a competitive advantage, forcing business owners to raise basic salary levels to meet workforce demands This situation is compounded by escalating costs of food, transportation, and national retail sales, further driving up input expenses.

Le Thuy Lan – ATCA/K12 Page 31 highlights that many SMEs are facing significant financial losses, increasing the risk of bankruptcy The situation is exacerbated by a banking system burdened with high levels of bad debts and unpaid loans, trapping SMEs in a detrimental cycle with limited prospects for recovery.

Small businesses are facing significant challenges due to production stagnation caused by low market demand Although high inflation was somewhat controlled between 2011 and 2012 through tighter monetary policies, the economy subsequently experienced deflation In early 2013, interest rates were lowered by 2-4%, bringing them to 8-10% However, credit growth remains stagnant as aggregate demand is weak; large inventories persist while consumer purchasing power declines, leading to decreased buying activity and reluctance among entrepreneurs to expand their businesses.

Mr Mai Huu Tin, President of the Vietnam Young Entrepreneurs Association, acknowledges the overwhelming challenges confronting private enterprises, noting that many small and medium-sized enterprises (SMEs) have already succumbed to these difficulties He emphasizes that at this point, these businesses can only await their inevitable decline.

Low domestic competitiveness and limited access to international markets

The competitiveness of SMEs is currently very low, facing significant challenges in accessing both domestic and international markets Despite having the advantage of local production, domestically-made goods struggle against a surge of smuggled imports, particularly from China, which are offered at lower prices This issue is further exacerbated when considering the global market landscape.

Many companies face challenges due to a lack of brand recognition and high production costs compared to regional competitors A significant portion of exported products, including garments, footwear, food processing, and automotive goods, relies heavily on imported materials, which can make up 60% of the final product When international prices rise, businesses are left with the difficult choice of either raising their prices or absorbing the losses.

 Out-of-date technology: the technological level (manufacturing assemblies, machines and equipment) used in Vietnam‟s enterprises is relatively low with 10%

Le Thuy Lan's report highlights significant challenges in Vietnam's technological landscape, revealing that only 2% of Vietnamese enterprises utilize high-tech applications compared to 31% in Thailand, 51% in Malaysia, and 73% in Singapore State-owned enterprises (SOEs) invest a mere 0.2-0.3% of their revenue in research and development (R&D), far below the 5-10% seen in developed countries, while the private sector shows virtually no investment in this area The commercialization of technology products is severely limited due to weak connections between research institutions, universities, and businesses Additionally, 70-75% of the labor force is unskilled, resulting in low absorptive capacity among domestic firms The combination of labor shortages and inadequate vocational training significantly impedes the advancement of technology in the country.

Many SMEs struggle with weak corporate management skills due to insufficient training and outdated practices A significant number lack long-term strategic business plans, relying instead on experiential learning Their distribution networks are often limited, and trade promotion efforts tend to be simplistic, impractical, and ineffective Notably, the budget allocated for trade promotion is less than 1% of revenue, in stark contrast to foreign-invested firms, which typically invest 10-20% of their revenue in this area.

Limited access to information about international markets and global trade significantly hampers competitiveness and leads to missed trade opportunities, particularly for SMEs The scattered nature of enterprise information contributes to fragmented knowledge of foreign markets, creating fundamental trade barriers This issue encompasses various areas, including management accounting, technical requirements, marketing skills, import regulations, and consumer preferences, as well as the assessment of imported goods' suitability Additionally, the inadequate language skills of entrepreneurs pose further challenges As Vietnam continues to integrate into the global economy, these deficiencies in essential skills could become increasingly problematic.

RECOMMENDATIONS TO SUPPORT VIETNAM’S SMES

Policy implications

Vietnam's market economy and small and medium-sized enterprises (SMEs) are in the early stages of development, making it crucial to promote market-oriented reforms and enhance the business environment in line with WTO guidelines The competitiveness of SMEs significantly depends on government action, highlighting the need for the establishment of comprehensive policies to support this vital economic sector in the future.

1.1 Legal framework and resource reallocation

It is time that the country shifted to a more balanced and dynamic economic model

To foster the growth of SMEs in Vietnam, establishing a rule-of-law based regulatory framework is crucial, as the current vague and fluctuating regulations, coupled with excessive bureaucracy, hinder business operations and drain resources Ms Vu Kim Hanh emphasizes that equality and state support are vital for SMEs, while Mr Bui Quang Tuan highlights the lack of natural selection in the market, where efficient SMEs are dissolving while inefficient state-owned enterprises thrive due to government backing A transparent legal framework with minimal state interference is essential to create a level playing field for both SOEs and private enterprises Additionally, the government must recognize the contributions of various economic sectors, prioritizing support for SMEs over the real estate market, which requires substantial investment and time to stabilize.

1.2 Easier access to capital and land-use rights improvement

Financial policies significantly influence capital mobilization and the growth of small and medium-sized enterprises (SMEs) Private SMEs often struggle with persistent funding shortages, particularly regarding long-term financing The stringent collateral demands imposed by banks, coupled with limited incentives for State-owned Commercial Banks to extend credit to SMEs, create a detrimental cycle This reluctance from private SMEs to engage with State-owned Commercial Banks further exacerbates the issue, hindering the financial support necessary for their development.

Le Thuy Lan – ATCA/K12 Page 35 highlights the challenges faced by SMEs due to their exclusion from the formal credit sector, forcing them to depend on informal lending By setting basic interest rates at 3-4% and applying lending rates of around 6% for SME loans, the government can provide substantial support This approach would help SMEs overcome financial barriers and contribute positively to the national economy.

Improving land-use rights is crucial for enhancing access to credit for SMEs, as unclear procedures hinder their ability to acquire land To tackle this issue, it is essential to clarify and expedite land-title allocation processes, reduce heavy fees and taxes on land registration, and implement straightforward and equitable dispute resolution procedures Additionally, the establishment of more industrial and commercial complexes will provide SMEs with the necessary premises for sustainable business operations.

1.3 Internal and external SMEs’ network development

SMEs should strengthen their connections with government institutions, large corporations, and domestic foreign-invested enterprises (FIEs) to overcome limitations and restrictions By enhancing partnerships with these entities, SMEs can secure markets for their products, gain better access to raw materials, and receive support in areas such as management, production, technology, capital, marketing, and credit guarantees Additionally, collaboration can address social and political challenges stemming from the disparity between small and large enterprises in developing countries, leading to reduced production costs, targeted technology transfers to improve production quality, stable market transactions to mitigate supply and demand fluctuations, and the establishment of collaborative research and development initiatives, fostering interdependence within the domestic industry.

To enhance collaboration among small and medium-sized enterprises (SMEs), state-owned enterprises (SOEs), and foreign-invested enterprises (FIEs), it is recommended that the government promote a long-term subcontracting system Establishing an effective framework for business contracting is essential to bridge the existing information and perception gaps between SMEs.

Le Thuy Lan – ATCA/K12 Page 36 emphasizes the importance of developing a comprehensive database for supporting industries, suppliers, and business broker services This initiative aims to strengthen collaboration between government institutions and the private sector by establishing more organizations and forums for sharing experiences and knowledge Additionally, it promotes an information network among institutions connected to small and medium-sized enterprises (SMEs).

Suggestions for SMEs

SMEs need to seize their chances to enhance competitiveness for the long-term development of businesses and the economy based on support given by the government

2.1 Training and managerial skills development

Small and medium business owners juggle multiple roles, including director, decision-maker, leader, manager, and executor They serve as communicators, engaging with the press and external stakeholders, while also managing internal communications with employees Their decision-making responsibilities encompass high-level policy and strategy choices As leaders, they inspire and motivate their teams, fostering a culture of change and innovation within the organization.

As managers oversee daily operations, it is essential for business owners and corporate executives, including CEOs and high-ranking officers, to maintain high standards of skills and qualifications through ongoing training programs Entrepreneurs must continually update their knowledge and essential skills in a knowledge-based economy, which encompasses various fields such as law, economics, culture, sociology, and psychology Key competencies like competition and strategy management, negotiation, presentation, communication, risk management, and business analysis and planning are critical for success in today's dynamic business environment.

To boost product quality and competitiveness in the global market, SMEs must actively strengthen collaboration and interaction with domestic enterprises Establishing sustainable partnerships grounded in a win-win spirit is essential for achieving this goal.

Le Thuy Lan emphasizes that the marketplace is characterized by interdependency, strengthening, and mutualism, rather than being a ruthless battleground It serves as a platform where stakeholders can pursue mutual benefits through interconnected supply-demand contracts while fulfilling their social responsibility to create wealth and employment This collaborative approach embodies entrepreneurship, which acts as a driving force for development in advanced economies globally.

Organizational culture encompasses the values, visions, norms, language, systems, symbols, beliefs, and habits that shape a workplace It represents the collective behaviors and assumptions that are instilled in new members, influencing their perceptions, thoughts, and emotions This culture significantly impacts how individuals and groups interact with each other, clients, and stakeholders.

In the workplace, culture, principles, and norms significantly influence employee interactions and performance When organizations foster healthy values, employees are motivated to work efficiently, optimizing resource utilization and achieving the best results Such norms encourage healthy competition among employees, which boosts overall productivity and efficiency Furthermore, this competitive spirit drives individuals to excel and seek promotions, ultimately contributing positively to the organization's growth and profitability.

In today's global economy, the SME sector plays a crucial role in fostering a healthy business environment, driving economic efficiency, and promoting development, especially in developing countries Despite varying definitions across organizations and nations, SMEs significantly contribute to both developed and developing economies Their importance has surged due to their agility, lower capital requirements, labor-intensive operations, and reduced management costs, allowing for more affordable production While they face certain challenges, SMEs are essential for enhancing innovation, boosting competitiveness, fostering entrepreneurship, generating employment, and facilitating fundamental economic restructuring.

Vietnam's SMEs face significant disadvantages compared to larger firms due to market imperfections in capital and product goods markets, leading to underperformance in employment creation and economic growth To maximize their potential contribution to a healthy economy, policy-makers and domestic entrepreneurs must explore conditions that support SME development A well-functioning market, inclusive government policies, and internal business improvements are essential Key recommendations include enhancing the legal framework, facilitating easier access to capital and land rights, fostering external and internal networks, improving training and managerial skills, strengthening partnerships, and cultivating a robust corporate culture These measures can help bridge the performance gap between Vietnamese SMEs and their international counterparts, positioning them as drivers of economic innovation.

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Tiêu đề	The Strategic Importance Of Small And Medium Enterprises To The National Economy And Vietnamese Smes Encountered Difficulties Facts And Solutions
Tác giả	Le Thuy Lan
Người hướng dẫn	M.A. Nguyen Hong Mai
Trường học	Banking Academy
Chuyên ngành	Foreign Language Department
Thể loại	graduation thesis

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Số trang	48
Dung lượng	1,35 MB