Small and medium enterprise and economic growth in Vietnam = Doanh nghiệp vừa và nhỏ và tăng trưởng kinh tế ở Việt Nam

NATIONAL ECONOMICS UNIVERSITY INSTITUTE OF PUBLIC POLICY AND MANAGEMENT ERASMUS UNIVERSITY ROTTERDAM INSTITUTE OF SOCIAL STUDIES VIETNAM - NETHERLANDS MASTER’S PROGRAM IN DEVELOPMENT ECONOMICS THESIS SMALL AND MEDIUM ENTERPRISE AND ECONOMIC GROWTH IN VIETNAM Student : Trinh Kim Loan Class : MDE 16B Supervisor : Dr Do Ngoc Huynh, PhD Hanoi - 2014 DECLARATION I hereby certify that this thesis contains no material that has been accepted for awards of any other degrees or diplomas at any other academic institutions To the best of my knowledge and belief, it contains no materials previously published or written by other people, except for those who have been listed in the references Hanoi, February 2014 Trinh Kim Loan ACKNOWLEDGEMENTS My thesis could not have been finished without the great support and assistance of many people I would like to express my sincere thanks to them First of all, I would like to express my special thanks to my supervisor, Dr Do Ngoc Huynh, who has supported and encouraged me to complete this thesis in due course I am thankful to Dr Dang Quang Vinh and Dr Nguyen Viet Cuong for the insightful comments, which in turn helped me to improve the thesis' analysis I wish to specially thank professors lecturers and staff of the Institute of Public Policy and Management (IPPM) at the National Economics University (Vietnam) as well as the International Institute of Social Studies (ISS) at the Erasmus University (the Netherlands) for giving me the opportunity to finish my study and for all their feedbacks and support I also would like to give my appreciation to Professor Sarath B Delpachitra and a friend Pham Van Dai for supporting me I am grateful to my beloved family member for their spiritual support and understanding over period of my study Hanoi, February 2014 Trinh Kim Loan TABLE OF CONTENTS DECLARATION .2 ACKNOWLEDGEMENTS LIST OF TABLES LIST OF BOXES LIST OF FIGURES .13 ABBREVIATIONS .15 CHAPTER 16 INTRODUCTION 16 1.Problem statement 16 2.Objectives of study 17 Research questions 18 Research hypotheses .18 Structure of the thesis 18 CHAPTER 19 LITERATURE REVIEW 19 a.The concept of SMEs .19 b The role of SMEs to economic growth 24 c.The role of SMEs to economic structural change 30 CHAPTER 33 CURRENT SITUATION OF SMALL AND 33 MEDIUM ENTERPRISES IN VIETNAM 33 1.The concept of SMEs in Vietnam 33 2.Major characteristics of SMEs in Vietnam 35 2.1 The economic scale and flexibility 35 2.2 The technological level .36 2.3 The organizational structure and management 38 2.4 The quality of labor force 39 2.5 The market share and strategy 40 Current situation of SMEs in Vietnam 41 3.1 On the number of SMEs 41 3.2 On the survival of SMEs 45 3.3 On the diversification of SMEs 47 3.4 On the geographical distribution of SMEs .48 3.5 On the credit access and capitalization of SMEs 49 3.6 On the labor structure of SMEs 51 4.The contribution of SMEs to economic development and economic structural change in Vietnam .52 4.1 SMEs and economic development 52 4.2 SMEs and economic structural change .54 4.3 SMEs and poverty alleviation 55 5.Challenges for SMEs in Vietnam .55 CHAPTER 57 MODEL SPECIFICATION AND EMPIRICAL RESULTS 57 1.2Model specification 58 1.1The econometric model for the role of SMEs to economic growth 59 1.2The econometric model for the role of SMEs to economic structural change 60 1.3The database 60 1.4Empirical results .63 In the process of examination of panel data sets, there are two most popular methods; namely, the fixedeffect method and the random-effect method are often used (Hausman, 1978) Because the fixed-effect method assumes systematic difference between panels, it is considered as more robust However, when considering the panel specified factors into account into consideration, the fixed-effects method is less efficient than random method Therefore, the choice between the fixed method or the random method depends on the estimation which is more robust Furthermore, empirical studies suggest that less efficient model are more robust and less robust models are more efficient (Hausman, 1978) In this study, both Fixed-effects and Random-effects regressions are performed and then applied Hausman specification test to choose the most preferable regression using the Hausman test (Hausman, 1978) 63 Robustness tests for the regression are also performed by using Hausman test Since both fixed-effects and random-effects are assumed to be spurious in the presence of heteroscedasticity and autocorrelation In this case, it is pointed out that OLS standard error would be significantly incorrect (Beck and Katz, 1995) and the coefficients from GLS regression will be not consistent (Wooldridge, 2002) In order to test for heteroscedasticity problem, the iterated GLS estimates are obtained and then performed a Likelihood Ratio tests (Lrtest) to test the null hypothesis of homoscedasticity The test procedure developed by Wooldridge (2002, 282–283) is used to test for the presence of autocorrelation .63 If the models exhibit the heteroscedasticity and/or autocorrelation, some remedial measures need be taken because the estimator from above Fixed-effects and Random-effects tend to be less reliable In this case, Beck and Katz (1995) suggested that the OLS with Panel -Corrected Standard Errors (PCSE) estimation should be the most appropriate method 64 3.1 The impact of SMEs on economic growth .64 1.5The impact of SMEs on economic structural change 67 CHAPTER 71 CONCLUSIONS AND POLICY IMPLICATIONS 71 1.MAIN FINDINGS 71 2.POLICY IMPLICATION AND RECOMMENDATIONS .71 3.LIMITATION AND SUGGESTION FOR FUTURE FOR STUDY 73 REFERENCES 74 APPENDIX 79 LIST OF PROVINCES CONTAINED IN EACH REGION 79 APPENDIX 80 THE DISTRIBUTION OF SMES BY PROVINCES IN VIETNAM 2008 80 APPENDIX 3: EMPIRICAL RESULTS 81 MODEL 4.2: EMPIRICAL RESULTS FROM FIXED-EFFECTS REGRESSION 81 LIST OF TABLES BOX 2.1: TYPES OF SMES BASED ON THE TYPES OF OWNERSHIP AND MANAGEMENT 20 BOX 2.1: TYPES OF SMES BASED ON THE TYPES OF OWNERSHIP AND MANAGEMENT 20 TABLE 2.1: MAIN ELEMENTS OF SMES’ DEFINITIONS IN THE ASEAN MEMBER COUNTRIES 23 TABLE 3.1: CLASSIFICATION OF SMES BY TOTAL CAPITAL AND NUMBER OF EMPLOYEES .35 TABLE 3.2: THE MAIN PURPOSES/APPLICATIONS OF USING COMPUTERS IN SMES 38 TABLE 3.3: THE NUMBER OF REGISTERED SMES IN PERIOD 2000 – 2009 .42 TABLE 3.4: CHANGES IN THE STRUCTURE OF THE SMES GROUPS43 TABLE 3.5: THE PROPORTION OF SMES BY INDUSTRIES (%) 47 TABLE 4.1: DESCRIBING OF VARIABLES AND DATA SOURCES 61 TABLE 4.2: DESCRIPTIVE STATISTICS 61 TABLE 4.3: CORRELATION MATRIX OF VARIABLES .63 TABLE 4.4: SUMMARY OF EMPIRICAL RESULTS FOR THE IMPACT OF SMES ON ECONOMIC GROWTH .66 TABLE 4.5: SUMMARY OF EMPIRICAL RESULTS FOR THE IMPACT OF SMES ON STRUCTURAL CHANGE 68 MODEL 4.3: EMPIRICAL RESULTS FROM RANDOM-EFFECTS REGRESSION 82 MODEL 4.2: EMPIRICAL RESULTS FROM PCSE REGRESSION 83 MODEL 4.3: EMPIRICAL RESULTS FROM PCSE REGRESSION 84 LIST OF BOXES Problem statement 16 The role of SMEs in economic development has been increasingly recognized since recent decades, especially for developing countries Specifically, SMEs contribute to economic development through creating jobs, improving productivity and increasing industrial outputs UNCTAD (1998) indicated that SMEs have been playing a vital role in the development process of many leading economies in Asia and contributed approximately 40 to 60 percent of all capital investment and a similar proportion to the productivity growth Tambunan (2008) showed that Indonesia is a typical example for SMEs’ role in economic growth, where SMEs accounted for more than 50% of GDP over the period 2000-2006 Harvie (2005) argued that SMEs made a significant contribution to the growth through job creation with about 50% - 70% of the total workforce and contributed as much to the output as large businesses (50.1% of turnover) in ASEAN developing countries There are also evidences that the productivity growth by SMEs increases in recent years, for example, at a level of 40% of that of large enterprises in Japan (Takakoshi, 2007) SMEs are an important component of international trade For example, the total export value of SMEs is estimated to account for about 35% of Asia’s exports (OECD, 2005) 16 The role of SMEs in economic development has been increasingly recognized since recent decades, especially for developing countries Specifically, SMEs contribute to economic development through creating jobs, improving productivity and increasing industrial outputs UNCTAD (1998) indicated that SMEs have been playing a vital role in the development process of many leading economies in Asia and contributed approximately 40 to 60 percent of all capital investment and a similar proportion to the productivity growth Tambunan (2008) showed that Indonesia is a typical example for SMEs’ role in economic growth, where SMEs accounted for more than 50% of GDP over the period 2000-2006 Harvie (2005) argued that SMEs made a significant contribution to the growth through job creation with about 50% - 70% of the total workforce and contributed as much to the output as large businesses (50.1% of turnover) in ASEAN developing countries There are also evidences that the productivity growth by SMEs increases in recent years, for example, at a level of 40% of that of large enterprises in Japan (Takakoshi, 2007) SMEs are an important component of international trade For example, the total export value of SMEs is estimated to account for about 35% of Asia’s exports (OECD, 2005) 16 There has been an increasing trend of empirical studies focusing on the relation between SMEs and economic development Using the panel data of thirty seven countries in the period from 1960s to 1990s, Hu (2003) explored the influence of SMEs on the economic growth with the empirical result that SMEs had positive impact on the economic growth in both developed countries and developing countries Beck (2005) used a data sample of 45 countries and found the evidence of strong and positive relation between the importance of SMEs and GDP per capita growth, and highlighted that SMEs played an important role to the growth In addition, SMEs have also proved a pivotal role in industrialization, particularly in developing countries which have a large proportion of SMEs (Tambunan, 2006) Elumba (2002) showed that SMEs are important to almost every economy in the world and play a key role in the industrialization of developing countries that they have unique characteristics on their own, and they are extremely flexible and can readily adapt to rapidly changing environment Bari (2005) indicated that SMEs play an important role in the economic structural transformation of the countries moving from the low- income to middle- income group with the majority of SMEs representing as entries of manufacturing industries and service businesses 16 There has been an increasing trend of empirical studies focusing on the relation between SMEs and economic development Using the panel data of thirty seven countries in the period from 1960s to 1990s, Hu (2003) explored the influence of SMEs on the economic growth with the empirical result that SMEs had positive impact on the economic growth in both developed countries and developing countries Beck (2005) used a data sample of 45 countries and found the evidence of strong and positive relation between the importance of SMEs and GDP per capita growth, and highlighted that SMEs played an important role to the growth In addition, SMEs have also proved a pivotal role in industrialization, particularly in developing countries which have a large proportion of SMEs (Tambunan, 2006) Elumba (2002) showed that SMEs are important to almost every economy in the world and play a key role in the industrialization of developing countries that they have unique characteristics on their own, and they are extremely flexible and can readily adapt to rapidly changing environment Bari (2005) indicated that SMEs play an important role in the economic structural transformation of the countries moving from the low- income to middle- income group with the majority of SMEs representing as entries of manufacturing industries and service businesses 16 In Vietnam, during the transformation process from a centrally- planned economy to a market- oriented economy, SMEs have played an important role in the economic growth and development, especially in aspects of creating jobs, labor income, economic structural changes through developing new industrial bases and/or supporting industries, and especially, the accumulation process for capital and entrepreneur skills for paving the way for further development The SME sector has been widely recognized as an engine driving economic growth, particularly in providing employment opportunities with significant proportion of domestic labor force (Phat, 2009) The number of SMEs increased significantly from 83,000 in 2003 to 450,000 enterprises in early of 2010 and constitutes 95 percent of the total enterprises in Vietnam (White Paper, 2009) The research topic on the role of SMEs to economic growth has recently attracted many researchers and economists in Vietnam However, most of these studies simply used statistic data to analyze and indicate the impact of SMEs on economic growth There are only a few empirical studies, especially those using quantitative approaches to highlight the relative importance of the sector in the economy Therefore, based on the foundation of recent empirical economic literature on the topic, this study will focus on examining quantitatively impacts of SMEs on the economic growth of Vietnam by using relevant econometric models and a provincial socio-economic database 17 In Vietnam, during the transformation process from a centrally- planned economy to a market- oriented economy, SMEs have played an important role in the economic growth and development, especially in aspects of creating jobs, labor income, economic structural changes through developing new industrial bases and/or supporting industries, and especially, the accumulation process for capital and entrepreneur skills for paving the way for further development The SME sector has been widely recognized as an engine driving economic growth, particularly in providing employment opportunities with significant proportion of domestic labor force (Phat, 2009) The number of SMEs increased significantly from 83,000 in 2003 to 450,000 enterprises in early of 2010 and constitutes 95 percent of the total enterprises in Vietnam (White Paper, 2009) The research topic on the role of SMEs to economic growth has recently attracted many researchers and economists in Vietnam However, most of these studies simply used statistic data to analyze and indicate the impact of SMEs on economic growth There are only a few empirical studies, especially those using quantitative approaches to highlight the relative importance of the sector in the economy Therefore, based on the foundation of recent empirical economic literature on the topic, this study will focus on examining quantitatively impacts of SMEs on the economic growth of Vietnam by using relevant econometric models and a provincial socio-economic database 17 Objectives of study 17 This study is purposed to use econometric techniques to analyze the impact of SMEs on the economic growth at the provincial level in Vietnam during the period 2000-2006 In particular, the econometric models are used to find empirical evidences on the role of SMEs to (i) economic growth rate and (ii) economic structural changes at the provincial level This is very important for Vietnam to highlight how the sector could be enhanced in line with the Drafted Strategy of Socio – Economic Development 2011-2020 promulgated by the Government (Draft of 2011-2020 Economic and Social Development Strategy) 17 This study is purposed to use econometric techniques to analyze the impact of SMEs on the economic growth at the provincial level in Vietnam during the period 2000-2006 In particular, the econometric models are used to find empirical evidences on the role of SMEs to (i) economic growth rate and (ii) economic structural changes at the provincial level This is very important for Vietnam to highlight how the sector could be enhanced in line with the Drafted Strategy of Socio – Economic Development 2011-2020 promulgated by the Government (Draft of 2011-2020 Economic and Social Development Strategy) 17 Research questions 18 Research hypotheses .18 Structure of the thesis 18 a The concept of SMEs 19 a The concept of SMEs 19 b The role of SMEs to economic growth 24 b The role of SMEs to economic growth 24 c The role of SMEs to economic structural change 30 c The role of SMEs to economic structural change 30 2.1 The economic scale and flexibility 35 10 heteroscedasticity problem, the iterated GLS estimates are obtained and then performed a Likelihood Ratio tests (Lrtest) to test the null hypothesis of homoscedasticity The test procedure developed by Wooldridge (2002, 282–283) is used to test for the presence of autocorrelation If the models exhibit the heteroscedasticity and/or autocorrelation, some remedial measures need be taken because the estimator from above Fixed-effects and Randomeffects tend to be less reliable In this case, Beck and Katz (1995) suggested that the OLS with Panel -Corrected Standard Errors (PCSE) estimation should be the most appropriate method 3.1 The impact of SMEs on economic growth The Hausman test rejected the null hypothesis of no systematic difference between the coefficients of the fixed-effect and the random-effect regressions and therefore support for the fixed-effect regression Furthermore, the Likelihood-ratio test rejected the null hypothesis of homoscedasticity, and the Wooldridge test rejected the null hypothesis of no autocorrelation Following, Beck and Katz (1995), PCSE regressions were performed as a remedy for heteroscedasticity and autocorrelation problems The summary of results from the fixed-effect and PCSE regressions and robustness test are presented in table 4.4 As can be seen from the table 4.4, the method identifying a SME by capital or labor does not affect to the regression results substantially in both Fixed-effect and PCSE regressions There is also no considerable change in regression results from PCSE and Fixed-effect regressions Almost independent variables in PCSE regression have the same sign of direction as in Fixed-effect regression except for the Lhopbed variable The results confirm that the SMEs sector have positive effect on economic growth confirming the hypothesis 1, that the SMEs sector have positives impact on provincial economic growth in Vietnam Positive relationships were observed between Lsmecapital (and also Lsmelabor) and Lgdp in both Fixed-effect and PCSE regression at the statistical significant level of 1% Accordingly, one percentage of increasing in the number of SMEs per 1000 people would lead to an increase of 0.144 - 0.159% in GDP per capita in Fixedeffect regression, but much larger increase of 0.418 - 0.443% in PCSE regression According to PCSE regression estimates higher impact of SME then Fixed-effect regression, assuming other things remained unchanged On the other hand, investment also plays an important role to economic growth We 64 find the positive impact of Linvest variable to Lgdp at 1% level of significance, in both Fixed-effect and PCSE regressions This empirical finding is consistent with the theoretical argument that investment is one of the main sources of economic growth, besides the scale of labor force and productivity The infrastructures variable (proxied by the number of telephone per 100 people) is found to have positively effect on economic growth at 1% level of statistical significance This explains why infrastructures, such as telecommunication, are so important to economic growth in Vietnam, similarly to that in other countries in all over the world The empirical results also showed that the relationship between Lhopbed and Lgdp at 10% level of significance However, the impact of Lhopbed is not consistent in two regressions While it positively affects economic growth in Fixed-regression, it negatively influences economic growth in PCSE-regression Nevertheless, we did not find strong evidence for the impact of other control variables including Lbasicedu and Ldoctor, as theoretically suggested The reason is that there might be some problems concerning the quality of education and healthcare services that are highly biases among provincial and economic regions 65 Table 4.4: Summary of empirical results for the impact of SMEs on economic growth PCSE regression Fixed-effect regression Lgdp Model 4.2a Model 4.2b Model 4.2a 0.1595*** (0.0292) Lsmecapital Model 4.2b 0.4430*** (0.0401) 0.1442*** (0.0272) Lsmelabor 0.4178*** (0.0379) Linvest 0.1853*** (0.0237) 0.1882*** (0.0236) 0.0985** (0.0410) 0.1055** (0.0418) Linfra 0.2547*** (0.0221) 0.2567*** (0.0222) 0.1059*** (0.0218) 0.1055*** (0.0220) Lbasicedu 0.0100 (0.0101) 0.0103 (0.0101) 0.0152 (0.0106) 0.0156 (0.0107) Ldoctor 0.0237 (0.0404) 0.0238 (0.0405) 0.0482 (0.0401) 0.0531 (0.0413) Lhopbed 0.1108* (0.0572) 0.1079* (0.0573) -0.1588* (0.0867) -0.1788** (0.0894) Constant 0.5511*** (0.1072) 0.5413*** (0.1073) 1.5938*** (0.1288) 1.6095*** (0.1320) sigma_u 0.4727 4757 sigma_e 0.1107 1110 0.8794 0.3295 0.4396 0.8788 0.3226 0.4337 0.5632 0.5592 427 427 427 427 F(6,360) = 437.37 F(6,360) = 435.15 Prob > F = 0.0000 Prob > F = 0.0000 = 840.39 Prob > = 0.0000 = 804.01 Prob > = 0.0000 R within R2 between R2 overall No of obs F-test/ Chi-test Hausman test Likelihood-ratio test for heteroscedasticity Prob> 358.47 = 0.0000 Prob> = 645.82 = 0.0000 Prob> Prob> = 28.70 = 0.0000 = 646.32 = 0.0000 Wooldridge test for F(1,60) = 141.059 F(1,60) = 160.407 autocorrelation Prob > F = 0.0000 Prob > F = 0.0000 ***, ** and * statistically significant at the level 1%, 5% and 10%, respectively Numbers in parentheses () are standard errors (See Appendix for the log file) 66 1.5 The impact of SMEs on economic structural change The Hausman test does not reject the null hypothesis of no systematic difference between the coefficients of the fixed-effect and the random-effect regressions and therefore support for the random-effect regression The Likelihood-ratio test rejected the null hypothesis of homoscedastic and the Wooldridge test rejected the null hypothesis of no autocorrelation Then, the PCSE regression is used as a remedy for heteroscedastic and autocorrelation problems of the model Table 4.5 summarizes results from the random-effect and PCSE regressions and robustness test Looking at the empirical results, we can see that the SMEs sector positively the industrial structure of the economy either classified by capital or labor in both the randomeffect and PCSE regressions However, there are differences in the statistical significance of the relation when applying PCSE regression instead of Random-effect regression Although the impact of SMEs variables (Lsmecapital and Lsmelabor) on Lindshare is not statistical significant in the random-effect regression, there is a strong positive relation between the SMEs variables (Lsmecapital and Lsmelabor) and Lindshare in PCSE regression with 1% level of statistical significance This empirical result from PCSE regression is supported by the fact that SMEs have actually influenced positively the industrialization process in Vietnam because they are the key player in the process of entering the industrial and services sector Then, research hypothesis is confirmed that presence of SMEs has positively contributed to the provincial industrialization in Vietnam Assuming other variables remained unchanged, one percentage of increasing in the number of SMEs per 1000 people would lead to an increase of 0.06-0,07% in the share of industrial and services sector in GDP 67 Table 4.5: Summary of empirical results for the impact of SMEs on structural change Random-effect regression Lindshare Model 4.3a Model 4.3b PCSE regression Model 4.3a 0.0132 Lsmecapital 0.0709*** (0.0095) Model 4.3b (0.0139) 0.0118 (0.0088) Lsmelabor Linvest 0.0609*** (0.0130) 0.0252*** 0.0254*** 0.0434*** 0.0457*** (0.0075) (0.0074) (0.0090) (0.0090) 0.0533*** 0.0535*** 0.0184*** 0.0199*** (0.0069) (0.0069) (0.0069) (0.0070) 0.0579*** 0.0578*** 0.0822*** 0.0815*** (0.0128) (0.0128) (0.0215) (0.0215) 0.0031 0.0031 -0.0060 -0.0059 (0.0034) (0.0034) (0.0072) (0.0071) -0.6981*** -0.6995*** -0.4941*** -0.5054*** (0.0406) (0.0406) (0.0464) (0.0465) sigma_u 0.1830 0.1840 sigma_e 0.0360 0.0360 R2 within 0.6874 0.6874 R2 between 0.2416 0.2383 R2 overall 0.2618 0.2589 0.7214 0.7207 No of obs 427 427 427 427 Linfra Ldoctor Leduqual _cons Chi-test 776.79 777.81 68 = = 233.92 Prob > Prob> = 0.0000 Prob> 3.96 Hausman test Prob> = 0.5553 = 0.0000 226.11 Prob > = 0.0000 = 0.0000 = 5.61 Prob> = 0.3457 Likelihood-ratio = 375.98 test for heteroscedastici Prob> = 0.0000 = 377.75 Prob> = 0.0000 ty Wooldridge test F(1,60) = 24.542 F(1,60) = for Prob > F = Prob > F = autocorrelation 0.0000 24.500 0.0000 ***, ** and * statistically significant at the level 1%, 5% and 10%, respectively Numbers in parentheses () are standard errors (See Appendix for the log file) For other independent variables, as can be seen from the table 4.5, investment has positive impact on the change of economic structure, as theoretically expected It shows the evidence for the positive impacts of Linvest at 1% level of significance, in both Fixedeffect and PCSE regressions This finding is somewhat useful because investment in Vietnam tends to focus on and support for the development of industrial and service sectors The infrastructures variable is found to have positively effect on the share of industrial and services sector in GDP at 1% level of statistical significance in both Random-effect and PCSE regression This empirical result is plausible because infrastructure is compulsory for the development of industrial and service sector Therefore, more advanced infrastructure lead to higher share of industrial and service sector in GDP The empirical results also showed a positive impact of Ldoctor at 1% level of significance in both Random-effect and PCSE regression The empirical result clearly shows the link between the development of health care system and the development of 69 industrial and service sectors Also, there is almost no evidence that Lbasicedu has an impact on economic structure change The reason is that there might be some problems concerning the quality of education that are highly biases among provincial and economic regions, as noted above 70 CHAPTER CONCLUSIONS AND POLICY IMPLICATIONS Main findings The thesis has examined the impact of SMEs to economic growth and economic structural change at provincial level in Vietnam using relevant econometric models with a provincial database We firstly make a brief survey of existing studies on the topic and current situation of the SMEs and economic growth in Vietnam In order to address the research questions, econometric models were specified and investigated the role of SMEs on economic growth and economics structural changes at Vietnam provinces There are two different ways to identify a SME; base on capital and/or labor Using a socioeconomic database of Vietnamese provinces covering the period from 2000 to 2006, this research empirically confirms the null hypothesis of the impact of SMEs in both capital and labor classifications We find the empirical evidence at high level of significance that the SME plays a positive role on economic growth rate and innovation of economic structure as theoretically expected Moreover, the amount of investment per capita (Linvest), infrastructure index (Linfra) are found to have positive effect on economic growth rate and innovation of economic structure We not find evidence for the statistically significant and consistent effects of variables including Lhopbed, Lbasicedu and Ldoctor on economic growth, and effects of Leduqual on economic structure innovation Besides, Ldoctor is found to have positive effect on economic structure innovation Policy implication and recommendations Based on the above results, certain policy implications can be abstracted The positive relation between SMEs and economic development level, specifically the provincial GDP per capital and the share of the industrial and services sectors in GDP confirms the important role of government policies in promoting the SMEs sector and considering it as one of the main engines of economic growth, especially in terms of creating jobs to shift the composition of labor force absorption, generating the value added, and improving the income and socio-economic profile of the people working in the SMEs sector Given that the FDI sector and the state sector could not attract much of redundant employees in the process of industrialization, the SMEs sector should be regarded as an 71 important policy objective for the Government to introduce policies to promote the country’s industrialization However, for SMEs to develop from a low starting point in terms of capital, management, and production technologies in the tough environment of competition with other sectors in the domestic and international markets, the Government needs to support them, effectively and efficiently, especially in terms of creating a favorable business environment The comprehensive policies measures should be provided: 1) Providing preferential credit schemes Government should give encouragement policy of investment for SMEs, especially in industries which have labor intensive or industrial factors, support to establish SMEs network as well as support center to help SMEs accessing the credit sources, investment fund, The Government also encourages the establishment of guarantee fund, development fund for SMEs to generate and support SMEs expand the capital Supporting the low interest rate for SMEs in medium and long term of loan 2) Guiding and supporting technology development Encourage investment of technological renovation and renewal of technical equipment according to the strategy development and production expansion of SMEs Raise the technology capability of SMEs through programs to support research, technological development to produce new products, transfer technology Support for Development of Science and Technology for an annual national funds to support SMEs innovation, technological capacity building 3) Supporting the development of human resourse of SMEs Training the workforce both in official training schools and vocational schools to meet the requirement of the economy in general and SMEs in particular, organizing the workshop, seminar on enterprise management in financial crisis and how to attract fund through the business plan The Government also needs to focus on the development of the education system and the healthcare system in order to meet the requirement of skilled and healthy workforce of the economy in general and SMEs in particular Not only the numbers of 72 schools, students, and teachers but also the quality of education is very important in the aspect that it would enhance the average human capital level in the economy, and then, the labor productivity This would play a crucial role in pursuing the strategy of sustainable economic development in Vietnam Limitation and suggestion for future for study This research was hampered by the lack of reliable source of data after 2006 Similarly due to non-observability of certain variable some proxy measures were adopted SMEs are considered as a fast growing sector It is obvious that empirical research needs to be done for this sector Furthermore, due to the nature of this data, it was assumed that endogeniety, was not an issue for the variable considered in the PCSE model However, there may be a possibility of endogeneity of some variables such as investment per capita or hospital bed per 1000 people because it can be argued that high level of GDP per capital makes it easier for provinces to build more hospitals Under such circumstances alternative modelling methods such as Generalized Method of Movements or Instrumental Variable (IV) would have been more appropriate This could be recommended as a suggestion for future research Empirical results may also help to identify strengths and weaknesses of the SME sector and thus, contribute to improve the overall policy development, implementation, management and administration of this sector The findings of this research point to some further areas of research For instance measure of productivity of capital and labor utilization, or efficiency of inputs and outputs, relative efficiency of sector in comparison with other competing sectors of the economy, education and financial governance and education and training are yet to be researched These 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quantitatively impacts of SMEs on the economic growth of Vietnam by using relevant econometric models and a provincial socio -economic database 17 In Vietnam, during the... disadvantages in archiving priority for lending or in building relationship with banks and financial institutions They are lacking of financial resources to invest in large projects, expand the business,... role in the economic growth and development, especially in aspects of creating jobs, labor income, economic structural changes through developing new industrial bases and/ or supporting industries,