Technical efficiency of small and medium enterprises in manufacturing sector in viet nam

VIET NAM – NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS --- TECHNICAL EFFICIENCY OF SMALL AND MEDIUM ENTERPRISES IN MANUFACTURING SECTOR IN VIET NAM By NGUYEN THI THU HUO

VIET NAM – NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

-

TECHNICAL EFFICIENCY OF SMALL AND MEDIUM ENTERPRISES IN

MANUFACTURING SECTOR IN VIET NAM

By

NGUYEN THI THU HUONG

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

Ho Chi Minh City, December 2013

VIET NAM – NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

-

TECHNICAL EFFICIENCY OF SMALL AND MEDIUM ENTERPRISES IN

MANUFACTURING SECTOR IN VIET NAM

A thesis submitted in partial fulfilment of the requirements for the degree of

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

ACKNOWLEDGEMENTS

This paper has could not be started and completed without the help of several individuals who supported me directly and indirectly First of all, I appreciate my supervisor Dr Pham Khanh Nam so much for his enthusiastic assistance He has not only given me genuine intellectual guidance in academy but also encouraged me a lot through the analysis process It is so hard for me to complete this research without his profound advice Thus, I am very grateful to him I am also thankful to Dr Nguyen Trong Hoai for sharing his knowledge and practice experiences in researching which are very useful for this study I am very grateful thank Dr Truong Dang Thuy for his comment and advice about thesis research design I also thank my friend Le Minh Tri for sharing his advantage discussions on econometric techniques Last but not least, I would like to thank my parents, and all my other family members for their concern and invaluable moral support

ABSTRACT

Most enterprises in Viet Nam is Small and medium enterprises (SMEs) In 2009 SMEs account for 98,54 percent in total enterprises in economy So, this paper examines the technical efficiency of small and medium enterprises in manufacturing sector in Viet Nam The paper concentrated on evaluating the technical efficiency of the firms Then

it identifies the determinant of technical efficiency in these small and medium enterprises The data set collected from survey of Central Institute for Economic Management (CIEM), Department of education (DoE), and Institute of Labor Science and Social Affairs (ILSSA) in 2009 with 1.968 observations This paper resulted in a high technical efficiency in 2009 Levels of technical efficiency ranged from 0.94 percent to 0.98 percent Regarding factors influencing technical efficiency, the paper shows that only firm age and area have a positive relationship with technical efficiency Others factor such as firm size, sub-contractor, competitor, enterprise launched new product and improve product have a negative relationship

Keywords: small and medium enterprise in manufacturing sector, technical efficiency,

stochastic frontier production function, determinant, Viet Nam

TABLE OF CONTENTS

CHAPTER 1: INTRODUCTION……….1

1.1 Problem statement……… 1

1.2 Research objective………3

1.3 Scope of study……… 3

CHAPTER 2: LITERATURE REVIEW……….5

2.1 Theoretical framework for technical efficiency……….5

2.2 Empirical literature on technical efficiency……… 9

2.3 Conceptual framework……… 19

CHAPTER 3: OVERVIEW VIET NAM SMEs AND DOMESTIC MANUFACTURING SECTOR……… 21

3.1 Overview of Vietnam SMEs……… 22

3.2 Domestic manufacturing sector………26

CHAPTER 4: RESEARCH METHODOLOGY……… 28

4.1 Empirical model……….28

4.2 Data and variables……… 31

CHAPTER 5: RESEARCH RESULT………34

5.1 Descriptive statistic………34

5.2 Regression results……… 36

CHAPTER 6: CONCLUSION AND POLICY RECOMEMDATON……….45 REPERENCE

APPENDIX

List of Tables

Table 1: Definition for Small and Medium Enterprises in Viet Nam……… 21

Table 2: Enterprises by labor scale and type in 2009………23

Table 3: Enterprise by capital size and economic sector and type in 2009 23

Table 4: Contributions to State budget of SME in the 2007-2009 periods……….25

Table 5: Variables and their descriptive……… .………32

Table 6: Deterministic statistic of main variables……… 34

Table 7: Correlation coefficient of variables……… 37

Table 8: Generalized Likelihood Ratio Test……… 38

Table 9: Distribution of Efficiency Level of Sample Firms……… ……38

Table 10: Average Efficiency Level by Firm Size………39

Table 11: Estimate frontier production function using Cob-Douglas production function……… ……….40

Table 12: Determinant of technical efficiency……… …………42

Table 13: Number of enterprises by labor scale in 2000 to 2009……… 52

Table 14: Laborers by sector.……… ………….52

Table 15: Gross output of industry at constant 1994 prices………53

Table 16: Manufacturing SMEs in Operation (2006-2009)……….54

List of Figures

Figure 1: Technical, allocative, and overall efficiency………5 Figure 2: Production frontier and technical efficiency……….6

CHAPTER 1: INTRODUCTION

1.1 Problem statement

Since Innovation 1986, private ownership has been encouraged in industries, commerce and agriculture Thanks largely to these reforms, Vietnam achieved around 8% annual GDP growth from 1990 to 1997, and the economy continued to grow at an annual rate of around 7 percent from 2000 to 2005, making Vietnam become one of the world's fastest growing economies Growth still remained strong during the late 2000s global recession, holding at 6.8 percent in 2010 The development is still stable until now, especially in small and medium enterprises (SMEs)

SMEs are the most important part of Viet Nam economy They play a vital role

in promoting economic growth, increasing national income, creating jobs for workers and contributing to the economic restructuring towards industrialization

According to the Vietnam Chamber of Commerce and Industry (VCCI), until the date

of 31/12/2011, Viet Nam has 543,963 enterprises In that, there are nearly 97 percent of small and medium enterprises, mainly private businesses SMEs use 51 percent of the workforce and contribute more than 40 percent of the national GDP If we take 133,000 cooperatives, farms and about 3 million individual businesses, this region contributes

up to 60 percent of GDP SMEs not only contribute significantly to the economic development of the country, but also create more than one million new jobs per year for the most untrained labor, contribute to poverty reduction, enhance security society

Manufacturing is one of the main fields of SMEs Output of manufacturing accounted for 51.3 percent in total gross output of industry (2009) It has also made significant contributions to the Gross domestic product (GDP) However this figure has gone down through several years: 21.13 percent in 2007; 20.22 percent in 2008 and

technical efficiency change and technical progress So, the reduction bases on this factor? Many papers in previous time showed that technical efficiency is the important factor effecting to productivity growth: Viet Le (2011), Viet Le and Charles Harvies (2010), Hung T Pham, Thanh L Dao and Barry Reilly (2010); Nguyen Khac Minh and Giang Thanh Long (2007); Nguyen Thang (2005); Tran Thị Bich (2008); Pham (2009); Nguyen Khac Minh (2007) Most of these studies used firm level data from surveys in

1997, 2002, 2005, 2007 Their technical efficiency reached more than 30 percent to nearly 90 percent It means that the firm can increase their current level of output with the same level of input to reach maximum efficiency

Furthermore, the determinant of technical efficiency is also an import matter to concern Nunes (2011) shows that age and size as well as cash flow is restrictive factors of the growth in SMEs In Viet Nam, number of labor in manufacturing sector

of the SMEs is 5,665 thousand people in 2007 and increase up to 6,449 people in 2009 The number of enterprise also increases from 155,771 enterprises to 248,842 enterprises in 2009 (nearly 63 percent increasing) Other factor contributing to productivity is material Material is the most important to industry, especially in manufacturing That is essential input in production process By using inputs effectively the enterprises can raise output Besides, there are many factors related to technical efficiency include internal factors and external factors

So, it is necessary to continue researching technical efficiency in firm, especially in manufacturing SMEs in Viet Nam The question is which level of technical efficiency

in manufacturing SMEs is and what factors affect technical efficiency? Which policy

we can use to improve technical efficiency? So, this paper will estimate the technical efficiency of Vietnamese manufacturing SMEs to evaluate firm performance and answer above question

1.2 Research objective

General research objective of this thesis is to investigate technical efficiency of small and medium enterprise in manufacturing sector in Viet Nam

Specific of objectives are:

a To measure technical efficiency of manufacturing SMEs in Vietnam

b To examine determinants of technical efficiency of manufacturing SMEs in Vietnam

1.3 Scope of study

The analytical unit in this thesis is small and medium enterprises in manufacturing sector in Viet Nam The reason for choosing manufacturing industry is this industry uses the same production function So, there will be an overview of the effectiveness of this sector without bias Thereby overall assessment of the effectiveness of the sector and make appropriate policy

The year was selected for this study is 2009 The previous years there have been

a lot of studies evaluating the effectiveness of TE in SMEs: 2002, 2005, and 2007 In

2009 SMEs are more variable, increasing both the number of employees and the size of the enterprises So assessing the increasing or decreasing of TE is necessary Thereby the Government will have the appropriate policies in order to maintain and increase the

TE next years

The methodology chosen is stochastic frontier approach This paper used stochastic frontier model to investigate technical efficiency in manufacturing sector by using Cobb-Douglas production function and Transcendental-logarithm (Translog) production function And the technique is running software Frontier 4.1 developed by Collie (2005)

The paper is structured as follows The next section is an overview of Vietnamese SMEs and manufacturing sector Then, the paper uses data collected from the survey of

2009 in manufacturing SMEs to evaluate the technical efficiency I bases on stochastic frontier production function to use methodology parametric approach I also find down some empirical that affects the technical efficiency Then the paper identifies several policy recommendations to improve the technical efficiency

CHAPTER 2: LITERATURE REVIEW

2.1 Theoretical framework for technical efficiency

Many researchers have analyzed performance of firm, especially manufacturing SMEs

Kalirajan and Shand (1999) and Farrell (1957) defined technical efficiency in the i-th

Y*i: Maximum possible output

That is a basis model to estimate But, maximum possible output is imperceptible and

must be estimated

Figure 1: Technical, allocative, and overall efficiency

Figure 2: Production frontier and technical efficiency

Source: Kalirajan and Shand (1999)

Figure 1 shows the classic framework to define overall efficiency in two technical efficiency and allocative efficiency By using two inputs (X1, X1) the enterprises produce Output (Y) In this figure the efficiency unit isoquant is Y=1 This equation shows all technical efficiency combinations The figure 1, P present that the enterprises uses high levels of input to produce output at Y=1 At that level of input the enterprise

do not reach high technical efficiency The ratio between optimal and actual resource use (OR/OP) is magnitude of technical efficiency Any point on the line Y=1 is technical efficiency At point Q, the enterprise use the minimum cost Besides, if efficiency includes relative factor price, it is indentified allocative efficiency OS/OR

So, the overall efficiency is OS/OP

Figure 2 shows the approach of production frontier and technical efficiency Enterprise uses input x to produce output Q At point A, a technical efficiency firm lies on the production frontier At point B, the firm is technical inefficiency

Several authors classified measurement of TE into two main group: parametric (Deterministic Frontier Model and Stochastic Frontier Model) and non-parametric approach (Data Envelope Analysis) (Coelli et, 2005; Murillo-Zamorano, 2004; Kumbhakar and Lovell, 2003) The non-parametric is associated with Data envelope analysis (DEA) Murillo-Zamorano (2004) showed that DEA is based on mathematical programming model to estimate optimal level of output and mix inputs The parametric method specifies stochastic production function using econometric technique in which error term in the regression is composed of two elements The stochastic production function model was developed by Aigner, Lovell and Schmidt (ALS) (1977), Meeusen and Van den Broeck (MB) (1977), and Battese and Corra (1977) It was largely used in econometric There is a composed error term in this model (Murillo-ZAmorano, 2004) The general functional form of the stochastic production function (SPF) is in the Cobb-Douglas function Follow the Cobb-Douglass:

Y = β1Kβ2Lβ3eut (2)

LnY = β1 + β2lnK + β3LnL + Ut (3)

In the production function, there are some important factors of production: total labor force (L); tools machines and raw materials (capital, K); qualified scientific, technical, organizational capabilities of the enterprise in particular and society in general (the general factor, β1) Output growth is fast or slow depending on the use of labor and capital, and also sub-of synthetic elements In addition, economic factors show overall production efficiency This model has some advantages: Among the described model

However, it is necessary to clearly distinguish the purpose mentioned in this study, which is technical efficiency instead of allocative efficiency According to Koopmans and Debreu-Farrell (1951), allocative efficiency refers to the efficiency of combining inputs and outputs in optimal proportions, including a price factor While, technical efficiency refers the ratio between the observed output and optimal output or the efficiency of using minimum input to give maximum output So, instead of mentioning the relationship between input and output, technical efficiency only refers

to the ratio between the observed output and the maximum output under the fixed input

Collie et (2005) developed the software Frontier 4.1 to evaluate enterprises performance The model specification may be expressed as:

Yit = xit + (Vit + Uit) ,i=1, ,N, t=1, ,T,

Where:

Yi is production of i-th firm;

Xi is a k x 1 vector of the input quantities of the i-th firm;

β is a vector of unknown parameters

Vi are random variables assumed to be independently and identically distributed as N (0,б2

Thus, the variable Zity represents other factors such as location of business, main contractor or sub contractor, competitors, or changes in product manufacturing or materials to suit the actual operation of the business

2.2 Empirical literature on technical efficiency

Because of the important of Technical efficiency in firm performance, so there are many discussion of efficiency measurement based on an efficient production frontier representing the maximum level of output that a firm can obtain from any given combination of input This chapter mentions on two main methods for efficiency are parametric and non-parametric methods Parametric method is based on a mathematical programming technique while non-parametric bases on an econometric technique There are some key differences of those methods A non-parametric technique is inherently an enveloping technique and requires little or no modification for efficiency analysis (Fried et al., 2008) It is not considered a statistical technique,

as inefficiency scores and the envelopment surface are “calculated” and not estimated This is also called deterministic because all deviations from the frontier are attributed

to inefficiency There is no random error in this approach This also makes the assumption that all firms have the same technology and production frontier Thus, all discrepancies in production are dericed entirely from business management or inappropriate technology (Nguyen Khac Minh et al., 2007) The mathematical programming technique is flexible in terms of the structure of production technology This method does not require the specification of a functional form and can avoid the effects of mis-specific for both technology and efficiency factors (Fried et al., 2008) The disadvantage of the technique is that it can be extremely sensitive to variable selection and data errors (Kalirajan and Shand, 1999)

The parametric approach is also called the stochastic frontier approach breaks down the random error into component That is due to random in the model and due to efficiency Some empirical are list below:

Nguyen Khac Minh, Giang Thanh Long and Bach Ngoc Thang (2007) analyzed the efficiency using data of 1,492 firms The data were collected from the Economic Census for Enterprises conducted by The General Statistic Office of Viet Nam (GSO) during the period 2000-2003 The methodology which the authors used is parametric approach (base on stochastic production function) and non-parametric approach (base

on DEA) The result showed that there is difference between two methodologies: the mean technical efficiency of SMEs was about 50 percent under SFP function and about

40 percent under the DEA approach

The technical efficiency in the Viet Nam manufacturing was also studied by Hung T Pham, Thanh L Dao, and Barry Reilly in 2010 The authors used SPF approach to estimate the data from the Viet Nam enterprises survey for 2003 and gave the result that an average manufacturing enterprises is operating at nearly 62 percent of its technical efficiency

Viet Le and Charles Harvie (2010) also evaluated technical efficiency of firm by using SPF function to analyze 5,204 observation of manufacturing SMEs from the survey conducted in 2002, 2005, 2007 The estimation give result that manufacturing in Vietnam SMEs have average technical efficiency from 84,2 percent to 92,5 percent This figure is relatively high The paper also provided the factors which influence efficiency include firm age, size, location, ownership, cooperation with a foreign partner Government assistant, innovation and subcontracting

Rand and Tarp (2006) shows that technical efficiency in Viet Nam manufacturing SMEs about 61 percent The data includes 1,128 observations collected from GSO during period 1991-2001 It is likely that the productivity of enterprises is inefficient

Nunes (2011) tested hypothesis about relationship between young firm, old firm with high technology and some variables: age, size, labor, internal financing, and external financing The research’s results shows that age and size affect the young SMEs, not old firms; cash flow and debt are determinant of not only young SMEs but also old SMEs; R&D intensity and labor productivity are possible to all SMEs growth; R&D intensity helps firms perform better, but the main is high tech firm; interest and debt are important to firm development

Bruno and Ricardo (1989) investigated a sample of Italian manufacturing firms They compare with the previous research and get the same result The labor demand is the process of the firm growth, in detail in small firm

Browyn H (2008) after present an imperial analysis from Italian SMEs with 10-50 labor by control for heteroskedasticity, serial correlation and survivorship bias, showed that: Firm growth not only effect by age and size but also by external finance That is law, export capacity, State subsidies and ration credit The empirical also give the differences between firm with financial system is better than firm independent external factor

Havie and Lee (2005) shows that almost employments were created by SMEs when studying some developing countries in East Asian such as China, Indonesia, and Viet Nam

Kokko and Sjöholm (2004) showed the role of internationalization of Viet Nam SMEs and give a conclusion that openness is the important key to maintain and increase firm’s growth

Title Researcher Year

Non-Guide to use Frontier version 4.1

2002, 2005,

2007

Technical efficiency from 84,2 percent to 92,5 percent

Stochastic

Frontier Analysis

Kumbhakar 2003 Examine

stochastic frontier model as an

Provide a gateway

to the professional literature as well as practical application

SPF

Survey from 1.492 firms in 2000-2003

The mean technical efficiency of SMEs was about 50 percent under SFP function and about

40 percent under the DEA approach

of manufacturi

ng SMEs in survey

2002, 2005,

2007

efficiency from 84,2 percent to 92,5 percent

- firm age, size, location, ownership, cooperation with a foreign partner Government

assistant, innovation and subcontracting affect to TE

s from 1996-2001

TE is from 79,6 percent to 86,7 percent

Balance Sheets

- Age and size are the factor effect the

1989 Tested a

sample of Italian

manufacturing firms Gibrat's Law

The labor demand is the process of the

specially in small firm

In the previous paper, both firm age and firm size are the main variables affect

to technical efficiency of the firms, especially in SMEs Most studies have found technical efficiency and firm size are positively related (Le, 2010; Nunes, 2011; Brada

et al., 1997) Analysis of firm level data of Taiwan SMEs leads to the observation that the productivity-size relationship has a virtuous cycle built-in More productive firms get larger and in the process, optain access to resources and information which enables them to become more productive Nevertheless, firm age and other factors is affected

to technical efficiency such as: openness, sub-contractor, location…They can have positive, negative or no correlation with efficiency There is no stylized patter of the relationship between efficiency and the above factors

A key economic aspect of firm performance in general and small firm performance in particular is technical efficiency This chapter showed that small firm efficiency can be viewed positively for several reasons Although small firms are often believed to be less efficiency than larger firms, this is often not the case The measurement of efficiency which was made easier with the introduction of an efficiency production frontier by Farrell in 1957 is discussed In this methodology a firm’s actual output is measured against the efficient frontier, representing the best practice frontier

The main goal of researches is to estimate the technical efficiency of manufacturing enterprises (specially is manufacturing SMEs) The key difference of the two methods

is the accommodation of statistical noise in the econometric technique DEA do not require any detail production function, while parametric approach needs the stochastic production function However, the parametric approach is more popular because of controlling statistical noise

There is a little diffidence in the result when using two methods The authors use parametric approach usually gave the higher level of technical efficiency in manufacturing firm The result when using DEA is lower, insignificantly But, the author research two key: estimate technical efficiency and determinant of technical efficiency usually parametric approach The result of technical efficiency is relatively high Firm age and firm size is two main factors affect to TE Beside, following time research and correlation of variables, the other factors have positive relationship or negative relationship with TE

2.3 Conceptual framework

Labor (L)

Age Size

Technical efficiency

Area, competition, Sub-contracting, improve product, launch product

The level of technical efficiency of a particular company is characterized by the relationship between observed production and some excellent products or potential (Greene 1993) Measurement of firm-specific technical efficiency based on the deviation of the observed output from the best production or efficient production frontier The actual production of the company is located on the border that is completely effective If it is below the frontier then it is technically inefficient, with the actual rate to determine the potential production level of each business

 Technical efficiency: Technical efficiency and production efficiency are the

main points of economic growth Technical efficiency is the effectiveness of a given set of inputs, which used to produce an output It concern about productive efficiency

If company wants to get productive efficiency, need also technical efficiency Technical efficiency is necessary for contribute input, human resources A company has been technical efficiency if this firm is producing the maximum output from the minimum quantity of inputs The input may be capital, labors, technology…

 Output (Y) is the amount of energy, work, goods or services produced by a

machine, factory, company or an individual in a period The more technical efficiency, the more output quality

 Capital (K) is the physical capital includes: Machinery, equipment, factories,

vehicles, inventory is necessary factor for direct manufacture Structural system of socio-economic infrastructure (roads, bridges, warehouses, beach, air port, information technology, transport, oil, gas…) facilitates and link economy action each others Investing more capital is increasing potential output, increasing real output It directly impacts to the economy development In developing countries, capital is the most scale

efficiency So, capital is important role in economy development in developing countries

 Labors (L) is input factor in manufacturing It is the necessary role for

economic growth Labor is not only reflected in quantity but also in quality of labor That is particularly in the knowledge, skills and experience accumulated In the current

of this knowledge and skill and considered as a kind of human capital to increase the production capacity of whole countries In developing countries low quality labors is usually surplus but lack of skilled, high technical labor

 Material (M) is the last input component in the production function Those are

total expenditure on raw materials and energy The energy cost includes gas, fuel, petrol, coal, diesel and electricity

 Firm size (size) is the number of wage worker It calculates the number of

employees working in the firm The number of worker can increase follow increase standard capital or not Large firms usually have more workers than small firms This is also a basis for classification of enterprises in different level such as: micro enterprise, small, medium or large enterprise

 Firm age (age) mentions the number of year since establishment In this paper,

I mention the firm in time from established up to the survey year The establishment bases on the date registration on business under the business registration license

 Area is dummy variable, which is used to show the location the firm located

The dummy variable takes the value of 1 if the firm is located in Industrial Park, tech Park or Exporting processing Park Enterprises in center of industry have better access to resources They can get intensive labor, capital and information Furthermore, they have benefit from issues law of Government Nevertheless, enterprises located in

High-urban without development industrial economy have to face higher costs for land and labor It is a little deficient to expand

 Competitor: A business that provides similar products or services The

presence of competitors in an industry drives down the price of goods and services because consumers have more alternatives from which to choose if the price of a particular good or service is too high In this thesis the author means that: when joining

in WTO, the Viet Nam enterprises must face to more other enterprises because of narrowing policy In case the enterprises have good way to develop business, they can alive, other is not So, it is good or bad depend on enterprise’s ability

 Improve product: Productivity is the efficiency with which a firm converts

inputs into outputs Since staffs represent the largest cost for many firms, labour productivity has special importance and vitally affects competitiveness Productivity can also be measured for plant and machinery For example, a machine might be available and functioning normally for 85% of an average week In the remaining time

it is being cleaned or repaired The production manager may consider that this figure could be improved through better and more regular servicing

 Launch product: Product Launch is a marketing strategy consisting of a

carefully planned and scheduled sequence of events with the goal to make a big happening out of the release and, of course, make as much sales as possible in a short time span To achieve of this the launch is scheduled to a specific date and time You really beat the drum already days and weeks prior to the actual release (the prelaunch phase), have a lot of affiliates on your side who support you in massively promoting your product in the Prelaunch phase You can even have potential customers subscribe

to a preference list which entitles them to a special bonus when they buy shortly after the Launch Then have the actual Product launch at exactly the specified time, that is,

by sending out several follow up messages letting your customers know that there were

so many sales in the first hours already that the product will probably be sold out soon and they’d have to hurry if they’d want to secure their copy

 Sub-contracting: Subcontracting refers to the process of entering a contractual

agreement with an outside person or company to perform a certain amount of work The out-side person or company in this arrangement is known as a subcontractor, but may also be called a free-lance employee, independent contractor, or vendor Many small businesses hire subcontractors to assist with a wide variety of functions For example, a small business might use an outside firm to prepare its payroll, an accountant to help with its record keeping and tax compliance, or a free-lance worker

to handle a special project Subcontracting is probably most prevalent in the construction industry, where builders often subcontract plumbing, electrical work, drywall, painting, and other tasks

Hiring subcontractors offers a number of advantages for small businesses For example, subcontracting mundane but necessary tasks can free up time and resources to enable the small business owner to concentrate on making money and growing the business In addition, hiring a subcontractor is usually less expensive than hiring a full-time employee, because the small business is not required to pay Social Security taxes, workers' compensation benefits, or health insurance for independent contractors Subcontracting does pose some potential pitfalls, however, such as a loss of control over the quality and timeliness of work But small business owners can take several steps to help ensure that their relationships with subcontractors are productive and beneficial for all concerned

CHAPTER 3: OVERVIEW VIET NAM SMEs AND DOMESTIC

MANUFACTURING SECTOR

In Viet Nam, Decree number 56/2009/NĐ-CP date 30, June 2009 defines that SMEs are enterprises business registration in accordance with law under three levels: micro enterprises, small enterprise and medium enterprise It bases on total capital or average employees (total capital first) Details are in table 1:

Table 1: Definition for Small and Medium Enterprises in Viet Nam

Scale

Area

Micro enterprise

Small enterprise Medium enterprise Total

capital

Number of employees

Total capital

Number of employees Agriculture,

forestry and

fisheries

10 people and under

<= VND

20 billion

From 10 people to

300 people

Manufacturing

and construction

10 people and under

<= VND

20 billion

From 10 people to

200 people

From VND 20 billion to VND 100 billion

From 200 people to

300 people

Commerce and 10 people <= 10 From 10 From VND From 50

people to VND 50

billion

100 people

Source: Government‘s Decree No.r 56/2009/NĐ-CP date 30, June 2009

This Decree classifies SMEs on the basis of three enterprise’s sectors: agriculture, forestry and fisheries; manufacturing and construction; commerce and services with three scales: micro enterprise, small enterprise and medium enterprise Micro enterprise

is the number of enterprises with 10 employees or less than 10 apply to all industries Small enterprise is classified according to two criteria: number of employees from 10

to 200 peoples, total capital below 20 billion for some scales: agriculture, forestry, fisheries, manufacturing and construction Particularly, commerce and service enterprise only employ from 10 peoples to 50 peoples Similarly, agriculture, manufacturing and commerce firms which are classified medium enterprises need to meet 2 conditions: number of employees is from 200 people to 300 people and total capital is from VND 20 billion to VND 100 billion Medium enterprises in commerce and services includes enterprises with total capital from VND 10 billion to VND 50 billion and total employees from 50 peoples to 100 peoples

The role of SMEs in the economy

SMEs are an integral part of the national economy; they play an important role in promoting economic growth, increase national income, create jobs for workers and contribute to the transformation economic restructuring towards industrialization Table 2 shows the number of SMEs increase every year, from 38.883 enterprises in

2000 to 242.453 enterprises in 2009 The figure is significant Some roles are listed below:

Firstly, According to the Ministry of Planning and Investment (2010), SMEs account

enterprises in whole economy In that, non-state sector SMEs is 235.436 enterprises, while large enterprises are only 3,496 enterprises

Table 2: Enterprises by labor scale and type in 2009:

Total

Labor scale Micro

enterprises

Small enterprises

Medium enterprises

Large enterprises

enterprises

Medium enterprises

Large enterprises

Secondly: SMEs contribute significant part to the State budget SMEs sector made a significant contribution on State budget From 2007 to 2009 although the ratio is appropriately the same but calculate in unit they trend to increase In 2007, taxes and other payables to the State Budget by the SME count for VND 58,403 billion, increasing VND 90,507 billion in 2008