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PRIVATE SECTOR FIRMS:
Size matters
The
private sector has increasingly been recognized as a critical engine
of economic growth for Vietnam. The Ministry of Planning and
Investment (MPI) is now preparing the national SME development
policy 2006-2010, as part of the country's five–year socio economic
development plan. Based on these policies, the Agency for SME
Development will design an action plan for SME promotion.1
This bulletin looks at some key aspects of private sector growth,
and makes some recommendations on how to develop larger and more
robust private firms.
Simplified procedures have contributed to an increased number of
registered firms
The Enterprise Law of 1999
established the principle that firms may do business in all sectors
and areas that are not prohibited, and replaced the former licensing
process with business registration. The expense and time needed to
establish a business have been reduced significantly. As a result,
tens of thousands of new enterprises have formally registered each
year. According to data from the National Business Information
Center (NBIC), which manages the national database on company
registration, for the past four years the number of enterprises
registered was double the number registered in the ten years prior
to the Enterprise Law, thereby bringing the total number of
registered firms in Vietnam to around 128,000.
But the
number of firms in actual operation is lower
Data from the General
Statistics Office (GSO) suggests that there were 62,908 enterprises
in operation by end of 2002, and roughly 72,012 by the end of 2003.2
This is approximately 55% of total registered firms. In any country
with a vibrant private sector, not only are business closures to be
expected, they are an integral part of the dynamic process that
occurs when firms -- and the corporate sector as a whole -- react to
continual changes in the external environment (such as new market
opportunities and business conditions). Therefore, this margin of
difference between operational and registered firms is not abnormal,
and to some extent it shows a dynamic private sector exists in
Vietnam. In OECD countries, about 60-70% of new firms survive the
first two years of activity, and only about 40-50% are still in
businesses seven years later. A recent survey conducted by MPDF,
across 300 randomly selected enterprises in five northern provinces,
identified a number of reasons for this 45% margin of difference
between the statistics for registered and operational firms. They
include: i) while new company registrations are captured fairly well
by the NBIC, the closure of firms is rarely recorded; ii) some
newly-established enterprises are actually new branches or
affiliates of an operational company; and iii) some firms were set
up as for other purposes–for example "ghost companies" that are a
vehicle to buy VAT invoices.3 A good understanding of
these reasons may help the government develop more effective
measures and programs to support businesses.
Firm
growth and dynamism are constrained by barriers in the business
environment
While the ease with which
businesses can formally register their operations has greatly
improved, numerous constraints on companies' growth and dynamism
remain. There are surprisingly few large private firms. On average,
a domestic private enterprise employs 31 people, with a total
capital of VND 4 billion. This compares with an average of 421
workers and VND 167 billion in capital in state-owned enterprises (SOEs),
and an average of 229 workers and VND 134 billion in
foreign-invested enterprises (FIEs). Average investment in fixed
assets per worker in a private firm is just VND 43 million, compared
with VND 247 million for a FIE and VND 137 million for a SOE.4
Private firms are unable to participate in big state-funded projects
and to compete internationally due to their small size and limited
capacity. In many cases, the pace of the firm growth and expansion
is constrained by a number of business environment factors. These
include limited access to various critical external resources, such
as land and premises, or sufficient investment capital; And in some
areas, regulations are still controlling, rather than facilitating,
firms' development, especially on tax issues.5
Focus
should shift towards supporting firms expansion and growth
There is quite a wide
spectrum of private sector development strategies and initiatives in
operation, but relatively few support firms to grow in size and
scale. Looking ahead, a shift towards policies and measures that
create a conducive environment for firm expansion in addition to
registration are needed. Policy priorities in the coming years
should include:
-
Improvements in the
corporate tax system. The current tax calculation and
administration system, including VAT invoice controls, are a
major constraint on companies that want to do business in a more
transparent manner, so as to access capital and other inputs
needed to support firm growth
-
Effectively
addressing land and premises constraints. Tangible improvements
in this area would have a major impact on the growth of private
sector firms6
-
Permitting private
firms to compete in those business sectors that remain largely
or wholly reserved for state enterprises only, such as oil and
gas, telecommunications and infrastructure
-
Streamlining and
enforcing company closure and bankruptcy procedures. This would
have a beneficial effect in 'recycling' scarce assets, and
creating an environment that is more conducive to business
dynamism
(1) MPI/UNIDO, Workshop proceedings on
SME development strategy and action plan for 2006-2010, January
2005.
(2) General Statistics Office, Situation of enterprises in 2002,
2003, 2004, Statistical Publishing House, 2005.
(3) IFC/MPDF, Private Sector Development Discussion Paper #20,
Beyond the Headline Numbers: Business Registration and Startup in
Vietnam, June 2005
(4) General Statistics Office, Situation of enterprises in 2001,
2002, 2003, Statistical Publishing House, 2004.
(5) World Bank Vietnam, Private Sector Development Policy Note:
Beyond Registration - How Vietnamese private firms are faring, June
2004
(6) World Bank Vietnam, ibid. |
