SMEs: How to Grow?

The survey of the provincial competitiveness index (PCI) 2015 announced recently by the Vietnam Chamber of Commerce and Industry (VCCI) showed that the business environment in Vietnam improved.

 

According to the report, most SMEs are established by families. Many have grown up from initial household production and many business individuals form a corporate entity when they find the opportunity. Up to 77 per cent are micro-enterprises and 69 per cent of small enterprises grow up from business households.

 

In general, education qualifications of SME owners are relatively high and diverse. A majority (nearly 60 per cent) graduate from colleges. A proportion (3-5 per cent) used to be leaders/managers at State agencies, some others (8-11 per cent) used to hold managerial titles at State-owned enterprises (SOEs), and a considerable rate (14-15 per cent) used to work for SOEs.

 

Despite positive signs seen, a majority of SMEs operate in the domestic market, the report showed. Only 3 per cent of micro-enterprises, 4 per cent of small enterprises and nearly 9 per cent of medium-sized enterprises have foreign customers. Even bigger domestic companies find it hard to reach out to the world. Only 24 per cent of big companies have an international presence. This partially explains why foreign direct investment (FDI) companies account for 70.7 per cent of Vietnam’s export value in 2015.

 

According to the report, domestic companies actually face a lot of difficulties when they want to expand production and business operations.

 

In fact, market sentiment, profit estimation or support from local authorities are not as expected at the start of a new business. About 20 per cent of micro-enterprises and 14 per cent of SMEs see worse market opportunities than their early time while only 6 per cent of bigger companies feel this. Approximately 32 per cent of micro-enterprises and 29 per cent of SMEs have witnessed a worse competition on the market than expected while the rate of bigger companies is only 22 per cent

 

Notably, business performance and results of SMEs in 2014 were much worse than bigger ones. Many SMES suffered losses. As many as 32 per cent of micro-enterprises, 17 per cent of small enterprises and 16 per cent medium enterprises incurred losses in the year, while only 10 per cent of bigger firms was in the same situation.

 

The report showed that 43 per cent of micro-enterprises and 54 per cent of small enterprises plan business expansions in the next two years. Medium enterprises and large enterprises, both with 66 per cent, want to scale up operations.

 

Assessing the local business environment in 2015, SMEs have less optimistic look than bigger ones on such aspects as access to land, transparency, fair competition and business support

 

As many as 87 per cent of SMEs have land, production and business premises, but only half of them have certificates of land-use rights. Only 22 per cent of micro-enterprises, 24 per cent of small enterprises and 29 per cent medium enterprises reportedly have highly or very highly stable business premises, while 31 per cent of bigger enterprises has this status.

 

About 75 per cent of SMEs said they have to rely on relationship to access information sources. Besides, 54 per cent of micro and small enterprises said the “agreement on tax payables with tax officials is an important work in the business.” About 65 per cent micro and small enterprises said paying informal charges happens often.

 

SMEs also have difficulty accessing business support services. Only 20-30 per cent reported having used these services. In addition, only 51-61 per cent of SMEs have information about preferential policies of central and local authorities, much lower than bigger ones (77 per cent).

 

According to the report, in the latest year, 74 per cent of companies surveyed were investigated in all areas. Remarkably, the bigger companies are, the more chance of investigations they will see. An SME receives 1-2 investigations a year while a bigger one may see three visits. In addition, 25 per cent of micro and small enterprises and 30 per cent medium enterprises have their investigation contents duplicated.

 

Up to 54 per cent of micro-enterprises and 49 per cent of small enterprises agreed with the statement that "Procedural paperwork is simple." Administrative procedures concerning social insurance, land, customs, fire safety, labour and environmental protection, and payment to the State Treasury increase in proportion of the scale of enterprises.

 

In addition, SMEs have not developed robustly in the past time because they find it hard to access land, capital, policy and legal information and bear heavy burdens of informal charges while they can hardly access high-quality business support services at a reasonable cost.

 

According to the report, to boost the SME development in the coming time, Vietnam needs to redesign SME support policies to catch up with new development paces. When a company is started up and brought into operation, it will need help to deal with the challenges of accessing capital and land, looking for customers and vendors, and settling administrative procedures.

 

In addition, information on local planning needs to be regularly updated on relevant websites and needs to be made informative and easy to understand for SMEs. Enhancing the transparency of the business environment is also a way to reduce and eliminate informal costs that SMEs are burdened with.

 

Particularly, according to the report, Vietnam needs to improve the quality of business support services and beneficiaries are clearly named SMEs. Local authorities need to consider ending the direct provision of business support services and handing the task to business associations and the private sector. They should be specialised in making policies and supervising service quality. Provinces and cities should further review and reduce unnecessary administrative procedures to further easy businesses and citizens in handling administrative paperwork. Immediate priority should be given to currently troubled issues to SMEs like social insurance, land tax, customs, safety and fire control, employment, and payment to the State Treasury. Inspections should be cut down as well.

 

Finally, the policy-making process must be systematic and effective coordination among central and local agencies is essential.