3. The business environment for SMEs and entrepreneurship in Viet Nam

Viet Nam’s GDP has grown at a rate almost always above the ASEAN average over the last 20 years (Figure 3.1, Panel A), with GDP expected to grow at an annual average rate of 6.5% also in the coming years (OECD, 2019[8]). As noted in chapter 2, Viet Nam’s rapid growth has been driven by manufacturing exports. A young population, competitively-priced and trainable labour force, a large domestic market, political stability and close proximity to major regional and global supply chains have all been factors that have favoured the rise of Viet Nam as a global manufacturing hub (Eckardt, Mishra and Dinh, 2018[9]).

The government of Viet Nam expects exports and foreign direct investment (FDI) to continue to be main the pillars of growth. In 2019, Viet Nam’s total export-import volume reached USD 517 billion, while FDI posted a national record high of USD 20.4 billion. In 2017, trade flows (i.e. the sum of imports and exports) in relation to GDP reached 200% (Figure 3.1, Panel B),1 the highest worldwide value among countries with a population of at least 50 million people (Korf, 2018[10]). In addition, the annual growth rate in manufacturing exports over the period 1990-2016 has been 13%, more than twice the world average and higher than other export powerhouses such as China (UNIDO, 2018[11]). Since 2012, thanks to its successful export promotion strategy, Viet Nam has experienced a continuous trade surplus.

Viet Nam’s monetary policy has accommodated the export promotion and FDI attraction strategies of the government. In particular, the Central Bank (State Bank of Viet Nam, SBV) has adopted a crawling peg exchange-rate policy against the US dollar in order to keep Vietnamese exports competitive in international markets (Figure 3.1, Panel C). 2 Interest rates have also recently been lowered to encourage investment. Finally, inflation has been tamed over the last years and maintained at an average annual rate of 3% over the period 2016-2019. However, Viet Nam has also experienced inflationary peaks in a not distant past, notably in 2008 and 2011 when inflation reached respectively 23% and 18% mostly due to increases in fuel and food prices (Figure 3.1, Panel D). 3

Based on the latest 2019 census, Viet Nam’s population consisted of 96 million people, 10 million more than a decade ago. Population has grown at an annual rate of 1.14% over the 2010s, only marginally less than in the previous decade (1.18%), which bears witness to the average young age of the local population. The literacy rate of the adult population (aged 15+) is 95.8%: 98.3% in urban areas and 94.3% in rural areas (GSO, 2019[12]). Following this trend, Viet Nam should reach universal literacy in the next decade.

In the first quarter of 2018, Viet Nam’s labour force consisted of 52.1 million people out of the 72.4 million adult population. One-third of the labour force worked as self-employed, while more than two-thirds (67.8%) was considered to be “rural”. Viet Nam’s unemployment rate was only 2% in 2018, much lower than the OECD average (5.3%). Similarly, Viet Nam’s youth unemployment rate was 7.1%, compared to the OECD average of 11.1% (GSO, 2018[13]). Viet Nam’s labour market participation rates are very high: 82.1% for males and 71.6% for females. Considering that the world’s female participation rate is 48.5%, Viet Nam has one of the highest female participation rates in the labour market worldwide (ILO/ILSSA, 2018[14]). This is the result of cultural and historical factors – socialist countries have traditionally had high rates of female education and labour market participation – and of specific government policies to encourage gender equality in access to education and work. Nonetheless, women are more exposed to vulnerable employment than men (Figure 3.2, Panel A), where vulnerable employment is defined as the sum of the employment status groups of own-account workers and contributing family workers (ILO definition).

Another possible dimension of vulnerability is job losses due to the automation of production processes. Due to the high integration of Viet Nam in manufacturing global supply chains, 70% of jobs in Viet Nam are exposed to the risk of automation in the future (Figure 3.2, Panel B) which is more than in other ASEAN countries. Unsurprisingly, risks related to automation are higher in textiles, clothing and footwear (86% of existing jobs) and electrical and electronics (75% of existing jobs) (ILO, 2016[15]). The skills upgrading of the Vietnamese labour force is, therefore, particularly important to ensure that new more highly skilled jobs be filled when assembly jobs and other simple manual jobs eventually disappear.

Working conditions have also improved in Viet Nam in recent years. In 2019, the government ratified the last two of the eight ILOs Conventions: i) Convention 98 on the Right to Organise and Collective Bargaining, to move away from the current prevalent situation where grassroots trade unions are controlled by management; ii) Convention 159 on Vocational Rehabilitation and Employment for Disabled Persons, to eliminate employment discrimination against people with disabilities. Viet Nam is estimated to lose about 3% of GDP as a result of the exclusion of persons with disabilities from the labour market.4 On January 2020, the government issued Decree 90/2019/ND-CP to increase the Regional Minimum Wage (RMS) by 5.5%, at VND 4.42, 3.92, 3.43 and 3.07 million in the four wage-setting regions of Viet Nam.5 This increase is lower than in the past few years when annual wage hikes had been in the range of 11-14%. This points to the government’s attempts to balance the rights of workers with investment attraction and inflation control (OECD, 2019[8]).

Since the Đổi Mới reforms of 1986, Viet Nam has swiftly opened its economy to foreign trade and foreign direct investment (FDI). In addition to joining the Association of Southeast Asian Nations (ASEAN) in 1995 and the World Trade Organisation (WTO) in 2007, Viet Nam has signed many bilateral investment treaties and free trade agreements (FTAs) with the major world economies, such as the Viet Nam-United States Bilateral Trade Agreement in 2000, the Viet Nam-Japan Economic Partnership Agreement (VJEPA) in 2009, the Viet Nam-Korea Free Trade Agreement (VKFTA) in 2015, the EU-Viet Nam Free Trade Agreement (EVFTA) in 2020 and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) in 2018. In 2020, Viet Nam was the second largest trading partner of the EU among ASEAN countries (after Singapore) and rivalled with Singapore to be the single country with the largest number of FTAs in the region.6

As a result, Viet Nam’s trade openness (i.e. the sum of imports and exports as a percentage of GDP) has constantly increased since the mid-1990s. By the same token, Viet Nam’s share of world trade rose from 0.03% in 1988 to 1.43% in 2017.7 At the beginning of the Đổi Mới economic transition in the mid-1980s, Viet Nam’s export volume was a trivial USD 0.25 billion and mostly consisted of seafood and agricultural produce. After joining ASEAN in 1995 and through the 1997-98 Asian financial crisis, Viet Nam started to develop a light manufacturing industry, focusing on textiles and garments mostly to serve Asia-Pacific trade partners (e.g. Japan, China, Australia and Singapore). Upon membership of the WTO in 2007, Viet Nam started having a more diversified basket of export products, which included oil, textiles, footwear and electronics. By that time, the United States had become Viet Nam’s largest trading partner. By 2017, Viet Nam’s exports had reached USD 212 billion: nearly half in electronics (telephones, broadcasting equipment, integrated circuits, computers), but the garment industry was also still very important. Major recent trading partners have been the United States, China, Japan, and Korea (Figure 3.3).

While Viet Nam’s export volume has been constantly on the rise, the knowledge intensity of its exports is still low. The Economic Complexity Index (ECI) gauges the heterogeneity and ubiquity (i.e. how many other countries export the same products that a given country exports) of national exports and can be taken as a measure of the knowledge intensity and competitiveness of a national economy (Hidalgo and Hausmann, 2009[16]). Countries will rank at the top of the ECI if they can export many products that a few countries can produce, while countries at the bottom of the ranking will tend to export a few products that many countries can produce. Viet Nam’s ECI is still lower than that of other ASEAN countries and much lower than the OECD average, although it has increased gradually since the Đổi Mới reforms, with the exception of in more recent years (Figure 3.4). A structural shift towards the production of more complex products that fewer countries can produce would be the most natural way for Viet Nam to capture more value from its exports.

Closely related to Viet Nam’s exports is its performance in FDI attraction: in 2018, foreign-owned companies, indeed, accounted for 70% of Vietnamese exports (OECD, 2018[17]). Viet Nam’s FDI inflows (mostly Greenfield investments) relative to GDP are the highest among ASEAN countries (Figure 3.5, Panels A and B). Over half of the FDI stock is in manufacturing, while one-quarter is in real estate (OECD/ERIA, 2018[18]). Viet Nam’s largest foreign investors are Korea, Japan, Singapore, and Taiwan.

Based on information from the OECD FDI Regulatory Restrictiveness Index, Viet Nam is more open to FDI than other large ASEAN economies. Two decades ago, Viet Nam had more FDI restrictions than the average of large ASEAN countries (Indonesia, Malaysia and the Philippines), but it converged rapidly towards this group and is now approaching the OECD level (Figure 3.5, Panels C and D). Among the 42 sectors surveyed by the OECD, those with the fewest regulatory restrictions (below or equal to 0.02) in Viet Nam are mostly energy, construction and engineering, while those with the most restrictions (above or equal to 0.3) are media and telecommunications (Table 3.1).

The Vietnamese government encourages FDI in a wide range of industries, notably those related to high-tech products, biodiversity, infrastructure development and the development of education, health and sports. FDI attraction in labour-intensive industries also remain a priority. Viet Nam’s efforts to liberalise FDI are longstanding and have continued until recent times. For example, in June 2015, the government issued Decree No. 60/2015/ND-CP to remove the 49% cap on foreign ownership in publicly-listed companies.8 The Investment Law and the Enterprise Law have also been revised several times to respond to changing conditions. The government has more recently planned to amend the Investment Law to integrate both domestic and foreign-owned companies under one common system.

Although FDI, especially in manufacturing, is a strong feature of the Vietnamese economy, FDI-SME linkages are still relatively weak: imports account for about 80% of total inputs into final export products and the average share of local sourcing by foreign-owned companies is 45%, which is lower than other main ASEAN competitors (e.g. Thailand, Indonesia, Malaysia and the Philippines) (OECD/UNIDO, 2019[19]).9 These figures should encourage the government to promote linkages between FDI and local SMEs more proactively (see chapter 6), but these are also the outcome of Viet Nam’s success in FDI attraction.

First, FDI in relation to GDP is higher in Viet Nam than in other large ASEAN countries (see Figure 3.5); thus, lower rates of local sourcing may well hide higher levels in absolute terms (e.g. in terms of contract volumes or relative to national GDP). Second, Viet Nam’s FDI regulatory restrictions are lower than those in other ASEAN economies, which means that multinational enterprises (MNEs) in Viet Nam are faced with fewer obligations than elsewhere to outsource locally. Third, some of Viet Nam’s FDI-driven sectors, such as electronics, require high-skilled suppliers which are less likely to be found locally, thus prompting MNEs to bring along their longstanding suppliers to the country destination of the investment.

A breakdown of value-chain linkages between “backward” and “forward” shows that, in the case of Viet Nam, the intensity of the former rose in the period 2000-2013, while the intensity of the latter declined (López González et al., 2019[20]) (Figure 3.6). An increase in backward linkages indicates that domestic companies, including SMEs, have become more integrated into GVCs, notably as providers of intermediate inputs. On the other hand, a decrease in forward linkages means that fewer domestic companies are purchasing from or providing services to foreign-owned companies. This confirms that FDI mostly caters to foreign markets in Viet Nam, but also suggests that few companies in Viet Nam have been able to emerge in downstream activities, for example as providers of local services to foreign-owned companies.

The main government initiative to build stronger linkages between FDI and local SMEs is the “Supporting Industry” policy, which aims to increase local sourcing in selected sectors through direct investment, corporate income tax and value-added tax exemptions, exemptions on import duties and credit incentives (see chapter 6 for more details on this programme). Going forward, the government could consider additional tax incentives specifically aimed at the upgrading of local suppliers by foreign-owned companies, as done by Malaysia and Singapore (Box 3.1). Joint ventures and licensing agreements have also been used in the past to encourage technology transfer from FDI to local SMEs, as shown by the example of Korea (Box 3.2). However, the success of this last policy largely depends on the local presence of SMEs able to collaborate with larger knowledge-intensive companies, thus calling for broader policies to upgrade the skills and innovation capacity of Vietnamese SMEs.

Product market regulations (PMR) refer to rules and regulations that affect competition in product markets, such as the existence and quality of competition law, the role of the state in the economy, including through state-owned enterprises, or still the presence of price controls. The OECD has developed a range of PMR indicators at both the economy-wide and sector levels which, as yet, do not cover Viet Nam. The World Bank Doing Business (WBDB) report is also a widely known source which measures the ease of doing business worldwide, mostly by asking questions to consultants and lawyers involved in business registration and business support in each of the surveyed countries.

In 2020, Viet Nam ranked 70th out of 190 countries in the WBDB report, an improvement by nearly 30 places since 2014 (Table 3.2). The three areas where Viet Nam performs better are “getting credit” – which measures the existence of movable collateral laws and credit information systems rather than direct access to bank loans – and two infrastructure-related indicators, “construction permits” and “getting electricity”. On the other hand, the areas where Viet Nam performs worst are those more closely related to entrepreneurship, notably the quality of the insolvency regime, the ease of starting a business (more specifically, a limited liability company) and the complexity of the tax system.

This last fact is puzzling since, as noted in chapter 2, Viet Nam is an entrepreneurial economy in which a large share of the population is involved in business creation and business ownership and in which the rates of gazelles and high-growth firms are high by international standards. However, most new businesses in Viet Nam, similar to other countries, take the legal form of sole proprietorship which is typical for the own-account workers, self-employed and very small firms, whereas the WBDB “starting a business indicator” refers to national legislation governing the creation of “more structured” (e.g. in terms of minimum capital requirements) limited liability companies. For these companies, the WBDB reports that it takes 16 days, 8 procedures and at least VND 3 million (a bit less than USD 130) to open one in Viet Nam. In this respect, the government issued in 2017 Resolution 136/NQ-CP to simplify the registration procedures of all legal forms of business enterprises. 10

Table 3.2 also shows that Viet Nam’s performance in the WBDB has improved in many areas, from getting electricity (+129 positions) to protecting investors (+60 positions) to paying taxes (+40 positions). This is the outcome of general reform efforts, including a resolution issued in 2014 (Resolution 19/NQ-CP) which aims to improve the ranking of Viet Nam in a number of international indicators every year, with the objective to achieve in each of them the ASEAN-4 average (Thailand, Indonesia, Malaysia, the Philippines). 11

Other major recent regulatory reform efforts have included: i) the so-called Project 30 (Box 3.3), which since 2010 has aimed to reduce regulatory compliance costs by an annual average rate of 30%, has resulted in the simplification of thousands of administrative procedures and has been credited, inter alia, with being a major driver of FDI attraction, especially in the early 2000s12; ii) one-stop shops and business portals, which have been deployed to provide information and advice on issues such as business registration and business licenses; and iii) Viet Nam’s Provincial Competitiveness Index (PCI), a joint initiative of the Viet Nam Chamber of Commerce and Industries (VCCI) and the United States Agency for International Development (USAID), which benchmarks the effectiveness of local market regulations.

The 2019 edition of the PCI was built using responses from 11 000 local enterprises and 1 500 foreign-owned enterprises, and showed an overall improvement in local governance in almost all provinces (Figure 3.7) (VCCI/USAID, 2019[24])). In particular, enterprises observed a significant reduction in informal charges, which is a proxy for local corruption, although still more than half of the enterprises reported having to pay such charges. Quang Ninh, in the north of the country, has been ranked as the most competitive province for three consecutive years, thanks to its supportive polices for SMEs including administrative reforms, infrastructure development, and policy measures aimed at encouraging investment and business linkages.

Going forward, based on the WBDB ranking, there is clearly room to improve insolvency procedures by reducing the length of the whole process (i.e. 5 years compared to the OECD average of 1.7 years) and increasing the recovery rate for secured creditors (i.e. 21% compared to the OECD average of 70%). This would help re-allocate productive resources more quickly and strengthen access to credit by re-assuring creditors on the ability to recover part of their credit if borrowers go bust. In addition, existing administrative procedures still need streamlining; for example, paying taxes consumes 384 hours per year in Viet Nam compared to the average of 159 hours in OECD countries. Further adoption of digital technologies can help streamline the relationships between the state and taxpayers.

Viet Nam has had a national competition law since 2004 (Law No. 27/2004/QH11) which regulates classic antitrust issues such as concentration in product and service markets, acts of unfair competition (including competition-restricting agreements), abuse of market dominant positions and forbidden acts by government agencies. A market share threshold of 30% is used to determine substantial market power and to prohibit certain anticompetitive behaviours, while a merger can be stopped if the resulting combined market share is 50% or more.

SMEs (measured by the number of employees or capital) are mostly exempt from the provisions of the Viet Nam competition law (OECD, 2018[27]). On the one hand, this is normal since SMEs, due to their size, are unlikely to reach a dominant market position. On the other hand, markets in competition laws are often narrowly defined, which means there might still be specific markets in which larger SMEs could reach a dominant position. In such a circumstance, there is no reason why the provisions of the national competition law should not be applied to SMEs. In addition, some of the provisions of the competition law are not properly enforced due to imperfect regulations and the limited resources of the Antitrust Authority (OECD, 2018[27]).

A major factor curbing competition in the Vietnamese economy lies in the significant role of state-owned enterprises (SOEs), which accounts for about two-fifths of national GDP. Vietnamese SOEs are much less efficient than multinational enterprises (MNEs) and other domestic private-sector companies, as shown by their higher incremental capital-output ratio (ICOR), which means investments yield fewer returns in SOEs. The reform of SOEs has been a priority of the national government; for example, Decision 929/QD-TTg of 2012 required SOEs to prepare detailed restructuring plans to focus only on their core business, which mostly concerns the provision of essential public goods and services. The government has also undertaken a process of divestment, although progress on this front has been slow.

An additional aim of future SOE reforms should be improvements in their corporate governance. Respondents to an OECD survey stressed the importance of ensuring that privatisation efforts lead to deep changes in managerial and administrative practices, such as through the election of a board of directors from the private sector, as well as the importance of clarifying a list of non-commercial obligations performed by SOEs and establishing an arm’s-length relationship with them to limit interference (OECD, 2018[17]).

Viet Nam’s main sources of tax revenue are the corporate income tax (CIT) and the value added tax (VAT), which stood respectively at 20% and 10% as of mid-2020, while tax revenue from personal income taxation (PIT) is still modest. This is a trend common to many emerging economies, which is the result of a large number of informal workers who fall outside the radar of tax authorities and of a large share of the population whose income is too low and therefore exempted from personal income taxation (Figure 3.8, Panel A).

Between 2004 and 2017 the CIT rate was reduced from 32% to the current 20%,13 which is lower than the OECD and ASEAN averages (Figure 3.8, Panel B).14 Due to the drop in the CIT rate and the inability to collect much revenue from personal income taxation, tax revenues in relation to GDP have declined in Viet Nam since 2010, from 22.4% to 18.2% (Figure 3.8, Panel C), which reduces the capacity of the government to spend on public policies.

As mentioned earlier, Viet Nam has made progress in the simplification of the tax regime, passing from the 131st to 109th position of the WBDB report. Nonetheless, tax payment is clearly an area where improvements are still possible; for example, it still takes considerably more time (384 hours) to deal with tax payments in Viet Nam than in other countries in the region (Figure 3.8, Panel D).

The SME Support Law, which has been in place since January 2018, floated for the first time in Viet Nam the idea of a special CIT regime for SMEs. Indeed, the law stipulates that SMEs shall be granted lower rates than the standard CIT rate for a given period of time and that micro-enterprises will also benefit from simpler accounting and tax administrative procedures. At the end of 2019, the Ministry of Finance issued a Resolution proposing a two-year CIT exemption for household and individual businesses that would convert to formally registered enterprises (see Box 3.4 for more information on Viet Nam’s regulation on household businesses), as well as a reduced CIT rate of 15% for micro-enterprises and 17% for small and medium-sized enterprises (based on the classification of the SME Support Law, see Table 2.1). However, this resolution still needs approval by the National Assembly. The Ministry of Finance estimates that this new regime will cost VND 9.2 trillion (USD 400 million) in terms of foregone fiscal revenues: VND 2.7 trillion from the temporary CIT exemption for “converting household businesses” and VND 6.5 billion from the reduced CIT rates for micro and small enterprises.

The main objectives of SME preferential tax regimes are to level the playing field between small enterprises and larger companies – the assumption being that the presence of fixed costs and low economies of scale makes running a small business comparatively more costly than operating a larger business – and to provide small enterprises with additional after-tax income, which may (or may not) be spent on investment and business expansion. In the case of Viet Nam, this policy is also meant to encourage business formalisation by simplifying tax compliance and accounting rules for micro-enterprises.15

On the downside, SME preferential tax regimes have often been charged with causing “growth traps” by discouraging business growth beyond the size threshold set by the law. This is, indeed, also the concern of Viet Nam’s Ministry of Finance, which has advanced the hypothesis that (growing) small companies might artificially create separate legal entities to remain under the new preferential tax regime. However, findings on threshold effects from empirical research are not conclusive, suggesting that the existence and size of these effects are country-specific and depend, inter alia, on the way the policy is implemented. In the case of Peru, for example, the IMF found that size-dependent regulations are costly for the economy, especially in the presence of labour market rigidities, and lead to lower aggregate wages, profits, and output, including through a stronger use of informal employment (Dabla-Norris et al., 2018[29]). However, in the context of Canada’s small business tax rate, Dachis and Lester (2015[30]) find that there is not an unusual clustering of firms near the income and capital asset thresholds set by the law, possibly because they are both set at a relatively high level (OECD, 2017[31]).

In the case of Viet Nam, the difference between the preferential tax rates and the normal CIT rates is small enough (3 and 5 percentage points respectively for small/medium enterprises and micro-enterprises) to limit the risk of major “growth traps”. This risk could be further reduced by making the phase-out from the preferential regime gradual.

A stronger note of caution is, on the other hand, needed for the two-year CIT exemption for converting household businesses, which does not seem to be generous enough to convince these enterprises, which have become used to operating semi-informally, to formally register under the Enterprise Law. In order to bring household businesses into the formal sector, the government of Viet Nam could instead think of a separate tax regime, the pre-requisite being that this new regime would only cover own-account workers and micro-enterprises employing only a few workers. Brazil’s Individual Micro-entrepreneur policy (Micro Empreendedor Indivdual, MEI) offers an example of a similar tax policy (Box 3.5).

Viet Nam’s SME lending has increased over the last years, reflecting the overall growth of the economy and reaching 22% of total bank lending in 2017 (Figure 3.9, Panel A).16 Although fully internationally comparable statistics on SME credit are not available, this figure appears to be in line with those of many OECD countries (OECD, 2019[33]). A study by the National Economics University additionally shows that the probability of getting a business loan is 23.7-26% lower if the enterprise is an SME, but 2.3-2.8% higher if the enterprise is a state-owned company.17

World Bank Enterprise Survey (WBES) data (2015[34]) show that, similarly to other countries, Vietnamese firms consider lack of external finance a major issue: 22% regarded this as the main problem in 2015, a slight decline from nearly 25% in 2009, but still higher than most other countries in the same region (Figure 3.9, Panel B).18 In addition, about half (48%) of the WBES-surveyed firms reported having either a loan or a credit line from a financial institution in 2015.19 The breakdown by firm size was 31% for micro-enterprises (5-9 employees), 49% for small firms (10-49 employees), 54% for medium-sized firms (50-249 employees) and 53% for large enterprises (250+ employees). The median amount of the most recent loan for an SME (less than 250 employees) was VND 2 billion (USD 85 000), while total outstanding loans/credit lines stood at VND 5 billion (USD 200 000). These values were about one-tenth of those found for large companies (250+ employees), respectively VND 20 billion (USD 850 000) and VND 57 billion (USD 2.2 million). The overwhelming majority of loans were collateralised (91%), with a slightly higher rate (93%) of SME loans.20

Only about half of the WBES-surveyed companies (47%) had applied for a loan in 2015: 45% of SMEs and 53% of large companies. The main reason for not applying for a loan was that there was no need (i.e. had sufficient capital, 69%). This could imply either good cash-flow management practices or a possible lack of growth aspirations. For the remaining 31% of those who needed a loan but did not apply (i.e. so-called discouraged borrowers), the complexity of the application process was the main reason (12.2% in total, 13.1% for SMEs and 7.2% for large companies), followed by unfavourable interest rates (4.6% for both SMEs and large companies) and high collateral requirements (6.6% in total, 7.4% for SMEs and 2.6% for large companies).

State-owned banks play an important role in SME financing in Viet Nam, accounting for 47% of total SME loans, only marginally lower than the proportion originating from private commercial banks (49%). State-owned banks are also a significant source of loans for large companies (43%), although private banks account for a larger proportion in this case (52%). Sources of finance other than traditional banks still play a very small role in the business financing landscape of Viet Nam (Figure 3.9, Panel C). As the banking sector is heavily regulated and a large share of enterprise financing is channelled through earmarked loans issued by state-owned banks,21 close ties with government officials are often considered important to access bank lending (Pham and Talavera, 2018[35]).

Going forward, the development of alternative financial institutions could help boost competition in the credit market and lead to better borrowing conditions, especially for smaller companies that have fewer relationships with state-owned banks and large commercial banks. In some large emerging economies, for example, credit co-operatives have become an increasingly important source of local finance for micro and small enterprises (OECD, 2020[32]), so that the government of Viet Nam could also think of introducing appropriate legislation in this area. At the same time, government-backed loan guarantees should be significantly scaled up to encourage more SME lending (see also chapter 5).

Financial inclusion has moderately improved in recent years in Viet Nam (Figure 3.10). The APEC Financial Inclusion Summit held in Viet Nam in 2017 marked the commitment of policymakers in the Asia-Pacific region to improve financial inclusion in their respective countries (GIZ/RFPI, 2018[37]). This was followed in Viet Nam by Resolution 01/NQ-CP of 2019, which gave the Central Bank (SBV) the main responsibility for implementing the National Financial Inclusion Strategy, the main aim of which is to increase the share of the population with access to finance (SBV, 2019[38]). The Strategy, for example, pointed out that Viet Nam has nearly 13 000 Post Offices which offer important services to regions with low population density and which could ease access to mobile money services. In fact, although there are more than 125 mobile phone subscriptions per 100 people in Viet Nam, according to the Global Financial Inclusion Database, the percentage of Vietnamese adults with mobile money accounts is less than 4% (MIX, 2018[39]).

Viet Nam’s Venture Capital (VC) market has recently attracted a record wave of investments in technology-based companies.22 Viet Nam ranked 43rd out of 125 countries in the 2018 Venture Capital and Private Equity (VC/PE) Country Attractiveness Index and was described as a “highly attractive market with increasing exposure” (IESE, 2018[40]). Figure 3.11 provides a summary of the different dimensions of the VC/PE attractiveness ranking. Viet Nam performs best in the area of “economic activity” (10th position), which includes indicators related to the size of the economy, growth expectations and employment levels. It ranks worst in the area of “investor protection and corporate governance” (99th position), which assesses the security of property rights and quality of legal enforcement. The capital market also performs relatively well, thanks to high trading volumes and an active Initial Public Offering (IPO) and Merger & Acquisition (M&A) market. On the downside, the debt market, as seen earlier, does not provide enough liquidity to start-ups and SMEs and is sapped by a high rate of non-performing loans (NPLs). In terms of the “human and social environment”, Viet Nam has good labour regulations but the generally low level of human capital does not favour access to external finance.

The main programme affecting VC development in Viet Nam is Project 844/QD-TTg, which was launched in 2016 and aims at “Building a start-up ecosystem with a vision to 2025”. The Project, which was followed by Decree 38/2018/ND-CP, regulates the operations of investment funds in SMEs and start-ups and is described in more detail in chapter 5 of the report.

Education takes a central role in the Vietnamese culture, with households investing a significant share of their income in the schooling of their children. Viet Nam’s government spending on education is higher than most regional peers (4.4% of national GDP) (Figure 3.12, Panel A), although the average investment per student is lower than in Thailand and Indonesia (i.e. USD 1 110 for primary school students and USD 1 797 for tertiary students) (Figure 3.12, Panel B). Viet Nam’s pupil/teacher ratio in primary education is 20.3, which is higher than in most ASEAN countries and helps explain the recent success of private and international schools, especially in the largest cities, that offer closer monitoring and tutoring of students.

Viet Nam is generally considered to have high-quality basic education, to the extent that it outperforms many rich economies in the OECD Programme for International Student Assessment (PISA): Vietnamese students are on par with the OECD average in mathematics and reading, while they rank 8th worldwide in science (Figure 3.12, Panel C).23 However, Viet Nam’s PISA sample is not representative of the whole student population, being biased by a higher socio-economic status than the average (OECD, 2016[41]). This poses a major comparability problem because Vietnamese households in the top wealth quintile spend 15 times more on private tutoring than households in the poorest wealth quintile (Dang and Rogers, 2016[42]). In addition, the share of the population that completes high school and enrols in tertiary education is still relatively low (28.5%) (Figure 3.12, Panel D), pointing to inequality in access to higher education.24

Many Vietnamese firms consider selecting workers with the right set of skills to be one of the most challenging problems facing their business. Results from the “Skills toward Employment and Productivity” (STEP) employer survey reveals that between 70% and 80% of Vietnamese graduates are not considered to have the required skills for professional or technical high-paid jobs. According to a World Bank analysis, Viet Nam’s educational system suffers from a major disconnect between employers, students and education/training providers. Stakeholders do not sufficiently interact with each other, while career guidance is still at its infancy (World Bank, 2014[43]). Students lack information about educational and occupational choices, while employers lack information about the content and quality of the educational offering. The inevitable outcome is a skills mismatch in the labour market, as shown by the fact that 43% of the working youths are in jobs that do not match their qualifications (OECD, 2017[44]).

Viet Nam does not have a well-performing technical and vocational education and training (TVET) system, although this could help address the skills mismatch. Viet Nam, for example, ranks only 117th (out of 132 countries) in the Vocational and Technical Skills pillar of the Global Talent Competitiveness Index (INSEAD, 2020[45]). TVET institutes in Viet Nam are classified into 395 colleges (cao đẳng), 541 secondary TVET schools (trung cấp) and 1040 TVET centres (trung tâm giáo dục nghề nghiệp) (Figure 3.13, Panel A). The majority of TVET admissions and graduates are in low-skilled short programmes, while vocational education provided by colleges as an alternative to university degrees is much less common.

The Directorate for Vocational Education and Training at the Ministry of Labour, Invalids and Social Affairs (MOLISA) guides Viet Nam’s TVET policies. The 2015 TVET Law tried to reduce skills mismatches by encouraging closer collaboration between TVET institutes and the business sector, mostly through tax incentives,25 but it has not proved very successful. Private enterprises tend to co-operate with TVET institutes more than SOEs or MNEs, but the main form of co-operation is simple internships and coaching, while the joint development of training programmes is much less common (Figure 3.13, Panel B). More generally, there is a certain reluctance by both TVET institutes and private-sector companies to collaborate; for example, some enterprises have reported that they have no training needs and openly refuse to work with TVET institutes (NIVET, 2018[46]).

Viet Nam is currently looking at a possible TVET reform with financial and technical support from Germany, which suggests the country might be moving towards a dual-education system combining theoretical learning in schools with practical learning in companies through periods of apprenticeship. Such a system has been highly successful in German-speaking countries (Germany, Austria and Switzerland) and has become a model for many others struggling to make a sense of their national TVET system. However, for dual education to work, there needs to be close co-ordination, not just collaboration, between the education and business sectors, especially in the design of training curricula. This co-ordination is currently lacking in Viet Nam and typically takes many years to materialise; in the case of Viet Nam, in particular, it would have to overcome the existing mutual distrust between TVET institutes and private-sector companies.

In 2019, Viet Nam ranked 42nd out of 129 countries in the Global Innovation Index of the World Intellectual Property Right Organisation (WIPO). Viet Nam has been improving its position in this ranking consecutively for 9 years, which has led it to become the best-ranked among lower-middle income countries and to rank 9th in the Asia-Pacific region, outperforming many regional peers with similar or higher income per capita (WIPO, 2019[48]).

As shown by the detail of Figure 3.14, Viet Nam does particularly well in the areas of “knowledge and technology outputs” and “market sophistication”. The first is the result, among other things, of a large share of high and medium-high technology manufacturers (0.4%), a high number of ISO 9001 quality certifications and generous spending on computer software (0.3% of GDP). However, knowledge creation is limited due to low numbers of patent registrations and scientific publications. Market sophistication is on par with more advanced economies such as Malaysia and China thanks to the scale of Viet Nam’s domestic market and credit availability (see section on debt finance). Viet Nam’s creative outputs are also appreciated and characterised by a high degree of creative exports (5.9% of total trade) and a large volume of original trademarks (USD PPP 85.3 billion), combined with a high rate of mobile-phone app creation (worth USD PPP 42.9 billion).

On the downside of the WIPO ranking, there is room to improve Viet Nam’s “innovation infrastructure”. Information and Communications Technology (ICT) infrastructure is still undeveloped, while inefficient use of energy hampers the environmental sustainability of production (Viet Nam ranks 92nd worldwide on GDP per unit of energy use). Other areas in need of improvements are “human capital and research” and “business sophistication”. While basic education is widely covered, the number of researchers per million people is only 701, Vietnamese universities are not present in any international ranking, and there are very few international students in national universities. In addition, Viet Nam’s rate of knowledge-intensive employment is very low (i.e. 1.1% of the workforce and 117th position out of 129 countries) and only 22.2% of firms offer formal training. Innovation linkages are also weak, as shown by low levels of university-industry research collaboration and R&D investment from abroad.

Business R&D provides the foundations for technological innovation. Between 2011 and 2017, business R&D in relation to GDP increased by nearly 8 times, from 0.05% to about 0.4%. Over the same period, total R&D increased from 0.2% to 0.5%, which means that the share of business R&D in total R&D spending went from 26% to 73%. Nonetheless, business R&D levels are still very low by international standards, not only compared to the OECD average (1.6%), but also to other ASEAN countries such as Malaysia and Thailand. The percentage of R&D personnel in the labour force is also low (and correlated with levels of R&D spending) in Viet Nam, as much as in other ASEAN countries (Figure 3.15). The limited amount of business R&D spending reflects the nascent stage of the country’s R&D development capacity, where the focus of production is mostly on assembly rather than product development. A policy framework that stimulates business R&D will be important to boost technological innovation and support the upgrading of SMEs into global value chains.

With respect to Information and Communication Technologies (ICT), Viet Nam offers a mixed picture. Viet Nam’s position in the ICT Development Index of the International Telecommunication Union (ITU) has declined over the years (94th, 102nd and 108th in 2010, 2015 and 2017 respectively).26 However, Viet Nam also ranked 5th out of 50 countries in the Global Services Location Index of 2019, 6 positions better than in 2016, mostly thanks to its software outsourcing services.27 In addition, Viet Nam has experienced a surge in both internet and mobile phone subscriptions (Figure 3.16, Panel A).28 Finally, Vietnamese firms seem to benefit more than their peers in the region from the use of ICT: there is in fact a nearly 200% gap in average multifactor productivity between companies using ICT and those not using ICT in Viet Nam (Figure 3.16, Panel B).

Viet Nam has in place a regulatory framework for science and technology (S&T) enterprises which provides a definition of these enterprises and the tax and credit incentives to which they are entitled. However, the granting of S&T enterprise certificates is the responsibility of local governments, which often do not have the evaluation capacity to make an informed decision. This explains the small number of “certified” S&T enterprises in Viet Nam (in the hundreds) (Nguyen, Nguyen and Le, 2014[49]) and the fact that many potentially eligible enterprises do not even try to qualify.

Viet Nam has also recently promulgated a Law on Technology Transfer and the associated Decree 76/2018/ND-CP which set guidelines on the registration and pricing of technology transfer and on the support of technology absorption at the firm level.29 However, although the law is a step forward, the problem of low technology absorption is mostly the outcome of inadequate technological infrastructure (see above), low human capital capacity, and weak protection of intellectually property rights (IPR).

In particular, although the national IPR law is quite complete and in accordance with international good practice, legal enforcement is weak (Sturgeon and Zylberberg, 2017[50]). As a result, it has been argued that firms often hesitate to file for patent protection because they see their ideas more often stolen than protected (World Bank/MPI, 2016[51]). In the 2019 International Property Rights Index (IPRI),30 Viet Nam ranked 89th globally (out of 129 countries) and 6th in the ASEAN region (of the 7 ASEAN countries covered in 2019). Box 3.6 provides an example of how Singapore (ranked 15th globally and 1st in the ASEAN region) has strengthened IPR for SMEs.

Viet Nam has grown very rapidly in the last 20 years, mostly following an export-led and FDI-attraction growth strategy. Today, Viet Nam is a high globally integrated economy, with trade flows (the sum of imports and exports) corresponding to 200% of national GDP. However, what has been one of the main strengths of the Vietnamese economy might become a risk factor at a time when many advanced economies are reconsidering their long supply chains due to recent trade disputes and the COVID-19 pandemic.

The government of Viet Nam has made important efforts to ease business regulations, for example through Project 30, and has significantly reduced its corporate income tax (CIT) rate to levels below the OECD and ASEAN averages. As of mid-2020, the government was also considering the introduction of an SME preferential tax regime which could free up resources for business investment in domestic small enterprises. On the downside, the national tax system remains complex and the large role of state-owned enterprises hinders competition in many domestic markets.

Basic education is of high quality in Viet Nam, but there are signs of inequality in access to higher education and skills mismatches in the labour market. The TVET system, which could help address the skills mismatch problem, is not strong enough, mostly because of the lack of collaboration and co-ordination between TVET institutes and employers. Finally, in line with the stage of development of Viet Nam, the national innovation system is still at an infancy stage. Business R&D spending has increased, but from very low levels, and some innovation laws (e.g. the IPR law) need to be better enforced.


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← 1. In 2019, the trade flows-GDP ratio had further increased and reached 210%.

← 2. A “crawling peg” is a type of fixed exchange rate regime that allows the devaluation of the national currency at a gradual rate against a foreign currency.

← 3. In 2008, one of the main reasons behind the upsurge in inflation was a rapid rise in remittances from the Vietnamese diaspora, which forced the Central Bank to print money to convert mostly US dollars into Vietnamese Dong (see, for example, Financial Times, 2008, “Vietnam’s inflation rate surges above 25%” (https://www.ft.com/content/674849da-2c03-11dd-9861-000077b07658). In 2011, the rise in inflation was rather a combination of factors such as the nearly collapse of the government’s petrol price stabilisation fund (due to a rise in global oil prices), large currency devaluation and the announcement of an increase in the legal minimum wage (see, for example, BBC, 2011, “Vietnam’s inflation rate rises to 23%”, https://www.bbc.com/news/business-14642479).

← 4. ILO, 2019, Viet Nam to ratify ILO Convention on employment for workers with disabilities (https://www.ilo.org/hanoi/Informationresources/Publicinformation/newsitems/WCMS_679336/lang--en/index.htm).

← 5. Minimum wages in Viet Nam are determined according to four regions set by the national government. Region I includes urban districts of central cities; region II includes peripheral, suburban districts of central cities and districts of provincial cities; region III includes provincial towns; region IV encompasses the rest of rural areas. Updated details of the regional administrative units can be found in the appendix of Decree 90/2019/ND-CP.

← 6. European Parliament. 2020. EU-Vietnam free trade deal gets green light in trade committee (https://europarl.europa.eu/news/en/press-room/20200121IPR70703/eu-vietnam-free-trade-deal-gets-green-light-in-trade-committee).

← 7. OECD calculations based on World Bank’s World Integrated Trade System: Viet Nam’s Trade flow statistics (https://wits.worldbank.org/CountryProfile/en/Country/WLD/Year/1988/TradeFlow/EXPIMP).

← 8. Foreign ownership of more than 51% will switch company status from domestic to foreign-owned, which comes with some stock-market and sector constraints (e.g. foreign-owned companies are not allowed to operate in some specific sectors such as distribution of rice, tobacco, crude oil, pharmaceuticals, etc.).

← 9. In the case of Viet Nam, local sourcing is strongest in textiles, followed by the metals sector and electronics. However, in the case of electronics, most local sourcing consists of plastic components rather than chips and other more sophisticated inputs.

← 10. For further information on Resolution 136/NQ-CP (enterprise registration procedure), see: https://luatvietnam.vn/dau-tu/nghi-quyet-136-nq-cp-chinh-phu-119321-d1.html#noidung.

← 11. This applies to the World Bank Doing Business indicators, but also to the Global Competitiveness Index of the World Economic Forum (WEF), the Global Innovation Index of the World Intellectual Property Organisation (WIPO) and the E-Government Development Index of the United Nations (UN). In 2020, the government aimed for an improvement by 10 positions the in World Bank Doing Business Index, 5 positions in the WEF Global Competitiveness Index, 3-4 positions in the WIPO Global Innovation Index, and 10-15 positions the UN E-Government Development Index (see Resolution 02/NQ-CP, issued on 1 January 2020, on “Continuing to perform key tasks and solutions to improve the business environment and national competitiveness in 2020”, http://www.chinhphu.vn/portal/page/portal/chinhphu/hethongvanban?class_id=509&_page=1&mode=detail&document_id=198738).

← 12. According to the Economist Intelligent Unit, the value of industrial output grew by more than 13% year on year in the first six months of 2010, and the FDI sector posted a growth rate of 17% (cited in Schwarz, 2010[89], “Project 30: A Revolution in Vietnamese Governance?”, Brookings Institution (https://www.brookings.edu/research/project-30-a-revolution-in-vietnamese-governance/).

← 13. Viet Nam also applies some special CIT regimes. Similar to other emerging economies, higher CIT rates are applied to oil and gas (32% to 50%) and mineral resource extraction (40% to 50%). In addition, lower CIT rates down to 10% are reserved for enterprises investing in geographical areas with socio-economic difficulties, economic zones or hi-tech parks or in specific domains such as high technology, scientific research and technological development, education and training, healthcare, culture, sport, and the environment (PwC, 2020[58]).

← 14. Viet Nam’s total tax and contribution rate is reported at an average of 37.6% of profits.

← 15. Viet Nam Finance Times, 2019, Lower tax for SMEs is the necessary leverage for the support of enterprise development, http://thoibaotaichinhvietnam.vn/pages/kinh-doanh/2019-05-24/giam-thue-cho-doanh-nghiep-nho-va-vua-don-bay-thiet-thuc-ho-tro-doanh-nghiep-phat-trien-71810.aspx.

← 16. Estimates on total SME loans are from the National Centre for Socioeconomic Information and Forecast (NCIF).

← 17. Viet Nam Financial Times. 2019. Enhancing SMEs’ access to finance (http://tapchitaichinh.vn/ngan-hang/nang-cao-kha-nang-tiep-can-tin-dung-ngan-hang-cua-doanh-nghiep-nho-va-vua-306222.html).

← 18. Another survey by UNU-WIDER/CIEM (2016[60]) confirmed these results, with 23% of Vietnamese firms considering lack of capital and access to finance as the main obstacles, down from 30% in 2013 and 45% in 2011.

← 19. In another study, 39% of SMEs were reported to have a loan (Dang and Chuc, 2019[59]). However, this study does not take into account credit lines such as overdraft facilities.

← 20. Property comprises 38.5% of the collateral for bank loans, while 26.5% of collateral is in the form of capital assets.

← 21. Earmarked loans are loans allocated for a specific policy objective, which can be SME growth, rural development or something else. In Viet Nam they are also called “policy loans”.

← 22. Financial Times. 2019. Venture capital piles into Vietnamese technology companies, https://www.ft.com/content/cbe426bc-adc4-11e9-8030-530adfa879c2.

← 23. Various post-test adjustments result in lower test scores, although Viet Nam remains a positive outlier given its GDP per capita (Glewwe et al., 2017[66]). Reasons given for this success include the communication of clear student learning goals to all schools and school subsystems and the frequent monitoring of teacher and school performance (McAleavy, Tran and Fitzpatrick, 2018[65]). Other surveys, such as the Trends in International Mathematics and Science Study (TIMSS), show consistent results.

← 24. School students who fail to pass high-school entry exams have no other choice than going to more expensive private schools, which means many of them drop out of high school.

← 25. For example, the government offers corporate income tax (CIT) breaks to companies that provide training to certain categories of workers (e.g. women and ethnic minorities) or in deprived economic regions. In addition, tax exemptions also apply to company donations to TVET organisations.

← 26. The ICT Development Index is based on three indicators, namely ICT access, ICT use and ICT skills.

← 27. Kearney Global Services Location Index 2019: https://www.kearney.com/digital-transformation/gsli/2019-full-report.

← 28. The mobile subscriptions is over 100 percent because one person may own more than a mobile phone or SIM card. There has been a decline in the rate of mobile phone subscriptions in recent years due to tighter control by the Ministry of Information and Communications (MIC) on the providers of SIM cards.

← 29. The Law on Technology Transfer is Law 07/2017/QH14: https://www.most.gov.vn/en/Pages/Detaildocument.aspx?vID=45.

← 30. The International Property Rights Index (IPRI), produced by the Property Rights Alliance, scores countries on the strength of the institutions underlying the property rights regime: the legal and political environment (LP), physical property rights (PPR), and intellectual property rights (IPR), covering 129 countries, https://www.internationalpropertyrightsindex.org.

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