Characteristics of the Vietnamese Business Environment: 

Evidence from the SME Survey in 2013

4 November, 2014

John Rand and Finn Tarp

Introducing the SME survey

• Small and medium enterprises (SMEs) continue to be central to the Vietnamese development process

• Contributing to economic growth and employment

• Characterize business conditions under which Vietnamese SMEs operate

• Firm dynamics: How do firms evolve?

• External environment: Does it bring challenges or opportunities?

Overview

• SME survey 2005, 2007, 2009, 2011 and 2013• Ten provinces• Approximately 2,500 non-state manufacturing

enterprises each year.• Four questionnaires:• Main (firm level)• Employee (sub-sample)• Economic accounts• Exit

• The report provides descriptive statistics and analysis of key trends in the 2013 data.

• The report is a joint effort of CIEM, DoE (University of Copenhagen) and ILSSA.

• Research supported by Danida and UNU-WIDER

Topics covered in the 2013 SME survey report

Topic Section

International economic crisis 3

Enterprise growth and dynamics 4

Bureaucracy, informality and informal payments 5

Investment and access to finance 6

Production, technology and labour productivity 7

Employment 8

Environment 9

Trade and sales structures 10

The 2013 survey (compared with 2011)

 Province Interviewed in

2013Interviewed in

2011Change

Ha Noi 280 268 4.5%

Phu Tho 255 251 1.6%

Ha Tay 342 340 0.6%

Hai Phong 182 200 -9.0%

Nghe An 343 345 -0.6%

Quang Nam 160 155 3.2%

Khanh Hoa 88 94 -6.4%

Lam Dong 77 76 1.3%

HCMC 600 568 5.6%

Long An 134 122 9.8%

Total 2,461 2,419 1.7%

Firm ownership structure

 Legal form 2013 2011 Change

Household enterprise 1,553 1,571 -1.1%

Private/sole proprietorship 198 193 2.6%

Partnership/ Collective/ Cooperative 55 65 -15.4%

Limited liability company 546 498 9.6%

Joint stock company 109 92 18.5%

Total 2,461 2,419 1.7%

Note: State-Owned Enterprises (SOEs) are not included in the sampling frame

Firm size

 Size 2013 2011 Change

Micro (<10 employees) 1,660 1,763 -5.8%

Small (10-49 employees) 614 566 8.5%

Medium (50-300 employees) 145 132 9.8%

Total 2,461 2,419 1.7%

The 2013 SME survey sample by size, location and ownership

The 2013 SME survey sample by sector

SME survival rates

    2011 2013Surveyed in 2011 Survivors 2,419

(2,449)1,988

  Exit confirmed    431

Survival rate     82.2

Annual survival rate   90.6

Newly surveyed     473

Total surveyed in 2013   2,461

• Annual survival rate between 2009 and 2011 = 92.2%• Annual survival rate between 2007 and 2009 = 91.6%

Exit probabilities

Dependent variable: Firm exit Marginal effects

Small -0.030 -0.035*

Medium -0.060** -0.072**

Ha Noi 0.047 0.057*

Nghe An -0.058** -0.063***

Quang Nam -0.084*** -0.086***

Long An -0.100*** -0.102***Partnership/Collective/Cooperative 0.109* 0.118*Limited liability company 0.051* 0.050*Sector dummies included No YesObservations   2,419 2,419

• Small and medium firms are 3 to 6% less likely to exit than micro firms• Nghe An, Quang Nam and Long An have lower exit probabilities than HCMC• Ha Noi has the highest exit probability• 356 SMEs (14.4%) temporarily closed their business in 2011-2013• 24% exited in 2013; 19% changed sector in which they operate

Enterprise growth and dynamics

Number of employees 2013 2011 Change

Total 23,589 27,509 -14.2%

Average 11.9 13.8 -13.8%

Micro 3.7 3.8 -2.6%

Small 20.2 20.0 1.0%

Medium 92.1 101.2 -9.0%

Employment Transition Matrix, 2011-2013

Employment Transition Matrix (%)

  Micro 2013 Small 2013 Medium 2013

Micro 2011 94.6 5.4 0

Small 2011 26.2 71.6 2.2

Medium 2011 2.5 25.6 71.9

• More mobility in small and medium firm categories• None of the micro enterprises transitioned to the medium category, only to

small• 2.2% of small firms became medium-sized• Around 25% of small and medium firms decreased in size

Employment growth

• Mean employment growth rate was on average negative (-1.3%)

• This holds for all provinces except: Quang Nam, Lam Dong and Nghe An

• Small and medium enterprises saw a negative growth in employment that ranges from 9 to 13%

• Micro firms increased the number of full-time workers by 3%

• All sectors have experienced a decline in employment rates between 2011 and 2013 except food, textile, rubber and chemical industry• The largest decrease (of more than 6%): leather manufacturing,

electronic machinery and motor vehicles

Regression analysis: Determinants of employment growth

 Control variablesWithout sector 

controlsWith sector controls

Small -0.166*** -0.171***

Medium -0.231*** -0.237***

Phu Tho -0.057** -0.051**

Hai Phong -0.059** -0.045*

Quang Nam 0.060** 0.074**

Long An -0.073*** -0.067**

Private/sole proprietorship 0.074*** 0.075***Partnership/Collective/Cooperative 0.083* 0.069Limited liability company 0.085*** 0.082***Joint stock company 0.070** 0.065*Observations  1988 1988

• Micro firms have experienced 17 to 23% higher annual growth in full-time regular workers than small and medium firms

• Compared to Ho Chi Minh City, Quang Nam had 6 per cent higher annual employment growth

• Household firms contribute less to the employment generation than other forms of manufacturing enterprises

Labour productivity

   Labour Productivity 1  Labour Productivity 2    2011  2013  Growth  2011  2013  Growth All  77.3  61.5  0.95 [0.87]  20.7  16.5  0.96 [0.89] Micro  65.8  54.3  0.96  18.0  14.1  0.96 Small  92.2  75.8  0.95  25.4  21.7  0.94 Medium  151.3  99.6  0.96  33.4  27.0  0.98 Urban   93.4  70.4  0.92  26.2  20.1  0.93 Rural  66.2  55.4  0.98  16.9  14.0  0.97 South  82.9  65.5  0.96  23.1  18.6  0.97 North  73.2  58.6  0.95  19.0  15.0  0.95 

Note: Million real VND. Mean labour productivity (LP) growth is defined as LP2013/LP2011. Median LP growth in brackets. 

• LP1 = real revenue per full-time employee• LP2 = real value added per full-time employee

   Labour Productivity Growth (2011 to 2013) 

 dln(LP1)  dln(LP2) 

   Coef  t-stat  Coef  t-stat Labour productivity level (log)  -0.477***  (-20.16)  -0.577***  (-24.11) Firm size (log number of employees)  0.124***  (5.82)  0.128***  (7.27) Diversification (Yes=1)  0.064  (1.24)  0.089**  (2.02) Innovation 1 (Yes=1)  0.015  (0.19)  -0.018  (-0.27) Innovation 2 (Yes=1)  0.021  (0.65)  -0.020  (-0.69) Household firm (Yes=1)  -0.066  (-1.35)  -0.070*  (-1.79) Urban (Yes=1)  -0.054  (-1.47)  0.075**  (2.30) South (Yes=1)  0.052*  (1.65)  0.076***  (2.73) Sector dummies  Yes  Yes Observation  1,861  1,861 Pseudo R-squared  0.27  0.33 Note: OLS. Robust standard errors.  *, ** and *** indicate significance at a 10%, 5% and 1% level, respectively. Base: Food processing (ISIC 15). 

Labour productivity growth

• Labour productivity growth is the highest among large firms in the south and urban firms in the second specification

   ECN or BRC + Tax code   Informal 2013  Formal 2013  Total  Per cent Informal 2011  551  60  611  (30.7) 

 (90.2)  (9.8)  (100.0) 

 Formal 2011  2  1,375  1,377  (69.3) 

 (0.2)  (99.8)  (100.0) 

 Total  553  1,435  1,988  (100.0) Per cent  (27.8)  (72.2)  (100.0)    

Note: Percentage in parenthesis. 

Informality

  2011 2013

  Per cent Number Per cent Number

Formal (Total) 72.7 1,759 71.4 1,757

Formal (Balanced) 71.9 1,430 72.2 1,453

Note: Formal definition: Firm has an ECN or a BRC and a tax code.

• Decrease in the speed of formalization compared to 2011 survey

      Firm Growth 

   (1)  (2) 

Firm Size  log (number of employees)  -0.082***  -0.092*** 

   (-13.22)  (-13.12) 

Registration  Formal = 1  0.072***  0.062***       (4.45)  (3.40) Location dummies included  No  Yes Sector dummies included  No  Yes Observation     1,988  1,988 Pseudo R-squared  0.09  0.12 

Informality and firm dynamics

• Well determined positive registration effect on employment growth

Most important constraints to growth

Investments

   2011  2013    Obs.  Share  Obs.  Share All  2,416  0.562  2,461  0.470 Micro  1,658  0.498  1,763  0.395 Small  613  0.674  566  0.629 Medium  145  0.821  132  0.788 Household firm  1,569  0.505  1,553  0.405 Non-household firm  847  0.666  908  0.582 Urban   1,035  0.529  1,062  0.373 Rural  1,381  0.587  1,399  0.544 South  1,014  0.454  1,059  0.410 North   1,402  0.640  1,402  0.516 

• Lower share of investments compared to 2011• 30% new investments compared to 2011• 60% of investments are repeated • 587 firms did not make any investment in the past four years

• Tendencies to invest• Increasing in enterprise size, for firms in rural and

Northern provinces

How was the investment financed?

• Main source of finance for new investments are formal loans and retained earnings

• Higher share of new investments financed by informal loans• Micro and household-owned firms more likely to use retained earnings or

informal loans• Larger firms finance investments through formal loans

Diversification and innovation

• An average Vietnamese SME is specialised• Only 11% of firms produced more than one product

• Similar to 2011, but declining diversification compared to 2009• But, urban and Southern firms show slight increase• Fabricated metal products (ISIC 28): increased level of diversification• Innovation: decreasing trend

• Firms producing furniture (ISIC 36) tend to innovate more than firms in other sectors

  Diversification  

(More than one 4-digit ISIC) Innovation 1  

(New product development) Innovation 2  

(Improvement of existing product)    2011  2013  2011  2013  2011  2013 All  11.0  10.9  4.0  0.6  38.4  16.3 Micro  10.1  8.8  3.4  0.4  32.9  12.7 Small  11.1  16.1  4.6  1.2  48.8  24.2 Medium  20.7  16.7  8.9  0.8  57.9  30.3 Urban   9.3  9.6  5.2  0.6  46.9  18.5 Rural  12.3  11.9  3.1  0.6  32.1  14.6 South  8.2  9.6  3.3  0.4  43.1  15.3 North  13.0  11.9  4.5  0.8  35.11  17.0 

Note: Numbers in percentages          

   Diversification  Innovation 1  Innovation 2    Coef  z-stat  Coef  z-stat  Coef  z-stat Firm size (log number of employees)  0.014***  (2.67)  0.002  (0.78)  0.072***  (8.36) Household firm (Yes=1)  -0.060***  (-4.01)  -0.005  (-1.05)  -0.007  (-0.35) Urban (Yes=1)  -0.054***  (-5.13)  0.003  (0.61)  0.044**  (2.54) South (Yes=1)  -0.026***  (-2.66)  -0.006*  (-1.77)  0.011  (0.75) Year dummy  -0.004  (-0.47)  -0.030***  (-6.67)  -0.224***  (-16.02) Sector dummies  Yes  Yes  Yes Observation  3,961  3,896  3,961 Pseudo R-squared  0.06  0.11  0.12 Note: Probit, marginal effects. Robust standard errors.  *, ** and *** indicate significance at a 10%, 5% and 1% level, respectively. Base: Food processing (ISIC 15). 

Diversification and innovation characteristics

• Larger enterprises are shown to diversify and innovate (only Innovation 2)• Household-owned, urban and Southern firms are less likely to diversify• Time dummies confirm that firms innovate less frequently in 2013 than in 2011

International crisis and SMEs

      Obs. Per cent Yes 

Full sample  2011  (2,419)  61.9 

 2013  (2,461)  68.3 

Balanced panel  2011  (1,988)  61.1    2013  (1,988)  69.4 

   Crisis No 2013  Crisis Yes 2013  Total  Per cent Crisis No 2011  294  479  773  (38.9) 

 (38.0)  (62.0)  (100.0) 

 Crisis Yes 2011  316  899  1,215  (61.1) 

 (26.0)  (74.0)  (100.0) 

 Total  610  1,378  1,988  (100.0) Per cent  (30.6)  (69.4)  (100.0)    

Note: Percentage in parenthesis.       

• All types of SMEs feel affected by the crisis• More severely perceived among small and medium than micro firms • More commonly felt among urban and Northern firms• 8% of firms in 2013 believe that the international crisis has brought

positive incentives (5% in 2011; 12% in 2009)

Conclusions and policy recommendations (1)

• Firm size is, on average, decreasing • Small and medium enterprises were reducing the number of full-time

employees at a higher rate than micro enterprises• Labour productivity has declined between 2011 and 2013, and the

decline is especially driven by micro rural enterprises• Decrease in the proportion of full time workers

• Business environment• Very few firms are facing no constraints • Informality in payments and access to finance remain some of the

most serious problems• Slow-down in formalisation • Investment rate has declined, especially among micro-sized urban

firms in the south

• Investment policies should address the declining investment trend• Policies should ease firm registration (formalisation) and formal credit

access, reflecting the fact that informality cannot assure an inclusive growth path sustained by investments in the SME sector

Conclusions and policy recommendations (2)

• Diversification and innovation • More specialisation among SMEs (product diversification does not seem to

be a tool for risk reduction)• Sharp decline in innovation, especially among rural micro firms• This decline could be a problem for future dynamics, as innovation through

the improvement of existing products is positively related to firm performance

• Policy focus on the improvement of the innovative capacity of SMEs

• Effects of the crisis: aggravated compared to 2009 and 2011• Around 70 per cent of surveyed enterprises stated that the international

crisis still had a negative effect on their doing business conditions• Micro sized firms are less affected by the crisis than their larger

counterparts• Firms in the northern part of the country sensed an increase in constraints • Exit rates: 9.3% confirmed exits• Temporary closures: around 17%, mostly among micro and small household

firms

Thank you!