SME and Entrepreneurship Policy in Viet Nam

Viet Nam has been one of the world’s fastest-growing economies in the last twenty years. The major economic reforms of the mid-1980s (Đổi Mới reforms) saw Viet Nam’s growth model gravitate towards attracting foreign direct investment (FDI) and exports of manufactured goods. In 2019, trade flows (i.e. the sum of imports and exports) relative to GDP reached 210%, the highest value in the world for countries with a population of at least 50 million people. The content of exports has also changed over time, moving from basic agricultural produce in the 1980s, to textiles and footwear in the 1990s and 2000s, and to electronics in more recent years. As a result, industry accounts for 55% of total employment and for 62% of national value added (significantly higher than OECD averages, 23% and 33% respectively), with large manufacturing companies alone contributing 40.5% of GDP. By contrast, SMEs (1-249 employees) employ 47% of Viet Nam’s labour force and generate 36% of national value added, much less than in the OECD area, although these figures are biased downward by the presence of a large domestic informal sector. Although SMEs account for a smaller share of the formal economy than in OECD countries, Viet Nam displays strong entrepreneurialism, as shown by high rates of business churning (business entry and exit rates combined), high-growth firms and gazelles.

Overall, Viet Nam’s business environment is conducive to business growth, although there are still areas for improvement. The national government has eased product market regulations through a series of simplification reforms, such as Project 30, and has lowered the statutory corporate income tax rate from 32% in the early 2000s to 20% today. The government is also envisaging the introduction of a preferential tax regime for SMEs which appears to be well designed, although it has not yet been voted into law by the National Assembly. On the downside, state-owned enterprises still account for a large share of the national economy (40% of GDP), hindering competition in many product markets, while compliance with tax regulations remains difficult, especially for SMEs.

Viet Nam’s basic education is of good quality, as shown by OECD PISA (Programme for International Student Assessment) scores, which are in line with OECD averages. However, there are also clear signs of inequality in access to higher education and skills mismatches in the labour market. The technical and vocational education and training (TVET) system could help address these mismatches, but it currently falls short of this objective. Viet Nam’s national innovation system is at an early stage of development, in line with the country’s lower-middle income status. The government has introduced relevant laws to prop up the national innovation system, but some of them need to be better enforced or adjusted, such as the Intellectual Property Rights Law and the Science and Technology Enterprise Law.

Viet Nam’s first SME and entrepreneurship policies date back to 2001, when a national law introduced a legal definition of an SME and established the SME Development Agency, which has since become the Agency for Enterprise Development (AED). More recently, the 2018 SME Support Law showed the commitment of the national government to supporting domestic SMEs. This law covers different policy areas such as taxation, access to finance, innovation and value chain development, although there are still areas that lack sufficient attention (e.g. SME digitalisation) and others where results have not been encouraging so far (e.g. the conversion of household businesses into formally registered enterprises). SME and entrepreneurship policy sees the involvement of different ministries and levels of government in Viet Nam, which calls for appropriate policy co-ordination arrangements. The SME Development Council was introduced in 2001 to this purpose, but it has not worked properly until now; it could, accordingly, be revamped to enhance co-ordination in SME and entrepreneurship policy.

Viet Nam has a relatively small number of programmes that specifically target SMEs, some of which have also experienced low take-up; for example, the SME Development Fund (SMEDF) and the Credit Guarantee Fund (CGF) both have low usage by SMEs and partnering banks. For banks, this may be because capped interest rates are set too low, which is exacerbated by limited confidence that public guarantees will be honoured (in the case of the CGF and especially for guarantees backed by provincial governments), while, for SMEs, cost-sharing requirements may be too high, for example in the case of the SMEDF.

Innovation policy has mostly focused on the support of R&D and Intellectual Property Rights (IPR), de facto excluding most small companies in non-high-tech sectors. The introduction of simple policy instruments, such as innovation vouchers, could help redress this bias by strengthening innovation capability also in smaller enterprises. Policies to encourage business internationalisation have prioritised trade facilitation (e.g. through the launch of the Viet Nam Trade Information Portal), while trade promotion efforts for SMEs (e.g. market information, export advice, participation in e-commerce) are still at an incipient phase.

Training policies have mostly focused on labour market entrants and the unemployed, with less attention placed on training employees in SMEs. Finally, women’s entrepreneurship support has recently gained some traction through a new project aimed at women’s start-ups. Nevertheless, the government should also ensure that women are adequately represented in all SME and entrepreneurship programmes, including those under the framework of the SME Support Law.

While Viet Nam has been successful in attracting FDI and developing an export-led model of growth, buyer-supplier linkages between multinational enterprises (MNEs) and local SMEs are still limited, which reduces the scope for technology spillovers from FDI. A number of factors explain this situation, including difficulties for potential upstream SMEs to meet international technical standards and to achieve economies of scale. Viet Nam’s main policy to encourage local SMEs to tap into GVCs is the “Supporting Industry” development programme, which targets six specific manufacturing sectors (i.e. textiles and apparel; footwear and leather; electronics; automobile; metal/machine tools; and high-tech industry). This programme is well-intended, but it should expand its focus to include potential SME upstream service suppliers as well as to second-tier suppliers. In addition, this programme could move beyond the mere provision of tax incentives and loan subsidies to embrace other important mechanisms that could boost upstream integration such as through supporting training, capacity building and business matchmaking. More generally, a more integrated approach is necessary to build supply chains that are more inclusive of domestic SMEs. This approach would hinge on four main pillars: improving firm-level capabilities and compliance with international technical standards; ease the search process for MNEs in finding “qualified” and “verified” domestic suppliers; upgrading the physical, digital and institutional infrastructure (e.g. upgrading the transport system, but also reinforcing IPR protection and supply chain finance); and encouraging relevant research from universities and the supply of support services from other stakeholders (e.g. testing by certification labs) in the national innovation system.

Business development services (BDS) are non-financial services (e.g. training, advice and mentoring) that aim to improve the performance of enterprises in terms of access to and ability to compete in domestic or international markets. The main objective of BDS is, therefore, enhancing the competitiveness of SMEs by strengthening their managerial skills. The Agency for Enterprise Development (AED) is the main government entity in charge of BDS promotion in Viet Nam, notably through the three Assistance Centres for SMEs, commonly known as TAC (from the previous name of Technical Assistance Centres), which are located in Ha Noi (North), Da Nang (Centre) and Ho Chi Minh City (South). The TAC centres play an important role and should be strengthened, either by creating more in other locations or by enhancing the decentralised training offer of the existing centres, for example through the use of mobile BDS clinics to reach more peripheral locations. Going forward, it will also be important to further encourage the rise of a private market for BDS, in particular by helping SMEs defray the costs of private-sector BDS providers and ensuring the good quality of the subsidised business support services. In this respect, two recent pilot projects in Ha Noi and Ho Chi Minh City set a good example on which the government could build to create a national network of accredited BDS organisations.

• Move forward with the current plan to enforce a preferential corporate tax regime for SMEs, in particular the legal provisions introducing lower tax rates for micro and small companies.

• Consider the introduction of another presumptive tax regime for household businesses and own-account workers to encourage their formalisation.

• Revamp the SME Development Promotion Council and expand its mandate to play a stronger inter-ministerial co-ordination role.

• Strengthen SME policy planning capacities in provinces that have not yet developed a local SME Development Plan by leveraging on the expertise of the Agency for Enterprise Development.

• Decrease the coverage rate of the CGF from 100% to closer to 80% to promote risk-sharing with partnering banks, and increase the annual premium fee for the credit guarantee from 0.5% to 1-2% (of the total guaranteed loan and interests) in order to promote the sustainability of the Fund.

• Complement supply-led programmes supporting R&D and technology-based enterprises with interventions, such as innovation vouchers, that aim to improve the innovation capacity of SMEs through skills upgrading and ICT adoption.

• Support more generously within-company training, with a view to enhancing the average labour productivity of SME workforces; for example, by implementing a demand-driven programme aimed at the upgrading of workforce skills in SMEs.

• Ensure that women-owned businesses are adequately represented in all government SME and entrepreneurship programmes, including those under the framework of the SME Support Law.

• Increase flexibility in the criteria for identifying “supporting industry” products to account for changes in industries and global value chains, expand the list to include key value chain services, and extend incentives beyond first-tier suppliers.

• Consider establishing new Assistance Centres for SMEs to ease access to government-supported BDS by SMEs located away from the current three centres. Alternatively, build up and expand the capacity of the existing centres to reach more peripheral locations, for example through mobile training units.

• Encourage the rise of a private market for BDS by covering part of the training or consulting costs faced by SMEs, while also controlling and ensuring the good quality of publicly-subsidised, private-sector BDS.