development of enterprises and the need for further

DEVELOPMENT OF ENTERPRISES AND THE NEED FOR FURTHER REFORMS OF THE BUSINESS SECTOR IN VIETNAM

10

H i g h l i g h t sLe Duy Binh - Truong Duc Trong

Economica Vietnam

Vientianne, 19 November 2015

2VIETNAM

Enterprises – a key player in an economy3

Resource

Market

Product

Market

Households Firms

Legislation

Legislation

Domestic private

enterprises (PSEs)

State-owned

enterprises (SOEs)

Foreign invested

enterprises (FIEs)Factors of

production

Money

Land, labor,

capital

Income:

Wage, in

terest

Public goods Publlic goods

Taxes TaxesGovernment

Output

Revenue

Good &

Services

Money

To compare the three

pillars of the enterprise

sector in Vietnam:• growth

• economic efficiency

• contribution to the

economy.

• opportunities and

challenges.

10

Highlights of the enterprise

sector and business

environment in Vietnam10

#1. The number of PSEs is increasing dramatically 5

0

50000

100000

150000

200000

250000

300000

350000

Number of PSEs

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

The number of PSEs has soared over the last

15-year period

Law on

Enterprises WTO entry

0

1000

2000

3000

4000

5000

6000

Number of SOEs

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Privatization made the quantity of SOEs decrease

0

2000

4000

6000

8000

10000

Number of FIEs

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

FDI promotion policies have positive impact

WTO entryLaw on

InvestmentBTA VN-USA

#2. Small and medium enterprises are in majority 6

43.42%

SMEs constituted nearly a half of total SOEs in 2013

SME large enterprises

95.55%

SMEs dominated the proportion of total number of PSEs in 2013


69.85%

two thirds the total number of FIEs in 2013 are SMEs


Small-scale

and scattered

business?0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2006 2007 2008 2009 2010 2011 2012 2013

Approximately 95% the total number of enterprises are SMEs

% SME % large enterprises

#2. PSEs – numerous workers but low productivity

PSEs are driving force for employment generation

7

10.2%

[VALUE]%

3.4%

Proportion of labor working in each type of enterprise (%)

SOEs

PSEs

FIEs

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 income per worker

• LP2 = Real value-added per worker

A fall in labour productivity in the SME sector

Source: John Rand and Finn Tarp. 2013. Characteristics of the Vietnamese Business Environment: Evidence from a SME Survey in 2013

BUT

#3. PSEs tend to have low and informal innovation8

Innovation in Vietnamese firms is generally low and tends to be informal.

a report by CIEM, DoE and GSO (2014) on firm-level competitiveness and technology in Vietnam has shown that in 2011, only 800 out of nearly 8000 surveyed enterprises (10%) were conducting original R&D.

Low level of technology acquisition

hinder PSEs to become active players in the

value chain of many FIEs.

Adap. But no R&D3%

Adap. and R&D1%

[CATEGORY NAME]

[VALUE]

No adapt. But R&D5%

PSEs tend to adopt or adapt existing innovations rather than develop new ones

#4. SOEs remain an important player in the economy9

SOEs have advantages in accessing production inputs

Own about

70% of total

producing

land

Be granted loans

without collateral &

often guaranteed

by the Government

0%

20%

40%

60%

80%

100%

SOE Other sectors

A gradual decline in GDP contribution

Benefit from

price subsidies

and special

privileges

SOEs control a large share of the output and revenue in

many sectors

9

26

26

57

88

91

21

21

12

24

37

41

51

90

94

97

99

0 10 20 30 40 50 60 70 80 90 100

Rubber and plastics

Construction

Chemicals

Water transport

Insurance

Telecomunication

Chemicals

Steel

Rubber and Plastics

Textile

Mining and quarrying

Refined sugar

Beer

Cement

Electricity, gas

Coal

Fertilizer

As share (%) of total output

for the sector (2009 or 2010)

As share (%) of total revenue

for the sector (2009)

#4. …thanks to special treatments from the government

SOEs are often rescued by the State

Budget when they are in troubles.

10

A few SOEs have the

monopoly power in

essential industries of

the country.

The Government

assigned SOEs some

functions or missions

The Constitution 2013: State-Owned

enterprises assumes the leading role in the

sector socialist - oriented market economy.

Socialist Market

Oriented Economy

30%

74%

51%

#4. The perception of SOE bias is growing11

Source: PCI-FDI Survey

2014, the figure reports the

share of firms agreeing that

there is bias towards SOEs

Firms assessment of bias

towards the SOEs

#5. FDI inflows have increased over 25-year period… 12

4.11

9.76

11.19

11.37

48.12

139.90

Information and …

electricity, gas, water, a…

Accomodation and …

Construction

Real Estate

Manufacturing

Top industries with largest investment capital (USD bil.)

10.768

10.937

15.463

17.987

28.401

32.745

36.891

37.233

MalaysiaUSA

HongkongBritish V.I

TaiwanSingapore

JapanKorea

Top countries with largest investment capital (USD mil.)

ASEAN entry BTA VN-USA WTO

FDI flows to Vietnam are active over 2000-2013. FDI flows will

certainly benefit from actual trade agreements and some

ongoing negotiations. Most of FDI inflows to Vietnam target

cheap labor and natural resources.

71.73

415

1,544

1.588

0

200

400

600

800

1000

1200

1400

1600

1800

0

10

20

30

40

50

60

70

80

ProjectsU.S billion

The number of new FDI projects reached record in 2014

#5. FIEs are offered many preferential treatments …

Types of preferential treatments towards FIEs

13

Incentives of Corporate Income Tax (CIT):

10% exemption for 15 years for hi-tech and IT

investment in which: free in the first 4

years, 50% in the next 9 years.

Incentives of import tax: Free import tax for

fixed asset; free import tax in 5 years from

production date for materials, components

(cannot produce in local market) used for

investment projects; free import tax for

materials (cannot produce at local) for

software manufacturing.

high incentives of

taxes: corporate

income tax, value

added tax, import-

export tax.

Projects hi-tech

development will

enjoy additional

incentives by

Prime Minister’s

regulation.

Industrial Park

(IP), Export

Processing Zone

(EPZ), Economic

Zone (EZ), Hi-tech

Park.

Location Taxes Other incentives

Strategy to attract large multinational corporations in technology

#5. …and they now become the driving force for exports14

68%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Perc

enta

ge o

f export

valu

e

FIEs’ export value now account for two thirds of Vietnam’s total export value

Domestic sectors

Foreign sectors

#5. but other contributions may be not commensurate15

Source: CIEM, DOE, GSO. 2014. Firm-level competitiveness and technology in Vietnam –

Evidence from a survey in 2013; http://bit.ly/1S84JZN

Only one fifth of Vietnamese businesses can “work” with FDI

businesses.

There is limited technology transfer between FIEs and domestic

enterprises. The majority of domestic enterprises are

transferring technology with each other (accounting for 66%).

Vietnamese appears to fail to link up with FIEs

+

PSEs FIEs

Transfer pricing (TP): the other side of the medal

tax arrears:

US$23.8 million

tax arrears:

US$4.2 million

“Black-list” – suspected TP

#6. Widening performance gap between three sectors16

4%

2%

10%

3%

1%

6%

0%

2%

4%

6%

8%

10%

12%

SOE PSE FIE

Return on Capital of Enterprises in VN

2009 2013

• Increase labour productivity

• Capital accumulation & linkage

• Equitisation & Divestment

• Accountability enhancement

• Develop supporting industries

• Promote technology transfer

#6. Widening performance gap between three sectors

Emerging perception: PSEs are the major pillar of Vietnam economy

17

“

”Mr. Bui Quang Vinh, Minister - Ministry of Planning &

Investment

Three

pillars of

Vietnam

economy

It’s important to realise

that if we don’t pay

proper attention to

domestic firms, we may

not succeed in economic

development.

PSEs

FIEs

SOEs

Reallocate the resources

in the economy to more

efficient sectors

HOW TO?

#7. Integration: opportunities along with challenges18

13 FTAs

VIETNAM

ASEAN

Cambodia

Laos

Indonesia

Phillippines

Myanmar

Thailand

Malaysia

Singapore

Brunei

China

S. Korea

Japan

Australia

New

Zealand

EFTA (EU +

Switzerland, Norway, Li

echteinsten, Iceland)

EAEC (EurAsian Economic

Community -

Belarus, Kazakhstan, Russi

a, Armenia and Kyrgyzstan)

S. Korea

Japan

TPP(Trans-Pacific

Partnership)

Chile

Canada Mexico Peru

USA

ACFTA

AKFTA

AJCPE

IndiaAIFTA

AANZ

FTA

VEFTA

AEC

WTO


62 BITs


FTAs can boost

small business

exports by reducing

trade costs, lowering

risks, and opening

new markets for

SMEs. FTAs are

expected boost direct

exports by SMEs to

25% of Vietnam’s total

exports.

Expected contributions

High-standard FTAs can play

a vital role in attracting FDI.

FTAs help Vietnam’s

enterprises move up the

value chain, compete in

more advanced economic

sectors and supporting higher

quality of jobs.

Technology transfer

(cleaner technology for a

sustainable development) can

be supported.

The “heavy lifting” of concluding comprehensive trade

agreements with the United States and its FTA partners also

makes it easier for Vietnam to negotiate - and benefit from -

additional higher-standard FTAs with new trade partners.


• Vietnam companies may not be ready for

dealing with challenges

• Vietnam has a low competitiveness level

(labor-intensive economy), while main trading

partners are productivity-driven economy

(Chile, Mexico), or innovation-based economy

(US, Canada, Japan, Singapore, Malaysia, Au

stralia, New Zealand).

• Tough requirements to meet: Rules of

origin, Sanitary and Phytosanitary

Standards, Technical standards, Intellectual

property

• Government lacks appropriate policies to

support vulnerable industries.

Risks & Challenges

Sugar industry

Pharmaceutical

industry

Livestock industry

Industries are most

vulnerable to FTAs entries

#8. Challenges to reform: a mountain to climb

Weaknesses of

Vietnam relative to

neighboring countries

in 2013 & 2014 are:

• corruption

• quality of infrastructure,

• regulatory burdens,

• quality of public services

22

7.32%

14.40%

17.60%

19.10%

20.80%

23.80%

25%

Malaysia

Thailand

Laos

Cambodia

Indonesia

China

Philippines

Less Corruption

18.8%

25.7%

27.5%

34.5%

40.3%

43.9%

47.1%

Philippin…

China

Thailand

Indonesia

Cambodia

Malaysia

Laos

Better Infrastructure

6.7%

14.8%

16.7%

17.5%

17.9%

20.2%

26.5%

Philippin…

Indonesia

Thailand

Malaysia

Cambodia

China

Laos

Public Services better

21.6%

25.0%

26.5%

29.4%

32.4%

35.0%

38.5%

Thailand

Malaysia

Cambodia

Philippines

Laos

China

Indonesia

Fewer regulations

% Firms agreeing Vietnam is superior than neighboring countries in aspects of:

“How would you compare the business environment in Vietnam to other countries in which you

considered investing?” (PCI Vietnam 2014)

#8. Challenges: a high mountain to climb

Source: PCI Survey Questions: To what extend do you agree with these statement, “Firms in my line of business pay bribes”, “Government uses compliance with local regulations to extract rents”, and Percentage of revenue firm has to spend for informal payments. Figures reports the scores in the median province.

23

107

111

123121 120

116

112

123

116

119

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Vietnam’s rankings in Corruption Perception Index

70%68%

66%

59% 58%

51%53%

50%

65%

40%38% 37%

50% 50%

40%44%

41%

66%

13% 12%10% 9%

7% 7% 6% 7%10%

2006 2007 2008 2009 2010 2011 2012 2013 2014

Key indicators of informal charges (2006-2014)

Firms in my line of business pay bribes

Government uses compliance with local regulations to extract rents

Over 10% of revenue in informal payments

[CATEGORY NAME];

[VALUE]

Stayed the same, 19%

Decreased, 18%

Percentage of people who feel that from 2007-2010 the level of corruption in Vietnam has:

Source: Transparency

International


Increase the cost of compliance and create legal risks for enterprises

24

19 117

1162

620

3266

8 124 162

746

3923

23 106 52

619

3424

19210 78

582

3072

29 125 75

496

3930

Law Decree Decision Circular Official Letter

Regulatory Burden: thousands of official letters (administrative orders/ công văn) each year

2010 2011 2012 2013 2014

Reflect an inconsistent, non-transparent and unpredictable legal system

Negatively affect the competitiveness of enterprises in Vietnam

Starting a business

Dealing with construction permits

Getting electricity

Registering Property

Getting Credit

Protecting Minority Investors

Paying taxes

Trading Across Borders

Enforcing Contracts

Resolving Insolvency

Key indicators in Doing Business 2016

Vietnam

Singapore

Thailand

Lao PDR


Doing Business 2016 ranking of Vietnam: 90/189

25

#8. Challenges to reform: a mountain to climb 26

Low percentage of skilled workers in the labor force, the figure struggled to increase

• Percentage of untrained workers hardly improved

• University and training institutions failed to offer skilled workers for companies.

Rapid demand for skilled labor is not met by the market supply

obstacle to raise competitiveness and achieve growth goals

Structure of labor market in Viet Nam, by skills (%), 2007-12

Source: Economic Outlook for Southeast Asia, China and India 2014: Beyond the Middle-Income Trap © OECD 2013

#9. Reforms continue to progress but at gradual pace27

Since 1986, Vietnam has embarked a vast program of

structural reforms with objectives of turning a centralized

economy into a market-based economy with socialist

orientation• Abolishing agricultural collectives

• Removing price controls on almost all traded goods&services

• Encouraging the establishment of private businesses

• Opening up the domestic market to foreign

investment, including foreign-owned enterprises

• Liberalizing gradually the banking sector so that interest

rates are determined according to market conditions

• Developing and improving the efficiency of the domestic

markets for goods/services & for capital (stock/bond markets)

• reformed legal system through revising Laws and Codes.

• Actively joining in international integrations.

The first structural reform – “Doi Moi”

Photo: The 6th National Congress of the

Communist Party of Vietnam marked

a turning point of the economic development

#10. Stronger reforms much needed

Continues the 1st structural reforms, whilepaying more attention to environmentalsustainability, social equity, and emergingissues of macroeconomic stability.

It defines three “breakthrough areas”:

i) promoting human resources/skillsdevelopment (particularly skills for modernindustry and innovation),

ii) improving market institutions, and

iii) infrastructure development

28

Restructuring

of SOEs

Banking

sector reform

Reforming public

investment

The Socio-Economic Development Strategy 2011-2020

#9. Vietnam is in need of the second structural reform

Enterprise Law and

Investment Law were

reformed in 2014 has

offered more opened and

free business environment.

29

Economic governance and institutional reform

1990

2000s

2014

Private business was legally accepted, but was

only allowed to produce and trade in business lines

stipulated by the State

Very complicated procedures and high costs

Was done business in any business lines which

were not prohibited by the State, but had to

register to official agencies.

Less complicated and reduced costs.

Have been really done business in all non-

prohibited lines, which are reduced to just 6.

Lower risks, costs and improve business climate

#9. Vietnam is in need of the second structural reform30

26%27%

22%

19%

24%

15%14%

17%

10%

6%7%

6%4%

6%

3% 3%4%

2%

2006 2007 2008 2009 2010 2011 2012 2013 2014

Indicators of entry costs (wait time to be fully legal)

Wait more than 1 month

Wait more than 3 months

Positive changes: the typical

wait time for a firm to be fully

operational reached a record

low in 2014.

Source: PCI Vietnam 2014

#10. Stronger reforms much needed

Target of 2015: time for adminprocedure will be decreased ahalf compared with current timeperiod and as same as 6developed countries in ASEANand China.

In 2016, strive for improving theindex of Vietnamese businessenvironment for reaching atleast reaching the average ofthe ASEAN-4 countries.

31

All the ministries and local

authorities must consider boosting

administrative reforms, improving

the business environment and

enhancing the economic

competitiveness as the key tasks

in 2015 and 2016.

“

”Vietnam’s Prime Minister

Nguyen Tan Dung

The Resolution No. 19/NQ-CP stipulates in

particular tasks that each ministries, agencies, local

governments should focus on implementing in 2015.

Resolution No. 19/NQ-CP

A short summary

10 highlights1. The number of PSEs is increasing dramatically, and small and medium enterprises are in majority

2. PSEs – numerous workers but low productivity

3. PSEs tend to have low and informal innovation

4. SOEs remain an important player in the economy thanks to special treatments from the government

5. FDI inflows have increased over 25-year period. They are offered many types of preferential

treatments. FIEs now become the driving force for exports, but other contributions may be not

commensurate.

6. The performance gap between three enterprises sectors is widening.

7. Integration: opportunities along with challenges

8. Challenges: a high mountain to climb.

9. Reforms continue to progress but at gradual pace

10. Stronger reforms much needed

33

References• VCCI, USAID. 2014. Provincial Competitiveness Index of Vietnam.

• CIEM, GSO, UoC. 2014. Firm-level technology and competitiveness in Vietnam. Evidence from a survey in Vietnam.

• World Bank. 2015. Are there preferential treatments of State-owned enterprises? A review of regulatory framework and evidences from practice

• OECD. 2013. Economic Outlook for Southeast Asia, China and India 2014: Beyond the Middle-Income Trap ©

• Duc Khuong Nguyen. 2015. Past experiences and new policies to cope with ongoing challenges and to sustain economic growth

• Sources: Office of the U.S. Trade Representative, “TPP Issue-by-Issue Information Center, E-Commerce and Telecommunications,” https://ustr.gov/trade-agreements/free-trade-agreements/trans-pacific-partnership/tpp-chapter-chapter-negotiating-6. Asian Development Bank.

• http://static1.vietstock.vn/vietstock/2015/20151005_Macro%20Insights_Đàm%20phán%20TPP%20và%20tác%20động%20các%20ngành.pdf

• http://gso.gov.vn

• http://moit.gov.vn

• http://mpi.gov.vn

• http://ciem.gov.vn

34

http://gso.gov.vn/

http://moit.gov.vn/

http://mpi.gov.vn/

http://ciem.gov.vn/

development of enterprises and the need for further

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