The strategic importance of small and medium enterprises to the national economy and vietnamese smes encountrered difficulties facts and solutions,graduation thesis

Graduation thesis

Banking Academy

ACKOWLEDGEMENT
My deepest appreciation stays with my supervisor and lecturer, M.A. Nguyen Hong Mai,
who has taken valuable time enthusiastically assisting me and supervising this thesis
despite being extremely busy in her capacity as Dean of Foreign Language Department.
Heartfelt thanks to Banking Academy of Vietnam, an unforgettable school where most
gorgeous dreams start and best memories of my life are cherished for eternity; along with
profound gratitude to the contingent of Foreign Language Department‟s lecturers for
everything they have done during the past four years to help me in my path of obtaining
the first Bachelor Degree in my higher education. I would like to deliver special
gratefulness to M.A Tran Thi Thanh Giang of Foreign Language Department for teaching
me not to lose passion, dedication and enthusiasm in any circumstances, regardless of
however hard they are; and that people should always devote themselves with one
hundred and twenty percent of energy to make life more worthwhile.

It will be very ungrateful of me if I do not list out the names of my senior Ms Nikki
Nguyen of IPCOMS and colleagues in companies where I spent my internship. Without
their assistance, my graduation paper could not be accomplished. I am obliged to their
very first real life lesson: never stop learning and working harder to achieve excellence
but not merely success in professional work, which I would keep in my mind all the times
in the following career path.

Further, I dedicate this paper to my family with infinite love. My parents and young
brother have always been at my nearest and supported every step of my life by faithful
love and long-lasting devotion. Last but never be the least; let me be grateful to all my
best friends, who are charming gardeners that make my soul blossoms and give me total
freedom to be myself.
Le Thuy Lan – ATCA/K12

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EXECUTIVE SUMMARY
All over the world, there is growing evidence that small and medium enterprises (SMEs)
play an important role in the national economic development of any country. SMEs are
becoming more and more a subject of high attention in not only developing countries,
countries in transition but also in the countries with developed economies.
In market economies, SMEs are the engine of economic development. Thanks to their
private ownership, entrepreneurial spirit, their flexibility and adaptability as well as their
potential to react to challenges and changing environments, SMEs contribute to
sustainable growth and employment generation in a significant manner. They provide
various goods and services, creating job opportunities, developing regional economies
and communities, helping competition in the market and offering innovation for the
society.
Since the State‟s recognition of private sector, Vietnam‟s SMEs have experienced
phenomenal growth and attributed to the formation of a opener, more dynamic, adaptable
base for increased national competitiveness. Notwithstanding these impressive
achievements, domestic SMEs have regrettably low survival rate after three years and
remain weak in terms of internal and external networking, human resources and readiness
to globalization. Apart from SMEs‟ low starting points, these shortcoming and difficulties
have been principally due to policy and regulations weaknesses and the prolonged
discrimination against private sector, access to capital or credit and land, lack of proprivate business environment and poor quality of human resources.
In order to enhance SMEs networks, competitiveness and innovativeness, Vietnam should
acknowledge the significance of this economic sector to a long-term sustainable national

economy. There is a pressing need to level the playing field, create solid supporting
industries, improve human resources quality, and upgrade infrastructure.

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LISTS OF ABBREVIATIONS
ANZ

Australia and New Zealand Banking Group Limited

FDI

Foreign Direct Investment

GDP

Gross Domestic Product

ODA

Official Development Assistance

R&D

Research and Development

SEGs

State-funded economic group(s)

SOEs

State-owned enterprise(s)

SMEs

Small and medium enterprise(s)

SOCBs

State-owned commercial bank(s)

UNIDO

United Nations Industrial Development Organization

VCCI

Vietnam‟s Chamber of Commerce and Industry

VINACOMIN

Vietnam National Coal-Mineral Industries Group

VINASHIN

Vietnam Shipbuilding Industry Group

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LISTS OF FIGURES
Location
Figure

Description

(Page)

Figure 1

SME definition by European Commission

4

Figure 2

Number of new SMEs in Vietnam from 2000 to 2010

14

Figure 3

Private Sector Contribution to Vietnam's GDP in comparison

22

with Public Sector and FDI
Figure 4

The number of dissolved enterprises in 2012

23

Figure 5

Business Cessation Data in some major cities

24

Figure 6

Figure 6: SMEs‟ difficulties in credit access in 2005 and 2012

26

Figure 7

Inflation rate in Vietnam from 2011 – 2013

30

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LISTS OF TABLES
Location
Figure

Description

(Page)

Table 1

Vietnamese SME definition

Table 2

SME classification criteria in some countries

Table 3

Comparisons between small and large enterprises

10

Table 4

SME GDP Contribution in Canada (2005)

13

Table 5

Share of SMEs in some countries (%) (2004)

16

Table 6

Share of SMEs in global economy

17

Table 7

The number of dissolved enterprises in 2013

24

Table 8

Annual interest rates in some countries

27

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TABLE OF CONTENTS
EXECUTIVE SUMMARY ........................................................................................ ii
LISTS OF ABBREVIATIONS ................................................................................iii
LISTS OF FIGURES ............................................................................................... iv
LISTS OF TABLES .................................................................................................. v
INTRODUCTION ..................................................................................................... 1
1. Rationale of the thesis ..................................................................................... 1
2. Research objectives and questions ................................................................ 1
3. Scope of study .................................................................................................. 2
4. Research methodology.................................................................................... 2
CHAPTER I: THEORETICAL FRAMEWORK ON SMALL AND MEDIUMSCALE ENTERPRISES ........................................................................................... 4
1. What is an SME? Definition and classification criteria ............................... 4

2. What makes competitive advantages of SMEs?............................................. 8
2.1 Small in size, big in power ............................................................................. 8
2.2 Efficiency maximization and waste reduction ............................................... 8
3. General theories on limitations and restrictions of SMEs compared to
larger counterparts ............................................................................................... 9
4. SMEs throughout the world .......................................................................... 10
4.1 Taiwan: Kingdom of SMEs ......................................................................... 11
4.2 American entrepreneurship and small business ........................................... 11
CHAPTER II: THE ROLE OF SMES IN NATIONAL ECONOMY .................. 13
1. As one of the accelerators of economic wheel............................................... 13
1.1 A contributor to national economic growth ................................................. 13
1.2 An initiator of economic dynamism and effectiveness ............................... 14
2. As a socio-economic stabilizer........................................................................ 16
2.1 Labor absorption, poverty alleviation and revenue generation ................... 16
2.2 Promotes stability and development of regional economies ....................... 18
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3. As the beginning of any big companies ......................................................... 19
CHAPTER III: DIFFICULTIES ENCOUNTERED BY VIETNAM’S SMES .. 21
1. A snapshot of SMEs in Vietnam: three decades of Vietnam’s private
sector..................................................................................................................... 21
2. Fact findings: the situation of Vietnam’s SMEs ......................................... 22
2.1 Business establishment, cessation, and dissolution ..................................... 22

2.2 SME shrinkage ............................................................................................. 24
3. Explanations to the status quo: constrains, obstacles, and difficulties ...... 25
3.1 Access to credit ............................................................................................ 25
3.2.1 Land and land-use rights ........................................................................ 27
3.2.2 State preference over SOEs ................................................................... 28
4. The influences of macroeconomic instabilities ............................................. 30
5. Low domestic competitiveness and limited access to international markets
............................................................................................................................... 31
CHAPTER IV: RECOMMENDATIONS TO SUPPORT VIETNAM’S SMES .. 33
1. Policy implications .......................................................................................... 33
1.1. Legal framework and resource reallocation ............................................... 33
1.2. Easier access to capital and land-use rights improvement ......................... 34
1.3. Internal and external SMEs‟ network development ................................... 35
2. Suggestions for SMEs ..................................................................................... 36
2.1 Training and managerial skills development ............................................... 36
2.2 Partnership enhancement ............................................................................. 36
2.3 Strong corporate culture establishment ....................................................... 37
CONSLUSION ........................................................................................................ 38
REFERENCES ....................................................................................................... 39

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INTRODUCTION

1.

Rationale of the thesis

The influence of entrepreneurship on economic development has been explained in
numerous studies of domestic and international authors. Vietnam is a notable case with
both opportunities and challenges, having a transitional economy and human resources of
low level. As such, it is essential to better understand and analyze the contribution of
SMEs to national economy over the last few decades and the main constraints hindering
new business start-ups in Vietnam. For eliminating these hindrances and promote small
businesses it would be necessary to figure out sound policy measures to support the
development of entrepreneurship in the country.
2.

Research objectives and questions

The thesis aims to give a broad overview on SMEs, assess the SME influence to the
economic development through employment generation, creation of added value, national
growth rate contribution and to ultimately discover practical solutions to save them from
existing situation and policy implications for their long-term development.
It seeks to clarify the three main following points around SMEs:
 How significant small and medium-scale businesses mean to a country‟s national
economy and explain why Vietnam should put due attention to this economic
sector?
 What are chief obstacles that Vietnam‟s SMEs are faced with since their first
emergence and especially the present situation on the context of downward
economic trend nationwide?

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 Which should be done to tackle existing inadequacies and shortcomings in order to
restore the well-being of private sector and put SMEs in the right track of
development as lessons from advanced economies worldwide?
3.

Scope of study

The paper studies briefly about the history of Vietnam‟s SMEs through their formation
contexts starting from the official promulgation of Law on Enterprise in 2005 and on
SMEs era in some countries at their early stages of development in the first chapter. The
rest predominantly focus on the period from 2010 to present and the overlook to the next
five years.
4.

Research methodology

This paper uses mainly secondary data source with some primary ones. They were
collected via prevalent information channels such as the Internet, domestic and foreign
newspapers, public researches, journals, statistical reports, annual reports, financial
reports, internal documents as well as conclusions drawn from observation, participation
in regular operation in several typical small enterprises. The analysis of obstacles
threatening the endurance and discouraging the growth of SMEs is based on empirical
evidence obtained from face-to-face surveys with small business owners undertaken

during internship. All data were carefully selected, synthesized and classified into
appropriate section of the thesis. The main policy implications are drawn about the
support needs of SMEs with the aim of achieving the growth of new firm formation rates,
the reduction of dissolution rate and turbulence, solutions to increase their contribution to
regional economic development of the country.
5.

Thesis structure

Chapter 1: This chapter deals with the theoretical framework to provide basic
understandings on the nature of small and medium enterprises, the difference in
classification criteria of countries in the world, leading competitive advantages compared
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to other economic sectors and a generalization of weaknesses that deter the normal
business operation and the enlargement of business scale.
Chapter 2: This section highlights the strategic importance of SMEs in terms of socioeconomic contributions as one of accelerator of the economy and stabilizer of the society.
Chapter 3: Difficulties faced by SMEs and explanations from different perspectives
provide a comprehensive background on the necessity of forming pragmatic solutions to
change the present situation for the better.
Chapter 4: Some recommendations on state policies and SMEs including policy
implications and advice for private entrepreneurs will be introduced in this section.
Based on the results of analysis, the thesis will conclude with a short conclusion of

contents that have been clearly presented previously.

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CHAPTER I: THEORETICAL FRAMEWORK ON SMALL AND MEDIUMSCALE ENTERPRISES
1. What is an SME? Definition and classification criteria
According to European Commission‟s SME definition which took effect on January 1,
2005, the category of micro, small, and medium-sized enterprises consists of enterprises
which employ fewer than 250 persons and which have either an annual turnover not
exceeding 50 million euro, or an annual balance sheet total not exceeding 43 million euro.

TO DEFINE SMEs

STAFF HEADCOUNT

+/BALANCE SHEET

ANNUAL TURNOVER

Figure 1: SME definition by European Commission
Source: European Commission
Definition in Vietnam: It is promulgated in Decree 90/2011/ND-CP issued on November
23, 2001 that:

SMEs are independent production and business establishments, which make business
registration according to the current law provisions, each with registered capital not
exceeding VND 10 billion or annual labor not exceeding 300 people.

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On the basis of the concrete socio-economic situation of each branch or locality, in the
course of implementing the support measures and programs, both or either of the abovementioned criteria on capital and labor may be applied in a flexible manner.
This Decree shall apply to SMEs, including:
o Enterprises set up and operating under the Law on Enterprise;
o Enterprises set up and operating under the Law on State-owned Enterprises;
o Cooperatives set up and operating under the Law on Cooperative;
o Business households making registration under Government Decree No
02/2000/ND-CP dated February 2, 2000.
The Government Decree No 56/2009 ND-CP promulgated on June 30, 2009 stipulates
that:
Sector

Micro

Small-sized enterprises

Medium-sized

enterprises
Headcount

enterprises
Total capital Headcount

Total

Headcount

(employees) capital
I. Agriculture, < = 10

< = VND 11 - 200

< = VND < = 300

forestry

20 billion

100 billion

< = VND 11 – 200

< = 100 < = 300

20 billion

VND 100

and

fishery
II.

Industry < = 10

and
construction

billion

III. Trade and < = 10

< = VND 11 - 50

< = VND 51 - 100

service

20 billion

50 billion

Table 1: Vietnamese SME definition
Source: Government Web Portal
There is no regional or indeed global consensus on the definition of SMEs. Definitions of
small and medium-sized enterprises can differ widely from nation to nation and it is

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difficult to find a universally accepted one. Generally, criteria classifying SMEs consist of
quantitative and qualitative parameters. Concerning the qualitative criteria which are used
to characterize SMEs, there are mainly four elements to be listed: there is often a
coincidence of ownership and management, as well as a simple organizational structure,
often a non-leading position in the market the company operates in, and finally a
predominant reliance on self-financing to sustain entrepreneurial development (Ceccarelli,
2010). With regards to the quantitative classification parameters, primarily the following
ones should be mentioned: staff headcount, annual turnover, invested capital, market
share and value added. In details:
 Staff headcount: is a crucial criterion for determining in which category SME
falls. The headcount has to include all employees, people working for the
enterprise being subordinated to it and considered to be employees under national
law, owner-managers, and partners engaged in a regular activity in the enterprise,
whereas apprentices or students engaged in vocational training, as well as
colleagues on parental leave or maternity are not to be considered in the headcount.
 Annual turnover and balance sheet total: The annual turnover is determined by
calculating the income that enterprise received during the year in question from its
sales and services after any rebates have been paid. Turnover should not include
value added tax (VAT) or other direct taxes. The annual balance sheet total refers
to the value of company‟s main assets.
Table 2: SME classification criteria in some countries

Nation
USA
Japan

Criteria
All industries
Manufacturing
Wholesale
Retail
Services

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Employees
1-500
1-300
1-100
1-50
1-100

Capital/Asset
N/A
< or =300M yen
< or =100M yen
< or =50M yen
< or =50M yen

Revenue
N/A
N/A

N/A
N/A
N/A

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EU

Australia

Korea

Singapore
Taiwan

Thailand
Malaysia
Indonesia
Philippines

Micro
Small
Medium
Micro
Small
Medium
Manufacturing

transportation

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<10
<50
<250
<5
5-19
20-199
<300

Construction
Commerce & services
Manufacturing
Services
Manufacturing
construction

<200
<20
N/A
<200
<200

Commerce, Transport
& other Services
Manufacturing
Wholesale
Retail
Manufacturing

Small
Medium
Small
Medium

<50
N/A
N/A
N/A
<150
<20
<100
<100
<200

N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
< SIN $ 15M
< NT$80 M
N/A

<$ 20,000
<$1M
P $ 1.5M-15M
P$ 15M-60M

N/A
7M EUR
27M EUR
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
< NT $100 M
N/A
N/A
N/A
<$US 6.6M
<$ 100,000
<$5M
N/A
N/A

Source: Profile of SMEs and SME issues in APEC, 2002 & SMEs of OECD, 2000

However, classification by scale also depends on other factors:
 The level of economic development among countries: most advanced economies
have very high standards on criteria. For instance, a business with 500 employees
is categorized as a SME in America, whereas in Vietnam the total headcount must
not exceed 300 people. Underdeveloped and developing countries have lower
capital or revenue criteria compared to developed countries.
 Specific industries have different characteristics: some industries are laborintensive while others are capital-intensive and require less labor force. In reality,

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many countries set up SME classification criteria separately for different industries
such as agriculture, manufacturing, service…
2. What makes competitive advantages of SMEs?
2.1 Small in size, big in power
As stated in the definition section, small and medium-scale enterprises generally have low
requirement of capital value. Along with less management and general operating expenses,
obviously those companies have faster and cheaper production. What‟s more, owing to
smaller scale, SMEs have the opportunity to take decision quickly and therefore adapt
swiftly to the situations and change for the better. Flexibility and openness to new,
refreshing ideas and innovations create admiring competitive advantages. SMEs,
observing the market closely, keeping up with the new demands, updating and putting
effectively technological advancements into production, understanding the requirements
of customers better and having intimate relations with its employees, are much more

flexible and elastic than the large ones in terms of manufacturing, marketing and service.
While giants are stuck to find solutions to cut down costs to lower price, smaller firms
constantly provide customers with a variety of new options with different price levels
suitable for financial capability of the majority. High consumption value makes up for the
lower profits earned. Eventually, SMEs seem to be highly profitable and gain satisfactory
value of market share.
2.2 Efficiency maximization and waste reduction
Smaller and medium scale companies value the importance of efficiency and they have
good reasons to take initiative in price-lowering and quality-improving competition. A
simple and flexible management structure proves to be advantageous compared to
complex system with time-wasting administrative procedures and inefficient staff. Unlike
state-funded enterprises, SME‟s capital comes from personal funds, so they are selfmotivated to do business effectively and earn profit. Business owners, core members of
director boards and employees willingly work overtime to finish the incomplete projects.
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Overheads, administrative expenses are calculated and allocated properly while all efforts
are put to minimize waste as well as maximize efficiency.
3. General theories on limitations and restrictions of SMEs compared to larger
counterparts
The above-mentioned strengths have produced enormous advantages to the economic
development of a country. But on the other side, the existence of SMEs represents some
traditional limitations and obstacles which make them weaker in facing unbalance
competition with bigger enterprises. They include: (1) the incapability to obtain sufficient

capital credit for start-up costs, upgrade infrastructures, technology and services as well as
financial expenses for business expansion: SMEs are significantly underfinanced mainly
caused by the logistical difficulties related to lending money to small business. Banks
tend to offer loans to SMEs at unfavorable terms because of high fixed costs related to
transactions; (2) The shortage of skilled workforce and (3) Greater risks of failure due to
poor corporate governance skills: this is particularly because the company directors have
less business experience and inclusive education on business administration and market
mechanism.

Marketing

Management

Internal
Communicati
ons

Small firms
Ability to react quickly to keep abreast
of fast-changing market requirements
Lack of bureaucracy. Dynamic,
entrepreneurial managers react quickly
to take advantage of new opportunities
and are more willing to accept risk.
Efficient and informal internal
communication networks. Affords a fast
response to internal problem-solving:
provides ability to recognise rapidly to
adapt to change in the external
environment.

Le Thuy Lan – ATCA/K12

Large firms
Comprehensive distribution and
servicing facilities. High degree of
market power with existing products.
Professional managers able to control
complex organisations and to establish
corporate strategies.
Internal communications often
cumbersome: this can lead to slow
reaction to external threats &
opportunities.

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Qualified
Technical
Manpower
External
Communicati
ons

Frequent lack of suitably qualified
technical specialists. Often unable to
support a formal R&D effort on an
appreciable scale.

Frequent lack of time or resources to
identify and use important external
sources of scientific and technological
expertise.

Finance

Great difficulty in attracting capital,
especially risk capital. Innovation can
represent a disproportionately large
financial risk.

Economies of
Scale and the
Systems
Approach

In some areas scale economies of form
substantial entry barriers to small firms.
Inability to offer integrated product
lines or systems.

Growth

Can experience difficulty in acquiring
external capital necessary for rapid
growth.

Patents

Government
regulations

Can experience problems in coping
with the patent system. Cannot afford
time and costs involved in patent
litigation.
Often cannot cope with complex
regulations. Unit costs of compliance
for small firms often high.

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Ability to attract highly-skilled
technical specialists. Can support the
establishment of a large R&D
laboratory.
Ability to plug into external sources
of scientific and technological expertise
Can afford library and information
services. Can buy crucial technical
information and technology.
Ability to borrow on capital market.
Ability to spread risk over a portfolio
of projects. Better able to fund
diversification into new technologies
and new markets.
Ability to gain scale economies in
R&D, production and marketing.
Ability to offer a range of
complementary products.

Ability to finance expansion of
production base. Ability to fund
growth via diversification and
acquisition.
Ability to employ patent specialists.
Can afford to litigate to defend patents
against infringement.

Ability to fund legal services to cope
with complex regulatory requirements.
Can spread regulatory costs. Able to
fund R&D necessary for compliance
Table 3: Comparisons between small and large enterprises
Source: (Xhepa, 2006)

4. SMEs throughout the world

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4.1 Taiwan: Kingdom of SMEs
Taiwan experienced a spectacular development with rapid growth as well as an ongoing
transformation from a traditional agricultural-oriented to a modern industrial and serviceoriented economy. In the course of this economic development, a tremendous increase in
living standards considering every social aspect such as education, transportation, and

housing has been achieved (Veselka, 2005, p.1). Here it has to be taken into consideration
that small- and medium-sized enterprises (SMEs) contribute to a great deal of
entrepreneurship, innovation and learning that play a decisive role in the process of its
economic development. In 2003, almost 98% of the approx. 1.2 million enterprises were
classified as SMEs, which realized 31.5% of the total sales and employed 77.5% of the
workforce. Besides, SMEs accounted for 99.4% of the 112,154 newly established
enterprises in Taiwan. In 2009, Taiwan‟s SMEs provided more than 75 percent of the
nation‟s total employment in the private sector. Though a single SME creates very limited
employment opportunities compared to large corporations, it helps establish job security
in a community and therefore spurs more spending and investment, resulting in a thriving
local economy. Although on average 30 percent of SMEs survive no more than five years,
Taiwan‟s SME sector has proven itself to be energetic and quick to adapt to changing
conditions. The sector has consistently made up a high proportion of Taiwan‟s total
enterprises. The value of SMEs is their nonstop innovation; new members of the sector
will continue to bring better and more creative new elements into Taiwan‟s business
environment.
4.2 American entrepreneurship and small business
Successful small businesses are critical to maintaining a robust U.S economy (Leebaert).
The numbers almost speak for themselves:
 99 percent of all American businesses are small
 Small businesses provide approximately 75 percent of the net new jobs added to
the US. Economy every year;
 Small businesses represent 99.7 percent of all employers;
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 Small businesses employ 50.1 percent of the private workforce;
 Small businesses provide 40.9 percent of private sales in the country.
However, American SMEs‟ contributions to the national economy and society mean
significantly more than revenues and profits those enterprises can earn. Flexible,
innovative and more responsive to customers‟ non-stop changing requirements SMEs can
bring about more occupation opportunities for women, minorities and stimulate high
unemployment rate sector. Entrepreneurship presents everywhere in the country and the
U.S Government plays a crucial role in creating an environment in which entrepreneurs
can flourish. It is truly the innovation, resilience and determination of small-business
owners that centers them at the heart of the American economy. Small businesses broaden
the base of participation in society, create jobs, decentralize economic power, and give
people a stake in the future.

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CHAPTER II: THE ROLE OF SMES IN NATIONAL ECONOMY
1. As one of the accelerators of economic wheel
1.1 A contributor to national economic growth
Small businesses provide catalytic benefits to the economy. They contribute to national
output, and to the society as a whole, beyond profits they generate. They play a significant
role in national economy by providing various goods and services, creating job

opportunities, developing regional economies and communities, helping the competition
in the market and offering innovation.
Small businesses generate half of the non-farm output of the U.S economy and. employ about
half of all Americans not working for government, while adding 60 to 80 percent of net new
(nongovernmental)

job

anually.

In 2005, small and medium-sized businesses, including

unincorporated businesses, represented 54.3% of GDP produced in the business sector of
Canada.
SME GDP Contribution

Size of firm

Size of firm
Small (fewer than 100 employees)
Medium (100 - 499 employees)
Large (500+ employees)
TOTAL

$M
414,093
122,409
451,935
988,437

% of GDP
41.9%
12.4%
45.6%
100.0%

Table 4: SME GDP Contribution in Canada (2005)
Source: Business Development Bank of Canada
In Vietnam, according to a Spring 2011 report the number of SMEs is nearing 400,000.
SMEs represent 99 percent of the number of businesses of the country. According to the
government over 40% of GDP is produced by SMEs, higher than the proportion occupied
by public sector and 2.5 times higher than FDI sector (Christopher, 2011). Further, SMEs
are the engine of growth in Vietnam just as small business plays the same role in
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developed markets like the U.S. In Vietnam, SMEs in Vietnam; on average, have seen
their profits grow approximately 20 percent each year for the immediate past.

Figure 2: Private Sector Contribution to Vietnam's GDP
in comparison with Public Sector and FDI
Source: Business-in-Asia.com

1.2 An initiator of economic dynamism and effectiveness

Economic stabilization: in most countries, SMEs are called shock absorber of the
economy and usually act as subcontractor for larger firms. They help promoting the very
important supplying industry by specializing in some certain components of a product.
Main areas of their presence are manufacturing industry, distribution industry and
services industry
According to UNIDO 2003, subcontracting can be defined as an economic relationship
where one entity (the main contractor) requests another independent entity (the
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subcontractor) to undertake the production of parts, components, sub-assemblies or the
provision of additional services that are necessary for the completion of the main
contractor‟s final product, always in accordance with the main contractor‟s specifications.
In the manufacturing industry they produce goods by using skills developed historically
and accumulated by individuals; Produce products whose row materials and goods are
limited in terms transferable time (foods, etc.); Operate fields in which are many
processing and manufacturing methods and whose economic efficiency can be enhanced
by specializing them in the areas of expertise (parts and supporting industry for autos,
home electric appliances …); Produce product whose market size is too small for big
companies to enter; Operate in markets where innovative entrepreneurs take risks,
commercialize new technologies and develop new business (“SMEs role,” 2013)
In Distribution Industry they operate in order to distribute a variety of goods efficiently
from the manufacturers to consumers and for the reason and need that the existence of
many SMEs having businesses tie-ups is essential.

In the Services Industry they operate in the presence of many services provided both to
businesses and individuals where due to constrain of time and distance, a large number of
SMEs are needed to provide them.
In addition, versatility, flexibility and quick adaption to market change do small and
medium scale enterprises great credit. In case of sudden market adjustments or economic
recession, large firms tend to streamline the staff in order to minimize costs in the context
of supply exceeding demand. Whereas, SMEs are well-known for utilizing available
resources and tactfully avoiding sufferings from such situations owing to simple
administrative system in which boards of director fighting to save their own flesh and
blood: the company itself.

Le Thuy Lan – ATCA/K12

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Graduation thesis

Banking Academy

2. As a socio-economic stabilizer
2.1 Labor absorption, poverty alleviation and revenue generation
One of the most important contributions of the sector is its crucial role as a local job
provider and thus a stabilizing force in society. Having a propensity to employ more
labor-intensive production processes than large enterprises; SMEs contribute enormously
to the provision of productive employment opportunities, the generation of income and
the reduction of poverty (Kongolo, 2010).
USA Germany Japan France England
SMEs in Total
Enterprises (%)

SMEs in Total
Employment (%)
SMEs in Total
Investment (%)
SMEs in Total Value
Added (%)
SMEs in Total Export
(%)
SMEs in Total Credits
(%)

Korea India

Turkey

97,2

99,8

99,4

99,9

96

97,8

98,6

99,5

50,4

64

81,4

49,4

36

61,9

63,2

61,1

38

44

40

45

29,5

35,7

27,8

56,5

36,2

49

52

54

25,1

34,5

50

37,7

32

31,1

38

23

22,2

20,2

40

8

42,7

35

50

48

27,2

46,8

15,3

4

Table 5: Share of SMEs in some countries (%) (2004)
Source: (Yilmaz, 2004)
In all countries, there can be made such a generalization that SMEs constitute more than
95% of enterprises. Despite the change from one country to another, SMEs creat 40 – 80%
of employment and 30-70% of gross national product.

Le Thuy Lan – ATCA/K12

Page 16

Graduation thesis

Banking Academy

European Of the 19.3 million enterprises in the European Union (EU) today, 99% are
Union
defined as SMEs and employ some 75 million people. There are only 35,000
(EU)
enterprises, with more than 250 employees, but 18 million enterprises
employ fewer than 10 people - the micro- enterprises. The average European
business provides employment for 4 people, including the owner/manager,
the average turnover being 500,000 euro.
Of this group, SMEs represent over 95% of enterprises in most countries and
generate over half of private sector employment. Moreover, most OECD
governments promote entrepreneurship and develop SMEs with a myriad of
OECD
policies and programmes because of SME difficulties such as financing,
Countries technology
and
innovation,
e-commerce,
management
and
internationalization. For example, in Korea measures include tax breaks and
reduced interest loans for starting new businesses in rural areas.

Latin
America

Asia

South
Africa

After focusing on large investments and wooing multinationals for years,
Latin American politicians are beginning to realize that SMEs are the true
job creators, as well as important players in technology supply chains. The
vast majority (approximately 80-90%) of companies are micro enterprises
and the governments have vastly reduced red tape to ensure SMEs needs are
attended to swiftly. Among the major regional economies, except of
Argentina, while these types of businesses flourished elsewhere in LatinAmerica, especially in Brazil and Mexico.
It has been recognised that some of the world„s best performing economies,
notably Taiwan and Hong Kong, are very heavily based on small
enterprises'. 81% of all employment in Japan is in SMEs where the average
enterprise employs nine staff as opposed to four in the EU.
The share of employment located in the micro, small and medium sectors
taken together is high – estimated recently at 60% while the sector generated
about 40% of output.
Table 6: Share of SMEs in global economy
Source: (Adapted from Lukacs, 2005)

Thanks to the huge quantity of SMEs throughout the country, previously unemployed
people are involved in labor force in local level, especially low-skilled employees in rural,
mountainous and far-flung and underdeveloped areas. The regional and national
Le Thuy Lan – ATCA/K12

Page 17

Graduation thesis

Banking Academy

unemployment rate and the flows of people rushing to major cities to seek for
employment are being greatly reduced. As a result, many worrying issues, namely urban
over- pollution as well as social problems caused by the “devils make work for idle hands”
situation will be addressed.
2.2 Promotes stability and development of regional economies
2.2.1 Regional development promotion
Not only providing occupation opportunities for local people, SMEs in provincial level
also know how to make proper use of resources and to promote the growth of local areas.
Every economy has less developed economic areas i.e. border provinces, rural and
mountainous areas and highlands…, all of which have certain obstacles with insufficient
infrastructures, poor transportation system, and limited distribution network. SMEs
constitute the basic source of materials, ideas, process and service that large enterprises
cannot do or do not want to do. Because aiming to benefit from the cost of economies of
scale, large enterprises implement a policy of manufacturing a product for a long period.
They tend to underestimate profits earned when investing in these areas because the
opportunity cost is too high to be accepted. If an economy only emphasizes on promoting
giant corporations, which would result in an asymmetric and disproportionate
development among economic regions; resources are wasted and the health of the whole
economy is adversely affected. On the contrary, regional SMEs are willing to engage in
local business. Surely they will contribute considerably to provincial-level economies if
local authorities implement pro-SME policies.
2.2.2 Local SMEs: traditional handicraft village development
Traditional craft villages play an important role in socio-economic in rural areas.
Moreover, this non-agricultural sector help maintain long-established trade of Vietnam.
Their products are very skillful and sophisticated, even though they are farmers and do

not specialize in handicrafts. Vietnam has about 300 traditional handicraft villages
including carpentry, bamboo-weaving, lacquer, embroidery, paper, pottery…, etc. The
Le Thuy Lan – ATCA/K12

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