Small and medium enterprise and economic growth in Vietnam = Doanh nghiệp vừa và nhỏ và tăng trưởng kinh tế ở Việt Nam

NATIONAL ECONOMICS UNIVERSITY
INSTITUTE OF PUBLIC POLICY AND MANAGEMENT

ERASMUS UNIVERSITY ROTTERDAM
INSTITUTE OF SOCIAL STUDIES

VIETNAM - NETHERLANDS MASTER’S PROGRAM
IN DEVELOPMENT ECONOMICS

THESIS
SMALL AND MEDIUM ENTERPRISE
AND ECONOMIC GROWTH IN VIETNAM

Student

: Trinh Kim Loan

Class

: MDE 16B

Supervisor : Dr. Do Ngoc Huynh, PhD

Hanoi - 2014
1


DECLARATION

I hereby certify that this thesis contains no material that has been accepted for
awards of any other degrees or diplomas at any other academic institutions. To the best of

my knowledge and belief, it contains no materials previously published or written by other
people, except for those who have been listed in the references.

Hanoi, February 2014

Trinh Kim Loan

2


ACKNOWLEDGEMENTS

My thesis could not have been finished without the great support and assistance of
many people. I would like to express my sincere thanks to them.
First of all, I would like to express my special thanks to my supervisor, Dr. Do
Ngoc Huynh, who has supported and encouraged me to complete this thesis in due course.
I am thankful to Dr. Dang Quang Vinh and Dr. Nguyen Viet Cuong for the insightful
comments, which in turn helped me to improve the thesis' analysis.
I wish to specially thank professors lecturers and staff of the Institute of Public
Policy and Management (IPPM) at the National Economics University (Vietnam) as well
as the International Institute of Social Studies (ISS) at the Erasmus University (the
Netherlands) for giving me the opportunity to finish my study and for all their feedbacks
and support.
I also would like to give my appreciation to Professor Sarath B. Delpachitra and a
friend Pham Van Dai for supporting me. I am grateful to my beloved family member for
their spiritual support and understanding over period of my study.

Hanoi, February 2014

Trinh Kim Loan

TABLE OF CONTENTS

DECLARATION...............................................................................................2
ACKNOWLEDGEMENTS..............................................................................3
LIST OF TABLES............................................................................................7
LIST OF BOXES..............................................................................................9
LIST OF FIGURES.........................................................................................13
ABBREVIATIONS.........................................................................................15
CHAPTER 1....................................................................................................16
INTRODUCTION..........................................................................................16
1.Problem statement......................................................................................................................................16
2.Objectives of study.....................................................................................................................................17
3. Research questions....................................................................................................................................18
4. Research hypotheses.................................................................................................................................18
5. Structure of the thesis................................................................................................................................18

CHAPTER 2....................................................................................................19
LITERATURE REVIEW................................................................................19
a.The concept of SMEs.................................................................................................................................19
b. The role of SMEs to economic growth.....................................................................................................24
c.The role of SMEs to economic structural change......................................................................................30

CHAPTER 3....................................................................................................33
CURRENT SITUATION OF SMALL AND..................................................33
MEDIUM ENTERPRISES IN VIETNAM.....................................................33
1.The concept of SMEs in Vietnam..............................................................................................................33
2.Major characteristics of SMEs in Vietnam................................................................................................35
2.1 The economic scale and flexibility.....................................................................................................35

2.2 The technological level.......................................................................................................................36
2.3 The organizational structure and management...................................................................................38
2.4 The quality of labor force...................................................................................................................39
2.5 The market share and strategy............................................................................................................40
3. Current situation of SMEs in Vietnam......................................................................................................41
3.1 On the number of SMEs.....................................................................................................................41
3.2 On the survival of SMEs.....................................................................................................................45
3.3 On the diversification of SMEs..........................................................................................................47

4


3.4 On the geographical distribution of SMEs.........................................................................................48
3.5 On the credit access and capitalization of SMEs................................................................................49
3.6 On the labor structure of SMEs..........................................................................................................51
4.The contribution of SMEs to economic development and economic structural change in Vietnam.........52
4.1 SMEs and economic development......................................................................................................52
4.2 SMEs and economic structural change...............................................................................................54
4.3 SMEs and poverty alleviation.............................................................................................................55
5.Challenges for SMEs in Vietnam...............................................................................................................55

CHAPTER 4....................................................................................................57
MODEL SPECIFICATION AND EMPIRICAL RESULTS..........................57
1.2Model specification..................................................................................................................................58
1.1The econometric model for the role of SMEs to economic growth....................................................59
1.2The econometric model for the role of SMEs to economic structural change....................................60
1.3The database.............................................................................................................................................60
1.4Empirical results.......................................................................................................................................63
In the process of examination of panel data sets, there are two most popular methods; namely, the fixedeffect method and the random-effect method are often used (Hausman, 1978). Because the fixed-effect
method assumes systematic difference between panels, it is considered as more robust. However, when

considering the panel specified factors into account into consideration, the fixed-effects method is less
efficient than random method. Therefore, the choice between the fixed method or the random method
depends on the estimation which is more robust. Furthermore, empirical studies suggest that less efficient
model are more robust and less robust models are more efficient (Hausman, 1978). In this study, both
Fixed-effects and Random-effects regressions are performed and then applied Hausman specification test
to choose the most preferable regression using the Hausman test (Hausman, 1978)...................................63
Robustness tests for the regression are also performed by using Hausman test. Since both fixed-effects and
random-effects are assumed to be spurious in the presence of heteroscedasticity and autocorrelation. In
this case, it is pointed out that OLS standard error would be significantly incorrect (Beck and Katz, 1995)
and the coefficients from GLS regression will be not consistent (Wooldridge, 2002). In order to test for
heteroscedasticity problem, the iterated GLS estimates are obtained and then performed a Likelihood
Ratio tests (Lrtest) to test the null hypothesis of homoscedasticity. The test procedure developed by
Wooldridge (2002, 282–283) is used to test for the presence of autocorrelation.........................................63
If the models exhibit the heteroscedasticity and/or autocorrelation, some remedial measures need be taken
because the estimator from above Fixed-effects and Random-effects tend to be less reliable. In this case,
Beck and Katz (1995) suggested that the OLS with Panel -Corrected Standard Errors (PCSE) estimation
should be the most appropriate method........................................................................................................64
3.1 The impact of SMEs on economic growth.........................................................................................64
1.5The impact of SMEs on economic structural change..........................................................................67

CHAPTER 5....................................................................................................71
CONCLUSIONS AND POLICY IMPLICATIONS......................................71
1.MAIN FINDINGS........................................................................................71
5


2.POLICY IMPLICATION AND RECOMMENDATIONS.........................71
3.LIMITATION AND SUGGESTION FOR FUTURE FOR STUDY..........73
REFERENCES................................................................................................74
APPENDIX 1..................................................................................................79

LIST OF PROVINCES CONTAINED IN EACH REGION..........................79
APPENDIX 2..................................................................................................80
THE DISTRIBUTION OF SMES BY PROVINCES IN VIETNAM 2008...80
APPENDIX 3: EMPIRICAL RESULTS........................................................81
MODEL

4.2:

EMPIRICAL

RESULTS

FROM

FIXED-EFFECTS

REGRESSION................................................................................................81

6


LIST OF TABLES

BOX 2.1: TYPES OF SMES BASED ON THE TYPES OF OWNERSHIP
AND MANAGEMENT..................................................................................20
BOX 2.1: TYPES OF SMES BASED ON THE TYPES OF OWNERSHIP
AND MANAGEMENT..................................................................................20
TABLE 2.1: MAIN ELEMENTS OF SMES’ DEFINITIONS IN THE
ASEAN MEMBER COUNTRIES..................................................................23
TABLE 3.1: CLASSIFICATION OF SMES BY TOTAL CAPITAL AND

NUMBER OF EMPLOYEES.........................................................................35
TABLE 3.2: THE MAIN PURPOSES/APPLICATIONS OF USING
COMPUTERS IN SMES................................................................................38
TABLE 3.3: THE NUMBER OF REGISTERED SMES IN PERIOD 2000 –
2009.................................................................................................................42
TABLE 3.4: CHANGES IN THE STRUCTURE OF THE SMES GROUPS43
TABLE 3.5: THE PROPORTION OF SMES BY INDUSTRIES (%)...........47
TABLE 4.1: DESCRIBING OF VARIABLES AND DATA SOURCES......61
TABLE 4.2: DESCRIPTIVE STATISTICS...................................................61
TABLE 4.3: CORRELATION MATRIX OF VARIABLES.........................63
TABLE 4.4: SUMMARY OF EMPIRICAL RESULTS FOR THE IMPACT
OF SMES ON ECONOMIC GROWTH.........................................................66
TABLE 4.5: SUMMARY OF EMPIRICAL RESULTS FOR THE IMPACT
OF SMES ON STRUCTURAL CHANGE.....................................................68
MODEL 4.3: EMPIRICAL RESULTS FROM RANDOM-EFFECTS
REGRESSION................................................................................................82
MODEL 4.2: EMPIRICAL RESULTS FROM PCSE REGRESSION..........83
MODEL 4.3: EMPIRICAL RESULTS FROM PCSE REGRESSION..........84

7


8


LIST OF BOXES
1. Problem statement.....................................................................................................................................16
The role of SMEs in economic development has been increasingly recognized since recent decades,
especially for developing countries. Specifically, SMEs contribute to economic development through
creating jobs, improving productivity and increasing industrial outputs. UNCTAD (1998) indicated that

SMEs have been playing a vital role in the development process of many leading economies in Asia
and contributed approximately 40 to 60 percent of all capital investment and a similar proportion to the
productivity growth. Tambunan (2008) showed that Indonesia is a typical example for SMEs’ role in
economic growth, where SMEs accounted for more than 50% of GDP over the period 2000-2006.
Harvie (2005) argued that SMEs made a significant contribution to the growth through job creation
with about 50% - 70% of the total workforce and contributed as much to the output as large businesses
(50.1% of turnover) in ASEAN developing countries. There are also evidences that the productivity
growth by SMEs increases in recent years, for example, at a level of 40% of that of large enterprises in
Japan (Takakoshi, 2007). SMEs are an important component of international trade. For example, the
total export value of SMEs is estimated to account for about 35% of Asia’s exports (OECD, 2005)....16
The role of SMEs in economic development has been increasingly recognized since recent decades,
especially for developing countries. Specifically, SMEs contribute to economic development through
creating jobs, improving productivity and increasing industrial outputs. UNCTAD (1998) indicated that
SMEs have been playing a vital role in the development process of many leading economies in Asia
and contributed approximately 40 to 60 percent of all capital investment and a similar proportion to the
productivity growth. Tambunan (2008) showed that Indonesia is a typical example for SMEs’ role in
economic growth, where SMEs accounted for more than 50% of GDP over the period 2000-2006.
Harvie (2005) argued that SMEs made a significant contribution to the growth through job creation
with about 50% - 70% of the total workforce and contributed as much to the output as large businesses
(50.1% of turnover) in ASEAN developing countries. There are also evidences that the productivity
growth by SMEs increases in recent years, for example, at a level of 40% of that of large enterprises in
Japan (Takakoshi, 2007). SMEs are an important component of international trade. For example, the
total export value of SMEs is estimated to account for about 35% of Asia’s exports (OECD, 2005)....16
There has been an increasing trend of empirical studies focusing on the relation between SMEs and
economic development. Using the panel data of thirty seven countries in the period from 1960s to
1990s, Hu (2003) explored the influence of SMEs on the economic growth with the empirical result
that SMEs had positive impact on the economic growth in both developed countries and developing
countries. Beck (2005) used a data sample of 45 countries and found the evidence of strong and
positive relation between the importance of SMEs and GDP per capita growth, and highlighted that
SMEs played an important role to the growth. In addition, SMEs have also proved a pivotal role in

industrialization, particularly in developing countries which have a large proportion of SMEs
(Tambunan, 2006). Elumba (2002) showed that SMEs are important to almost every economy in the
world and play a key role in the industrialization of developing countries that they have unique
characteristics on their own, and they are extremely flexible and can readily adapt to rapidly changing
environment. Bari (2005) indicated that SMEs play an important role in the economic structural
transformation of the countries moving from the low- income to middle- income group with the
majority of SMEs representing as entries of manufacturing industries and service businesses..............16
There has been an increasing trend of empirical studies focusing on the relation between SMEs and
economic development. Using the panel data of thirty seven countries in the period from 1960s to
1990s, Hu (2003) explored the influence of SMEs on the economic growth with the empirical result
that SMEs had positive impact on the economic growth in both developed countries and developing
countries. Beck (2005) used a data sample of 45 countries and found the evidence of strong and
positive relation between the importance of SMEs and GDP per capita growth, and highlighted that
SMEs played an important role to the growth. In addition, SMEs have also proved a pivotal role in
industrialization, particularly in developing countries which have a large proportion of SMEs
(Tambunan, 2006). Elumba (2002) showed that SMEs are important to almost every economy in the
world and play a key role in the industrialization of developing countries that they have unique
characteristics on their own, and they are extremely flexible and can readily adapt to rapidly changing
environment. Bari (2005) indicated that SMEs play an important role in the economic structural
transformation of the countries moving from the low- income to middle- income group with the
majority of SMEs representing as entries of manufacturing industries and service businesses..............16
In Vietnam, during the transformation process from a centrally- planned economy to a market- oriented
economy, SMEs have played an important role in the economic growth and development, especially in

9


aspects of creating jobs, labor income, economic structural changes through developing new industrial
bases and/or supporting industries, and especially, the accumulation process for capital and
entrepreneur skills for paving the way for further development. The SME sector has been widely

recognized as an engine driving economic growth, particularly in providing employment opportunities
with significant proportion of domestic labor force (Phat, 2009). The number of SMEs increased
significantly from 83,000 in 2003 to 450,000 enterprises in early of 2010 and constitutes 95 percent of
the total enterprises in Vietnam (White Paper, 2009). The research topic on the role of SMEs to
economic growth has recently attracted many researchers and economists in Vietnam. However, most
of these studies simply used statistic data to analyze and indicate the impact of SMEs on economic
growth. There are only a few empirical studies, especially those using quantitative approaches to
highlight the relative importance of the sector in the economy. Therefore, based on the foundation of
recent empirical economic literature on the topic, this study will focus on examining quantitatively
impacts of SMEs on the economic growth of Vietnam by using relevant econometric models and a
provincial socio-economic database........................................................................................................17
In Vietnam, during the transformation process from a centrally- planned economy to a market- oriented
economy, SMEs have played an important role in the economic growth and development, especially in
aspects of creating jobs, labor income, economic structural changes through developing new industrial
bases and/or supporting industries, and especially, the accumulation process for capital and
entrepreneur skills for paving the way for further development. The SME sector has been widely
recognized as an engine driving economic growth, particularly in providing employment opportunities
with significant proportion of domestic labor force (Phat, 2009). The number of SMEs increased
significantly from 83,000 in 2003 to 450,000 enterprises in early of 2010 and constitutes 95 percent of
the total enterprises in Vietnam (White Paper, 2009). The research topic on the role of SMEs to
economic growth has recently attracted many researchers and economists in Vietnam. However, most
of these studies simply used statistic data to analyze and indicate the impact of SMEs on economic
growth. There are only a few empirical studies, especially those using quantitative approaches to
highlight the relative importance of the sector in the economy. Therefore, based on the foundation of
recent empirical economic literature on the topic, this study will focus on examining quantitatively
impacts of SMEs on the economic growth of Vietnam by using relevant econometric models and a
provincial socio-economic database........................................................................................................17
2. Objectives of study....................................................................................................................................17
This study is purposed to use econometric techniques to analyze the impact of SMEs on the economic
growth at the provincial level in Vietnam during the period 2000-2006. In particular, the econometric

models are used to find empirical evidences on the role of SMEs to (i) economic growth rate and (ii)
economic structural changes at the provincial level. This is very important for Vietnam to highlight
how the sector could be enhanced in line with the Drafted Strategy of Socio – Economic Development
2011-2020 promulgated by the Government (Draft of 2011-2020 Economic and Social Development
Strategy)...................................................................................................................................................17
This study is purposed to use econometric techniques to analyze the impact of SMEs on the economic
growth at the provincial level in Vietnam during the period 2000-2006. In particular, the econometric
models are used to find empirical evidences on the role of SMEs to (i) economic growth rate and (ii)
economic structural changes at the provincial level. This is very important for Vietnam to highlight
how the sector could be enhanced in line with the Drafted Strategy of Socio – Economic Development
2011-2020 promulgated by the Government (Draft of 2011-2020 Economic and Social Development
Strategy)...................................................................................................................................................17
3. Research questions....................................................................................................................................18
4. Research hypotheses.................................................................................................................................18
5. Structure of the thesis................................................................................................................................18
a. The concept of SMEs................................................................................................................................19
a. The concept of SMEs................................................................................................................................19
b. The role of SMEs to economic growth.....................................................................................................24
b. The role of SMEs to economic growth.....................................................................................................24
c. The role of SMEs to economic structural change.....................................................................................30
c. The role of SMEs to economic structural change.....................................................................................30
2.1 The economic scale and flexibility.....................................................................................................35

10


2.1 The economic scale and flexibility.....................................................................................................35
2.2 The technological level.......................................................................................................................36
2.2 The technological level.......................................................................................................................36
2.3 The organizational structure and management...................................................................................38

2.3 The organizational structure and management...................................................................................38
2.4 The quality of labor force...................................................................................................................39
2.4 The quality of labor force...................................................................................................................39
2.5 The market share and strategy............................................................................................................40
2.5 The market share and strategy............................................................................................................40
3.1 On the number of SMEs.....................................................................................................................41
3.1 On the number of SMEs.....................................................................................................................41
3.2 On the survival of SMEs.....................................................................................................................45
3.2 On the survival of SMEs.....................................................................................................................45
3.3 On the diversification of SMEs..........................................................................................................47
3.3 On the diversification of SMEs..........................................................................................................47
3.4 On the geographical distribution of SMEs.........................................................................................48
3.4 On the geographical distribution of SMEs.........................................................................................48
3.5 On the credit access and capitalization of SMEs................................................................................49
3.5 On the credit access and capitalization of SMEs................................................................................49
3.6 On the labor structure of SMEs..........................................................................................................51
3.6 On the labor structure of SMEs..........................................................................................................51
4.1 SMEs and economic development......................................................................................................52
4.1 SMEs and economic development......................................................................................................52
4.2 SMEs and economic structural change...............................................................................................54
4.2 SMEs and economic structural change...............................................................................................54
4.3 SMEs and poverty alleviation.............................................................................................................55
4.3 SMEs and poverty alleviation.............................................................................................................55
1.2 Model specification.................................................................................................................................58
1.2 Model specification.................................................................................................................................58
1.1The econometric model for the role of SMEs to economic growth....................................................59
1.1 The econometric model for the role of SMEs to economic growth........................................................59
1.2The econometric model for the role of SMEs to economic structural change....................................60
1.2 The econometric model for the role of SMEs to economic structural change........................................60
1.3 The database............................................................................................................................................60

1.3 The database............................................................................................................................................60
1.4 Empirical results......................................................................................................................................63
1.4 Empirical results......................................................................................................................................63
In the process of examination of panel data sets, there are two most popular methods; namely, the fixedeffect method and the random-effect method are often used (Hausman, 1978). Because the fixed-effect
method assumes systematic difference between panels, it is considered as more robust. However, when
considering the panel specified factors into account into consideration, the fixed-effects method is less
efficient than random method. Therefore, the choice between the fixed method or the random method
depends on the estimation which is more robust. Furthermore, empirical studies suggest that less efficient

11


model are more robust and less robust models are more efficient (Hausman, 1978). In this study, both
Fixed-effects and Random-effects regressions are performed and then applied Hausman specification test
to choose the most preferable regression using the Hausman test (Hausman, 1978)...................................63
In the process of examination of panel data sets, there are two most popular methods; namely, the fixedeffect method and the random-effect method are often used (Hausman, 1978). Because the fixed-effect
method assumes systematic difference between panels, it is considered as more robust. However, when
considering the panel specified factors into account into consideration, the fixed-effects method is less
efficient than random method. Therefore, the choice between the fixed method or the random method
depends on the estimation which is more robust. Furthermore, empirical studies suggest that less efficient
model are more robust and less robust models are more efficient (Hausman, 1978). In this study, both
Fixed-effects and Random-effects regressions are performed and then applied Hausman specification test
to choose the most preferable regression using the Hausman test (Hausman, 1978)...................................63
Robustness tests for the regression are also performed by using Hausman test. Since both fixed-effects
and random-effects are assumed to be spurious in the presence of heteroscedasticity and autocorrelation.
In this case, it is pointed out that OLS standard error would be significantly incorrect (Beck and Katz,
1995) and the coefficients from GLS regression will be not consistent (Wooldridge, 2002). In order to test
for heteroscedasticity problem, the iterated GLS estimates are obtained and then performed a Likelihood
Ratio tests (Lrtest) to test the null hypothesis of homoscedasticity. The test procedure developed by
Wooldridge (2002, 282–283) is used to test for the presence of autocorrelation.........................................63

Robustness tests for the regression are also performed by using Hausman test. Since both fixed-effects
and random-effects are assumed to be spurious in the presence of heteroscedasticity and autocorrelation.
In this case, it is pointed out that OLS standard error would be significantly incorrect (Beck and Katz,
1995) and the coefficients from GLS regression will be not consistent (Wooldridge, 2002). In order to test
for heteroscedasticity problem, the iterated GLS estimates are obtained and then performed a Likelihood
Ratio tests (Lrtest) to test the null hypothesis of homoscedasticity. The test procedure developed by
Wooldridge (2002, 282–283) is used to test for the presence of autocorrelation.........................................63
If the models exhibit the heteroscedasticity and/or autocorrelation, some remedial measures need be taken
because the estimator from above Fixed-effects and Random-effects tend to be less reliable. In this case,
Beck and Katz (1995) suggested that the OLS with Panel -Corrected Standard Errors (PCSE) estimation
should be the most appropriate method........................................................................................................64
If the models exhibit the heteroscedasticity and/or autocorrelation, some remedial measures need be taken
because the estimator from above Fixed-effects and Random-effects tend to be less reliable. In this case,
Beck and Katz (1995) suggested that the OLS with Panel -Corrected Standard Errors (PCSE) estimation
should be the most appropriate method........................................................................................................64
3.1 The impact of SMEs on economic growth.........................................................................................64
3.1 The impact of SMEs on economic growth.........................................................................................64
1.5The impact of SMEs on economic structural change..........................................................................67
1.5 The impact of SMEs on economic structural change..............................................................................67

12


LIST OF FIGURES

FIGURE 3.1: THE PROPORTION OF SMES AND OTHER ENTERPRISES
BY LABOR.....................................................................................................43
FIGURE 3.2: THE PROPORTION OF SMES AND OTHER ENTERPRISES
BY CAPITAL..................................................................................................44
FIGURE 3.3: CAPITAL STRUCTURE OF SMES IN PERIOD 2000-2008

(%)...................................................................................................................49
FIGURE 3.4: LABOR STRUCTURE OF SMES IN PERIOD 2000-2008 (%)
.........................................................................................................................51

13


14


ABBREVIATIONS
AFTA

Asian Free Trade Association

APEC

Asia-Pacific Economic Cooperation

ASEAN

Association of Southeast Asian Nations

CIEM

Central Institute for Economic Management

EU

European Union

FDI

Foreign Direct Investment

GDP

Gross Domestic Product

GSO

General Statistics Office

ILO

International Labor Organization

LEs

Large Enterprises

MPI

Ministry of Planning and Investment

MEs

Micro Enterprises

NGOs

Non-Governmental Organization

OECD

Organization for Economic Co-operation and
Development

SMEs

Small and Medium Enterprises

UNCTAD

United Nations Conference on Trade and
Development

UNESCAP

United Nations Economic and Social Commission for
Asia and the Pacific

VCCI

Vietnam Chamber of Commerce and Industry

WTO

World Trade Organization

WEF

World Economic Forum

15


CHAPTER 1
INTRODUCTION
1.

Problem statement

The role of SMEs in economic development has been increasingly recognized since
recent decades, especially for developing countries. Specifically, SMEs contribute to
economic development through creating jobs, improving productivity and increasing
industrial outputs. UNCTAD (1998) indicated that SMEs have been playing a vital role in
the development process of many leading economies in Asia and contributed
approximately 40 to 60 percent of all capital investment and a similar proportion to the
productivity growth. Tambunan (2008) showed that Indonesia is a typical example for
SMEs’ role in economic growth, where SMEs accounted for more than 50% of GDP over
the period 2000-2006. Harvie (2005) argued that SMEs made a significant contribution to
the growth through job creation with about 50% - 70% of the total workforce and
contributed as much to the output as large businesses (50.1% of turnover) in ASEAN
developing countries. There are also evidences that the productivity growth by SMEs
increases in recent years, for example, at a level of 40% of that of large enterprises in
Japan (Takakoshi, 2007). SMEs are an important component of international trade. For
example, the total export value of SMEs is estimated to account for about 35% of Asia’s
exports (OECD, 2005).
There has been an increasing trend of empirical studies focusing on the relation

between SMEs and economic development. Using the panel data of thirty seven countries
in the period from 1960s to 1990s, Hu (2003) explored the influence of SMEs on the
economic growth with the empirical result that SMEs had positive impact on the economic
growth in both developed countries and developing countries. Beck (2005) used a data
sample of 45 countries and found the evidence of strong and positive relation between the
importance of SMEs and GDP per capita growth, and highlighted that SMEs played an
important role to the growth. In addition, SMEs have also proved a pivotal role in
industrialization, particularly in developing countries which have a large proportion of
SMEs (Tambunan, 2006). Elumba (2002) showed that SMEs are important to almost every
economy in the world and play a key role in the industrialization of developing countries
that they have unique characteristics on their own, and they are extremely flexible and can
readily adapt to rapidly changing environment. Bari (2005) indicated that SMEs play an
16


important role in the economic structural transformation of the countries moving from the
low- income to middle- income group with the majority of SMEs representing as entries of
manufacturing industries and service businesses.
In Vietnam, during the transformation process from a centrally- planned economy
to a market- oriented economy, SMEs have played an important role in the economic
growth and development, especially in aspects of creating jobs, labor income, economic
structural changes through developing new industrial bases and/or supporting industries,
and especially, the accumulation process for capital and entrepreneur skills for paving the
way for further development. The SME sector has been widely recognized as an engine
driving economic growth, particularly in providing employment opportunities with
significant proportion of domestic labor force (Phat, 2009). The number of SMEs increased
significantly from 83,000 in 2003 to 450,000 enterprises in early of 2010 and constitutes
95 percent of the total enterprises in Vietnam (White Paper, 2009). The research topic on
the role of SMEs to economic growth has recently attracted many researchers and
economists in Vietnam.1 However, most of these studies simply used statistic data to

analyze and indicate the impact of SMEs on economic growth. There are only a few
empirical studies, especially those using quantitative approaches to highlight the relative
importance of the sector in the economy. Therefore, based on the foundation of recent
empirical economic literature on the topic, this study will focus on examining
quantitatively impacts of SMEs on the economic growth of Vietnam by using relevant
econometric models and a provincial socio-economic database.
2.

Objectives of study

This study is purposed to use econometric techniques to analyze the impact of
SMEs on the economic growth at the provincial level in Vietnam during the period 20002006. In particular, the econometric models are used to find empirical evidences on the
role of SMEs to (i) economic growth rate and (ii) economic structural changes at the
provincial level. This is very important for Vietnam to highlight how the sector could be
enhanced in line with the Drafted Strategy of Socio – Economic Development 2011-2020
promulgated by the Government (Draft of 2011-2020 Economic and Social Development
Strategy).
1

For examples, Nam (2009) studied the financial market and solutions to expand the capital source for
SMEs. Binh (2010) analyzed the development and the role of SMEs after 10 years establishing and applying
the enterprise law. Quan (2009) explored the situation of SME in Vietnam during period financial crisis. Linh
(2009) studied about the development human resource of SMEs in integration process.

17


3.

Research questions

Based on the above objectives of study, the thesis focuses on the main research
question of “How do SMEs affect economic growth in Vietnam?” with following subresearch questions:
(1) Do SMEs have positive impact on provincial economic growth rate in Vietnam?
(2) How do SMEs affect provincial economic structural changes in Vietnam?
4.

Research hypotheses

To pursue the above research questions, we test the following research hypotheses:
Hypothesis 1: Economic growth rate at the provincial level is positively affected
by the variables of SMEs.
Hypothesis 2: The provincial industrialization level is positively affected by the
variables of SMEs.
Beside the variables of SMEs, in the related econometric models, we also use other
independent variables, such as investment, human capital, poverty, education among other
variables of characteristics of provinces that may affect economic growth rate and
industrialization process at the provincial level.
5.

Structure of the thesis

The structure of the thesis is as follows.
Chapter 1: Introduction. This part focus on the necessity of research topic, the
objective of study, research questions and hypothesis and the structure of the thesis.
Chapter 2: Literature Review. This chapter provides a review of recent studies on
the role of SMEs to economic growth and economic structure changes, focusing on the
theoretical arguments and empirical evidences in these aspects that will provide the
foundation for the empirical analysis in Chapter 4.
Chapter 3: Current Situation of SMEs in Viet Nam. This chapter is for analyzing

the current status of SMEs in Vietnam, especially discussing the role of SMEs to economic
growth and industrialization.
Chapter 4: Model Specification and Empirical Results. This chapter uses relevant
econometric models and a provincial database to make empirical analyses of the role of
SMEs to provincial economic growth and economic structure changes.
Chapter 5: Conclusions and Policy implications: this part presents a summary of
main findings of the thesis and policy recommendations.

18


CHAPTER 2
LITERATURE REVIEW

a.

The concept of SMEs

The role of SMEs in economic development has become a popular topic for
researchers, economists, and policy makers. However, there is still no consensus on the
concept of SME. According to Fink and Ploder (2007), there are about 200 different
definitions of SMEs in the economic literature. These definitions are varied among
countries and regions due to their specific history or socio - economic conditions.
However, in general, there are two main approaches to SMEs definition, namely, the
quantitative approach and the qualitative approach.
The quantitative approach is based on quantitative criteria such as employment,
turnover, and asset size of enterprises 2. This approach has been often used in the studies
focused on the industry and/or country level in order to seek clear statistical views on the
related issues of SMEs. The definition of SMEs using the quantitative approach is
generally easy to derive and get a quantitative overview of firms. Furthermore, this

approach is important and appropriate in studies using statistics or quantitative analyses of
SMEs. However, due to a number of reasons, many applications of the quantitative
definition of SMEs are not effective in specific circumstances.
Therefore, the qualitative definition of SMEs is introduced to complement the
quantitative definition of SMEs and distinguish between SMEs and the other types of
enterprises. The qualitative approach is based on the ownership or management control of
the firm businesses. This means that the qualitative approach attempts to consider the
meanings, beliefs, and behavioral aspects that distinguish SMEs from the other forms of
firms. Hauser (2006) pointed out that the definition of SMEs based on their size does not
specify different features between SMEs and large enterprises or not highlight the unique
characteristics of the SMEs. Thus, only by using the qualitative approach, the nature and
hidden contents of SMEs could be revealed. The qualitative approach studies SMEs in the
perspective of ownership and management, among others.

2

See Beck (2005), Tambunan (2006), Milton (2003), Bari (2005), and the enterprises law of most of
countries.

19


There are generally three types of SMEs in line with 3 kinds of ownership and
management, as illustrated in Box 2.1.
Box 2.1: Types of SMEs based on the types of ownership and management

Box 2.1: Types of SMEs based on the types of ownership and management
•

Type 1 SMEs are enterprises in which the manager is also the owner or a

member of the family that owns the enterprises. He or she made business
decisions on short and long-term issues based on his/her or family’s interests or
enterprises interests (in Germany, this type SMEs is so-called Mittelstands or
Family enterprises).

•

Type 2 SMEs are enterprises in which the manager determines short-term
important issues and prepares long-term plans/issues to submit to the owner or
a board of owners for final decisions. The owner or the board of owners
normally consists of private investors. They make decisions based upon the
principle of maximizing benefits for themselves and also for enterprises.

•

Type 3 SMEs are enterprises belonged to enterprise groups. In this case,
important and strategic issues are decided for the interest of the group by the
headquarters of the group. Therefore the decision was made possible when it
brings maximal profits for the group.
(Source: abstracted from Hauser (2006))
Since SMEs are limited to a certain scale, they can recover their operating costs and

easily manage the enterprise in a more flexible manner. The owners may get precise and
systematic information on their enterprise and also have a sufficient knowledge on their
operation. The managers are also the owners, then they do not have to deal with other people in
making business decisions. By contrast, the owners of large enterprises often do not have
perfect information and knowledge of management and internal aspects of their enterprise.
Investment and operational decisions are made relying on the information provided or
presented by enterprise managers. Moreover, normally in large enterprises, the shares are held
by private stakeholders so the ownership of shares is widely dispersed than that in SMEs. The

weight for making decision of each owner becomes smaller and depends on the number of
shares he or she holds. In the extreme case, if a company is quoted at the stock exchange, the
relations between the shareholders and the enterprise may be completely anonymous. The
20


owners of SME have a stronger linkage to their enterprise than that of large enterprises. Thus,
according to the qualitative approach, it is worth noting that the main difference between
SMEs and large enterprises is based on the ownership and management. This confirms that the
qualitative approach based on the ownership and management as well as other criteria to
distinguish SMEs with large enterprises presents the nature of private control of SMEs.
The qualitative approach is commonly used to define SMEs for purposes such as
orientation for industrial development and economic areas for developing SMEs. This
approach is also effective in supporting programs with specific objectives such as job
creation, maintaining and developing specific/traditional industries, and improving the
living conditions in certain areas. In an extreme case, NGOs with the aims of preserving
traditional culture or improving living standards for poor people often offer programs to
support the households, production groups (one type of SMEs) in accessing credit facilities
and factors of production. In this case, it is necessary to use an approach which can reveal
the nature of SMEs – the quantitative approach.
Although there are advantages in using the qualitative approach, as noted above,
the quantitative approach has been more widely used in empirical studies of SMEs due to
its convenience in getting information on the quantitative criteria of SMEs. It is not easy,
and sometimes quite difficult, to deal with the qualitative criteria, especially for the cases
of developing countries due to lack of official information sources.
The European Union has introduced a quantitative definition of SMEs in 2006
(European Union, 2006). Accordingly, SME are determined by three main factors: (i) the
number of employees, (ii) the total assets, and (iii) the annual turnover. Based on these
factors, SME can be divided into three more detailed categories: (1) middle enterprises
(less than 250 employees and less than 50 million euro annual turnover or less than 43

million euro total assets); (2) small enterprises (less than 50 employees and less than 10
million euro annual turnover or less than 10 million euro total assets); and (3) micro
enterprises (less than 10 employees and less than 2 million euro annual turnover or less
than 2 million euro total assets). This definition is approved by member countries of the
Union, the European Investment Bank (EIB) and the European Investment Fund (EIF) to
improve consistency and effectiveness of policies which support to SMEs to promote
entrepreneurship, investment and growth. This single SME definition is applied for SMEs
across the EU.

21


Based on the quantitative approach, the definition of SMEs is also varied among
different countries in the world. In the United Kingdom (UK), the Companies Act 2006
defines SMEs based on the financial accounting requirements. Accordingly, a small
company is defined as firms that have a turnover of at most £6.5 million, a total value of
assets of at most £3.26 million and employs at most 50 workers. Similarly, a medium-sized
company has a turnover of no more than £25.9 million, a total value of assets of no more
than £12.9 million and employs no more than 250 workers. It is important to note that even
within UK, there might be other definition for specific purpose. The British Bankers
Association (BBA) in March 2008 introduced its own definition of SMEs. Accordingly,
SMEs were defined based on sole traders, partnerships, limited liability partnerships,
limited companies associations, charities, and clubs with an annual income of under £1
million. This definition is a combination of both quantitative and the qualitative definitions
of SMEs.
In the United State (US), the definition of SMEs is set by a government agency
called the Small Business Administration (SBA). Accordingly, the definition of the term
“size standards” is considered as the first criteria to recognize an SME. The Government
has set this feature to give benefits and funds for SMEs. Thus, SMEs cannot be dominant
in their field. They must also be independently owned and operated. Different from the UK

and the European Union which have a simple definition of SMEs applied to all industries,
the US has set “size standards” for each individual enterprise in different industries.
Common size standards are 500 employees for manufacturing and mining industries, 100
employees for wholesale trade industries, USD 7 million of annual income for retail and
service industries, USD 33.5 million of annual income for general & heavy construction
industries, USD 14 million of income for all special trade contractors, and USD 0.75
million income for the agricultural industry.

22


Table 2.1: Main elements of SMEs’ definitions in the ASEAN Member Countries
Country/Economy

Employee (*)

Capital

Fixed
assets

Sales

Production
capacity

Brunei Darussalam

99

-

-

-

-

Indonesia

100

-

+(**)

+

-

Malaysia

150

-

-

+

-

Philippines

199

-

-

+

-

Singapore

199

-

+

-

-

Thailand

200

+

+

-

-

Vietnam

200

+

-

-

-

Myanmar

< 200(****)

+

-

-

+(***)

Cambodia

< 200

-

-

-

-

Lao PDR

99

-

+

-

-

Source: APEC (2003); except Myanmar, Cambodia, and Lao PDR from UNESCAP (2004).
Notes: (*) figures indicate the maximum number of employees in a firm defined as an MSME; (**) “+”as an
element of the definition; (***) production value; (****) depends on the economic sector 3.

In the developing countries, there is no standard definition of SMEs. The
classification of SMEs varies widely across countries. The parameters that are most
commonly used for classifying SMEs are number of employees, turnover, and level of
capital or value of assets (see Table 2.1). In ASEAN countries, some countries set up
definitions of SMEs for statistical purposes, other countries have definitions of SMEs for
policy purposes. The definitions of SMEs also differ by industry and by policy program.
As shown in Table 2.1, the number of employees is the most common criteria to be
used. However, many member countries also use a monetary measure such as initial
investment, including or excluding land and building, annual sales or turnover, or
production capacity to define SMEs. Even with the number of employees, there is a
considerable diversification between the member countries.
There are many reasons that there are various definitions of SMEs in the world
nowadays based on the fact that the purpose of using these definitions are highly
diversified in order to deal with specific dimensions concerning SMEs. For example, in the
financial sector, SMEs usually build a vast base of customers for banking purposes.
Ideally, in banking, when lending to their SME customers, credit institutions use a
3

A discussion paper of APEC agenda in 2003, “SMEs in Asia and APEC”.

23


systematic criteria of SMEs in order to make decision on how to meet financial needs of
SMEs. Practically in some cases, especially for developing countries, commercial banks
are lending to SMEs based on their owned concept and criteria, even without a clear
official definitions. In such cases, it is necessary to establish a (official) systematic concept
and criteria of SMEs, considering both quantitative and qualitative criteria and to formally
use for the banking purposes to assess precisely their SMEs customers’ capability and
necessary conditions when making lending decisions.

b.

The role of SMEs to economic growth

Recently, there has been a debate on role of SMEs to economic growth. There are
mainly two different views on the role of SMEs in economic growth among economists,
policy makers, and the corporate managers. Many researchers believe that SMEs are an
important determinant of the economic growth, while some others argue that SMEs have a
little impact in driving the economic growth.
For the first view, many research papers based on the stylized facts from
developed, developing and less developed countries emphasize the role of SMEs and
policy programs designed to support and assist SMEs. Cravoy (2009), Hu (2003), and
Tambunan (2006) studied experience from newly industrial countries in East and Southeast
Asia as Hong Kong, Korea, Taiwan, and many Europe countries and showed that SMEs
have significant impacts on economic growth. Based on the argument that SMEs are a
determinant of economic growth, they argued that government should support SMEs to
achieve economic development goals. They particularly emphasized the importance of
subcontract networks, accumulation, creation, and innovations of SMEs.
By contrast, there are also a number of studies suggesting another view on the role
of SMEs. Although they recognize the role of SMEs, it does not mean that LEs are not
important in the economy as such that SMEs can be replaced by LEs. This is actually not a
new story for economists. Some classical researches, such as Hoselitz (1959), Staley and
Morse (1965), and Anderson (1982), predicted that SMEs advantages would reduce over
time and LEs would dominate in economic development process (Tambunan, 2006).
Although there are two opposed views on the role of SMEs to economic
development, the first view has been dominant in recent decades, and it has been supported
by the stylized facts in both developed and developing countries, especially in the
developing world. The World Bank and many non-government organizations (NGOs) have
approved a substantial amount of SMEs support programs in LDCs with the objective that
24

SMEs enhance competition and entrepreneurship, and thus, have external benefits on the
economic efficiency, innovation, and overall productivity growth (World Bank, 2002,
2004). SMEs are generally more productive than large enterprises (LEs) but they meet
difficulties in entering financial markets and other institutional failures. SMEs expansion
boosts employment more than LEs growth because SMEs are usually more laborintensive. In other words, The World Bank believes that government’s supporting
programs for SMEs in LDCs help them to exploit social benefits and to strengthen their
competition; and then, SMEs can boost economic growth and development. In period of
1998-2002, The World Bank actually approved more than US$10 billion in SMEs support
programs (World Bank, 2002).
UNCTAD (1998) recognized SMEs as an important tool for empowering economic
growth when studying the role of SMEs to the rapid economic growth of countries in Asia and
North America. SMEs are considered an important element in the government policies and
they are included in policy programs to reduce poverty, accelerate economic growth,
encourage foreign direct investment, diversify the economy, and create new job opportunities
(APO, 2007). Furthermore, recent economic development studies highlights that SMEs have a
potential to become a powerful driver in the process of industrialization. The practical
experience from some East and Southeast Asian countries, like South Korea, Taiwan, Hong
Kong, and Singapore, proves that successful cases of SMEs development have usually directly
contributed to trade and export-oriented strategies, and indicates that SMEs could compete
effectively in both domestic and international markets. In some Asia countries, SMEs
eventually contributed 60 percent of the total manufacturing exports (UNCTAD, 1998).
In developed countries, SMEs are considered a dynamic economic sector to
promote economic growth based on new technology and high productivity. Audretsch and
Keilbach (2004) and Muller (2007) measured the impact of new born SMEs on economic
growth, using the rate of newly established enterprises and the share of capital of SMEs to
examine the impact of SMEs on the economic growth and showed positive effects of
entrepreneurship capital on the growth in Germany.
Empirical analysis on the role of SMEs has recently been widely developed. Many

researchers have used econometric models and empirical database to estimate impacts of
SMEs on economic growth. Most of them have used Solow-style regression models as a
basis for considering the impact of SMEs on economic growth (Beck, 2005). Recently,
there have been subsequent improvements in related empirical studies. Some variables
25