1. Characteristics of the Vietnamese Business Environment: Evidence from the SME Survey in 2013 4 November, 2014 John Rand and Finn Tarp

2. Introducing the SME survey Small and medium enterprises (SMEs) continue to be central to the Vietnamese development process Contributing to economic growth and employment Characterize business conditions under which Vietnamese SMEs operate Firm dynamics: How do firms evolve? External environment: Does it bring challenges or opportunities?

3. Overview SME survey 2005, 2007, 2009, 2011 and 2013 Ten provinces Approximately 2,500 non-state manufacturing enterprises each year. Four questionnaires: Main (firm level) Employee (sub-sample) Economic accounts Exit The report provides descriptive statistics and analysis of key trends in the 2013 data. The report is a joint effort of CIEM, DoE (University of Copenhagen) and ILSSA. Research supported by Danida and UNU-WIDER

4. Topics covered in the 2013 SME survey report TopicSection International economic crisis3 Enterprise growth and dynamics4 Bureaucracy, informality and informal payments5 Investment and access to finance6 Production, technology and labour productivity7 Employment8 Environment9 Trade and sales structures10

5. The 2013 survey (compared with 2011) Province Interviewed in 2013 Interviewed in 2011 Change Ha Noi2802684.5% Phu Tho2552511.6% Ha Tay3423400.6% Hai Phong182200-9.0% Nghe An343345-0.6% Quang Nam1601553.2% Khanh Hoa8894-6.4% Lam Dong77761.3% HCMC6005685.6% Long An1341229.8% Total2,4612,4191.7%

6. Firm ownership structure Legal form20132011Change Household enterprise1,5531,571-1.1% Private/sole proprietorship1981932.6% Partnership/ Collective/ Cooperative5565-15.4% Limited liability company5464989.6% Joint stock company1099218.5% Total2,4612,4191.7% Note: State-Owned Enterprises (SOEs) are not included in the sampling frame

7. Firm size Size20132011Change Micro (<10 employees)1,6601,763-5.8% Small (10-49 employees)6145668.5% Medium (50-300 employees)1451329.8% Total2,4612,4191.7%

8. The 2013 SME survey sample by size, location and ownership

9. The 2013 SME survey sample by sector

10. SME survival rates 20112013 Surveyed in 2011Survivors2,419 (2,449) 1,988 Exit confirmed 431 Survival rate 82.2 Annual survival rate 90.6 Newly surveyed 473 Total surveyed in 2013 2,461 Annual survival rate between 2009 and 2011 = 92.2% Annual survival rate between 2007 and 2009 = 91.6%

11. Exit probabilities Dependent variable: Firm exitMarginal effects Small-0.030-0.035* Medium-0.060**-0.072** Ha Noi0.0470.057* Nghe An-0.058**-0.063*** Quang Nam-0.084***-0.086*** Long An-0.100***-0.102*** Partnership/Collective/Cooperative0.109*0.118* Limited liability company0.051*0.050* Sector dummies includedNoYes Observations 2,419 Small and medium firms are 3 to 6% less likely to exit than micro firms Nghe An, Quang Nam and Long An have lower exit probabilities than HCMC Ha Noi has the highest exit probability 356 SMEs (14.4%) temporarily closed their business in 2011-2013 24% exited in 2013; 19% changed sector in which they operate

12. Enterprise growth and dynamics Number of employees20132011Change Total23,58927,509-14.2% Average11.913.8-13.8% Micro3.73.8-2.6% Small20.220.01.0% Medium92.1101.2-9.0%

13. Employment Transition Matrix, 2011-2013 Employment Transition Matrix (%) Micro 2013Small 2013Medium 2013 Micro 201194.65.40 Small 201126.271.62.2 Medium 20112.525.671.9 More mobility in small and medium firm categories None of the micro enterprises transitioned to the medium category, only to small 2.2% of small firms became medium-sized Around 25% of small and medium firms decreased in size

14. Employment growth Mean employment growth rate was on average negative (-1.3%) This holds for all provinces except: Quang Nam, Lam Dong and Nghe An Small and medium enterprises saw a negative growth in employment that ranges from 9 to 13% Micro firms increased the number of full-time workers by 3% All sectors have experienced a decline in employment rates between 2011 and 2013 except food, textile, rubber and chemical industry The largest decrease (of more than 6%): leather manufacturing, electronic machinery and motor vehicles

15. Regression analysis: Determinants of employment growth Control variables Without sector controls With sector controls Small-0.166***-0.171*** Medium-0.231***-0.237*** Phu Tho-0.057**-0.051** Hai Phong-0.059**-0.045* Quang Nam0.060**0.074** Long An-0.073***-0.067** Private/sole proprietorship0.074***0.075*** Partnership/Collective/Cooperative0.083*0.069 Limited liability company0.085***0.082*** Joint stock company0.070**0.065* Observations 1988 Micro firms have experienced 17 to 23% higher annual growth in full-time regular workers than small and medium firms Compared to Ho Chi Minh City, Quang Nam had 6 per cent higher annual employment growth Household firms contribute less to the employment generation than other forms of manufacturing enterprises

16. Labour productivity LP1 = real revenue per full-time employee LP2 = real value added per full-time employee

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

18. Informality 20112013 Per centNumberPer centNumber Formal (Total)72.71,75971.41,757 Formal (Balanced)71.91,43072.21,453 Note: Formal definition: Firm has an ECN or a BRC and a tax code. Decrease in the speed of formalization compared to 2011 survey

19. Informality and firm dynamics Well determined positive registration effect on employment growth

20. Most important constraints to growth

21. Investments Lower share of investments compared to 2011 30% new investments compared to 2011 60% of investments are repeated 587 firms did not make any investment in the past four years Tendencies to invest Increasing in enterprise size, for firms in rural and Northern provinces

22. How was the investment financed? Main source of finance for new investments are formal loans and retained earnings Higher share of new investments financed by informal loans Micro and household-owned firms more likely to use retained earnings or informal loans Larger firms finance investments through formal loans

23. Diversification and innovation An average Vietnamese SME is specialised Only 11% of firms produced more than one product Similar to 2011, but declining diversification compared to 2009 But, urban and Southern firms show slight increase Fabricated metal products (ISIC 28): increased level of diversification Innovation: decreasing trend Firms producing furniture (ISIC 36) tend to innovate more than firms in other sectors

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

25. International crisis and SMEs All types of SMEs feel affected by the crisis More severely perceived among small and medium than micro firms More commonly felt among urban and Northern firms 8% of firms in 2013 believe that the international crisis has brought positive incentives (5% in 2011; 12% in 2009)

26. Conclusions and policy recommendations (1) Firm size is, on average, decreasing Small and medium enterprises were reducing the number of full-time employees at a higher rate than micro enterprises Labour productivity has declined between 2011 and 2013, and the decline is especially driven by micro rural enterprises Decrease in the proportion of full time workers Business environment Very few firms are facing no constraints Informality in payments and access to finance remain some of the most serious problems Slow-down in formalisation Investment rate has declined, especially among micro-sized urban firms in the south Investment policies should address the declining investment trend Policies should ease firm registration (formalisation) and formal credit access, reflecting the fact that informality cannot assure an inclusive growth path sustained by investments in the SME sector

27. Conclusions and policy recommendations (2) Diversification and innovation More specialisation among SMEs (product diversification does not seem to be a tool for risk reduction) Sharp decline in innovation, especially among rural micro firms This decline could be a problem for future dynamics, as innovation through the improvement of existing products is positively related to firm performance Policy focus on the improvement of the innovative capacity of SMEs Effects of the crisis: aggravated compared to 2009 and 2011 Around 70 per cent of surveyed enterprises stated that the international crisis still had a negative effect on their doing business conditions Micro sized firms are less affected by the crisis than their larger counterparts Firms in the northern part of the country sensed an increase in constraints Exit rates: 9.3% confirmed exits Temporary closures: around 17%, mostly among micro and small household firms

28. Thank you!