Vietnamese small and medium sized enterprises (SMEs) in the period of global economic integration: Opportunities and challenges

MA. NGO THI THU HUONG Hai Phong University Người phản biện: ThS.  Nguyễn Ái Thi ThS. Đỗ Thị Mỹ Dung

 ABSTRACT: In the period of global economy integration, Vietnam making great effort to participate in international organizations and negotiate successfully a number of Free Trade Agreements brings about fruitful opportunities for socio -economic development. Along with the trend, SMEs (Small and medium sized Enterprises) - a main factor in the economic engine have a lot of opportunities to expand their production, develop their business. However, in a new play field, SMES have to face quite a few challenges from the highly competitive and demanding markets.Therefore, SMEs need appropriate strategies to be compatible with the new competitive environment. The article is intended to study the chances and challenges for SMEs from Vietnam’s economic integration.

KEYWORDS: Small and medium sized enterprises (SMEs), global economic  intergration, oportunities, challeges.

INTRODUCTION

In the period of global economy integration, Vietnam making great effort to participate in international organizations and negotiate successfully a number of Free Trade Agreements brings about fruitful opportunities for socio - economic development. Along with the trend, SMEs (Small and medium sized Enterprises) - a main factor in the economic engine have a lot of opportunities to expand their production, develop their business. However, in a new play field, SMES have to face quite a few challenges from the highly competitive and demanding markets.Therefore, SMEs need appropriate strategies to be compatible with the new competitive environment. The article is intended to study the chances and challenges for SMEs from Vietnam’s economic integration.

1. OVERVIEW OF VIETNAM’S SMALL AND MEDIUM-SIZED ENTERPRISES (SMEs)

After the downtrend of Vietnam economy in 1998 - 1999 due to the negative effect of Asian economic crisis, it was widely recognized that the essential reform of State-owned enterprises (SOEs) and the development of the private sectors were indispensable for continuous growth. Under such circumstances, special attention was paid to the establishment and the promotion of small and medium-sized enterprises (SMEs) with purpose of enhancing competitiveness, creating employment opportunities and supporting the industries.

In November 2001, Government Decree 90/2001/ND-CP, a first pro-SME development legal document, was written. The Decree provides the official definition of an SME as “a business establishment with registered capital of no more than Vietnam dong (VND) 10 billion (equivalent to USD 630,000) or with a workforce of no more than 300 regular employees” .

Recognizing that the SME grouping by Decree 90/2001/ND-CP is too general to provide useful data to policy formulation, hence, the Vietnamese government changed the SMEs definition in terms of size segmentations, which is stated in Decree 56/2009/ND-CP as follow: “Small and medium-sized enterprises are business establishments that have registered their business according to law and are divided into three levels: very small, small and medium according to the sizes of their total capital (equivalent to the total assets identified in an enterprise’s accounting balance sheet) or the average annual number of laborers (total capital is the priority criterion)”,concretely classified in the table below:

Table 1.1. SMEs classification

 

From the opening policy for SMEs, there have been more and more SMEs creating, developing and playing important role in Vietnam’s economic development. Recently, SMEs’ activities have been activated and those gained outstanding achievements, contributed to the production growth, promoted Vietnamese inner-force, economy, society. At the same time, they help minimize the problems related to poverty, unemployment, and increase the state budget. Specifically, according to (VCCI), until 2011, about 543,963 enterprises were registered under the Law on Enterprises, with total capital of VND 6 million billion. SMEs account for 97% the total number of enterprises in the country, which are mainly private enterprises; employ 77% of the workforce and account for 80% of the retail market.  According to the government over 40% of GDP is produced by SMEs.  SMEs have a significant position in any nations’ economy, event in highly developed countries. Thus, SMEs development is actually one of the most important missions of the nation.

As the potential role in the efficiency of economy, many studies have conducted to recognize and point out the effects on these sector performances, the advantages and disadvantages, strengths and weaknesses of SMEs, especially those in the integrating process. Quite a few previous studies have shown effects of regional and global economic integration on SMEs in many countries such as ASEAN, Nigeria, China, etc, as well as opportunities and challenges of the integration to SMEs (Hirschman, 1958; Rugman 1997; OECD, 2000; Macmillan, 2008; Rahman and Ramos, 2010; Parida, 2012). Beside the positive results, the findings from most researches have mentioned the limited capacity of SMEs as a main weakness so it is quite difficult for them to take advantage from the process. Specifically, as reported by the OECD (2012), the primary difficulties faced by SMEs in ASEAN countries are limitation in accessing to the capital and technology, and highly competitive markets, and shortage of high-qualified workforce. Moreover, according to Oum and Narjoko (2010), due to the issues related to macroeconomic policy such as tax policy, technical barriers and differences in business environment, the issues reveal the weaknesses of SMEs in understanding the law as well as catching up with the requirements and regulations of foreign markets. Or Rahman and Ramos (2010) pointed out that SMEs suffer from a lack of management skills and techniques to achieve high efficiency. From those previous studies, Vietnam might share the same weaknesses as well as obstacles in the economic integration process.

2. OVERVIEW OF VIETNAM’S GLOBAL ECONOMIC INTEGRATION

Looking back at Vietnam economy in the period from 2007 up to now, after integrating into WTO (2007), Vietnam, along with ASEAN has continuously participated in a large number of free trade Agreements (FTAs) including bilateral and multilateral FTAs with many developed countries. Regarding the FTA, which is stated in Business dictionary as “A treaty between two or more countries to establish a free trade area where commerce in goods and services can be conducted across their common borders, without tariffs or hindrances but labour or capital may not move freely. Member countries usually impose a uniform tariff on trade with non-member countries”, it is an indispensable trend in the integrating process. The table below shows the events of Vietnam’s integration by year:

Table 2.1. Vietnam’s global and regional economic integration events by year

The global integration of our country into the world trade organisations has greatly promoted the development of SMEs with the promising and potential favourable conditions. However, there is considerable room for Vietnamese SMEs to more fully exploit the economic opportunities provided through international trade.

3. VIETNAMESE SMEs’ OPPORTUNITIES IN THE PERIOD OF GLOBAL ECONOMIC INTEGRATION

The WTO accession and numerous FTAs are expected to bring about new opportunities for SMEs development which are analysed and collected from the terms and conditions in FTAs as well as the previous studies as the following:

The first opportunity is the expansion of Vietnam’s export market. Since participating in regional and global organisations as ASEAN, WTO, TPP or signing and exploiting FTAs; Vietnam has been becoming a key element connecting about 56 economies until 2020 (Nguyen, 2015), of which include 18 APEC members and big economies. Thanks to it, our country’s image could be improved and impressed by others, which is proved by 3.568 new FDI projects with registered capital of $49,997 million. Recently, our country has joined 3 value chains in global economy, which are value chains of food and nutrition security, energy and energy security, garment and footwear. There are also some Vietnamese brands, which can be competitive in the international markets such as textiles and garment, telecommunication, petrol and gas, produces (coffee, rice, pepper…).

The second opportunity is easier access to production factors as well as advanced technology. The reduction in tariffs for FTA partners have promoted the investment into Vietnam which is considered to be the third country to produce their export items with low price. Consequently, Vietnamese SMEs take the advantages to renovate their machines, equipment, etc. in order to meet the requirements of their target markets.

The third opportunity is training workforce to have high qualifications and skills. Due to the high requirements of quality, design and technical aspects for exports to ASEAN, WTO, TPP or FTA markets, SMEs’ workforce need to be qualified enough.

The fourth opportunity is access to capital investments from outside. As a member of global organisation or a partner in FTAs, Vietnam can attract the capitals from other countries/ members and become a link between one economy and the others. For example, Vietnam is a member of ASEAN, while there is ASEAN - China FTA, from the connection; Vietnam is a key element for members in ASEAN to exchange with China through Vietnam.

4. VIETNAM’S  SMEs’ CHALLENGES

After the WTO accession and successful FTAs, along with good opportunities, Vietnamese SMEs anticipate tremendous difficulties in both domestic and global markets because they lack a competitive edge over foreign rivals. Many SMEs experience high production costs, poor quality of products, and low degree of innovativeness. Moreover, capital shortage, lack of advance technology, management skills and expertise, and insufficient market information, and so on hindered these young SMEs to compete globally. In the articles, some main challenges would be analysed to call for under- the-control improvement for SMEs.

The first challenge is competition in international market. Vietnamese commodities, when accessing to international market, have to compete with those from more developed countries. Moreover, integrating regionally and globally means many non-tariff, technical and food hygiene and safety barriers are introduced and strictly passed. For instance, EU demands the quality of health and human - related products, packages, origins, etc. they have their high standard for any imports. Thus, that is actually a challenge for Vietnamese SMEs who have a very simple or outdated production line.

The second challenge is competition in the home market. Vietnam has to face with a lot of problems rising from the liberalization of economic sectors in the committed integration process. Many industrial and agricultural products are less competitive compared with those imported from EU, US, Japan, China and ASEAN. For instance, the price of some domestically produced goods is higher than international price. Many products from Thailand, Japan, and Korea have appeared and attracted Vietnamese customers with high quality and reasonable price. In fact, there are big retailers as Big C and Metro taken over by Thai company. Pressure of competition put on key services like finance and bank, post and telecommunication, and information technology is even heavier. Thousands of state owned and private enterprises existing under import substitute and protection policies will hardly remain in this competition. Decreased profit, loss, bankruptcy and unemployment - inevitable consequence of the structuring following the commitments to access international organizations, especially WTO, may cause unfocused economic, political and social effects.

The third challenge is little understanding of integration process and FTA as well as limited capability of SMEs. The results of a survey of Ministry of Planning and Investing (2014) have shown that 76% Vietnam Enterprises were not clear about ASEAN economic community (AEC), 94% did not know about the content of AEC negotiation. Recently, there have been more and more FTAs signed and completed, so SMEs need to understand them thoroughly the process in order to build up strategies to cope with.

5. CONCLUSION

Vietnam’s SMEs have made fundamental breakthrough after the strong regional and global integration despite quite a few challenges ahead. Hoping with the assistance of the government and their own essential improvement, SMEs would create the most feasible plan and strategies to face the challenges and promote sharply in the near future.

References

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