Development situation of SMEs in Vietnam

List of abbreviation
SMEs: Small and medium enterprises
LEs: Large Enterprises
SOEs: State Owned Enterprises
NSEs: Non State Enterprises
GDP: Gross Domestic Product
VND: Vietnam Dong
CGSs: Credit Guarantee Schemes
VCCI: Vietnam Chamber of Commerce and Industry
MPI: Ministry of Planning and Investment
CIEM: Central Institution of Economic Management
ILO: International Labor Organization
MOLISA: Ministry of Labor, Invalids and Social Affairs
OECF: Overseas Economic Cooperation Fund
SPA: State Planning Committee
UNIDO: United Nation Industrial Development Organization
BID: Vietnam Investment and Development Bank
ICB: Vietnam Commercial and Investment Bank
Vietcombank: Vietnam for Foreign and Trading bank
RIDA: Research Institute for Development Assistance
MPDF: Mekong Project and Development Facility
HCMC: Ho Chi Minh City
CESAIS: Center for Economic Studies and Application
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List of figure
Figure 1.1 Research methodology 3
Figure 5.1 Organization chart of BEMES company. 41
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List of Table
Table 3.1 Trend in number of business enterprises 15
Table 3.2 Equipment and technology level of SMEs (1991-1995) 16
Table 3.3 Difficulties facing SMEs in general 18
Table 4.1 Funding source of financing NSEs in HCMC and Hanoi 22
Table 4.2 Credit sources 23
Table 4.3 The main purpose of borrowing from banks 24
Table 4.4 The short-term credit distribution of banks to NSEs 25
Table 4.5 Medium and long-term credit distribution of banks to economy by
sector
26
Table 4.6 The level of capital borrowing from banks 27
Table 4.7 The changing interest rate from 1986-1995 28
Table 4.8 Difficulties in borrowing from banks 29
Table 4.9 The difficulties in borrowing money from banks 31
Table 4.10 Problem SMEs faced when asking banks loans 31
Table 4.11 Classification of companies according to the size of business
capital
32
Table 4.12 Overdue debt in short-term credit banks classification of
economic sector
33
Table 4.13 Overdue debt in long-term credit banks classification of
economic sector
36
Table 4.14 Target when borrowing money from informal financial source of
SMEs
37
Table 4.15 The condition to borrow from informal financial sector. 37
Table 4.16 Evaluation of SMEs about advantages of financing in informal
finances
38
Table 4.17 The borrowing interest of informal source 39
Table 4.18 Summary the criteria and characteristics of each funding
source.
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Table 5.1 Income statement of January-September 1998 49
Table 5.2 Balance sheet of January-November 1998 49
Table 5.3 Pro forma income statement for the new project 50
Table 5.4 The growth rate of labor and sales of 1994-1997 52
Table 5.5 Leasing package for Xuan Kien by International Leasing
Company.
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1 Chapter 1
2 Introduction
1.1 Rationale of the study
Small and medium sized enterprises (abbreviated as SMEs) play significant economic,
social roles in employment creation, resource utilization, and income generation, contribute
to exports and make the economy more dynamic. Governments in most countries, whether
they are highly industrialized, developing or among the least developed, have expressed
increased enthusiasm for SMEs because of their contribution to the people’s well being
and satisfying their basic needs.
SMEs also occupy a vital role in the distribution system of all nations. This sector works
closely with customers, which is essential to promote the industrial growth of industries.
SMEs can provide new and innovative ideas to industries, which require a huge
investment for developing and existing. So, it is important to facilitate SMEs.
However, SMEs in most of the developing countries face many difficulties such as
shortage of capital, or the lack of materials and management skills. The promotion of
SMEs may be an effective and important approach to economic development. According
to the preliminary findings of a survey of 17 economies conducted by Taiwan economists,
the problems faced by SMEs in Asian-Pacific region differ considerably. In developing
countries like Vietnam, the main difficulty in business of SMEs is the lack of financing.
SMEs are hungry of capital. Nhuan (1997) and an overview of Vietnam Fund (1997) by
Bear Stearn International Limited show that: Financial institutions can not exploit
completely their capital capability while SMEs face shortage of capital. The question is why
SMEs can not be qualified to borrow this available fund? Which factors cause borrowing
failure of SMEs?
Besides, Beesly and Rothwell (1987) observes that companies need to complete a good
financial plan before talking with potential lenders. The financial institutions looking at
some criteria (four “Cs” (Characteristic, Capability, Collateral and Capital) model that will
be mentioned in the literature review) in the lending decision. For borrowers, particularly
SMEs need to know the factors that influence the lending decision of financial institutions.
They also need to know which criteria they should focus and improve to get fund from
financial institutions. Some recent surveys on evaluating loan eligibility in New Zealand,
Canada which are mentioned in literature review show that lack of management skill, poor
performance, weak financial position, ability to repay debt and insufficient security of SMEs
are the key reasons for banks to reject lending to SMEs. The question is that whether
SMEs in Vietnam have the same difficulties or not?
1.2 Problem statement
In Vietnam SMEs has been formed and developed since the late nineteenth and early
twentieth centuries. Up to present, SMEs have remained dissatisfied with the funding
supply from all financial institutions. The gap between the funding needs of SMEs and the
supply from financial institutions stems from both the capabilities of SMEs themselves and
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different requirements of the others. In getting loans from different sources, SMEs have to
satisfy different provisions, which sometimes turn out to be impossible for them. Many
SMEs have struggled to get fund from multiple sources at reasonable prices. Some have
succeeded but the others either have stayed lack of fund or have to agree with unbearable
interest.
1.3 Objectives of the study
1. Review financial sources for SMEs
• Identify the different financial sources available in Vietnam for SMEs.
• Determine contribution of each major financial institution to funding SMEs.
• Identify an analyze difficulties facing SMEs in getting loans from financial institutions.
2. Based on several case studies of selected SME’s successful in getting funds recently in
order to derive lessons for other SMEs.
1.4Research framework
The research framework has been designed in such a way that both SMEs and financial
institutions are attributed and treated in one topic. This whole research focuses upon the
SMEs financial problems in getting funds from formal financial institutions.
The research has been carried out in Vietnam, and can be divided into three stages:
• In the first stage, the review of commercial banks, SMEs and Government bodies that
have responsibility of supporting SMEs development were carried out. The relevant
data in financing was collected and reviewed during this stage.
• In the second stage, the data was analyzed to know the situation of SMEs in Vietnam
especially in financing area. The common obstacles SMEs have to face were
classified. Which ones are raised by Government’s policy, which ones are raised by
financial institutions and which ones are raised by SMEs themselves. The
responsibilities in those obstacles of the Government policies, financial institutions, or
SMEs are identified.
• Some companies that were successful in getting external funds are selected to analyze
for in-depth understanding the successful factors to have lesson for others.
• Finally, in the third stage, all the data has been composed into this report.
The framework for the study research is showed in the following figure.
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Research Framework
F
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Banks
Financial
leasing
Informal
sources
1. Contribution to funding
SMEs
2. Criteria in evaluating loans
to SMEs
3. Advantage and
disadvantages
1. SMEs’ capabilities
-Management
-Financing
-Technology
-Market
2. Financial
documentation
- Business planning
- Bookkeeping activities
Gap
Analysis of selected cases
SMEs
Lessons and recommendations
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1.5Research methodology
Both primary and secondary data were collected for this research study.
Primary data:
♦ In-depth interviews with financial institution’s executives (bank officials, lessors,
SMEs creditors), the pattern of these interviews was a mix of structured and
unstructured type of interviews, following areas were discussed:
Financing policies for SMEs.
Financing distribution for SMEs.
Financial institutions’ opinions on SMEs
Difficulties these financial institutions facing in funding SMEs.
♦ In-depth interviews with SMEs managers, the following areas were discussed:
Financial situation of the companies
Past financing sources the companies call for
Where did the companies often get funds?
Difficulties in getting fund from each financial institution.
What were the companies’ efforts to get funds?
Secondary data:
♦ Annual reports and others publication of
Federal Bureau of Statistics on non-state sector and statistics Yearbook
State bank, World Bank and Commercial banks
Some Government bodies such as Vietnamese Chamber of Commerce and
Industry (VCCI), Industrial department of Ministry of Planning and Investment
(MPI), Central Institution of Economic Management (CIEM), Project on
Assistance to SMEs.
♦ Newspapers, magazines, journals and books
♦ Case studies, speech reports
1.6Scope of the research
♦ SMEs in Vietnam include both State-owned and non-State owned enterprises (SOEs
and NSEs). In this research only NSEs was selected to study.
♦ The research focuses only on financing problems and issues related to SMEs.
♦ There are many financial institutions supporting SMEs in Vietnam financially. They
are commercial banks, financial leasing and international funds based in Vietnam
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such as Vietnam Templeton Fund, Vietnam Frontier Fund, or some funding
supporting organizations for SMEs that are aided by some international
organizations. However, just three main sources known as banks, financial leasing
and informal sector are chosen to study.
♦ Geographic area of Vietnam has been selected.
1.7Outline of the study
Chapter I introduces the rationale, problem statement, objective, methodology and
scope of the study.
Chapter II is a review of certain number of previous studies on SMEs, its contribution to
economy, its advantages and disadvantages. However, financing problem is the central
concern of the review. Besides, to solutions, models that have been applied in other
countries and arguments on them will be presented.
Chapter III provides an understanding of the situation of SMEs in Vietnam and their
contribution to the economy. General difficulties facing SMEs will be discussed.
Chapter IV introduces the available financial institutions in Vietnam, their contribution to
funding SMEs and their criteria in evaluating loans to SMEs. The difficulties facing SMEs
in getting funds from financial institutions is finding, in which the difficulties that due to
weaknesses of SMEs themselves are focused as certain concern.
In Chapter V three selected case studies will be presented background of the company,
development history and financial situation, their funding problems and ways overcome
the problems will be discussed to draw possible lessons
Chapter VI gives conclusions and some recommendations. Potential application of the
research, its limitation and some suggestion for to further studies are also give.
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Chapter 2
Literature review
2.1The role of SMEs to the national economy
2.1.1 Employment creation
Small-scale businesses are likely to utilize labor-intensive technologies. They can
establish rapidly and put into operation to produce quick return. This has been found
also that it is cheaper to create jobs for employment for SMEs than in large industries
(Bosworth, 1986). For example, in Indonesia, the LEs capital intensive industries require
an investment of US $ 50,000 to employ an additional worker. One the other hand, the
small-scale industries require an investment of US$ 500 for an additional worker
employed (Tan Thiam Soon, 1984). United Kingdom for example, at one time
encouraged small enterprises to employ more manpower and the Government provided
subsidy to the employer for each additional worker employed. With the relative ease of
starting of small enterprises as compare that of starting a large enterprise, there is a
potential of job creation in the small business sector. For countries, it is a solution to
generate more jobs for employment.
2.1.2 Regional and Rural Development
Tan Thiam Soon (1984), small business requires relatively little amount of capital and a
low level of technology. They can be easily established in the less developed areas of a
country, and help in spreading economic activities from urban to rural areas. In this way,
small enterprises not only provide the country flakes with employment opportunities, but
also help to reduce the flow of migration from the rural to the already overpopulated
cities.
2.1.3 Provision of Services to Local community
Tan Thiam Soon (1984), small enterprises play a very important role in many countries
in providing daily services. Indeed SMEs are responsible for the supply of food,
transportation, and daily necessities. Services are all provided better by small business
than State-large enterprises. Small retailers make it possible for the customers to
purchase many different items in one shop. As a matter of fact, without the services of
SMEs, our life will be hampered and very inconvenient.
2.1.4 Supporting the Large Enterprises (LEs)
Tan Thiam Soon (1984), the advantage of economies of scale can be achieved only
through larger operations. Some business activities require larger amount of capital and
a high level of technology, which are beyond the capability of small businesses. Hence,
large enterprises are also important to the national economy in terms of providing
employment and training of skills. However, (Beesley and Rothwell, 1987) in many
countries like Japan, large enterprises cannot survive on their owned. They require the
supporting services of small enterprises in terms of supply of material, parts and
components, semi-finished goods and distribution of finished products. Some foreign
investment also looks at the sufficiency and efficiency of locally supporting services.
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Some products or components and accessories do not require high precision work and
can be outsource to allow companies to concentrate upon more important areas such as
marketing, quality control, product design and research and development.
2.2Main barriers to growth of SMEs
Three sources of constraints or barriers for the growth of SMEs have been identified by
Barber (1987). The literature on the issue will be presented according to this
classification of finance, skilled labor, and technology.
2.2.1 Skilled labor barrier
Small firm is likely to face special difficulties in the attracting and retaining skilled labor.
The evidence found out by Beesley and Rothwell, R., (1987) shows a consistent picture
of wages and salaries per employee increasing with plant and firm size. Lower level of
training that in small firms tends to be more often of an informal rather than formal nature
also appears to be associated with smaller size.
Access to skilled labor is often crucial to the successful innovative performance of the
firm; any evidence of small firms being specially disadvantage in their capacity to train or
recruit skilled labor has particular significance. The point made by Bosworth (1986), is
that there are two distinctive types of skilled labor shortage. One is the actual shortage
that a firm may experience because of its current planned activities. The second is a
latent shortage because firms reconcile themselves to shortages by default. Against
though as with the case of finance, the available literature often fails to make important
analytical distinctions of this kind.
In Vietnam, a report on the survey of management training need of SMEs in Vietnam
(1997) that conducted by MPDF determines the need for management training and
related services. The difficulties faced by managers of SMEs are found in with financial
management, financial planning is two of the most difficulties. The survey was not only
demand statistics for management training of SMEs but also did the qualitative and
quantitative analysis in supply side. The finding from the survey about 92% of the
companies have a need for management training. The survey also finds that private
firms operate in a mostly hostile legal/ regulatory environment. In addition, few support
services are available to private businesses, virtually none tailored for SMEs in Vietnam.
2.2.2 Technology barrier
Perhaps the clearest answer on a particular factor imposes barriers to growth of small
firms comes from the paper by Rothwell and Beesley (1987) on access to external
technology. These is also supported by Giaoutzi (1988) that for SMEs to be able to play
an effective role on technology development. Access to higher education and
technological research institutions need to improve. Venture capital, other innovative
structure, improving infrastructure should be provided. Besides, the establishment of
Science Park, regional technology is not real barrier to innovation and technologies.
Because the use of external technology is seen as a employment to, and not a substitute
of, in house technological efforts by innovative firms- the employment of qualified
scientists of, in house technological efforts by innovative firms - the employment of
qualified scientists and engineers being quite central to the technological development of
the firm.
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