Lack of credit hampers SMEs

Access to credit remains the most serious obstacle to the success of Viet Nam’s small-to-medium enterprises, a newly-published survey shows.

Falls in demand are also cited for the first time as a serious constraint to business which “might be a result of the general slowdown experienced in economic activity.”

The survey of more than 2,500 SMEs in 10 cities and provinces last year found that almost 40 per cent of enterprises were credit constrained with the majority in rural Viet Nam.

The Central Institute for Economic Management; the Institute of Labour Science and Social Affairs; the University of Copenhagen and the Danish embassy organised the survey to research the country’s business environment.

The survey investigated the interaction of SMEs with domestic and international business with the focus on growth, employment, production, technology and efficiency, diversification, innovation, survival and closure.

Questions about their role in the informal sector; informal payments as well as their bureaucratic and administrative burden were also asked.

Although almost 70 per cent of respondents said the international financial crisis had harmed business, 12 per cent – mostly larger enterprises – reported they had actually benefited from it, University of Copenhagen economist Dr John Rand told a conference to reveal the results of the survey in Ha Noi yesterday.

The benefits included cheaper inputs, weaker competition and more and better government support, he said.

The researchers say the survey found that the business environment appears to have deteriorated because the number of unconstrained enterprises fell between 2007 and last year.

The yearly survival rate of surveyed SMEs had declined to 91.6 per cent between 2007 and 2009 from 94 per cent between 2005 and 2007.

The survey shows temporary closure as a relatively common SME response to coping with the financial crisis.

“Closing temporarily to weather the storm appears to have been a widely used coping mechanism and illustrates why official bankrupt statistics may not give a fully accurate picture of the crisis impact,” says the report.

Almost one-fifth of enterprises temporarily closed between 2007 and 2009 against the very few of 2005, 2007 surveys.

The survey results suggest that although Viet Nam’s enterprises are becoming less specialised, the diversification may be at the cost of lower short-term revenue growth.

The diversification rate last year was 14.5 per cent compared with 8.2 per cent in 2007.

But researcher Finn Tarp warned that already tardy innovation among SMEs was in decline, especially among the smallest.

Just 2.7 per cent of surveyed enterprises introduced new products against 5 per cent in 2007 with 41 per cent having improved existing products against 44.5 per cent in 2007.

The researcher suggested the decline may reflect higher uncertainty as a result of the financial crisis which has limited demand for new technology.

The survey shows new production technologies improve an enterprise’s chances of survival and he recommended the creation of incentives to innovate and invest in research and development.

“Market failures – the result of a tepid response to investment in R&D without incentives – must be addressed,” he said.

The survey shows that although more SMEs are entering the formal sector, the incidence of informal payments is rising.

More and more SMEs recognised the benefits of formalisation, even households and micro firms, although high costs to enter the formal sector, high regulatory compliance costs, and punitive tax rates can force enterprises to operate informally and forego legal recognition, explained economist Dr Rand.

The benefits included better access to credit and investment and better employment conditions.

Thirty-five per cent of SMEs surveyed were designated as part of the informal sector; in 2007 the figure was 41 per cent.

More than 60 per cent of workers did not have formal contracts although the number increased markedly with enterprise size.

Researcher Tarp argued that the “bribe to hide” hypothesis that suggests informal-sector enterprises tend to pay more bribes than those of the formal sector had not been confirmed.

Domestic data shows that formal enterprises are the primary bribe payers.

The survey shows that registered enterprises are 24 per cent more likely to pay bribes than those of the formal sector.

It also shows the larger enterprises are more likely to pay bribes than their micro rivals and those in Ha Noi are more likely to pay bribes than similar enterprises in HCM City.

The researchers concede that regulation and corruption are “fundamental topics” in any discussion of private-sector development and the business environment in developing countries. — VNS

Tags: Vietnam companies, Vietnam enterprises, Vietnam SMEs