Domestic Private Enterprise Sector Continues to be Dominated by Micro and Small Enterprises

Diep Nguyen

10:47 03/07/2019

BizLIVE -

The domestic private sector is dominated by micro and small enterprises (MSEs). Out of around 500 thousand existing domestic firms, 98 percent are small and microenterprises.

Domestic Private Enterprise Sector Continues to be Dominated by Micro and Small Enterprises

Photo: HostelWorld

There is considerable churning in the domestically-owned private enterprise sector in Vietnam, with the registration of new and closure of existing enterprises both rising in recent years. A total of 107,000 firms closed or suspended business in 2018, compared with 73,000 business closures in 2017. 
Another 24,000 business closed shop during the first five months of 2019, a 18.3 percent increase over the same period last year. The number of newly-registered enterprises increased by 131,000 in 2018 compared with 127,000 in 2017, significantly exceeding the number of closures during both periods. 
Newly registered enterprises also eclipsed closures in the first five months of 2019 with 54,000 new registrants. Among businesses that closed, trading enterprises suffered the most, accounting for 40 percent of all businesses that were liquidated or whose operations were suspended in early 2019. 
A Survey of Vietnam Chamber of Commerce and Industry (VCCI)4 shows that difficulties in findingsuitable markets, low competitiveness of domestic firms and products, limited access to  financial and labor resources were among the main reasons behind enterprise liquidations or suspensions. 
Despite these challenges, the number of newly registered firms has consistently exceeded the number of firms that have been liquidated, at least since 2013. The domestic private sector is dominated by micro and small enterprises (MSEs). Out of around 500 thousand existing domestic firms, 98 percent are small and microenterprises. 
 
While these enterprises create the vast majority of jobs in the economy, many operate in relatively low productivity services (small retail, restaurants) and simple manufacturing. Most are focused on the domestic markets and few of these businesses are engaged in export activities. They often lack the scale, access to finance and technology to make them efficient producers.
To support MSEs to expand rapidly, the most important policy imperative is to provide a level playing field for all firms. While Vietnam has made progress in improving its business environment (as evidenced in the improvement in the World Bank Doing Business Ranking), some deep-seated distortions remain. 
The government needs to revisit the competition policy program to strengthen competition-supporting institutions and fully decentralize the decision-making process to allow equal access of all enterprises to key production factors, such as land, credit, labor and technology.
In addition, the government needs to implement reforms to strengthen structural changes in the economy that will boost private investment and create greater efficiency in state-owned enterprises (SOEs) and continue to reduce a disproportionately large role of the state in the economy. The strong presence of SOEs results in inefficient prices and various other market distortions that suppress the domestic private sector.
Rationalization of the role of the state requires the elimination of private sector distortions and an end to favorable treatment of SOEs. The state needs to relinquish the direct management of economic activities where no market failures exist and concentrate more on its role in providing a level playing field for all economic sectors.

DIEP NGUYEN

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