Three years ago, when the Mekong Delta Project Fund surveyed Vietnamese parents, it discovered that raising entrepreneurs was not a popular ambition.
Mario Fischel, the Fund's general manager laughs, "They thought it was a step away from being a crook." Fortunately, perceptions have changed. In 2000, the Fund whose role is to develop small- to medium-sized enterprises (SMEs) and help them raise financing, received 103 inquiries, signed 12 memorandums of understanding (MOUs), completed nine projects and helped 25 companies raise a total of US$11.42 million.
Fischel says Vietnam's new Enterprise Law, the bilateral trade agreement with the US, the opening of the stock exchange, and easier flow of credit to private firms have dramatically improved the business environment. "The fundamental attitude shift underlying these measures is that Vietnam realises it needs SMEs to take the country to the next development stage."
The January 2000 Enterprise Law is credited with increasing the number of registered SMEs in Vietnam by 13,000 to 45,000. Phan Nguyen Toan, managing partner with Leadco, one of Vietnam's first private law firms, explains: "Under the old company law requirement, applicants had to submit complicated dossiers that included application forms prepared according to government format, economic feasibility studies, three-year business plans and evidence of financial capability." Most Vietnamese SMEs could not meet all the requirements and the ones that did faced delays in getting approval. Since the Enterprise Law, Leadco has experienced a 300% increase in advising and helping entrepreneurs set up SMEs. "Instead of complicated, cumbersome and costly procedures," says Toan, "companies in Ho Chi Minh City and Dong Nai can register their entity via the internet." Still, there is room for improvement, Dang Linh Chi, a Leadco partner points out that SMEs need more help accessing capital and credit.
Fischel says finance is one of the most critical factors for SME growth. "To a certain degree, the issue is about arming bank credit officers with the specific set of skills and expertise needed to lend successfully to SMEs." This means teaching cost-effective loan appraisal focusing on the unique characteristics of SMEs. "It also means providing assistance to strengthen the local banks, through improvements in their operating systems and credit procedures or by raising additional equity to bolster their capital base." Local bank lending to the Fund's SME projects increased from US$7.6 million in 1999 to US$11.5 million in 2000.
Finance is just one challenge. The explosion of SMEs in Vietnam forces entrepreneurs to jostle over a small pool of professional staff. Nguyen Hung Quang, Leadco deputy managing partner says: "Vietnam is still unable to meet its human resources demand." HCM City-based human resources consultancy NetViet, hopes to exploit this demand. Director Duong Xuan Giao says that SMEs that relied on informal and personal relationships to locate employees, are realising that hiring skilled staff is crucial. "Any firm that lacks employees able to communicate fluently in English will lag far behind other companies in regional and global markets." NetViet offers recruitment services and employee evaluations, charging 200,000 dong (US$13.60) for a series of problem solving skills, English, mathematics and logical deduction tests. The company charges 950,000 dong to interview and shortlist employees.
Vietnamese SMEs are excited by the gradual entry of the country into the global economy and have ambitions of becoming regional and even global players. However, they will have to compete in product quality and price, as well as operate within international technical standards. For example, larger and more lucrative markets like the US and Europe have specific environmental requirements for imports. The Vietnamese government will establish a forum to help Vietnamese companies meet international market environmental standards. But until then, creating cleaner technologies will create obstacles for SMEs who face insufficient technical support, lack of information and limited financing.
Vietnam's SME initiatives point towards fuelling a larger private sector-based export led growth. Key industries targeted are textiles, garments, handicrafts, agriculture, fisheries and software development.
The 2001-2010 Socio-Economic Development Strategy sketches policies that "pay special attention to developing and applying IT (information technology)" by encouraging companies to invest more in research and development activities, and to renovate their technologies. Corporate taxes for software and IT companies have been reduced. Nguyen Thanh Hien, business development director with CadPro, a Hanoi based IT solutions company, says: "In 1993, most companies imported software and then customised the software." While many companies have jumped on the software development bandwagon to take advantage of the lower taxation, few are actually creating software. "The most difficult problem for IT companies is finding good programmers," Hien says.
The government wants to change that by creating more IT degree courses at local universities. Another growth impediment is that rampant copyright infringement forces developers to focus on creating specific software programs for state agencies or state-owned enterprises (SOEs) rather than creating software for the larger population. However, this strategy limits export and growth potential. As CadPro specialises in Vietnamese language processing software, exporting is irrelevant.
SMEs can achieve quicker regional growth through partnerships with experienced foreign companies. In 1997, Bui Ngoc Anh hired seven university graduates to work at her home developing software for Canadian giant, Nortel. By 2000, her company, Ho Chi Minh City-based TMA had more than 100 engineers and designers. The Fund introduced TMA to India's largest software exporter, Tata Consultancy Services (TCS) last year. TMA designers are now working at TCS's offices in India, gaining valuable skills.
"India has a reputation for world class developers," Anh says. "And when India imports computer programmers from Vietnam, it proves that we are capable of producing high quality programmers." TMA is adapting TCS software products for the regional market and will serve as TCS' offshore development centre for its products. Anh says TMA's potential growth could be as dramatic as 200%. "We are Vietnam's largest private software company," she says, "but we are small by world standards." TMA now has more than 130 designers and wants to enter other Asian countries. Anh concedes, however, that while Vietnam can produce enough IT savvy people to meet its own needs, "in terms of meeting foreign countries' demand, there is a still a lot of work to be done to produce qualified English-speaking IT engineers."
Qualified English speakers are a necessity for Vietnam's growing tourism industry too. While major cities like Hanoi have internationally known brand hotels like the Hilton Hanoi Opera, there is room for SMEs like Phuong Lan. For years, the company's main business was making and exporting handicrafts and wooden furniture to Europe and Asia. Then the company diversified into hotel management. As one of the oldest SMEs, Hanoi-based Phuong Lan has enjoyed first mover advantage. Deputy director Vu Minh Nguyet says: "There are very few 10-year-old private companies in Vietnam." As European and Asian tourists continue to stream into the country, Nguyet expects business at their Hanoi hotel to increase.
The domestic market also offers unique opportunities for SMEs. After producing ceremonial paper money for five years, Ho Chi Minh City-based Nhat Hue Co wants to produce high quality tissue roll paper to compete with imported products. Nhat Hue expects 2001 to be a year for significant growth after securing a long-term loan last year from a local commercial bank.
The US$250,000 loan covers 42% of Nhat Hue's cost of building a new factory in HCM's Tan Tao industrial zone. The company's factory will create 70 new jobs and annual hard currency savings of US$2.2 million.
Despite positive signs such as increased domestic lending, SME growth and diversification, political issues can create speed humps in Vietnam's economic reform efforts. Tom Siebert, president of the 650 member US Chamber of Commerce in Vietnam criticised delays in ratifying the US-Vietnam trade pact. US Trade Representative Robert Zoellick wants to link the trade pact to other bilateral trade agreements for submission as an omnibus package to the US Congress. Siebert worries that delays in passing the bilateral trade agreement will lead Vietnam to cancel Normal Trade Relations (NTR) for the US, affecting both countries' businesses in textiles, garments, electronics and films. Siebert says he will continue to push for quick and effective implementation of the trade pact.
Politics aside, even though domestic policy changes are occurring rapidly within the private sector, analysts warn that results will not be immediate. Andrew Speer, World Bank country director says, "The (Vietnamese) government has recently completed plans to address four problems; the banking system, state enterprises, the trade system and private sector development." Speer says Vietnam's plans to address these difficult structural problems will take some years to implement. "Of course we would argue for more rapid change than the gradual path of reform adopted here. However, we acknowledge that in some areas a more gradual approach has merit." The World Bank expects to increase support for investment, infrastructure, environment protection and poverty reduction.
Over the next two months, US$250 million will be given to Vietnam, Speer says. "We currently envision two more credits in 2003 and 2004. The organisation has a very positive view of Vietnam's competitiveness though. The sooner reforms are carried out, the better it will be for job creation and economic progress in Vietnam."