Enterprise Develop Agency/Ministry of Planning and Investment Ministry of Planning and Investment (MPI) Enterprise Development Agency (ASMED) Policies to Strengthen Viet Nam’s SME capacity in the Global Economic Crisis Pham Thi Hong Trang (MS) International Cooperation Official Seoul, 8/2009

Content Overview on Viet Nam’s economy SME in Viet Nam Major Problems Government Policies

Overview on Viet Nam’s economy SME in Viet Nam Major Problems Government Policies

Viet Nam Viet Nam is located in the Eastern part of the Indochina peninsula, bordering China to the North, Laos and Cambodia to the West with a long land border of 4,550 km, and facing the Eastern Sea (South China Sea) and the Pacific to the East and the South Climate: Vietnam lies in the tropics and monsoon Topography: Three quarters of Vietnam's territory consist of mountains and hills Administrative Units: Vietnam is divided into 63 provinces and cities. Population: about 86,5 million people (Density 260 ppl per square kilometer. Language: Vietnamese. Capital: HA NOI. Currency: DONG

Overview on Vietnam economy Compare to the first quarter 2008 Enterprise Develop Agency/Ministry of Planning and Investment Overview on Vietnam economy Compare to the first quarter 2008 Industrial output increase 2.4%. Agricultural output increase 0.9%; Total sale in service sector increase 21.9%; GDP in 1st quarter 2009 is 3.1% (compared to 7.4% in 2008)

Overview on Vietnam economy Compare to the first quarter 2008 Export turnover is US $4.7 billion, decrease by 15% compare to the first quarter 2008. Import turnover is $4.3b, decrease by 45% compare to 2008; Total committed ODA capital is US$26.23m; Total newly FDI registered capital is $1.2m, equivalent 30% the same period in the previous year;

Overview on Vietnam’s economy Main figures The first 6 months in 2008 The first 6 months in 2009 1 GDP (%) 6.5 3.9 Agriculture, Forestry, Fishery Sector (%) 3.04 1.25 Industry and Construction Sector (%) 7.00 3.48 Service Sector (%) 7.60 5.5 2 Industrial output (%) 16.5 4.8 Agricultural output (%) 4.5 2.5 3 Export turnover ( billion US$) 29.7 27.6 4 Import turnover ( billion US$) 44.5

Overview on Vietnam economy Main figures The first 6 months in 2008 The first 6 months in 2009 5 Total committed ODA capital (million US$) 1783.00 1539.00 6 Total newly FDI registered capital (billion US$) 16.2 4.7 7 Number of newly registered enterprise 35,047 41,100 Total newly registered capital (billion VND) 291,743 170,000

Overview on Viet Nam’s economy SME in Viet Nam Major Problems Government Policies

Enterprise Develop Agency/Ministry of Planning and Investment New SME Definition Decree 56/2009/ND-CP on Supporting for the development of small and medium-sized enterprise Sector Super small enterprise Small enterprise Medium-sized enterprise   The number of employees Total capital The number of I. Agriculture, forestry and aquaculture <10 < 20 Billion VND < 200 < 100 billion <300 II. Industry and Construction III. Trade and Service < 50 < 50 billion <100 SME are categorized into three levels, namely super small enterprises, small enterprises, medium-sized enterprises, operating in three main sectors according to the first level branch in the Vietnamese system of economic branches. Such categorization is based on either of two criteria, namely total capital or annual number of employees (total capital is the main criteria) specifically as follows:

Overview on SME in Viet Nam Enterprise Develop Agency/Ministry of Planning and Investment Overview on SME in Viet Nam Total number of registered SME: around 41,100 SME present around 97% of total enterprises SME create around 3 million jobs, account for 40% GDP and 29% export value with growth rate of 18%/year Registration is steadily rising since simplification of procedures and introduction of new laws

Number of Enterprise by Legal Form Enterprise Develop Agency/Ministry of Planning and Investment Number of Enterprise by Legal Form 2002 2003 2004 2005 2006 SOEs 5,363 4,845 4,597 4,086 3,720 Non-State 55,237 64,526 84,003 105,167 123,392 FIEs 2,308 2,641 3,156 3,697 4,220 Private sector account for the majority of enterprise. I mention it because more than 20 years ago the State enterprise dominated the country’s economy.

Overview on Viet Nam’s economy SME in Viet Nam Major Problems Government Policies

Major problems with SME Lack of recognition of the great impact of globalization, the international and regional integration process Have a small scale, have limited capital, a small number of employees. Lack of information on input markets. Limitation in market access; the quantity of products manufactured by SME is small in scale, mainly for domestic use, and even for very small local areas.

Major problems with SME Weaknesses in science and technology capacity and unskilled workers Constraints in relation to linkages between business and production units Unprofessional Internal management of SME Lack of transparency in financial management

Technology Capability of SME

Enterprise Develop Agency/Ministry of Planning and Investment SME technology capability Most SME use backward technology, 3-4 generation compared to average level of the world Most SME use technology in 1980s Limited capability in technology research and innovation Only 0.1% annual turnover is used for technology innovation (GTZ survey on 1200 enterprises Most of Vietnamese enterprise are using backward technology compared to the average level of the world from 3 to 4 technological generations. Many SME are still using old equipments which were dismissed by State enterprises. In the fierce competition, SME find that problem extremely difficult. 80% SME have no strategy to invest in science and technology

Enterprise Develop Agency/Ministry of Planning and Investment R&D activities Less than 5% SME implement R&D activities. There is no enterprise in insurance and ICT sector implement R&D Technology innovation happen most often in garment and automobile sector (VCCI survey in 2006 in 8 sectors: Garment and textile, automotive, insurance, banking, ICT, sea transportation, fishery, electronic) There is less than 5% SME implement R&D activities, R&D mainly happen in large companies; There is no enterprise in insurance and ICT sector implement R&D Technology innovation happen most often in garment and automobile sector

Capability in technology research and innovation Enterprise Develop Agency/Ministry of Planning and Investment Capability in technology research and innovation 1% total cost used for R&D and 0.2% for technology innovation in all sectors Almost enterprise has no strategy and budget for this activities Less than 1% total cost used for R&D and 0.2% for technology innovation in all sectors Almost enterprise has no strategy and budget for this activities

Innovation rates (SME survey 2007 by CIEM, DOE, ILISSA) Enterprise Develop Agency/Ministry of Planning and Investment Innovation rates (SME survey 2007 by CIEM, DOE, ILISSA) The Table above shows a sharp decline in innovation rates between 2005 and 2007. Around 41% of enterprise in 2005 reported an introduction of a new product during the past 3 years. However, only 5% of firms in 2007 introduce new product.

Technology characteristics Enterprise Develop Agency/Ministry of Planning and Investment Technology characteristics 2005 2007 Level of technology Only hand tools only 10.3 7.7 Manually operated machinery only 3.5 5.0 Power driven machinery only 24.6 27.5 All of the above 61.6 59.8 Age of technology Under 3 years old 22.9 22.0 Between 3 and 5 years old 34.9 36.5 Between 6 to 10 years old 30.4 Between 11-20 years old 9.5 12.5 More than 20 years old 2.3 1.5 New or second hand New 61.1 71.1 Used 34.1 24.4 Self-constructed 4.8 3.9 This table shows some characteristics of the technology employed by Vietnamese manufacturing enterprise. In 2005 around 10% of enterprises only used hand tools in their production. This decreased 7.7% in 2007. The machinery and equipment used is fairly new. Over 85% is no more than 10 years old in the survey. Finally, more than 61% of all purchased technology was procured new in 2005, a number that increased to 72%. Recently theory suggests that enterprises which buy used capital goods are often the ones which are most severely credit constrained.

Demand for techno innovation by SME New investment Enterprise Develop Agency/Ministry of Planning and Investment Demand for techno innovation by SME New investment % enterprise has made investment 2005-2007 % financed by own capital/retained earnings 2005 2007 All 62.2 42.2 66.9 74.0 Micro 55.5 34.2 67.3 77.9 Small 72.4 56.3 69.3 71.8 Medium 76.7 69.4 57.1 61.2 Urban 56.5 38.6 72.1 70.1 Rural 66.6 45.2 64.0 76.5 This table show that around 1/5 of firms make new investment each year. The probability of investing increases with enterprise size and urban enterprises invest less frequently than rural enterprises. It is reported that retained earnings were a major source of financing. Some 74% of new investments are financed using internal funds. This figure decrease with enterprise size, although medium sized enterprises still use 61% of their own capital in investment financing.

Demand for techno innovation by SME Investment purpose Enterprise Develop Agency/Ministry of Planning and Investment Demand for techno innovation by SME Investment purpose Figure show that 54% of investment are made to add capacity to production facilities. The second most important category is replacement of old equipment. Investments related to improvements in safety and environmental requirements remain a minor issue among Vietnamese SME.

Reasons for the inability of SME to access to technology

Major Problems Export market narrowed down and Export price decreased Factory closing Unemployment increase Example: Fishery export turnover by 10.7% Footwear sector 8.7% Tex and Garment 1.3% Domestic market suffered from input cost. Q1 of 2009: 65,000 laborers lost jobs, 39,000 laborers partially unemployed, 3,000 laborers abroad returned home early Difficulty in accessing to supportive financial resources. Security Market go down and interest rate go up Difficulty in mobilizing capital. Real Estate Market is freezing

Overview on Viet Nam’s economy SME in Viet Nam Major Problems Government Policies

Enterprise Develop Agency/Ministry of Planning and Investment 1. Urgent measures to be taken - Government Resolution No. 30/2009/NQ-CP: financial incentives SME can get the following benefits: 30% CIT payable deduction for 2009. The remaining 70% CIT payable: 9 months extension for the deadline of submission of the tax payables for selected SME. For exporting enterprises: a refund of 90% input VAT. Obtaining the remaining 10% of VAT input refund once the payment documents are justified. Comprising many urgent measures, in which the banking sector plays a very important role Under this resolution, SME can get the following benefits: (i)            30% CIT payable deduction for the 4th quarter 2008 and the whole year of 2009 regarding the income from the business activities. (ii)           The remaining 70% CIT payable: An extension up to 9 months for the deadline of submission of the tax payables of 2009 for SME (the remaining 70% CIT payable) and the enterprises operating in producing and/or processing goods from agriculture, forestry, fisheries, textile and electronic parts. (iii)          For exporting enterprises, they shall benefit a temporary refund of 90% input VAT for the exported goods without justifiable payment documents via bank on a case-by-case basis. They will continue obtaining the remaining 10% of VAT input refund once the payment documents are justified.

Enterprise Develop Agency/Ministry of Planning and Investment 2. Government's stimulus packages The first stimulus package: short-term lending (Prime Minister’s Decision 131): 4% interest rate subsidy The second stimulus package: long-term lending (PM’s Decision 443): 4% interest rate subsidy For agricultural and rural development (PM’s Decision 497): interest-free lending for agricultural machineries, 4% interest rate for agricultural inputs and materials The first stimulus package have been implementing from Jan 23, 2009 to Dec 31, 2009. The second VND17 trillion stimulus package have been implementing from April 1, 2009 to Dec 31, 2011, with the aim of providing businesses with long-term capital sources. During the first six months of 2009, SBV carried out the interest rate subsidy program in a prompt and comprehensive manner in line with Decision No. 131/QD-TTg of January 23, 2009, Decision No. 333/QD-TTg of March 10, 2009, Decision No. 443/QD-TTg of April 4, 2009 and Decision No. 497/QD-TTg of April 17, 2009 of the Prime Minister on providing banking loans to individual and corporate borrowers. 4% supporting interest rates for borrowers (Decision No 131/QD-TTg and No 333/QD-TTg) An interest rate incentive of 4% for medium and long-term loans (Decision 443/QĐ-TTg) Decision No. 497/QD-TTg: interest support loans for procurement of machinery, equipment and material for agricultural production and construction material for rural housing development: provide interest-free loans for farmers and entities to buy fixed assets for production, such as agricultural machinery and vehicles. The loan period is 24 months. The program will also offer farmers a 4% interest rate subsidy on loans for a one-year term to buy fertiliser, pesticides and construction materials. The maximum budget for the program will be VND12 trillion ($700 million), which will come from the government stimulus package

Enterprise Develop Agency/Ministry of Planning and Investment 3. Government eases conditions for credit guarantee Businesses from all sectors that have charter capital of a maximum of VND20 billion (US$1.13 million), or employ less than 500 workers, are eligible for credit guarantees. Credit guarantee does not apply to consultancy, real estate, securities, services, or for loans to pay debt, but does apply to low-income and student housing projects or to build cemeteries Regulations on credit guarantee for businesses have been loosened to create better conditions for businesses to access bank loans, according to a new decision issued by the Prime Minister.No 14/2009/QD-TTg Businesses from all sectors that have charter capital of a maximum of VND20 billion (US$1.13 million), or employ less than 500 workers, are eligible for credit guarantees. Under the regulations, credit guarantee does not apply to consultancy, real estate, securities, services, or for loans to pay debt, but does apply to low-income and student housing projects or to build cemeteries

Short term measures to help SME over crisis Credit guarantee program for enterprise: 575 billion VND 4% interest rate subsidy program: 85 banks participate; 178.722 billion VND is disbursed; Subsidy interest rate for export lending is 2.9%;

Short term measures Tax policies To issue policies on tax delay, reduction and exemption (PIT, CIT and VAT); CIT: To reduce by 30% on CIT for SME. Reduction of 9,900 billion VND in state budget, 6,800 billion dong delay to 2010; VAT: 50% reduction in VAT for some goods (1,050 billion dong), reduction in state revenue of 1000 billion dong; delay up to 180 days for import goods; PIT: Delay in tax revenue is 1,600 billion (1st quarter 2009)

Long term strategy

New Government’s Decree 56/2009/ND-CP on supporting for SME development New SME Definition SME Development Plan Support Policies

GOVERNMENT DECREE On Supporting for the development of SME Scope of regulation: Prescribes the support policies and state management on supporting SME development. Subject: Apply to SME, SME Support Organizations and State Management Bodies on SME development.

New SME Definition Decree 56/2009/ND-CP on Supporting for the development of small and medium-sized enterprise Sector Super small enterprise Small enterprise Medium-sized enterprise   The number of employees Total capital The number of I. Agriculture, forestry and aquaculture <10 < 20 Billion VND < 200 < 100 billion <300 II. Industry and Construction III. Trade and Service < 50 < 50 billion <100

Planning for SME Development Ministries, Provinces, Organizations SME development plan 5-year Plan Annual Plan Overall 5 year Socio-Economic Development Plan

Enterprise Develop Agency/Ministry of Planning and Investment The State management body in SME development in localities Relevant Departments, Organizations Development Orientation Policies and legal documents formulation Supportive programs consolidations Information Supportive Programs Coordination, Guide and Examination MPI/ASMED Annual Report on SME development People’s Committees DPI SME Development Plan The People’s committees of the provinces and centrally-run cities shall support the development of SME in their respective localities with the following major tasks: Orientating the SME development work, formulating or taking part in the formulation of legal documents guiding the implementation of the Government’s on the promotion of SME in localities. Summing up and formulating the SME support programs, coordinating, guiding, and inspecting the implementation of support programs after the approval thereof Organizing dialogues between local authorities and SME to exchange information, solve obstacles and difficulties of SME; commend and reward craftsmen, businessmen and SME who have excellent achievements in business, creative in making product designs and job skills transfer. Making and sending the sum-up reports annually to the Ministry of Planning and Investment on the development of SME as well as problems to be settled. Collaborating with the relevant ministries, agencies, and organizations in the development of SME in their respective localities according to current regulations. 2. The People’s Committees of the provinces and centrally-run cities shall assign the Department of Planning and Investment to be to focal point, which shall collaborate with other Departments and agencies in formulating the development programs and plans for SME in the sectors thereof to submit to the People’s Committees for approval, promulgation and direction for organization of implementation. Those provinces with the total number of SME over 3000 (excluding co-operative and household business) can establish a unit under the Department of Planning and Investment to carry out the functions and tasks on developing local SME. SME

GOVERNMENT DECREE On supporting for the development of SME 30/6/2009, Prime Minister issued Decree 56/2009/ND-CP and will be implemented on 20th August, 2009” New definition of SME Supportive policies are in more detail Enhance the role of Enterprise Development Agency (ASMED): ASMED shall assist the Minister of Planning and Investment in performing the function of state management over SME development. The State management body in SME development in localities: Department of Planning and Investment (DPI) to be the focal point in formulating the development programs and plans for SME. SME development support plan: must be incorporated into the annual plan and 5-year plan of Ministries, agencies, localities, national economy plan with budget and solutions for implementation

Domestic SME policy trends and initiatives Facilitating SME’s access to finance SME accounting regime Human resource training support for SME Technical and technological assistance Promoting market expansion

Domestic SME policy trends and initiatives Supporting local industry development Supporting SME’s access to information Building up SME promotion institutional infrastructure Implementation of the SME Development Plan 2006 -2010 ODA attraction: ODA commit capital for 2009 – 2010 is expected US$8-10 billion

Thank you very much Contact: Enterprise Development Agency Ministry of Planning and Investment No 6B, Hoang Dieu Street, Hanoi, Viet Nam. Tel: +84 80 4 3231 Fax: +84 43 734 2189