Introduction

Small and medium enterprises (SMEs) have been at the core of Vietnam’s strategy for inclusive growth and economic transformation. Vietnam has experienced unprecedented growth and poverty reduction, turning the country into a middle-income economy relatively quickly. Most growth came from structural change with labour force movement to the manufacturing sector. This change has largely happened without worrying trends as regards income inequality, especially within urban areas. SMEs have been key for this transition following the Doi Moi reform process. Vietnam adopted a dual-track approach allowing private firms to expand alongside the state sector as long as they fulfilled their quotas at state-given prices. Also important for the development of a thriving SME sector has been reform design and willingness to experiment. These initiatives included state-owned enterprise (SOE) reform, foreign direct investment, industrial zone policies, and business-related administrative initiatives, with significant state influence remaining a core feature of the development strategy.

Why Do Household Businesses Stay Informal?

Using unbalanced panel data from the small and medium enterprise surveys in 2005, 2007, 2009, 2011, 2013, and 2015, this chapter investigates factors associated with informality in Vietnam. We assume that household businesses, especially the top tier firms, become formal either because they perceive benefits of formalization such as an increase in the household performance, or because they want to escape bribes and harassment. Using the random effects model with controlling for the pre-formalization trends, our results show that productive household businesses stay informal because net costs from tax payment may surpass net benefits from formalization. Moreover, government controls do not promote formalization, especially among the ‘upper’ tiers of informal households. Our findings raise suspicions of collusion corruption between informal households in top tiers and officials. Future steps could be qualitative and quantitative studies to investigate collusion corruption as a determinant of informality in developing countries.

Certification and Business Risk

This chapter investigates the scope for international private standards to play a role in reducing business risk among the small and medium enterprises in Vietnam. Business risk is measured as variability in revenue, variability in customer base, practice of making informal payments, and temporary firm closure. The results show lower levels of business risk among certified firms, especially for firms in the middle deciles of the risk distribution. This finding is robust to the use of different business risk measures. Certification also correlates negatively with risk for technologically advanced firms, as well as firms located in rural areas and northern provinces of Vietnam. The results suggest that firms could find protection from business downsides by investing in internationally recognized quality management tools.

Slack Resources and Innovation in Vietnamese SMEs

Slack resources are usually identified as an endogenous motivation for firms to innovate, but it is crucial to assess this relationship, especially in different institutional contexts. Therefore, the chapter investigates the relationship by exploring a longitudinal dataset of 15,589 observations from about 2,500 surveyed manufacturing small and medium enterprises (SMEs) in Vietnam. The analysis reveals that slack resources promote innovation in different ways. While the financial slack harms the efforts of innovating, the presence of human resource slack encourages firms to engage more in innovation activities resulting in the introduction of new products or business processes. The authors further found that for firms located in a more favourable business environment the impact of human resource slack on innovation is less pronounced whereas the negative impact of financial slack is lessened. The above results enrich the literature on the relationship between slack and innovation within an institutional context in emerging economies.

Conclusion

Structural change has been a significant contributor to Vietnam’s impressive growth experience over the past three decades. Labour has moved rapidly from agriculture into manufacturing, with important improvements in livelihoods as the result. The private sector has played a key role in this success story, and especially small and medium enterprises (SMEs) have shown the necessary dynamism to adapt to an economic policy and institutional reform design, characterized as decentralized experimentalism. This dynamism of private SMEs has played a crucial role for the pace of diffusion of experimental successes—upstream and downstream along the value chain. Whether this success will carry into the future when innovation of new technologies and productivity growth will have to become core drivers of Vietnam’s growth prospects stands out as a major challenge for future success.

How Important Are Management Practices for the Productivity of Small and Medium Enterprises?

Is the lack of ‘managerial capital’, alongside human and financial capital, a constraint on the growth of firms in developing countries? The evidence on this is still mixed, especially among small and medium enterprises. This chapter uses a panel of Vietnamese enterprises to investigate this question. We build a multidimensional measure of managerial capital, combining both practices and attitudes, and link it with consistent estimates of firm-level productivity and mark-up. We show that there is a positive and significant association between managerial capital and productivity: changes in management practices allow firms to be more efficient. Furthermore, we compare this association by firm size, and show that managerial capital is arguably as important for micro and small firms as it is for medium ones. Finally, it appears that the indicators related to ‘entrepreneurial attitudes’ play a more important role than elementary business skills.

Capital Allocation, Credit Access, and Firm Growth

In this chapter, the authors explore the relationship between firm growth, access to finance, and the efficiency of capital allocation in Vietnam over 2005–15. They test whether firms with higher marginal returns to capital are more or less likely to get access to financing. This is a key test of how efficiently the financial system is functioning. The authors also test whether credit supply constraints are hindering capital allocation by limiting the investment and employment activities of firms with the highest marginal return on capital. They find that high return investors, with the greatest marginal return on capital, have a lower likelihood of having formal finance (loans outstanding with formal credit institutions). The study finds evidence that rejected credit applications are limiting investment activity but not employment, particularly for firms with higher investment efficiency. This suggests a link between firm growth and a suboptimal allocation of credit.

Does Union Membership Pay Off? Evidence from Vietnamese SMEs

In the absence of adequate institutional mechanisms, trade unions can potentially promote some measure of equity and social justice for workers including for instance higher wages and other worker benefits. Yet limited data availability means little is known about the effect local firm-based trade unions may have on individual earnings in developing and transition economies. Using matched employer–employee data from the 2013 and 2015 SME surveys, this chapter examines the union wage premium among workers in Vietnamese small and medium-sized enterprises. Controlling for both firm and worker characteristics, including time-varying unobserved heterogeneity, the results show that unionized workers’ wages are 9–22 per cent higher than those of non-union workers, with the exact estimate depending on the econometric approach chosen.

The Vietnam SME Data, 2005–15

Since the initiation of the Doi Moi reforms in 1986, it is widely believed that Vietnam’s small and medium enterprises (SMEs) have critical characteristics that contribute to the country’s impressive economic and social development over recent decades. Specifically, SMEs represent a source of economic growth, savings, job creation, and increased competition. Despite their vast potential, general knowledge on their characteristics as well as the opportunities and constraints they were facing was lacking, thus making it difficult for evidence-based government policy recommendations to be formulated. This chapter sheds light on the Vietnam SME database covering surveys over 2005–15, and represents the basis for the analytical work in books chapters. The authors outline the purpose behind the data collection—including sample design, firm and owner characteristics, attrition—comparing the data with the characteristics of Vietnam’s overall enterprise population.

Pecuniary Returns to Working Conditions

Using matched worker-firm data from three waves of the Vietnam Small and Medium Enterprises data, we examine whether workers are compensated with higher wages for working in vulnerable jobs and unfavourable working conditions. Wage equations indicate that there are no clear compensating mechanisms for working in poor conditions, for having an informal contract, and for having few financial benefits. Quantile regressions show that workers in the upper tail of the wage distribution are more likely to be penalized for working in adverse working conditions. Employees recruited through official hiring channels with an informal contract earn less than employees hired through social networks. Upon estimating mean decompositions of wage gaps based on working conditions, we find that the gap is almost entirely explained by the conjunction of worker, job, and firm characteristics in 2015, in contrast to the previous survey year of 2013.