Asian Development Bank economist Dominic Mellor

Asian Development Bank economist Dominic Mellor writes on how Vietnam needs a more dynamic and innovative private sector fuelled by home-grown entrepreneurship.

Vietnam remains one of the world’s most dynamic market economies. The country’s GDP has grown at an impressive 7 per cent over each of the last 15 years. Yet disruptive technologies are ­exposing long-term vulnerabilities in agriculture, manufacturing, supply chains, and other verticals.

Responding to the Fourth Industrial Revolution will require Vietnam to recommit to a dynamic private sector-led economy fuelled by innovation, entrepreneurship, and domestic companies that can adapt quickly.

Foreign direct investment in manufacturing can continue to be a valuable source of jobs and investment in the short term. In the long term, however, home-grown small- and medium-sized enterprises (SMEs) must feed the economy’s hunger for innovation and productivity. Fortunately, the Vietnamese public has an entrepreneurial temperament. If given sufficient incentives to innovate, they will be up for the challenge.

The government is doing its best to provide those incentives as well as a policy framework for private sector growth. Resolution 35 set an aggressive goal for new business startups. The SME support law implemented last year liberalises taxes for small, medium, and micro-enterprises. Municipalities, including Ho Chi Minh City and Danang, have frameworks and five-year action plans to support startups and innovation. Thanks to these changes, Vietnam’s standing in the World Bank’s Ease of Doing Business Index has climbed from 99th in the world in 2013 to 69th last year.

Informing continued reforms

Vietnam’s well-intentioned entrepreneurship policy reforms must continue to evolve. For example, the government needs to do more to simplify licensing and permits, and to reduce the regulatory burdens on Vietnamese SMEs. In the face of heavy paperwork and compliance costs, many businesses would rather stay small and informal than grow big enough to pop up on the government’s radar. Informal businesses therefore do not operate efficiently, struggle to attract new talent and innovate, and cannot participate in international value chains.

While the government has made significant strides in reducing licensing and permitting requirements for business, much work remains to be done.

Under current regulations, SMEs must still navigate more than 6,000 mini-permits. To help the government prioritise reforms, the Asian Development Bank (ADB) is supporting the Central Institute for Economic Management to develop a new tool. This tool will measure the compliance cost of enterprises for every licence, permit, and regulation. With this data, the government will be able to target and prioritise reforms more effectively.

Reforms will yield the best results when they receive input and feedback directly from SMEs themselves. Historically, though, SMEs have been struggling to be heard in the public-private dialogue.

Through the Australian-funded Mekong Business Initiative (MBI), the ADB has worked hard to involve SMEs in policy dialogue. In 2016, we helped launch the Vietnam Private Sector Forum in partnership with the Vietnam Young Entrepreneurs’ Association.

We have also supported dialogue between the government and women’s business associations, and have involved entrepreneurs in frameworks and action plans to support entrepreneurship at the municipal level.

We hope that based on private sector feedback, the government will continue to reform and modernise support for SMEs.

Innovations in finance

Small- and medium- sized enterprises need to embrace change to thrive in a wholly transformed world

Policy is no cure-all. SMEs also need better access to private sources of financing.

Unlike lenders in highly developed economies, banks in Vietnam typically do not extend credit without collateral. Nor do they offer cash flows or invoice financing.

Thus, Vietnamese SMEs must turn to non-bank sources for funds to expand or cover short-term cash flow requirements. The alternative financing instruments available to them have historically been limited: mainly loans from friends, family, and community-based networks.

Here too we are beginning to see green shoots of change. Vietnam-based fintech startup Kiu Global has developed a credit scoring tool that analyses a given SME’s finances against a variety of risk factors. Banks can then use this information in order to make risk-appropriate decisions on collateral-free SME loans. The ADB has been working with ABBank to de-risk onward lending to SMEs based on Kiu Global’s credit scoring technology.

In April, the ADB and the MBI supported the launch of the new Vietnam Angel Network. The angel investor group, which has built network connections with similar groups throughout the ASEAN, will grow Vietnam’s capacity to offer early-stage investment and mentorship to startups and SMEs. Meanwhile, venture capital investments grew sharply over the last 18 months. These investments in Vietnamese startups tripled last year from $291 million in 2017 to $889 million last year, according to the Topica Founders Institute. Accelerating SMEs access to finance will continue to be critical in the years ahead.

The recent worldwide explosion of fintech promises to fill the remaining gaps in enterprise financing. But before these solutions can be adopted in Vietnam, the government must warm to emerging technologies and offer sandboxes for testing, verifying, and regulation.

Since 2016, the ADB has been facilitating workshops with officials from the State Bank of Vietnam, the Ministry of Finance, and other financial regulators across the Greater Mekong Subregion. Step by step, both regulators and commercial banks are warming to fintech’s potential. And last year, the MBI partnered with the state bank on a fintech challenge that for the first time invited international fintechs to test solutions for the Vietnamese market in partnership with commercial banks.

Sourcing innovation from abroad

Much has been written in recent years about Vietnamese startups and the imperative to drive home-grown innovation.

But home-grown innovation is not likely to be enough. The Global Innovation Index ranks the innovative capacity of domestic companies in Vietnam only at 101st, with private companies investing only 3 per cent of their budgets into research and development (R&D). While growing Vietnam’s capacity to produce innovative, high-quality SMEs, we must also consider how to make its larger enterprises more competitive.

It is a growing global trend for large corporations to align with innovative startups to fuel their need to innovate. Startups tend to be highly specialised, focussing on specific problems in their industry verticals. By their very nature, they are innovative and willing to take R&D risks that larger enterprises cannot. But unless a large corporation is located in a very large innovation source market such as Europe, North America, or China, it is unlikely to find the exact startup technology to meet its needs close to home.

There is an emerging global infrastructure, driven by consulting firms and Silicon Valley stalwarts such as Plug and Play, to help companies scout globally for startups, pilot solutions with them, and facilitate commercial agreements. Sometimes commercial agreements simply take the form of vendor-customer relationships. At other times, they involve some form of investment or outright acquisition.

This infrastructure is at its very early stage of development in Asia, and it faces additional changes in emerging markets such as Vietnam. Technology startups tend to expand first into larger markets where there are more attractive demand-side economies of scale.

The ADB is preparing a new ADB Ventures facility to help address this challenge and assist corporations in Vietnam and other emerging markets in acquiring innovative technologies more quickly. The facility will work with industry verticals to aggregate their demand for certain solutions. Then it will help scout for early-stage technology innovators that can provide those solutions. Finally, ADB Ventures will facilitate matchmaking between corporations and solutions-providers, supporting the solutions to pilot and scale in Asia.

The Fourth Industrial ­Revolution is upon us. The ­private sector must build its ­innovative capacity in order to accelerate Vietnam’s long-term economic development. Government policy, forged in ­dialogue with the private sector, can facilitate the process: ­easing regulatory and ­compliance burdens, providing more comprehensive support for developing businesses, opening access to new sources of finance, and supporting ­entrepreneurship. VIR