Increased access to funding and new legislations are among the measures being rolled out by the Vietnamese government to support the country’s small- and medium-sized enterprises (SMEs).

Late last month, the Ministry of Planning and Investment (MPI) announced four preferential loan programmes to be made available to SMEs this year under its SME Development Fund, formed in 2013.

Late last month, the Ministry of Planning and Investment (MPI) announced four preferential loan programmes to be made available to SMEs this year under its SME Development Fund, formed in 2013.

Of the VND560 billion (US$24.7 million) set aside for the fund, VND100 billion ($44.1 million) will be extended to companies with a focus on innovation; VND180 billion ($79.4 million) to businesses in the agriculture, forestry and aquaculture sectors; VND180 billion ($79.4 million) to processing and manufacturing firms; and VND100 billion ($44.1 million) to water supply, management and treatment companies.

The SMEs will enjoy a 24-month grace period from the time of the original loan approval, though maximum disbursements will vary depending on the programme.

The fund aims to fill part of the financing gap left by conventional banks, which have not traditionally extended loans to smaller outfits because of perceived risks, despite these firms contributing roughly 40 per cent to Viet Nam’s GDP, according to the MPI.

Currently, SMEs make up 97 per cent of all companies operating in the Vietnamese economy, and provide employment to more than 50 per cent of the national workforce.

Supply chain links

While many SMEs will welcome the availability of new lines of credit, the MPI’s development fund is limited.

Another option for smaller firms is to seek private investment from domestic and foreign companies.

Such a route allows enterprises to secure funding by demonstrating viable cash flow and established business connections, rather than having to document hard asset backings, as required by banks.

However, the difficulty of achieving such support was brought to light by reports at a seminar hosted by the International Finance Corporation in HCM City last October, which said that only 21 per cent of Vietnamese SMEs are linked with global supply chains. This compares poorly with regional neighbours such as Thailand, where 30 per cent of SMEs have established connections, and Malaysia, at 46 per cent.

Virginia Foote, president and CEO of business advisory firm Bay Global Strategies, and board member of the American Chamber of Commerce in Viet Nam, echoed this sentiment. “It has been difficult for SMEs to grow business with firms that are 100 per cent foreign-owned, as well as those that operate in industrial parks or manufacturing zones, because smaller firms have struggled to break into the supply chain,” she told Oxford Business Group (OBG).

Seeking to overcome this difficulty and bolster connections with international markets, around 110 SMEs from Viet Nam took part in a conference in Singapore in mid-March, part of a broader effort to seek investment from Việt Nam’s third-largest foreign investor.

Speaking at the event, Nguyen Tien Minh, Viet Nam’s ambassador to Singapore, said that Vietnamese firms could better serve regional and global markets via business connections with Singapore, which already has more than $38 billion invested locally.

Thian Tai Chew, a representative of the Singapore Business Federation, told media at the conference that the ASEAN region was where Singaporean businesses most wanted to expand their investments, with Viet Nam ranking third among South-east Asian nations for targeted investment.

Legislating for growth

Many of the hardships faced by small businesses in the country could be overcome by a draft law, which was submitted by the MPI in November 2016.

Known as the Law on Supporting SMEs, the legislation aims to formalise regulations for smaller companies, as well as their operating environment and support mechanisms. Parliament is expected to vote on the final version of the law later this year.

Of the 45 articles contained in the draft, one aims to cut the corporate income tax rate for SMEs by three percentage points to 17 per cent between 2017 and 2020.

Some critics have pointed out that this is not a big enough reduction, given that many multinationals are currently subject to a much lower 10 per cent rate on earnings.

Nonetheless, Pham Dinh Thi, director of the Tax Policy Department under the Ministry of Finance, said the plan would “ensure that there are thousands of newly established enterprises every year.”

A proliferation of new small businesses could help offset lower tax earnings and is in line with the government’s aim to increase the number of SMEs operating in the country from 600,000 to one million by 2020. 

Oxford Business Group

* Rey Davis-Tuplano is Editorial Manager of Oxford Business Group, a global research and consultancy firm.