Cronyism a hindrance in small-medium enterprises

Saigon Investment
(Saigon Investment) - Private conglomerates in Vietnam have grown rapidly over the last decade, especially after a boom in the local real estate market following the country’s move towards global integration. 

Illustrative photo.

Illustrative photo.

In essence, private companies have higher productivity rate than state-owned companies, yet in Vietnam, private companies have the lowest productivity rate than even state-owned or Foreign Direct Investment (FDI) companies.

Low productivity

Most large-scale private companies in Vietnam have only recently emerged on the top, mainly by focusing on real estate activities, and accumulating wealth from land ownership by exploiting close relationships with government officials and related agencies who reserve the right to distribute pieces of public land managed by the government. During the last few years, some large-scale companies diversified some of their business activities to lucrative areas such as manufacturing, energy, banking, trade, transport, healthcare, education and even some hi-tech fields.

The Vietnam White Book on Information and Communication Technology 2019, released in 2020, shows that the return on equity (ROE) ratio of private businesses in 2016 and 2017 were 4.4% and 6%, respectively. Their return on assets (ROA) ratios were 1.4% and 1.8%, respectively; and capital turnover or return on invested capital reached just 0.71 and 0.73, respectively. Although the average profit margin increased, the percentage of companies operating at a loss was between 40% and 50% during the years from 2011 until 2017.

Risks from loans have also been a big problem for private businesses, with their debt-to-capital ratios reaching 2.3 times in 2016 and 2017. The quality and performance of companies in terms of added value and labor productivity have been low and falling far below other neighboring countries. The manufacturing value added (MVA), and MVA per capita in Vietnam have been low in production and processing industries, and even in the export sector. Vietnam's MVA in 2016 reached USD 29.28 bn and per capita income was USD 310, which were much lower than China and ASEAN-6 countries.

The figures released by the General Statistics Office in 2018 indicate that workers in the private sector made VND 58 mn per person annually, compared with VND 248 mn earned by workers in FDI companies and VND 339 mn in state-owned enterprises (SOEs). This was primarily because private companies operate on a very small scale, and especially household businesses, which make up 90% of the private sector, participate mostly in simple activities like making traditional items, or providing commercial services for local consumers. They are small scale, lack resources and support, and are severely hampered by private businesses from increasing their productivity.

Vietnam's labor productivity is extremely low, compared with other countries in the region. Based on the buying power in 2011, Vietnam's labor productivity in 2017 was USD 10,232, just 7.2% of that in Singapore, 18.5% in Malaysia, 36.2% in Thailand, 43% in Indonesia and 55% in the Philippines. The difference in labor productivity between Vietnam and these countries is still increasing.

Unfair competition

The differences in several aspects between private companies and state-owned and FDI businesses have their roots in the business environment with unfair competition among economic sectors. Though the Constitution, laws and resolutions introduced by the Party Committees have repeatedly stressed fairness for all economic sectors, the problem of discrimination and unfairness between most private companies and state-owned and FDI businesses has been static for the last 30 years, and still commonplace and serious.

SOEs belong to the economic sector with a pivotal role, that bonds them tightly to the state, which reserves the ultimate power in designing and enforcing laws, polices and plans for socio-economic development, and in holding and distributing the most important resources of the country. Though controlled and managed directly by several state agencies, SOEs are generally protected from competition with domestic and international private companies and have different privileges, access to various resources, and trading rights in highly profitable areas and projects.

This is also a reason why a few SOEs have become a huge burden to the entire economy because they have made losses and been in debt for ages, causing ineffective use of resources, increasing costs and prices of products they provide, and continue to take opportunities and valuable resources away from other businesses.

Additionally, the problem of group interests and crony businesses have become common in recent years, resulting in unfair competition between crony businesses and those without any close relationships with government officials. According to a report on the Provincial Competitiveness Index (PCI) jointly made and released by Vietnam Chamber of Commerce and Industry (VCCI) and the US Agency for International Development (USAID) in 2018, upto 70% of companies believe that business resources like contracts and land have fallen into the hands of companies that have close ties with government officials or agencies. Access to information is also unfair, with 69% of companies saying that only special bonds can ensure access to reliable sources of information or documents from competent provincial agencies.

Under such unfair competition in a business environment, private enterprises face a different kind of pressure which severely hampers their growth. Their access to resources, trading rights and business opportunities are all seriously restricted or even taken away unfairly by preferred companies. They have to pay a higher price for different resources and products because the interest groups control the market, especially with regards to land, premises for production, and business activities and transport, which then raises market prices and reduces their profits. Their profit margins are too small and unstable, making it more and more difficult for private companies to make further investments and hindering them from thinking big or making long-term plans for their sustainable development.

Such an oppressive environment has not encouraged cooperations to grow, but rather, it has caused separation and suspicion among different business sectors, and distrust among favored companies and ones discriminated against. An unfair business environment is also a favorable ground for corruption to grow, causing irreparable losses of resources and opportunities for any hope of the sustainable development of the country.

Phạm Chi Lan, Financial Expert

Các tin, bài viết khác

Đọc nhiều nhất

Illustrative photo.

Domestic tour operators’ hopeful of revival by summer

(Saigon Investment) - Vietnam has not yet opened its doors for international visitors, however, domestic tourism could possibly salvage the flagging tourism industry with attractive packages and discount fares during the coming summer months.