EntErprisE survEys 65103 Country notE sEriEs viEtnam Running a Business in Vietnam 2011 N ew data from Enterprise Surveys indicate that Vietnamese firms have several comparative advantages over firms in other similarly populated countries and countries in the same income group (table 1). Senior managers report spending only 5 percent of their time dealing with the requirements of government regulation—much lower than Vietnam’s peer countries. In addition, firms experience few power outages, fewer losses due to crime, and firms rank corruption as a relatively minor obstacle. However, one-fourth of Vietnamese firms ranked access to finance as the biggest business environment obstacle when presented with a list of 15 obstacles. Specifically, firms report high collateral requirements—218 percent relative to the loan amount. Among similarly populated countries, only firms in the Philippines report a higher percentage. The Vietnamese economy is well integrated in global trade. Relative to similar economies, a high proportion of firms in Vietnam are exporters, and Vietnamese firms use a comparatively high proportion of foreign inputs 13 as well. Compared to its peer countries, Vietnamese firms are younger, especially in the retail sector. Vietnamese firms are on average larger (figure 1), and also employ proportionally more women and notE no. have more female top managers compared to similarly populated countries in the same income group. The Enterprise Surveys use standard survey instruments 1,053 firms were surveyed from June 2009 to January 2010. to collect firm-level data on a country's business environ- The information collected refers to the characteristics of Country ment from business owners and top managers. The surveys the firm at the moment of the survey or to fiscal year 2008. cover a broad range of topics including access to finance, corruption, infrastructure, crime, competition, labor, ob- What is the average firm in Vietnam? stacles to growth and performance measures. The survey The average firm3 in Vietnam is larger, in terms of the is designed to be representative of a country’s private non- number of employees, than the typical firm in other lower- agricultural economy, and firms sampled are stratified by middle-income countries. On average, firms in Vietnam size, location,1 and sector (figure 2)2 to ensure that most employ 75 full-time employees (figure 1), though the major types of firms are covered. Only firms with five em- majority of firms in Vietnam have less than 20 workers on ployees or more are included in the sample. In Vietnam, their payrolls. Perhaps not surprisingly, Vietnamese firms Figure 1 The average firm in Vietnam is the largest among similar income-level countries World Bank Group Average number of permanent, full-time workers 80 70 60 Percent 50 40 Lower-Middle-Income Average 30 20 10 0 Tonga 2009 Yemen 2010 Senegal 2007 Nigeria 2007 Kosovo 2009 Micronesia 2009 Timor-Leste 2009 Indonesia 2009 Vanuatu 2009 Uzbekistan 2008 Samoa 2009 Nicaragua 2006 Swaziland 2006 Guatemala 2006 Pakistan 2007 Moldova 2009 Paraguay 2006 El Salvador 2006 Mongolia 2009 Georgia 2008 Ecuador 2006 Lesotho 2009 Ukraine 2008 Philippines 2009 Honduras 2006 Vietnam 2009 Source: Enterprise Surveys. Figure 2 Characteristics of the firms interviewed Size Location Sector Retail 5% Other Services Services 21% 13% Red River Large South East Medium Delta (100+ employees) 36% (20-99 employees) 32% Other sectors 37% 41% 5% Manufacturing Manufacturing Manufacturing South Central Manufacturing 74% 82% Small Coast 82% North Central 82% (5-19 employees) Mekong Coast 22% 11% River Delta 11% 11% Source: Enterprise Surveys. also employ more temporary workers, on average nearly for three years less than firms in the other services sector 36, compared with only 8 in other lower-middle-income and seven years less than the average manufacturing firm. economies. Moreover, the age of firms in Vietnam differs by the size Though the typical firm in Vietnam has been in operation of the firm. The typical small firm is younger than both for ten years (table 2), 40 percent of firms have been in medium and large firms—by four years and thirteen years, existence for five years or less. The average manufacturing respectively. firm in Vietnam has been in existence longer than firms The most common ownership structure is a limited in other sectors. On average, retail firms are the youngest partnership; just over two fifths of Vietnamese firms are held in Vietnam—the average retail firm has been in operation this way, followed by sole proprietorships (26 percent) and How does Vietnam 2009 compare with other countries in the same income or Table 1 population group? Lower-middle- Similarly populated income economies countries Ranking 1 assigned to the largest value (26 countries†) (13 countries ‡) Percent of firms formally registered when started operations in the country 17 9 Private domestic ownership (%)* 15 11 Private foreign ownership (%)* 13 3 Government/state ownership (%)* 1 1 Percent of firms with female participation in ownership 5 3 Bank finance for investment (%) 13 7 Percent of exporter firms 2 4 Domestic sales (percent of sales) 26 12 Percent of firms with internationally recognized quality certification 7 6 Percent of firms with annual financial statement reviewed by external auditor 14 7 Capacity utilization (%) 4 6 Percent of firms using their own Web site 3 7 Percent of firms using e-mail to communicate with clients/suppliers 5 6 Lower-middle- Similarly populated income economies countries Ranking 1 assigned to the smallest value (26 countries†) (13 countries ‡) Value of collateral needed for a loan (percent of the loan amount) 21 9 Number of power outages in a typical month 3 2 Senior management time spent in dealing with requirements of government regulation (%) 8 10 Average number of visits or required meetings with tax officials 7 4 Incidence of graft index** 15 10 Losses due to theft, robbery, vandalism, and arson against the firm (percent of sales) 1 4 Source: Enterprise Surveys. Note: This table presents a ranking out of different groups of economies for each of the listed indicators. The lower-middle- income group includes 26 countries and the similarly populated group consists of 13 countries. The numbers are ranks as opposed to the actual value of the indicator. 2 Table 2 The average firm in Vietnam 2009 Lower-middle- Similarly populated Vietnam income economies countries (26 countries †) (13 countries ‡) Age (years) 10.3 14.6 16.7 Percent of firms formally registered when started operations in the country 87.5 88 87.9 Closed Most common legal form Limited Partnership Sole Proprietorship Shareholding Co. Private domestic ownership (%)* 89.9 87.9 93.4 Private foreign ownership (%)* 7.4 9.8 4.6 Government/state ownership (%)* 2.7 0.5 0.6 Percent of firms with female participation in ownership 59.2 41.3 41.6 Percent of firms with female in top management position 26.4 20.8 24.2 Experience of the top manager (years) 15.0 16.0 17.7 Average number of temporary workers 35.8 7.8 9.0 Average number of permanent, full-time workers 74.7 31.9 58.1 Percent of full-time female workers 36.0 31.0 32.9 Source: Enterprise Surveys. shareholding companies that are privately traded (21 percent). also differs by firm characteristics—exporters employ Companies with publicly traded shares represent the smallest 10 percent more full-time permanent female workers, on proportion of firm ownership in Vietnam at just over average, than non-exporters, while foreign-owned firms4 2 percent. Compared to economies of similar income levels employ a workforce with 10 percent more female workers and with similar populations, Vietnam ranks the highest in than domestically owned firms. A greater proportion of terms of the proportion of a firm’s ownership that is held large firms in Vietnam, on average, have a top manager by the state. The average firm in Vietnam has a level of who is female—18 percent more large firms have a female government ownership of 3 percent, although 93 percent of top manager compared to small firms, and 15 percent private firms in Vietnam have no government share at all in more large firms compared to medium firms feature a ownership. female in the top managerial role. In roughly 30 percent of firms in Vietnam, a least half of the workforce is female. Among similar-income economies, How do businesses operate in Vietnam? Vietnam ranks fifth out of 26 in terms of the percentage of Relative to other lower-middle-income economies and firms with female ownership. Vietnamese firms rank third similarly populated countries, Vietnam presents a mixed in this measure when compared to countries with similar picture regarding access to finance. Vietnamese firms rank populations. The gender composition of Vietnamese firms third (after El Salvador and Samoa) among other lower- Table 3 Choices by the average firm in Vietnam 2009 Lower-middle- Similarly populated Vietnam income economies countries (26 countries †) (13 countries ‡) Internal finance for investment (%) 82.3 71.1 67.1 Bank finance for investment (%) 12.7 15.2 18.1 Value of collateral needed for a loan (percent of the loan amount) 217.7 151.6 126.8 Loans requiring collateral (%) 90.8 79.5 68.8 Percent of firms with a checking or savings account 89.4 85.2 85.4 Percent of exporter firms 20.5 11.1 16.8 Domestic sales (percent of sales) 88.2 94.9 93.7 Sales exported directly (% sales) 8.6 3.5 4.4 Sales exported indirectly (% sales) 3.2 1.6 1.9 Sales that are pre-paid (%) 15.5 20.4 15.5 Sales sold on credit (%) 66.3 37.4 52.7 Percent of firms with internationally recognized quality certification 16.7 12.6 15.8 Percent of firms with annual financial statement reviewed by external auditor 30.1 41.1 38.9 Capacity utilization (%) 76.7 70.2 75.3 Percent of firms using their own Web site 40.0 25.8 43.1 Percent of firms using e-mail to communicate with clients/suppliers 83.2 54.6 67.2 Source: Enterprise Surveys. 3 population levels, only Turkey has a larger proportion of Figure 3 The average time to clear customs both sales that are direct exports (10 percent) and indirect varies by region exports (7 percent). Not surprisingly, Vietnamese firms sell the lowest proportion of goods and services domestically Days to clear customs, by region 32 (88 percent) compared to other lower-income-countries. 28 Again, among countries with a similar population size, only 24 Turkish firms make a lower proportion of sales that end 20 up in domestic markets (83 percent). The percentage of Days 16 12 exporter firms (combining direct and indirect exporters) in 8 Vietnam is almost twice the average compared to its lower- 4 middle-income peers and higher compared to the average 0 Red River Delta North Central Mekong River South Central South East of its comparator countries for population size (table 3). Coast Delta Coast Compared to similarly populated countries, Vietnam also ■ Days to clear exports ■ Days to clear imports ranks highest for the percentage of inputs of foreign origin (40 percent). It is interesting to note the regional Source: Enterprise Surveys. differences in customs processing times for the five middle-income countries on the percentage of private firms regions surveyed. Firms in the South Central Coast (figure relying on bank financing for working capital; however, 3) report significantly lower time to clear exports through Vietnamese firms are just below average when relying on customs (2 days vs. 4 to 5 days for the other regions); bank financing for investment purposes. High collateral however, they also report significantly more time to clear requirements as a percentage of the loan may be the imports through customs (29 days vs. 6 to 13 days for the cause for this variance. Among other similarly populated other regions). Note that among the five regions, firms countries, Vietnam ranks 9th out of in the South Central Coast report the 13 countries at 218 percent of the smallest import intensity (percentage of loan amount and also ranks highest inputs of foreign origin) at 17 percent— in terms of loans requiring collateral The percentage significantly smaller than Red River (table 3). However, government- of exporter firms Delta and South East regions, each owned firms5 require significantly less (combining direct reporting 43 percent. Efforts to improve collateral—130 percent of the loan the efficiency of custom clearances for amount, compared with 225 percent and indirect exporters) imports may help firms, especially in the for firms with no government in Vietnam is almost South Central Coast. participation in ownership. In a comparison of innovation and Survey data yield other important twice the average technology measures (table 3), Vietnam differences among Vietnamese compared to its lower- appears to be doing well compared to firms regarding their use of external middle-income peers similar lower-middle-income countries, financing. Manufacturers are but not as well as similarly populated significantly more likely, compared countries. For example, 40 percent of to retail and other services firms, to Vietnamese firms use their own Web use banks to finance working capital—63 percent versus site compared to an average of 26 percent for comparative 33 percent and 38 percent, respectively. Similarly, large lower-middle-income countries but to an average of firms are more likely to use external financing compared to 43 percent for similarly populated countries. Comparing small or medium firms—75 percent versus 31 percent and within-country subgroups in Vietnam, exporters, 53 percent; and foreign-owned firms are less likely to have a government-owned firms, foreign-owned firms, and bank loan or line of credit than domestic firms—30 percent large firms are all significantly more likely to have their versus 52 percent. annual financial statements reviewed by external auditors, Vietnam is much more integrated into global trade than are more likely to use their own Web site, and are more its peers, ranking the highest among lower-middle-income likely to use e-mail to communicate with clients and/or economies in the percentage of sales that are exported suppliers. Non-exporters, entirely privately owned, purely directly (9 percent). Vietnamese firms rank third-highest domestically owned, and small firms, on the other hand, in the percentage of sales exported indirectly (3 percent); use less Web technology and internationally recognized only Samoa and Micronesia have higher percentages of best practices regarding annual financial statements than indirectly exported sales. Among economies with similar their counterparts in Vietnam’s peer economies. 4 Table 4 Constraints on the average firm in Vietnam 2009 Lower-middle- Similarly populated Vietnam income economies countries (26 countries †) (13 countries ‡) Number of power outages in a typical month 2.0 9.8 4.8 Senior management time spent in dealing with requirements of government regulation (%) 4.6 7.8 12.4 Average number of visits or required meetings with tax officials 0.9 1.7 1.6 Percent of firms expected to pay informal payment to public officials (to get things done) 52.5 29.5 29.5 Incidence of graft index** 13.4 17.1 15.7 Losses due to theft, robbery, vandalism, and arson against the firm (% of sales) 0.2 1.4 1.0 Percent of firms paying for security 58.2 56.9 57.3 Source: Enterprise Surveys. What constrains firms in Vietnam? was 9 percent greater than exporters. When asked which of 15 presented obstacles was the A number of the factors constraining firms in Vietnam greatest, nearly a quarter of Vietnamese firms indentified were additionally noteworthy in relation to economies with access to finance. The practices of the informal sector similar income levels as well as countries with comparable (19 percent) and transportation infrastructure (13 percent), population levels. The regulatory burden on Vietnamese respectively, were identified by firms firms is comparatively lower than that as the second and third highest on firms in both cohorts—senior obstacles facing businesses. On the Corruption in managers of firms in Vietnam spend opposite end of the spectrum, the 5 percent of their time dealing with three least-constraining obstacles Vietnam is identified government regulation, compared for Vietnamese firms were labor by relatively few firms to an average of 8 percent in other regulations (.9 percent), political lower-middle-income countries and instability (.4 percent) and the (3 percent) as the 12 percent in countries with population procedures of the courts and judicial largest constraint and levels similar to Vietnam. The average system (.2 percent). ranks as the tenth number of visits with tax officials each Access to finance is identified year is one, i.e., one fewer than reported by the highest proportion of firms (out of 15) most- in both comparator groups (table 4). as the greatest constraint faced identified major The constraints identified by firms by Vietnamese businesses, but differ according to whether a business there is some disparity based on constraint on firms’ is an exporter or not. As noted above, firm characteristics. For example, business activity. significantly fewer exporters identify 11 percent more non-exporting access to finance as the greatest obstacle firms than exporters identify access they face, and this difference does not to finance as a major constraint, 14 percent more firms appear to be due to variations in firm size (figure 4). without a female top manager versus those with top Slightly over 20 percent more exporters believe that the female management identify access to finance as a major constraint, and 14 percent more private firms than those Figure 4 Few exporters identify access to with government participation in ownership identify finance as a major constraint access to finance as a major obstacle. The practices of the informal sector were identified Percent of firms identifying access to finance as a major constraint 25 as the greatest obstacle by one out of every five firms interviewed in Vietnam. The proportion of firms 20 identifying these practices as a major constraint did not 15 Percent vary significantly across firm characteristics, however— with the exception of domestic versus foreign ownership 10 and exporters versus non-exporters. Over 40 percent 5 more foreign-owned firms than domestically owned firms in Vietnam identified practices within the informal sector 0 Exporters Non-exporters as the greatest obstacle they face in their operations. The ■ Small ■ Medium ■ Large proportion of non-exporting Vietnamese firms identifying practices in the informal sector as their greatest obstacle Source: Enterprise Surveys. 5 court system in Vietnam is fair, impartial and uncorrupted Notes compared to non-exporters. 1 The major cities in each of the five Vietnamese regions are: Red Corruption in Vietnam is identified by relatively few River Delta—Hanoi, Hai Phong; North Central Coast—Thanh firms (3 percent) as the largest constraint and ranks as Hoa, Vinh; Mekong River Delta—Can Tho; South Central Coast— Da Nang, Nha Trang; and South East—Ho Chi Minh City, Bien the tenth (out of 15) most-identified major constraint on Hoa. firms’ business activity. Nonetheless, over half of firms 2 This figure presents the unweighted distributions by size, sector and location of the firms interviewed without any inferences to the interviewed (52 percent) expect to make informal payments whole economy. to public officials in order to get things done, a proportion 3 The term “average firm� is meant to convey the average firm that is significantly higher than the proportion of firms characteristics from the Vietnam 2009 Enterprise Survey. 4 Firms with ≥ 10 percent of foreign ownership are defined as in other lower-middle-income economies or similarly- foreign-owned. populated countries (both averages are 30 percent). 5 Firms with ≥5 percent and <100 percent of government/state Firms in Vietnam experience a notably low amount of ownership are defined as having government ownership. * The ownership variables represent the average ownership losses due to theft, robbery, vandalism and arson—on composition within a firm. The variables do not represent the average, firms in Vietnam lose 0.2 percent of sales (in ownership composition across firms. terms of monetary value)—the lowest compared to both ** The Incidence of Graft Index is the percentage of instances in which a firm was either expected or requested to provide a gift or economies with similar incomes and countries with similar informal payment during solicitations for public services, licenses or population levels. permits. This Index uses data from 6 survey questions for each firm. Although Vietnam performs well in several business For purposes of Index computation, a refusal to answer a particular survey question is considered an affirmative answer. This Index is environment measures compared to countries with a modified version of the Graft Index defined in A. Gonzalez et al. similar income levels and population sizes, Vietnamese 2007. World Bank Policy Research Working Paper #4394. firms still lag their peers regarding access to finance, use † Lower-middle-income economies are: Ecuador 2006, El Salvador 2006, Georgia 2008, Guatemala 2006, Honduras 2006, Indonesia of technology and standard business practices regarding 2009, Republic of Kosovo 2009, Lesotho 2009, Micronesia, Fed the auditing of financial statements. Firms also report the Sts. 2009, Moldova 2009, Mongolia 2009, Nicaragua 2006, Nigeria practices of the informal sector as an obstacle to their 2007, Pakistan 2007, Paraguay 2006, Philippines 2009, Samoa 2009, Senegal 2007, Swaziland 2006, Timor-Leste 2009, Tonga 2009, competitiveness. Reforms aimed at lowering collateral Ukraine 2008, Uzbekistan 2008, Vanuatu 2009, Vietnam 2009, values required by banks, streamlining the regulatory Yemen 2010. ‡ Similarly populated countries are: Argentina 2006, Brazil 2009, requirements for business entry/exit, and encouraging Colombia 2006, Indonesia 2009, Kenya 2007, Mexico 2006, firms to adopt international best practices regarding Pakistan 2007, Philippines 2007, Poland 2009, Russian Federation technology use and accounting standards could help the 2009, Turkey 2008, Vietnam 2009, Ukraine 2008. Vietnamese private sector. The Enterprise Surveys measure the business environment in over 100 countries in the world. A standardized questionnaire, universe under study, and implementation methodology is used to make sure information is comparable across countries and time. The full data and documentation explaining the methodology are available at www.enterprisesurveys.org. The Country Notes are a product of the staff of the Enterprise Analysis Unit. The findings, interpretations, and conclusions expressed in this note are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of theWorld Bank or the governments they represent. 6