Small and medium enterprise and economic growth in Vietnam = Doanh nghiệp vừa và nhỏ và tăng trưởng kinh tế ở Việt Nam

LIST OF TABLESTable 2.1: Main elements of SMEs’ definitions in the ASEAN Member Countries ...17 Table 3.1: Classification of SMEs by total capital and number of employees...29 Table 3.2:

NATIONAL ECONOMICS UNIVERSITY

INSTITUTE OF PUBLIC POLICY AND MANAGEMENT

ERASMUS UNIVERSITY ROTTERDAM INSTITUTE OF SOCIAL STUDIESVIETNAM - NETHERLANDS MASTER’S PROGRAM

I also would like to give my appreciation to Professor Sarath B Delpachitra and afriend Pham Van Dai for supporting me I am grateful to my beloved family member fortheir spiritual support and understanding over period of my study.

Hanoi, February 2014

Trinh Kim Loan

TABLE OF CONTENTS

DECLARATION 2

ACKNOWLEDGEMENTS 3

LIST OF TABLES 6

LIST OF BOXES 7

LIST OF FIGURES 8

ABBREVIATIONS 9

CHAPTER 1: INTRODUCTION 10

1 Problem statement 10

2 Objectives of study 11

3 Research questions 12

4 Research hypotheses 12

5 Structure of the thesis 12

CHAPTER 2: LITERATURE REVIEW 13

1 The concept of SMEs 13

2 The role of SMEs to economic growth 18

3 The role of SMEs to economic structural change 24

CHAPTER 3: CURRENT SITUATION OF SMALL AND MEDIUM ENTERPRISES IN VIETNAM 27

1 The concept of SMEs in Vietnam 27

2 Major characteristics of SMEs in Vietnam 29

2.1 The economic scale and flexibility 29

2.2 The technological level 30

2.3 The organizational structure and management 32

2.4 The quality of labor force 33

2.5 The market share and strategy 34

3 Current situation of SMEs in Vietnam 36

3.1 On the number of SMEs 36

3.2 On the survival of SMEs 39

3.3 On the diversification of SMEs 41

3.4 On the geographical distribution of SMEs 42

3.5 On the credit access and capitalization of SMEs 43

3.6 On the labor structure of SMEs 45

4 The contribution of SMEs to economic development and economic structural change in Vietnam 46

4.1 SMEs and economic development 46

4.2 SMEs and economic structural change 47

4.3 SMEs and poverty alleviation 48

5 Challenges for SMEs in Vietnam 49

CHAPTER 4: MODEL SPECIFICATION AND EMPIRICAL RESULTS 51

1 Model specification 51

1.1 The econometric model for the role of SMEs to economic growth 52

1.2 The econometric model for the role of SMEs to economic structural change 53

2 The database 53

3 Empirical results 56

3.1 The impact of SMEs on economic growth 57

3.2 The impact of SMEs on economic structural change 60

CHAPTER 5: CONCLUSIONS AND POLICY IMPLICATIONS 64

1 Main findings 64

2 Policy implication and recommendations 64

3 Limitation and suggestion for future for study 66

REFERENCES 67

APPENDIX 1: LIST OF PROVINCES CONTAINED IN EACH REGION 72

APPENDIX 2: THE DISTRIBUTION OF SMES BY PROVINCES IN VIETNAM 2008 73

APPENDIX 3: Empirical results 74

LIST OF TABLES

Table 2.1: Main elements of SMEs’ definitions in the ASEAN Member Countries

17

Table 3.1: Classification of SMEs by total capital and number of employees 29

Table 3.2: The main purposes/applications of using computers in SMEs 32

Table 3.3: The number of registered SMEs in period 2000 – 2009 36

Table 3.4: Changes in the structure of the SMEs groups 38

Table 3.5: The proportion of SMEs by industries (%) 41

Table 4.1: Describing of variables and data sources 54

Table 4.2: Descriptive Statistics 55

Table 4.3: Correlation matrix of variables 56

Table 4.4: Summary of empirical results for the impact of SMEs on economic growth 59

Table 4.5: Summary of empirical results for the impact of SMEs on structural change 61

LIST OF BOXES

Box 2.1: Types of SMEs based on the types of ownership and management 14

LIST OF FIGURES

Figure 3.1: The proportion of SMEs and other enterprises by labor 37

Figure 3.2: The proportion of SMEs and other enterprises by capital 39

Figure 3.3: Capital structure of SMEs in period 2000-2008 (%) 44

Figure 3.4: Labor structure of SMEs in period 2000-2008 (%) 45

Development

Development

Asia and the Pacific

CHAPTER 1 INTRODUCTION

1 Problem statement

The role of SMEs in economic development has been increasingly recognized sincerecent decades, especially for developing countries Specifically, SMEs contribute toeconomic development through creating jobs, improving productivity and increasingindustrial outputs UNCTAD (1998) indicated that SMEs have been playing a vital role inthe development process of many leading economies in Asia and contributedapproximately 40 to 60 percent of all capital investment and a similar proportion to theproductivity growth Tambunan (2008) showed that Indonesia is a typical example forSMEs’ role in economic growth, where SMEs accounted for more than 50% of GDP overthe period 2000-2006 Harvie (2005) argued that SMEs made a significant contribution tothe growth through job creation with about 50% - 70% of the total workforce andcontributed as much to the output as large businesses (50.1% of turnover) in ASEANdeveloping countries There are also evidences that the productivity growth by SMEsincreases in recent years, for example, at a level of 40% of that of large enterprises inJapan (Takakoshi, 2007) SMEs are an important component of international trade Forexample, the total export value of SMEs is estimated to account for about 35% of Asia’sexports (OECD, 2005)

There has been an increasing trend of empirical studies focusing on the relationbetween SMEs and economic development Using the panel data of thirty seven countries

in the period from 1960s to 1990s, Hu (2003) explored the influence of SMEs on theeconomic growth with the empirical result that SMEs had positive impact on the economicgrowth in both developed countries and developing countries Beck (2005) used a datasample of 45 countries and found the evidence of strong and positive relation between theimportance of SMEs and GDP per capita growth, and highlighted that SMEs played animportant role to the growth In addition, SMEs have also proved a pivotal role inindustrialization, particularly in developing countries which have a large proportion ofSMEs (Tambunan, 2006) Elumba (2002) showed that SMEs are important to almost everyeconomy in the world and play a key role in the industrialization of developing countriesthat they have unique characteristics on their own, and they are extremely flexible and canreadily adapt to rapidly changing environment Bari (2005) indicated that SMEs play an

important role in the economic structural transformation of the countries moving from thelow- income to middle- income group with the majority of SMEs representing as entries ofmanufacturing industries and service businesses

In Vietnam, during the transformation process from a centrally- planned economy

to a market- oriented economy, SMEs have played an important role in the economicgrowth and development, especially in aspects of creating jobs, labor income, economicstructural changes through developing new industrial bases and/or supporting industries,and especially, the accumulation process for capital and entrepreneur skills for paving theway for further development The SME sector has been widely recognized as an enginedriving economic growth, particularly in providing employment opportunities withsignificant proportion of domestic labor force (Phat, 2009) The number of SMEs increasedsignificantly from 83,000 in 2003 to 450,000 enterprises in early of 2010 and constitutes

95 percent of the total enterprises in Vietnam (White Paper, 2009) The research topic onthe role of SMEs to economic growth has recently attracted many researchers andeconomists in Vietnam.1 However, most of these studies simply used statistic data toanalyze and indicate the impact of SMEs on economic growth There are only a fewempirical studies, especially those using quantitative approaches to highlight the relativeimportance of the sector in the economy Therefore, based on the foundation of recentempirical economic literature on the topic, this study will focus on examiningquantitatively impacts of SMEs on the economic growth of Vietnam by using relevanteconometric models and a provincial socio-economic database

1 For examples, Nam (2009) studied the financial market and solutions to expand the capital source for SMEs Binh (2010) analyzed the development and the role of SMEs after 10 years establishing and applying the enterprise law Quan (2009) explored the situation of SME in Vietnam during period financial crisis Linh (2009) studied about the development human resource of SMEs in integration process

3 Research questions

Based on the above objectives of study, the thesis focuses on the main research

question of “How do SMEs affect economic growth in Vietnam?” with following

sub-research questions:

(1) Do SMEs have positive impact on provincial economic growth rate in Vietnam?(2) How do SMEs affect provincial economic structural changes in Vietnam?

4 Research hypotheses

To pursue the above research questions, we test the following research hypotheses:

Hypothesis 1: Economic growth rate at the provincial level is positively affected

by the variables of SMEs

Hypothesis 2: The provincial industrialization level is positively affected by the

variables of SMEs

Beside the variables of SMEs, in the related econometric models, we also use otherindependent variables, such as investment, human capital, poverty, education among othervariables of characteristics of provinces that may affect economic growth rate andindustrialization process at the provincial level

5 Structure of the thesis

The structure of the thesis is as follows

Chapter 1: Introduction This part focus on the necessity of research topic, the

objective of study, research questions and hypothesis and the structure of the thesis

Chapter 2: Literature Review This chapter provides a review of recent studies on

the role of SMEs to economic growth and economic structure changes, focusing on thetheoretical arguments and empirical evidences in these aspects that will provide thefoundation for the empirical analysis in Chapter 4

Chapter 3: Current Situation of SMEs in Viet Nam This chapter is for analyzing

the current status of SMEs in Vietnam, especially discussing the role of SMEs to economicgrowth and industrialization

Chapter 4: Model Specification and Empirical Results This chapter uses relevant

econometric models and a provincial database to make empirical analyses of the role ofSMEs to provincial economic growth and economic structure changes

Chapter 5: Conclusions and Policy implications: this part presents a summary of

main findings of the thesis and policy recommendations

CHAPTER 2 LITERATURE REVIEW

1 The concept of SMEs

The role of SMEs in economic development has become a popular topic forresearchers, economists, and policy makers However, there is still no consensus on theconcept of SME According to Fink and Ploder (2007), there are about 200 differentdefinitions of SMEs in the economic literature These definitions are varied amongcountries and regions due to their specific history or socio - economic conditions.However, in general, there are two main approaches to SMEs definition, namely, thequantitative approach and the qualitative approach

The quantitative approach is based on quantitative criteria such as employment,turnover, and asset size of enterprises2 This approach has been often used in the studiesfocused on the industry and/or country level in order to seek clear statistical views on therelated issues of SMEs The definition of SMEs using the quantitative approach isgenerally easy to derive and get a quantitative overview of firms Furthermore, thisapproach is important and appropriate in studies using statistics or quantitative analyses ofSMEs However, due to a number of reasons, many applications of the quantitativedefinition of SMEs are not effective in specific circumstances

Therefore, the qualitative definition of SMEs is introduced to complement thequantitative definition of SMEs and distinguish between SMEs and the other types ofenterprises The qualitative approach is based on the ownership or management control ofthe firm businesses This means that the qualitative approach attempts to consider themeanings, beliefs, and behavioral aspects that distinguish SMEs from the other forms offirms Hauser (2006) pointed out that the definition of SMEs based on their size does notspecify different features between SMEs and large enterprises or not highlight the uniquecharacteristics of the SMEs Thus, only by using the qualitative approach, the nature andhidden contents of SMEs could be revealed The qualitative approach studies SMEs in theperspective of ownership and management, among others

2 See Beck (2005), Tambunan (2006), Milton (2003), Bari (2005), and the enterprises law of most of

countries.

There are generally three types of SMEs in line with 3 kinds of ownership andmanagement, as illustrated in Box 2.1.

Box 2.1: Types of SMEs based on the types of ownership and management

Box 2.1: Types of SMEs based on the types of ownership and management

 Type 1 SMEs are enterprises in which the manager is also the owner or a

member of the family that owns the enterprises He or she made businessdecisions on short and long-term issues based on his/her or family’s interests orenterprises interests (in Germany, this type SMEs is so-called Mittelstands orFamily enterprises)

 Type 2 SMEs are enterprises in which the manager determines short-term

important issues and prepares long-term plans/issues to submit to the owner or

a board of owners for final decisions The owner or the board of ownersnormally consists of private investors They make decisions based upon theprinciple of maximizing benefits for themselves and also for enterprises

 Type 3 SMEs are enterprises belonged to enterprise groups In this case,

important and strategic issues are decided for the interest of the group by theheadquarters of the group Therefore the decision was made possible when itbrings maximal profits for the group

(Source: abstracted from Hauser (2006))Since SMEs are limited to a certain scale, they can recover their operating costs andeasily manage the enterprise in a more flexible manner The owners may get precise andsystematic information on their enterprise and also have a sufficient knowledge on theiroperation The managers are also the owners, then they do not have to deal with other people inmaking business decisions By contrast, the owners of large enterprises often do not haveperfect information and knowledge of management and internal aspects of their enterprise.Investment and operational decisions are made relying on the information provided orpresented by enterprise managers Moreover, normally in large enterprises, the shares are held

by private stakeholders so the ownership of shares is widely dispersed than that in SMEs Theweight for making decision of each owner becomes smaller and depends on the number ofshares he or she holds In the extreme case, if a company is quoted at the stock exchange, therelations between the shareholders and the enterprise may be completely anonymous The

owners of SME have a stronger linkage to their enterprise than that of large enterprises Thus,according to the qualitative approach, it is worth noting that the main difference betweenSMEs and large enterprises is based on the ownership and management This confirms that thequalitative approach based on the ownership and management as well as other criteria todistinguish SMEs with large enterprises presents the nature of private control of SMEs.

The qualitative approach is commonly used to define SMEs for purposes such asorientation for industrial development and economic areas for developing SMEs Thisapproach is also effective in supporting programs with specific objectives such as jobcreation, maintaining and developing specific/traditional industries, and improving theliving conditions in certain areas In an extreme case, NGOs with the aims of preservingtraditional culture or improving living standards for poor people often offer programs tosupport the households, production groups (one type of SMEs) in accessing credit facilitiesand factors of production In this case, it is necessary to use an approach which can revealthe nature of SMEs – the quantitative approach

Although there are advantages in using the qualitative approach, as noted above,the quantitative approach has been more widely used in empirical studies of SMEs due toits convenience in getting information on the quantitative criteria of SMEs It is not easy,and sometimes quite difficult, to deal with the qualitative criteria, especially for the cases

of developing countries due to lack of official information sources

The European Union has introduced a quantitative definition of SMEs in 2006(European Union, 2006) Accordingly, SME are determined by three main factors: (i) thenumber of employees, (ii) the total assets, and (iii) the annual turnover Based on thesefactors, SME can be divided into three more detailed categories: (1) middle enterprises(less than 250 employees and less than 50 million euro annual turnover or less than 43million euro total assets); (2) small enterprises (less than 50 employees and less than 10million euro annual turnover or less than 10 million euro total assets); and (3) microenterprises (less than 10 employees and less than 2 million euro annual turnover or lessthan 2 million euro total assets) This definition is approved by member countries of theUnion, the European Investment Bank (EIB) and the European Investment Fund (EIF) toimprove consistency and effectiveness of policies which support to SMEs to promoteentrepreneurship, investment and growth This single SME definition is applied for SMEsacross the EU

Based on the quantitative approach, the definition of SMEs is also varied amongdifferent countries in the world In the United Kingdom (UK), the Companies Act 2006defines SMEs based on the financial accounting requirements Accordingly, a smallcompany is defined as firms that have a turnover of at most £6.5 million, a total value ofassets of at most £3.26 million and employs at most 50 workers Similarly, a medium-sizedcompany has a turnover of no more than £25.9 million, a total value of assets of no morethan £12.9 million and employs no more than 250 workers It is important to note that evenwithin UK, there might be other definition for specific purpose The British BankersAssociation (BBA) in March 2008 introduced its own definition of SMEs Accordingly,SMEs were defined based on sole traders, partnerships, limited liability partnerships,limited companies associations, charities, and clubs with an annual income of under £1million This definition is a combination of both quantitative and the qualitative definitions

Table 2.1: Main elements of SMEs’ definitions in the ASEAN Member Countries

assets Sales

Productioncapacity

-Source: APEC (2003); except Myanmar, Cambodia, and Lao PDR from UNESCAP (2004).

Notes: (*) figures indicate the maximum number of employees in a firm defined as an MSME; (**) “+”as an

element of the definition; (***) production value; (****) depends on the economic sector 3.

In the developing countries, there is no standard definition of SMEs Theclassification of SMEs varies widely across countries The parameters that are mostcommonly used for classifying SMEs are number of employees, turnover, and level ofcapital or value of assets (see Table 2.1) In ASEAN countries, some countries set updefinitions of SMEs for statistical purposes, other countries have definitions of SMEs forpolicy purposes The definitions of SMEs also differ by industry and by policy program

As shown in Table 2.1, the number of employees is the most common criteria to beused However, many member countries also use a monetary measure such as initialinvestment, including or excluding land and building, annual sales or turnover, orproduction capacity to define SMEs Even with the number of employees, there is aconsiderable diversification between the member countries

There are many reasons that there are various definitions of SMEs in the worldnowadays based on the fact that the purpose of using these definitions are highlydiversified in order to deal with specific dimensions concerning SMEs For example, in thefinancial sector, SMEs usually build a vast base of customers for banking purposes

3 A discussion paper of APEC agenda in 2003, “SMEs in Asia and APEC”.

Ideally, in banking, when lending to their SME customers, credit institutions use asystematic criteria of SMEs in order to make decision on how to meet financial needs ofSMEs Practically in some cases, especially for developing countries, commercial banksare lending to SMEs based on their owned concept and criteria, even without a clearofficial definitions In such cases, it is necessary to establish a (official) systematic conceptand criteria of SMEs, considering both quantitative and qualitative criteria and to formallyuse for the banking purposes to assess precisely their SMEs customers’ capability andnecessary conditions when making lending decisions.

2 The role of SMEs to economic growth

Recently, there has been a debate on role of SMEs to economic growth There aremainly two different views on the role of SMEs in economic growth among economists,policy makers, and the corporate managers Many researchers believe that SMEs are animportant determinant of the economic growth, while some others argue that SMEs have alittle impact in driving the economic growth

For the first view, many research papers based on the stylized facts fromdeveloped, developing and less developed countries emphasize the role of SMEs andpolicy programs designed to support and assist SMEs Cravoy (2009), Hu (2003), andTambunan (2006) studied experience from newly industrial countries in East and SoutheastAsia as Hong Kong, Korea, Taiwan, and many Europe countries and showed that SMEshave significant impacts on economic growth Based on the argument that SMEs are adeterminant of economic growth, they argued that government should support SMEs toachieve economic development goals They particularly emphasized the importance ofsubcontract networks, accumulation, creation, and innovations of SMEs

By contrast, there are also a number of studies suggesting another view on the role

of SMEs Although they recognize the role of SMEs, it does not mean that LEs are notimportant in the economy as such that SMEs can be replaced by LEs This is actually not anew story for economists Some classical researches, such as Hoselitz (1959), Staley andMorse (1965), and Anderson (1982), predicted that SMEs advantages would reduce overtime and LEs would dominate in economic development process (Tambunan, 2006)

Although there are two opposed views on the role of SMEs to economicdevelopment, the first view has been dominant in recent decades, and it has been supported

by the stylized facts in both developed and developing countries, especially in thedeveloping world The World Bank and many non-government organizations (NGOs) have

approved a substantial amount of SMEs support programs in LDCs with the objective thatSMEs enhance competition and entrepreneurship, and thus, have external benefits on theeconomic efficiency, innovation, and overall productivity growth (World Bank, 2002,2004) SMEs are generally more productive than large enterprises (LEs) but they meetdifficulties in entering financial markets and other institutional failures SMEs expansionboosts employment more than LEs growth because SMEs are usually more labor-intensive In other words, The World Bank believes that government’s supportingprograms for SMEs in LDCs help them to exploit social benefits and to strengthen theircompetition; and then, SMEs can boost economic growth and development In period of1998-2002, The World Bank actually approved more than US$10 billion in SMEs supportprograms (World Bank, 2002).

UNCTAD (1998) recognized SMEs as an important tool for empowering economicgrowth when studying the role of SMEs to the rapid economic growth of countries in Asia andNorth America SMEs are considered an important element in the government policies andthey are included in policy programs to reduce poverty, accelerate economic growth,encourage foreign direct investment, diversify the economy, and create new job opportunities(APO, 2007) Furthermore, recent economic development studies highlights that SMEs have apotential to become a powerful driver in the process of industrialization The practicalexperience from some East and Southeast Asian countries, like South Korea, Taiwan, HongKong, and Singapore, proves that successful cases of SMEs development have usually directlycontributed to trade and export-oriented strategies, and indicates that SMEs could competeeffectively in both domestic and international markets In some Asia countries, SMEseventually contributed 60 percent of the total manufacturing exports (UNCTAD, 1998)

In developed countries, SMEs are considered a dynamic economic sector topromote economic growth based on new technology and high productivity Audretsch andKeilbach (2004) and Muller (2007) measured the impact of new born SMEs on economicgrowth, using the rate of newly established enterprises and the share of capital of SMEs toexamine the impact of SMEs on the economic growth and showed positive effects ofentrepreneurship capital on the growth in Germany

Empirical analysis on the role of SMEs has recently been widely developed Manyresearchers have used econometric models and empirical database to estimate impacts ofSMEs on economic growth Most of them have used Solow-style regression models as abasis for considering the impact of SMEs on economic growth (Beck, 2005) Recently,

there have been subsequent improvements in related empirical studies Some variablesincluded in these models represented certain factors affecting economic growth, includingincome, saving, population indicators (Beck, 2005; Audretsch and Keiback, 2004; Muller,2007) Typically, Beck (2005) examined the relation between SMEs and economic growth

by using a data sample of 45 countries over the period 1990- 2000 and the followingregression:

(yi,2000 - yi,1990)/10 = αyyi,1990 + βSMESMEi + γXXi + εi (2.1)Where y is the log of real GPD per capita, SME is the size of the SME sector, BE iseither Business Environment or Institutional Development; X is a set of conditioninformation; i is the country index; and ε is the white-noise error term To measure the role

of SMEs in the economy, the author used a database on the share of manufacturingemployment accounted for SMEs and construct two measures of SME size: (i) SME250 isthe share of the SME sector in the total official labor force the in manufacturing sector withthe definition of SME250 an enterprise with less than 250 employees This variableprovided a consistent measure of firm size across countries; (ii) SMEOFF is the share ofthe SME sector in the total official labor force in the manufacturing sector with thedefinition of SMEOFF an official country definition varying between 100 and 500employees Besides, other independent variables, such as business environment orinstitutional development, were also added Business environment is an aggregate indicator

of the business environment in which SMEs operate that included information, the cost ofinput factors, the cost of entering the market, and the efficiency of the bankruptcy system.Institutional Development is an aggregate indicator of the institutional environment inwhich SMEs operate These included information about responsibility in the politicalsystem, the quality of regulations, political stability, and the rule of law, corruption andbureaucracy, and the effectiveness of government For dependent variables, the author usedthe average annual growth rate in real GDP per capita averaged over the period 1990-2000

The author used the above model to examine the relationship between the size ofthe SME sector and economic growth and found that there is a strong positive relationbetween these two variables This result does support SME supported programs for thepurpose of accelerating economic growth However, the evidence from cross-countrycomparisons did not indicate that SMEs have a strong impact on the income of the poorand there is no significant relation between SMEs and poverty

In another study, using the panel data of 37 countries covering the period from1960s to 1990s, Hu (2003) empirically examined the influence of SMEs on economicgrowth by using the following regression model:

G= βSME0 + βSME1SME + βSME2 (SME)2

+ βSME3 (Mature) + ε (2.2)Where G is the industrial growth rate and ε denotes the error term in the equation.SME is measured by the proportion of SMEs to the total number of firms or by theproportion of employees hired by SME to total number of employees This study alsoconsidered the possible existence of the diminishing effect of SME on the economicgrowth and used the (SME)2 to demonstrate the possible non – linear influence andassuming that an increase in SME would lead to a positive economic growth meanwhilethe marginal effect of (SME)2 leading to a negative economic growth

The results showed that SMEs have a positive impact on the economic growth inboth developed countries and developing countries An economy with large share of SMEswould have higher economic growth rate For advanced economies group, there is asignificant positive impact of SMEs on economic growth when SMEs measured by number

of entrepreneurs However, there is no significant influence on economic growth whenSMEs were measured by employment share The implication of this result is that in thehigh- income economies, the contribution of SMEs to their economic growth mainly camefrom the innovative entrepreneurs By contrast, the SMEs contribution to the economicgrowth in developing countries is mainly from the value created through job creation

SMEs have been widely considered as a labor intensive sector and have significantcontribution to the economic development through creating new jobs and employmentopportunities Cravoy (2009) investigated the importance of the relative size of the SMEsector measured by the share of the SME employment in the total formal employment andthe level of human capital in SMEs measured by the average years of schooling of SMEemployees The author used an annual panel data set of SMEs in Brazil for the period1985-2004 to examine the following model:

grit = ai + b lnyit-1 + βSME ln SMERit + αy ln SMEHit + ψlnXlnX it + v it (2.3)Where gr denotes the GDP per capita growth; lny is the initial GDP per capita; b isthe convergence coefficient; and X is a vector of variables that control differences acrosseconomies This X vector was proxied by the growth determinants suggested by Mankiw et

al (1992) They are the overall level of human capital, physical capital and the populationgrowth SMER is the relative size of the SME sector and SMEH is the human capital ofSME sector, respectively The variables in vector X encompassed growth determinants.The empirical results indicated that the important role of SMEs and human capital in SMEs

is more important for economic growth than the relative size of the SME sector

According to Tambunan (2006), SMEs have two important roles: (i) acceleratingeconomic growth through their output contributions to gross domestic product (GDP), and(ii) reducing poverty through employment creation and income generation effects Theincreases in output and employment in SME lead the increased output and employment inthe whole economy through three main linkages, namely, production (forward andbackward), investment, and consumption Hypothetically, there is a positive correlationbetween output growth in SMEs and economic growth The following simple equationdescribes this hypothesis:

dYN = a0 + a1dYMSME + ai Xi + e (2.4)where dYN is the annual growth rate (%) in national income or real GDP per capita(be in log form); dYMSME is the annual growth rate (%) in output in respectively MSME;

Xi is a set of economic growth determinants; ai is a vector of coefficients on the variables

in X (i = 3,4,….,n); and e is a random variable that has mean 0 at fixed values of thepredictor variables, commonly referred to as the regression residual or the error component

in the equation that captures the effects of time invariant and time-varying unobservedvariables

The output growth in SME can be originated from four sources; (i) the growth inthe number of establishments, (ii) the growth in the number of workers, (iii) the growth inthe output or productivity of SMEs (with constant number of establishment and (iv) thetotal workers per firm), or a combination of the first three sources With two differentanalytical approaches, the study indicated two key findings First, the OLS regressionsshowed that SMEs are significantly related to economic growth Second, two-stage leastsquares regression to control for simultaneity bias showed that SMEs were not robustlylinked with the growth

Beside the common approach that SMEs play an important role to economicgrowth, there are also studies using the concept of economies of scale to emphasize thatlarge firms with greater levels of capital, modern machines and production systems have

advantages of scale in the production These enterprises relying on their advantages wouldstep crossing the threshold of production to reach technical barriers and innovativeactivities Thus, large enterprises would increase their production, account for the majorityshare of the market and drive economic growth According to this approach, only largefirms are satisfied with requirements of scale efficiency Acs (1996) suggested anargument there is no room for the SMEs in the economies with growth of scale andactually predicted that the role of SMEs in the future would be diminished.

Carlos (2003) argued that SMEs are hardly to be a driven force of economic growthbecause of certain limitations SME definition is not clear and changed in different stages

of economic development and structural changes SME definition is a scale indicatorwhich is determined by many other factors And, SMEs normally depend on LEs in theaspect of subcontracts and financing access Thus, the relative efficiency of SMEs depends

on a network of industrial linkages with larger firms During the process of economicdevelopment, SMEs would become the less influential Therefore, the presence of theSMEs is relative and changed over time

SMEs are usually considered the main source of attracting labor and thus maycreate jobs opportunities However, some authors suggest that SMEs do not boostemployment relatively In contrast, LEs provide more stable and higher quality jobs.Therefore, they have positive impacts on poverty alleviation Tambunan (2006) hassummarized some previous researches on SMEs based on Davis (1993), Biggs and Shah(1998), Little (1987) and Snodgrass and Biggs (1996) who believed that there is noevidence that SMEs are an engine of job creation Davis (1993) found that although jobcreation is higher in SMEs, there is no relation between job creation and the size of SMEs.Shah (1998) provided evidences that LEs were the dominant source of the employmentcreation in the manufacturing sector in Sub-Saharan Africa However, Little (1987) andSnodgrass and Biggs (1996) found that MEs are more labor intensive and not better at jobcreation than LEs These studies opposed the view that SMEs are the engine of jobformation

Although there are different views on the role of SMEs to economic developmentdue to certain socio economic conditions and theoretical arguments, the SME sector isgenerally considered as an engine of economic growth and development in the developingworld nowadays In the developing countries, there are shortages of socio-economicenvironment to develop large firms, such as professional management system, highly

developed financial markets, qualified human sources, and stable socio economicconditions in order to capture large firms’ advantages, such as economics of scale andmodern technology In such environment, the SMEs sector provides an important platform

to attain economic development by utilizing the SMEs unique advantages as well as toaccumulate necessary capital, develop management skills and qualified labor force as well

as other conditions in order to transform themselves gradually and smoothly to becomelarge firms during the process of development

3 The role of SMEs to economic structural change

The industrialization process has played a very important role to economicdevelopment in the developing countries nowadays The level of industrialization is alsoone of the key indicators to classify a country to be a developing country or a developedcountry Historically, various industrialization strategies have been pursued to archiveobjectives of economic development in both developing and developed countries.Recently, along with the dominance of studies on the role of SMEs to economicdevelopment, there has been also many studies focusing on the role of SMEs in economicstructure change that SMEs have a pivotal role in the process of industrialization,particularly in developing countries that have a large proportion of the agricultural sector.Also in these countries, the proportion of SMEs usually accounts for more than 90% totalnumber of enterprises and SMEs play an important role in the process of transforming theeconomy toward industrialization (Tambunan, 2006)

The SMEs sector pushes up the process of industrialization mainly through somecertain channels: (i) SMEs focusing on the non-agricultural activities in the rural areasprovide necessary goods and services for the development of the agricultural sector, such

as fertilizers, seeds, agricultural technology transfers, irrigation system to improve theproductivity of the agricultural sector and industrialize the agricultural sector from theinside; (ii) SMEs operate directly in the agricultural sector to produce agricultural products

or focus on processing agricultural products to increase value-added of the agriculturalsector in both absolute term and relative term in percentage of GDP; (iii) SMEs absorb andhelp shifting relative redundant laborers in the agricultural sector into industrial andservices sectors

Tambunan (2006) argued that, in Indonesia, SMEs engaged innon-farm activities are especially important for low income or poor

households in rural areas These enterprises have also been animportant engine for the development of local economies andcommunities

Elumba (2002) argued that SMEs are important to almost every economy in theworld, and particularly to Africa with many development challenges SMEs usuallyrepresent the largest share of the business establishments and play a key role in theindustrialization process of developing countries They have unique characteristics on theirown They are extremely flexible and can readily adapt to rapid changes in the businessenvironment, especially in the process of economic integration

Bari (2005) indicated that, for the less- developed countries, SMEs play animportant role in the structural transformation, moving the countries from the low- income

to middle- income groups SMEs contribute to promoting industrial structural changes byincreasing the contribution share to GDP from the industrial and service sectors, such asmanufacturing industries, trading and retailing activities, and also, decreasing the reliance

of the economy on agriculture sector SMEs are usually main entries of manufacturingindustries and service businesses Therefore, they have been affecting economy structuralchanges not only through inputs factors such as labor and capital but also through outputfactors such as income and consumption

Tambunan (2008) reported that SMEs are accounting a large proportion in theservices sector, such as trade, hotels and restaurants, and manufacturing industries inIndonesia SMEs actually account for 90% of total non- agriculture enterprises Themajority of SMEs, especially small enterprises are expanded widely throughout theeconomy, from the urban to rural areas They are usually subcontractors for largeenterprises in manufacturing industries and service sectors SMEs are important in theaspects of creating new jobs and bringing higher income for the people, especially in therural area in the process of industrialization With dynamic and flexible characteristics,SMEs are main drivers of the integration process for rural agricultural areas to becomeurban industrial and services areas SMEs are, therefore, important to promote theurbanization process that is always along with the process of industrialization

Generally, practical experience and empirical evidences proved that SMEs haveplayed an important role as a driving force to the industrialization in the world economynowadays, especially developing countries SMEs are main entities of industrial and

service sectors and serve as the bridge or intermediation between cities and rural areas.They have been playing a vital role in economic structural changes from agricultural basedeconomic activities to industrial based economic activities, especially in developingcountries.

In summary, this chapter provided a brief view of recent theoretical and empiricalstudies on the role of SMEs, specifically their impacts on economic growth and structuralchanges There has been no common definition of SMEs but they are varied amongeconomies based on the different socio-economic conditions and policy purposes Manyempirical studies suggested the important role of SMEs to economic development,especially in the aspects of their contributions to the economic growth and job creation Indeveloping countries like Vietnam, SMEs have particularly played an important role in theprocess of industrialization They are capable to absorb redundant labor forces and savingfrom the agricultural sector/rural areas to develop the industrial and services sectors/urbanareas, thereby promoting the process of the physical and human capital accumulationtoward industrialization

CHAPTER 3 CURRENT SITUATION OF SMALL AND MEDIUM ENTERPRISES IN VIETNAM

1 The concept of SMEs in Vietnam

Although there is no single concept of SMEs, and the definition and classification

of SMEs varies widely across countries, as noted in Chapter 1, the parameters that mostcommonly used when classifying SMEs are the number of employees, turnovers, and thelevel of capitalization or value of their assets In Vietnam, during the process of economicreforms called “Doi Moi”, the official definition of an SME was stipulated relatively late

In November 2001, the Government Decree No 90/2001/ND-CP (Decree 90, in short), for

the first time, provided an official definition of SME Accordingly to Decree 90, SME isdefined as an independent production or business establishment, which makes businessregistration according to the current law provisions, each with registered capital notexceeding VND 10 billion or annual labor not exceeding 300 people”4 Vietnam Chamber

of Commerce and Industry (VCCI) classifies small and micro-enterprises as business unitsthat have less than 50 employees, in which business units that have from 10 to 49employees are classified as small enterprises By contrast, business units that have 1 to 9employees are classified as micro enterprises According to Decree 90, medium enterprisesare defined to have from 50 to 299 employees5

However, after 7 years of implementation, the definition of SME in Decree 90became no longer relevant and exposed some shortcomings This classification lead todifficulties and confusion for enterprises and government management institutionsidentified SME standards related to supporting policies for this type of enterprises Thereare some enterprises which have more than 300 employees (in case of 500 – 600employees), with their registered capital under VND 10 billion These institutions are to beconsidered as SMEs There are enterprises that have registered capital over VND 100billion and having less than 300 employees, but also have been classified as SMEs Theclassification of an SME that only relies on its registered capital or the number of

4 See Article 3, Decree No 90/2001/ND-CP dated 23 November 2001

5 See Huong (2009)

employees without consideration of special characteristics of the related economic sectormight cause some in-appropriate and irrational judgments Mainly in the manufacturingsectors, the enterprises which have registered capital around VND 10 to 24 billion areconsidered insignificant, while in some service sectors, this registered capital amount isconsidered as rather high.

Moreover, the classification of enterprises according to the registered capital isalso subjective, imprecise, and difficult to control because they are registered byenterprises owners and there is no specific regime to control such of registration.Registered capital of such companies is reported by the founders and they haveresponsibilities for their declaration except for enterprises which required legal capital insome sectors as gold trading, tourism, travel, insurance, and real estate This legal capitalonly reflects legal responsibilities of owners and the companies for their debts, interestduring their business operations Consequently, the registered SMEs list has not reflectedthe real features of institutions which have standards of SMEs This leads to confusion indetermining the correct objects for aid or supporting programs dominated by Government,Financial organizations, NGOs Sometimes, eligible SMEs have been not chosen tosupport while other enterprises which are not eligible for aid program actually receivedsupports from programs

In order to overcome this issue, the Government has promulgated a new definition

of SMEs in Decree No.56/2009/NĐ-CP dated on the 30th June 2009 (Decree 56, in short).

Accordingly to Decree 56, SMEs were classified by their business sectors and specific size

as micro, small, medium enterprises SMEs that have registered their business according tolaw are divided into three levels: micro, small, and medium following their total capital(total capital is equivalent to their total assets which are identified on their balance sheet)

or annual average number of employees (total capital is the priority criteria), as showed intable 3.1

Table 3.1: Classification of SMEs by total capital and number of employees

Scale

Sectors

Micro Enterprises

Small enterprises Medium enterprises

Employees Total

capital Employees

Total capital Employees

Agriculture,

Forestry and

seafood

Under10employees

UnderVND 20Billions

From

10 to 200employees

FromVND 20 to

100 Billions

From

200 to 300employees

Industrial and

construction

Under10employees

UnderVND 20Billions

From

10 to 200employees

FromVND 20 to

100 Billions

From

200 to 300employees

Commercial

and Service

Under 10employees

UnderVND 100Billions

From

10 to 50employees

FromVND 10 to

50 billions

From

50 to 100employees

Source: Decree No.56/2009/ND-CP dated on the 30th June 2009

2 Major characteristics of SMEs in Vietnam

Due to the historical reason, the Vietnamese economy has a quite low threshold foreconomic development SMEs in Vietnam are, therefore, in small economic scale, simpleand unclear structure with limited market, lack of management skills and financialcapabilities, and backward technologies

2.1 The economic scale and flexibility

SMEs in Vietnam are mainly enterprises with small capital and labor scale Thenumber of enterprises with capital less than VND 1 billion accounts for 41.8% of totalSMEs, meanwhile the number of enterprises with employees less than 10 people accountsfor 51.3% of total SMEs (MPI, 2008) The proportion of micro and small enterprises is quitehigh in the total number of SMEs Although the number of registered SMEs has increasedevery year, the majority of them are in belonged to the category of micro and smallenterprises

With the small economic scale, SME have some advantages which are particularly

important for developing countries as Vietnam Most of SMEs are quite dynamic and easy

to adopt in the rapidly changing business environments SMEs in Vietnam also have simpleand flexible organizational structures Therefore, they are sensitive in responding to therequirements of market, especially when the market conditions change SMEs have greaterflexibility than large enterprises, especially in the process of decision-making They canquickly adjust their objectives or strategies, and move quickly from decisions to actions Onthe other hand, since SMEs have been linked directly to the consumers, they could getprecise and necessary information by listening to their customers, make judgments timely onanticipated market trends or fluctuations

However, due to their small size, SMEs may have economic disadvantages compared

to the larger competitors in terms of economies of scale and cost per unit of output SMEssuffer from the constraints of inability to respond to bad market conditions such as economicrecession and/or financial crisis The recent global financial and economic crisis, started in

2008, had influenced huge impacts on SMEs, and there have been a lot of SMEs exited orfrozen their operations Within two years of crisis, the number of enterprises bankrupted orexited the market has increased significantly (estimated 10,000 enterprises) (MPI, 2008)

In the first quarter of 2012, 3000 enterprises that had closed were classified as SMEs6

Furthermore, SMEs are also facing challenges in developing human resource,accessing the financial capital market, technology, and information Establishing fromsmall capital and lower value of total assets, SMEs have disadvantages in archivingpriority for lending or in building relationship with banks and financial institutions Theyare lacking of financial resources to invest in large projects, expand the business, attract theattention of the media and the public for development trademarks, as well as motivate themodern technology

2.2 The technological level

Currently, it is widely accepted that there are three stages of technologicaldevelopment process, namely adopting technology, mastering technology, and creatingtechnology Vietnam is now considered to be at the first stage of this process Creation ofnew technology requires knowledge intensive activities such as research and development(R&D) that are extremely limited in SME sector Most SMEs use backward technologyand then record low productivity Especially, there are SMEs that still use out of dated

technology for decades with some SMEs using the hand tools and manual works (MPI,2008) Many SMEs have been using old equipments that foreign enterprises have ceased toutilize.

According to World Economic Forum (WEF, 2006), Vietnamese indicator of thetechnological level is very low, ranking 92/125 and continue show downward trends Theapplication of new technology, innovations and creativity are considered as necessaryrequirements to improve the competitiveness of SMEs in the process of internationalintegration Lacking of modern technology and innovations are considered as a significantdisadvantage of SMEs in Vietnam in the process of international economic integration

Because of the limited capital, SME have limited capacity to buy modernequipments or improve the technology level of their operations Out of dated equipmentsand technology are the reasons that SMEs are less competitive, low labor productivity, andlow quality outputs They often undermine environmental impacts, occupational health andsafety of employees SMEs are usually failure to attract skilled workers and in building thecapacity of human resources

Table 3.2 presents an example of the proportion of SMEs using computers inbusiness activities These figures are considered relatively high at about 91.6% MostSMEs have less than 3 computers (48.7%)7 However, the purposes of using computers aremainly simple for word processing, accounting management, internet accessing, andsending e-mails It is hardly to see that SMEs use computers for further purposes such asfor training, business management, research on process, and product development It isobvious evident that SMEs have not been taking advantages of computers and ITtechnologies in exploiting producing process and product development and increasingproductivities and efficiency

7 See Hong (2007)

Table 3.2: The main purposes/applications of using computers in SMEs

Purpose of using computer/applications The rate (%)

2.3 The organizational structure and management

The simple structure and direct management style are common features of SMEs inVietnam The small number of employees directly reflects the small size and lowcomplexity in micro-enterprises and small enterprises The similar situation occurs formedium enterprises with low number of hierarchy level and low volume of workingactivities The working process and main tasks of labors in SMEs are quite simple Theyare often assigned different tasks at the same time with low level of specificity Thedocumentation and profile of organization chart, job descriptions or position description ofdivisions seem less important The low hierarchy means that management system is simpleand direct style The decision making power is vested to the owners or managers Theenterprise culture is strongly influenced by character of owners A preliminary survey ofSMEs in Ho Chi Minh City has shown that about 40% of SMEs meet difficulties due tonot-well-defined organized structure; approximately 37% of SMEs face the risk ofunmanageable information from the workflows8 As reported by Loan (2011), 100% of

SMEs in Da Nang city have organizational structure following direct management style inwhich the owners make all the decisions In certain aspects, an enterprise with a simplestructure, less complex operations and owner-manager have distinct advantages, as noted

in Chapter 1 However, in the long-run, those may become constraints to SMEs expansion

in scope Consequently, this explains the reason why, in development process, there havebeen rapid increase in number of SMEs while quality being held unchanged

2.4 The quality of labor force

With simple organizational structure, the labor force of SME is also small bynumber The owners play important roles in enterprise and have big impacts on the quality

of labor force The majority of SMEs owners are young entrepreneurs who are dynamic,hard-working and eager-to-learn, but lack of business knowledge, management experience,and high education attainment In other words, their selections of enterprises are notcompatible with the leadership and management skills A recent survey conducted by theMPI of 63,000 SMEs indicated that the number of SME owners with high school levelaccounted for up to 55.63% and 43.3% of them reported to have education level rangedbetween primary and secondary Furthermore, SMEs in rural areas have faced more serioussituations with the rate of employees reaching high school level accounted for only 9.8%9.Many SMEs’ owners just have completed high school education There is only a smallnumber of young entrepreneurs graduated university or post- graduated with almost nopractical exposure Most SMEs’ owners and managers have no experience or lessexperience in the management works before starting their business Most SMEs’ managerand owners recognized that their management capacity and skills are poor They havelimited ability in market forecasts and little experience in exports and international trade.The weakest points of the owners are soft skills such as foreign languages, communicationskills, information collecting, and applying technology in business Most of SMEsmanagers agreed that their management capacity did not match well with the requirements

of their enterprise development

Although there are no reliable statistics on the education level of workers or staff inSMEs, many researchers argued that education level of SMEs employees is relativelylower than that of other type of enterprises, specifically large enterprises Many SMEshave the majority of untrained workers in regular jobs Employees are lacking ofindependent and active attitude in working, ability to plan, basic skills to work with

9 Linh (2009)

computers and foreign languages10 According to CIEM (2010), about 60% of SMEs couldnot hire skilled workers This is compounded by the limitation in budgets and over-work ofthe owner managers They have not enough time to pay attention in developing humanresources The training courses for employees are not conducted regularly The work forcemainly gains their knowledge through doing The motivation for employees in working atSMEs is mainly driven by wages and salaries paid by the owners Therefore, the SMEsproductivity and efficiency of human resources are not high Also according to CIEM(2010), around 55% of SMEs have difficulty in keeping employees to work in the long run.

2.5 The market share and strategy

The domestic market is the main market of SMEs Most of SMEs have revealed thattheir main competitors are large Vietnamese enterprises The competition is different indifferent sectors of operation In the agriculture and fishing sector, 64% of SMEs considerthat they have to compete with large enterprises in Vietnam Similarly, in the garments,footwear, furniture and computer software sector, this rate are around from 40% to 42%.Meanwhile, in the electronic industry, SMEs consider that that foreign firms (47%) or jointenterprise business (35%) are their main competitors (CIEM, 2010)

Most of Vietnamese SMEs outputs are being sold in the primary domestic market.Only small number of SMEs is engaged in exporting activities There was only 5.2% ofSMEs engaged in export activities in 2007; by 2009 this rate has increased to 5.9%11 Theenterprises participating in the export market are mostly in medium-size (34.9%) Individualentrepreneurs have not joined in export market, the export companies are usually limitedcompanies or joint stock companies (17% -18%) The number of foreign customers of eachSMEs involved in exporting is average at 5 customers This confirms that the exportingSMEs have relatively few international trading partners

The main export markets of SMEs are China, Japan, USA, ASEAN and EU whichare also the main export market of Vietnam Some other markets are mainly Taiwan,Korea, Hong Kong, Australia, and some African countries The majority of SMEs (85%)with big export markets includes Europe (30%), Japan (22%), United States (16%),ASEAN (12 %) and China (9%)12 The main products exported to these markets are

10 Thanh (2006)

11 CIEM (2010)

computer software, hardware, furniture, textile, garments, agricultural, and marineproducts.

Focusing on the daily operations, owner–managers of SMEs are usually notinterested in market information, the strategy and vision development These businessdimensions are not conducted in SMEs Market survey and market forecast activities arequite new concept for almost SMEs It’s quite difficult for SME to build their strategy toexpand business, especially in entering new markets SMEs often do not clearly understandabout the legal environment and business methods in other countries Furthermore, SMEsare usually lacking of skills in marketing; their competitiveness of their products in terms

of price and quality is not high Typically, SMEs gain new markets basically relying ontheir owner’s relationship or new clients find them purely by luck or accidentally

The planning activates in SMES are also found limited SMEs only have a short–term strategy, mainly monthly or quarterly, and tend to focus on short term productionplan They do not pay attention to build long-term business plan and long -term strategy.The number of SMEs without strategies for 2 years accounts approximately 85% of totalSMEs in Vietnam (Giang, 2009) Most of SMEs are just interested in the provision of theirproduct and/or service without understanding about the position of the enterprise in themarket, or market trend

In the majority share of SMEs, owner–managers of SMEs are not willing to sharethe business decisions to other members This limits the effectiveness of teamwork as well

as using advantages of internal resources The implementations of strategies are noteffective because employees do not interact with the owners Regular staff meetings withthe aim of sharing long-term goals of SMEs are rarely conducted SMEs employees havenot many chances to comprehend the vision and strategy of their enterprise Theenterprise’s orientations and strategic objectives have usually been not well documentedand shared among employees

Without long–term strategic plans, most of SMEs have failed to expand after theirinitial establishment and only a minority of them could continue to develop According toChi (2008), around 36% of SMEs disappeared after within five years of establishment and21% disappeared after 10 years The number of enterprises observed in the period 1995-

1996 actually fell 64% in the period 2000-2001

3 Current situation of SMEs in Vietnam

3.1 On the number of SMEs

The number of SMEs has developed rapidly during recent decades After the

proclamation of Enterprise Law in 1999, which has been applied since 2000, with a strong

administrative reform of enterprises registering process, the number of registered SMEshas grown significantly

During period 2000–2009, the annual average growth rate of registered SMEs was

at around 22% The number of registered SMEs actually increased by approximately 36%

in 2001 and 34% in 200413 By the end of the year 2010, there were approximately 84,000established enterprises

Table 3.3: The number of registered SMEs in period 2000 – 2009

registered SMEs

Increasing rate of SMEs

Accumulation of number of SMEs

Source: White paper 2009, Agency for SMEs Development – MPI

The number of registered enterprises was about 34,100 SMEs in 2001, and has beenrapidly increased by approximately 12 times up to 499,591 enterprises within only one decade.This figure looks impressive and proves that the impact of bold reforms in businessenvironment made by the Enterprise Law (1999 and 2005) have been effective Despite of

economic difficulties in the period 2009 – 2010 due to the global financial crisis, the number ofregister SMEs has continued rising

The proportion of SMEs in the total number of enterprises in Vietnam has increasedand they have accounted for the major share in total enterprises Particularly, during theperiod of 2005 - 2008, the percentage of SMEs has increased from 96.8% to around 98%.This suggests the importance of SMEs in the economy during the process of economicintegration and industrialization (see figure 3.1)

Figure 3.1: The proportion of SMEs and other enterprises by labor

Note: Other include large enterprises Data source: The enterprise in Vietnam 9 years at the beginning of 21 century (GSO)

Looking at the structure of the SMEs sector by SMEs groups (based on the firmscale), we can see that the above impressive growth mainly came from the micro-enterprises group As can be seen in Table 3.4, during the period 2000-2009, micro-enterprises represented the highest proportion in the SMEs sector Also during the period2000-2009, the micro group recorded an overall growth of approximately 9%

In 2009, the micro group accounted for two third of the SMEs sector At the sametime, the share of small enterprises was declined by 6.2% The share of medium enterprisesgroup was also declined by approximately 2.6% This means that the main force ofincreasing in the total number of SMEs during the period from 2000-2009 was due to the

contribution of substantial growth of the micro enterprises group

Table 3.4: Changes in the structure of the SMEs groups

Year Micro Enterprise Small Enterprise Medium Enterprise

Source: White paper 20011, Agency for SMEs Development – MPI

Classified by the registered capital, the number of SMEs has been also dominantand accounted for over 80% of the total number of enterprises (see figure 3.2)

Figure 3.2: The proportion of SMEs and other enterprises by capital