State owned enterprises in VietNam perceptions of strategic direction for a society in transition

# MCB University Press, 0951-3558 State-owned enterprises SOEs in Vietnam Perceptions of strategic direction for a society in transition Philip C.. Nguyen National Economics University,

SOEs in Vietnam

169

The International Journal of Public

Sector Management, Vol 13 No 2, 2000, pp 169-177.

# MCB University Press, 0951-3558

State-owned enterprises

(SOEs) in Vietnam Perceptions of strategic direction

for a society in transition

Philip C Wright

School of Business, Hong Kong Baptist University, Kowloon Tong,

Hong Kong, and

V.T Nguyen

National Economics University, Hanoi, Vietnam

Keywords Vietnam, Change, Macro-economics

Abstract Explores, using face-to-face interviews, the perceptions of managers in state-owned

enterprises in Vietnam, as to their strategic plans Given that many of these enterprises will have

to be privatized, sometime in the future, it is surprising that little thought has been given to this

eventuality Suggests that the massive nature of the state sector (40-50 per cent of the economy)

will make it difficult for policy makers to enact change Outlines a macro-economic formula for

planned, gradual conversion, keeping this reality in mind.

Introduction

In Vietnam, the state-owned industrial/business sector still comprises 40-50 per

cent of GNP and 60per cent of domestic income (Tran, 1998) The Vietnamese

currency is not traded in world markets, and government policy seeks to merge

market economy concepts with a strong tradition of socialism (Draft, 1996)

Thus, the state-owned sector is expected to play a major role in the

modernization of the country

Faced with what might become a long-term economic slowdown, the key

question appears to be: how to build a competitive economy when confronted

with the forces of globalization, while still remaining true to socialist principles

Thus, strategic planning within SOEs becomes critically important, as (in

macro terms) the direction taken by the state-owned sector will, in large

measure, determine the strength and the direction of the economy

It must be stressed here that Vietnam is not a centrally-planned economy

Managers in SOEs have considerable latitude in charting strategic direction

Although the state sector cannot be described as vibrant or dynamic, these

companies are not all moribund, revenue-losing organizations (Ngo, 1998)

VINA Milk, for example, has developed an excellent line of products that

compete successfully with foreign competitors

Conversely, the government has been actively reducing the number of SOEs

(from c 12,000 to c 6,000), through a series of amalgamations and privatization

(Tran, 1998; Thanh, 1998) While this process has not gone smoothly,

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government policy seems firmly set towards freeing some large portion of the state-owned economy (Nguyen, 1998a)

Therefore, managers in SOEs now are faced with the problem of survival, many for the first time Either their particular enterprises will remain within the arms of the state, but with stricter performance targets and fewer subsidies,

or they well be ``equitized'' (equitization is the Vietnamese term for privatization), and forced to make their own way in the world Either way, the task will not be easy Carrying high debt loads and burdened by a lack of skills, many (but one should stress ± not all) of these organizations face an uncertain future (Nguyen, 1998a; McCornac and Wright, 1998)

Therefore, it is critical to understand how SOE managers plan their organizational futures, in that, despite ``equitization'', much of the economy still will consist of SOEs, at least in the medium-term future This paper, therefore, will explore both the concept of strategic planning within SOEs and perceptions of what should be changed, in macro-economic terms From these data, we will create a model that outlines possible future directions, in both policy formation and strategic planning

Methodology Conducting research in Vietnam is a difficult experience, since (as in many societies) there is little tradition of independent, confidential inquiry (Adair, 1995; Yin, 1989) In addition, the role of relationships in securing information from managers cannot be underestimated (Berrell and Wright, 1999)

In this project, for example, contacts were made through students, in order to gain entry to suitable research subjects ± individuals in the top levels of management Indeed, the fact that 36 senior SOE executives agreed to participate in academic research is regarded as a major breakthrough Thus, while our ``sample'' (n = 36) comprises a mere 13 per cent of SOEs (n = 280) in the Hanoi area, we view this research as a unique and a valuable contribution

to scholarly knowledge In this situation, a convenience, or judgmental sampling process, i.e working through relationships, was the only feasible way

to gain access to this group of senior managers (Sekaran, 1992) Supported by the work of Weiss (1994), we argue that it is preferable to create a pilot study using a small sample, rather than to conduct no research at all! We note Weiss's warnings, however, concerning the inappropriateness of generalizing from these findings and we will be cautious when drawing conclusions

The research instrument consisted of a short, three-item questionnaire, administered through face-to-face interviews The data then were categorized and frequency tables generated to draw out common themes

The sample consisted of four banks, 11 trading companies (import/export), seven public utilities enterprises (housing, gas, water, electricity), two in hospitality management (hotels and tourism), nine manufacturers, one airline and two service companies With such an eclectic sample, no attempt was made

to present the data by category It was felt that their common status as SOEs,

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operating under roughly the same regulations and economic conditions,

ensures the integrity of the sample In addition, much of the literature combines

all SOEs into one category (Ha, 1998c; Thanh, 1998)

The research findings

Perception of how the ``Asian crisis'' will affect SOEs in the next five years

The first question: ``How will your enterprise be affected by the ongoing Asian

financial/business crisis for the next five years? Please list the areas'', was

answered by all but one respondent (n = 35) and several respondents listed

more than one area (see Figure 1)

It is obvious from Figure 1 that productivity is a major concern Despite the

relatively low wage levels in Vietnam, many state-owned industries are not

competitive The textile industry, in particular, has been singled out, as

manufacturers have been forced to subcontract ``in order to survive fierce

competition of [sic] international markets'' (Huong, 1998; Manh, 1998) In other

areas ± cement is but one example ± poor quality and price combine to make

the product susceptible to off-shore competition (Nyoc, 1998) The importance

placed on the productivity issue, therefore, fits well with conclusions drawn

from the professional literature (Le, 1998)

As for the fear that domestic growth will slow down during the next five

years (Figure 1), reducing the considerable market for goods and services, this

issue was likely to be a major concern, as the Vietnamese have grown

accustomed to phenomenal growth rates In 1996, for example, exports grew by

33 per cent to US$7.2 billion and GNP grew by 9.3 per cent This growth

compared favourably with China's 9.7 per cent, greatly outstripping Western

economies (Canada +1.5 per cent; USA +2.4 per cent) (PECC, 1998)

By June 1998, exports were forecast to grow by `` just'' 13 per cent and,

despite official denial, in August 1998 the Dong was allowed to depreciate

slightly (Ha, 1998a) It is little wonder, then, that slowing domestic demand is a

major concern (Vietnam Economic News, 1998), as it is not difficult to equate a

sluggish domestic economy with a weakening export sector (Vietnam

Economic Times, 1998a)

Figure 1 Perception of issues affecting SOEs during the next five years

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Conversely, it is surprising that mobilization, or availability of capital, was perceived to affect only six enterprises, as there has been much debate over this issue (Chi, 1998a, 1998b; Ha, 1998b; Nguyen, 1998b) Similarly, exchange rate fluctuations, a major concern elsewhere, were mentioned only five times, lack of foreign investment only four, and cost of imported materials and equipment only three times All these issues seem to be major concerns in both government and private-sector circles (Vietnam Economic Times, 1998b) Three of the issues listed only once ± debt payment, fewer exports and bad loans ± might be subsumed into the general category: ``availability/mobilization

of capital'' (Figure 1), so they will not be discussed further It is surprising, however, that changing government policies were not regarded as a major concern, in that SOEs appear (in the press at least) to be in for a major restructuring (Ha, 1998b; Tran, 1998) As the equitization programme has faltered, however (Thanh, 1998), one might speculate that, as the respondents have seen government policies come and go, they are no longer concerned Obviously, then, it is not what is in Figure 1 that is surprising, but what is not in, or what was not perceived as important that surprises Except for some broad economic concerns, it is as if managers of these SOEs have been divorced from many of the major economic and regulatory challenges facing Vietnam

As the debt owed by SOEs now amounts to more than half of the country's gross national income (McCornac and Wright, 1998), perhaps it is felt that government ``loans'' will continue to isolate SOE managers from drastic change, for to allow SOEs to go bankrupt would be too great a shock to an already feeble economy

How SOEs' strategy has changed to cope with the Asian crisis Based on the answers to question one, outlined in Figure 1, the respondents then were asked to detail how strategy within their SOEs had changed Note that the question was purposely worded so that managers could indicate that

no change had occurred All respondents, however, were able to point to changes in direction, some major, some minor (Figure 2)

While only one respondent suggested that little change would be necessary, however, there is only moderate evidence that SOEs' managers are planning to take the painful decisions made by organizations in other parts of the world While there was some willingness to reduce costs (n = 7), or to substitute domestic equipment/materials for foreign imports, only five (14 per cent) had plans to downsize their enterprises Indeed, it would appear that, in large measure, diversification and market development were seen as the way ahead This perception does not match with reality of the marketplace, nor does it seem to take the government's desire for privatization (equitization) into account Just as, in general, the SOEs' managers' view of the next five years (Figure 2) does not seem to include many of the challenges widely thought to lie ahead, the idea that a strategy of expansion and diversification can be

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successful (without the attendant focus on productivity, efficiency and cost

cutting) does not fit with experience elsewhere, either in the West or in other

emerging economies, for example, China

Question 3: What changes in the economy ± in a macro sense ± are necessary to

address the problems facing your enterprise during the next five years?

This question elicited a surprising response, as reform of the state-owned

economic sectors was seen as one of the two most important (n = 14)

macro-economic changes that needed to be made during the next five years (Figure 3)!

That reform of the banking system (n = 14), along with flexibility in exchange

rates (n = 9), was mentioned often was expected given the amount of publicity

generated by these two issues (Chi, 1998a, 1998b; Ha, 1998b; Hoang, 1998)

Corruption, too, is regarded widely as a menace to economic growth, especially

smuggling and corrupt practice by government officials (Duc, 1998; Hau,

1998)

Figure 2 Strategies to be pursued

by SOEs during the next

five years

Figure 3 Perceived changes in macro-economic policy necessary during the next five years

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It is interesting to note that, while in a micro sense, SME managers seem to be trying to preserve the status quo, their macro-economic solutions are quite liberal, stressing reform and financial flexibility The more regressive, protective measures were suggested by relatively few respondents (Figure 3) Certainly, the major choices are well attuned with generally-accepted, mainstream economic views (Soludo and Shameen, 1998) The explanation for this dichotomy may lie in the realization that, while change is necessary, personal preference dictates that change occur elsewhere One might be quite liberal in a general sense, therefore, but self-preservation determines how we view our own jobs

Discussion

It would appear that the majority of our respondents do not intend to restructure their enterprises to compete within a global economy As Vietnam's economy is not yet open to unfettered competition, however, perhaps the social ramifications of re-engineering the state-owned sector are, at present, too awful

to contemplate In an economy where growth has slowed and where export markets have become unstable, perhaps a headlong rush to modernization is not feasible at this time

Rather than create massive unemployment, caused by an equally massive shrinkage in SOEs, perhaps the more humane policy would be to encourage private enterprise, while gradually downsizing the public sector The most inefficient, debt-ridden and largest money losers may have to be shut down, merged or restructured but, with such a large portion of the economy owned by the state, turning Vietnam into a capitalist enclave is not feasible at this time This moderate approach flies in the teeth of Western economic orthodoxy More than 50years of socialism, however, has created a society where expectations of what government can and should do are quite different from Western norms

This attitude was personified by remarks made during a government-sponsored conference for young ``entrepreneurs'' held in early September 1998 Typical comments included:

The state should set minimum prices for each product and establish a network of purchasing agents

Sometimes we have been forced to sell at a certain price [to dealers] whether we like it or not.

We have proposed that the Government ban imports [that compete with] domestically-produced goods (Vietnam News, 1998).

This kind of ``entrepreneurial'' thinking, while anecdotal, illustrates the strains felt by many Vietnamese when faced with the economics of the marketplace Also the wars that have given rise to the present political system are not forgotten in Vietnam For the first time in centuries the Vietnamese are free to choose their own destiny (Wright and Newton, 1998) Should another

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conqueror, this one economic and couched in terms like `` globalization'', be seen

to take over, there could be widespread resistance in government, domestic

business and the general population

Anecdotal evidence suggests, for example, that some young people are being

urged by their elders to shy away from joint ventures and to work for domestic

companies, so as to be true to their motherland This is a proud nation ± the

depth of nationalistic feelings should not be underestimated

Having urged moderation, this policy must be coupled with a programme to

make SOEs more efficient and, ultimately, to move them towards profitability

Long-cherished management practices and work attitudes must be changed

(McCornac and Wright, 1998) Managers must be held accountable for results

The expected outcomes may be different from in the West, but results need to

be measured and responsibility instilled into the SOE system Our proposed

policy of moderation does not mean neglect, nor is it a licence to lose money; it

is a call to design a uniquely Vietnamese way to modernize an economy

It is suggested strongly, based on experiences elsewhere, especially in

Russia, that a supportive infrastructure needs to exist before capitalism can be

introduced successfully That infrastructure, especially in terms of financial

transparency, contract law and freedom from burdensome regulations, has not

yet taken root in Vietnam SOEs, therefore, need to remain an economic

mainstay in order to prevent widespread social and economic chaos

The other side of this issue, of course, is the creation of an environment in

which the private sector will grow That topic is beyond the scope of this paper

but, if a ``modernization'' policy is to succeed, it must be coupled with a growing

private sector Otherwise, Vietnam will be saddled with a growing list of

inefficient, state-owned industries, unable to meet the needs of its people, while

being marginalized

Towards a model of modernization in Vietnam

Under this model (Figure 4), the state-owned sector, now the most important

pillar of the economy, gradually diminishes in importance as the private sector

increases in size as a result of infrastructure development Note, however, that

the state-owned sector remains a noteworthy player on the economic stage for

the foreseeable future

The second prerequisite is the development of human capital Preparing a

cadre of managers capable of performing effectively within such a system will

take time and considerable investment over the long term (Wright and Newton,

1998)

The key issue, both from a social and from an economic perspective, is to

monitor the change process and to make macro-economic adjustments when

necessary The expectations of the population need to be given the chance to

adapt over time

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