Impacts of start-ups and SMEs on the nature of work and employment in Vietnam: perspectives from evolutionary economics

Impacts of start-ups and SMEs on the nature of work and employment in Vietnam: Perspectives from evolutionary economics LE ANH KHANH MINH The University of Queensland – a.le@uq.net.au

Impacts of start-ups and SMEs on the nature of

work and employment in Vietnam:

Perspectives from evolutionary economics

LE ANH KHANH MINH The University of Queensland – a.le@uq.net.au

Abstract

Never has the trend of start-ups and small-and-medium enterprises (SMEs) risen so rapidly

in Vietnam In this context, these new business entities alter thoroughly the nature of work and employment in the economy The impacts can be studied using evolutionary economics because the mainstream, traditional thoughts have failed to incorporate institutional and social factors into analysis While traditional schools of thoughts view the main economic figure to be individual who is tasked with making decisions at a period of time under resource scarcity, recent heterodox perspectives start to adopt the fact that agents are also subject to history and complex systems of rules It is the meso-level movements that drive evolutions in behaviours of the micro, individual rule-carriers and in the macro domain of the whole industry or economy The continuum does not range from ‘micro-’ to ‘macro-’, but also includes ‘meso-’ in between Using micro-meso-macro framework from the evolutionary school, the paper seeks to explain the impacts of start-ups and SMEs at micro- and macro-level by looking from the meso-perspective In doing so, this exploratory paper also aims at laying out ideas for further research into the economic dynamics of start-ups, while adding, though little and incremental, contribution to the literature on evolutionary economics in Vietnam

Keywords: start-ups and SMEs in Vietnam; nature of work and employment; evolutionary

economics; micro-meso-macro; rule; complex system

1 Introduction

Although the start-up and SME trend is blooming in Vietnam, the start-up ecosystem remains an understudied aspect The rise of these new economic entities has altered the nature

of work and employment in the country More focus is placed on soft skill training and

extra-curricular experience rather than traditional education Huge and successful companies now invest more in new businesses and talents The idea of life-long career in one organization is becoming less common, replaced by the tendency to hop between jobs and freelancing These are only a few movements in the recent employment scene in Vietnam In the near future when there are more resources pouring into innovation and entrepreneurship, more changes can be expected It is time to start studying start-ups and SMEs and their impacts on the economy

As innovation, entrepreneurship, start-ups and SMEs are dynamic by nature, frameworks from mainstream, neoclassical economics may not serve well to analyse the impacts of them on the nature of work Therefore, the author feels the need to take the perspective of evolutionary economics, in particular the micro-meso-macro framework by Dopfer et al (2004), to look at the changes At this stage of research, the paper aims to provide

an exploratory survey of the impacts that start-ups and SMEs have on the employment scene in Vietnam

The outline of the paper is as followed: First, the paper seeks to provide an overview of evolutionary economics and its main idea in contrast with mainstream neoclassical school, followed by the micro-meso-macro framework It then discusses the impacts of start-ups and SMEs at three levels: meso, micro and macro Among these, the meso-level analysis is further divided into four categories based on the taxonomy of rules: cognitive, behavioural, social and technical For readers’ convenience, these impacts are denoted as [Mic], [Mac], [C], [B], [S] and [T], corresponding to micro-, macro-impacts, cognitive, behavioural, social and technical rules

A full summary table of these impacts can be found in the conclusion part of this paper

2 The Evolutionary Economics Perspectives

2.1 Evolutionary economics – An overview

Evolution economics emerged as a new economic school of thought only a few decades ago However, the original idea of the branch was rooted since the late nineteenth century In a 1898 article, Thorstein Veblen called into question “Why is economics not an evolutionary science?” and coined the idea of a new branch of economic thinking – evolutionary economics Veblen argued, in the article, that economics, as with other modern sciences, are evolutionary sciences (Veblen, 1898) Since then, many famous economists have made significant contributions to this modern, evolutionary line of thinking Besides Veblen with the notion of institutions, habits and norms as determinants of economic choice, there have also been other economic philosophers who have exerted considerable influence on the branch These include Joseph Schumpeter with his work on entrepreneurship, innovation and creative destruction, Friedrich Hayek with his notion of self-organization via knowledge, Kenneth Boulding and the parallel comparison

between biological economics and evolutionary economics, Richard Nelson and Sidney Winter with their evolutionary theory of economic change, and Geoffrey Hodgson with his extended work on social institutions Following the tradition of evolutionary economics, there have also been recent economists in the field: Kurt Dopfer, John Foster and Jason Potts with their micro-meso-macro framework for economic analysis, Jason Potts and Brian Loasby with complex system theory, Peter Earl and Tim Wakeley on business economics and consumer theory, and Thomas Mandeville on information economics

In essence, evolutionary economics takes its main idea from biology’s Darwinism – it treats Darwin’s evolutionary theory as a starting point of the new thinking line Whereas the main analysis figure of biology is gene and genetic material, those of evolutionary economics are rules

or routines (Boulding, 1983) Dopfer & Potts (2015) denoted a rule as the idea that organizes actions or resources into operations and, as such, economic actions or resources are the product

of rules At individual level, routines or rules are the knowledge within the socio-economic context that shapes human’s cognition, behaviour, convention, and habit At firm level, routines are what determine corporate structure, organizational culture and features of the goods and services that a firm offers to the market These routines are emergent phenomena that are socially sourced, although they may have started with individual experimentation (Earl, 2017)

As with the passing down of genes to later generations, evolutionary economics places emphasis

on the passing down of rules and routines in the economy across time Mutations are viewed as similar to innovation, which is an origination of new rules and routines in the economic complex system Innovation ultimately changes relative competitive fitness of rivals Any rules

or routines that have the best competitive fitness are retained and replicated by other rule carriers, leading to wider application of the routines or rules on which the success was based The process of changing rules is necessarily the process of knowledge growth, which in turn, is key to economic development

Darwin’s biological evolution Evolutionary economics

Gene and genetic material Rules and routines as socially sourced, emergent

phenomena Selection and passing down of genes best adapted

to changes in external context

Competition, selection, diffusion of rules and routines with competitive fitness to the system

rules and routines

Figure 1 Evolutionary economics and Darwin's biological evolution

By definition, Veblen notes that evolutionary economics “must be the theory of a process of cultural growth as determined by the economic interest, a theory of cumulative sequence of economic institutions stated in terms of the process itself” His view places emphasis on the

feature of path dependency, co-evolutionary process, and sets of institutions in economic analysis In other words, economics is not merely a computational cost-benefit analysis; rather, economics should also incorporate insights from other sciences that study human’s nature and behaviour, such as sociology, history, philosophy, and moral studies Movements in the economic sphere, including behaviour, decision, thinking, and evolution, are all products of the interactions in the complex system of rules and routines throughout history and across context Evolutionary economics differ from the currently dominant, mainstream neoclassical economics in many ways Firstly, the two lines of economic thinking hold contrast views on the nature of human, or more broadly, economic agents In mainstream economics, the economic human, homo economicus, is portrayed as having perfect rationality and computational capability He is self-interested and utility-maximizing creatures whose quest is to optimize his welfare under certain resource constraint Meanwhile, evolutionary economics consider human

to be product of contexts This is in line with Veblen’s institutionalist view that human is a creature of habit that follows socially embedded rules and routines unconsciously In deed, we

do not simply gather information from the environment, compare the cost and benefit of each scenario and make decisions Our actions are drawn from a pool of habits, depending on their contingencies The use of a habit reinforces its probability of being chosen again in the future In this way, there is no given set of ranked preferences, but a set of habits with varied propensities (Veblen, 1898)

Secondly, evolutionary economics also differ on the assumption of information in the economy Mainstream thinking assumes an environment of perfect information, where everyone is fully aware of all metrics and variables necessary for making decisions in his or her best interest This is not usually the case in reality as human is subject to bounded rationality with a certain set of available information (Simon, 1972) As a consequence of this imperfect information world, there exist transaction cost, search cost, cost of switching or changing mindset and behaviour, marketing cost of making the products known to target consumers, and barriers to entry and exit Evolutionary economics assumes the above as problems of knowledge

Thirdly, evolutionary thinking does not view the economy to tend toward a state of equilibrium In mainstream economics, after a change in the economic system, such as a price change, the system eventually pulls back to the state before the change happens This reflects a conception of time as logical and reversible (Robinson, 1980) In this sense, any future events can be predicted upon probabilities of scenarios Recent heterodox economics hold a contrary view of irreversible time flow: Any disturbance in the economic system does not lead back to the previous state, but to a new state of new habits and their attached propensities As Bausor (1982, 1984) and Shackle (2010) denoted, a particular choice results in a certain outcome and

new information, which alters perception and worldview of the decision-maker, who would then change the choice in the next stages of time, making an endless loop Evolutionary economics also emphasizes the role of history and institutions in economic evolution Small shocks can lead to big difference in the long run, creating system lock-ins that make it impossible to go back and do differently As such, evolutionary economics do not see the economy under the equilibrium approach Instead, it pictures the system as a process of interactions and selection of rules and routines underlying micro- and macro-level decisions and behaviours: a co-evolutionary process Economic evolution is essentially evolution of knowledge embedded in the socio-economic ground of society

Human agent as self-interested, utility-maximising

creature with perfect rationality and hedonistic

computational capability

Human agent as creature of context, habit and bounded rationality, following embedded rules; actions drawn from a pool of habits according to the habit’s propensity of use

Perfect, symmetric information Only some certain set of available information;

assume problems of knowledge and costs of transaction, searching, switching, changing lifestyles, marketing, and barriers to entry and exit Logical, reversible, ergodic view of time; future

events happen according to predicted probabilities

Historical, irreversible, non-ergodic view of time; small shocks lead to big changes and system lock-ins; history and institution matters, loop of new information and new decisions

The economy tends toward an equilibrium state

after shocks

No equilibrium; the economy cannot return to the state before shock; co-evolutionary process of information, rules and decisions keep the economy changing

Figure 2 Mainstream economics and Evolutionary economics

3 Micro-meso-macro

A framework used to analyze the evolution of economic system is the micro-meso-macro framework Dopfer et al (2004) developed the framework based on the ontology of evolutionary economics that the economic system, in nature, is a “population of rules, a structure of rules, and a process of rules” The authors do not see the division of economics into macro and micro sufficient to examine economic evolution: “From the evolutionary perspective, one cannot directly sum micro into macro” In line with this thinking, economics is not merely defined by decisions and behaviours of individuals, firms, and the aggregate consequences Indeed, there must also be consideration for history, institutions, norms, and rules in the

society From micro-level to macro-level, there needs an intermediate level that describes the underlying institutional factors that are actually driving economic changes This level is the meso-level lying in between the micro-macro continuum

Figure 3 Unit of analysis

Dopfer et al (2004) characterize the economy as a highly complex system of rules, which interact with each other and change over time These dynamic interplay and evolution of rules give rise to new rules or enhance existing ones, driving economic evolution These drivers happen at the meso-level of the system in a process of origination, adoption, and retention of rules A meso unit consists of a generic rule and its population of actualization, which is made

up of agents and agencies carrying the rule From micro perspective, economic agent is “a rule-using and rule-making animal”; in other words, human is a product of institutions, expectations, surroundings, that creates and follows these rules simultaneously and unconsciously Such rules shape the cognitive reasoning and behaviour of economic agents, such as perception of work, organizational culture and division of labour From macro perspective, meso units make up the entire system or structure of concern Many rules from the broad environment, including economic, social, technological, political, ecological, and so forth, all dynamically interact and construct the big picture, particularly an industry or a whole economy The meso units within a system define the features of such system, such as industrial organization, market structure, management and governance Any change in generic rules at meso-level induces changes at other levels In the micro domain, it is the change in the cognition and behaviour of rule carriers and how they interact, whereas in the macro domain, it is the change in the coordination structure between meso units

4 Impacts on the Nature of Work and Employment

4.1 The meso domain

At meso level, the main unit of analysis is the meso unit, comprising of a generic rule and its population of actualization One way to classify generic rules is the taxonomy of rules (Dopfer & Potts, 2015), which divides rules into subject rules and object rules Subject rules are those that shape agents’ internal mind and external interaction with other subjects, which are then categorized into cognitive and behavioural rules Object rules are rules for organizing things, either between many subjects or objects, and further comprise of social and technical rules

Generic Rules

Figure 4 Rule taxonomy

In the case of Vietnam, the trend of start-ups and SMEs has given rise to changes in many rules and routines in the economy The rules not only originate, diffuse and retain by themselves, but also affect and be affected by other rules, creating a co-evolutionary process of cognitive, behavioural, social and technical rules in the economy

Cognitive rules [C]

Cognitive rules are subject rules for thinking and perceiving the world that operate in the internal mind of the subject – the economic agent In Vietnam, the perception and expectation of job and career have transformed dramatically since the rise of start-ups and SMEs Office hours are still 8 hours per working day, but the actual hours people are on the job can exceed the total amount of time they spend in the office [denoted C1; a complete table of impacts can be found in the conclusion] With the aid of technology [T1, T2] jobs can now be brought to places other than the office, even home and on holiday, so people can be “at work” outside office hours [C2] The emergence of new types of jobs on part-time, contractual or voluntary terms [Mac2] leads

to the concept “freelance” [C3] Prior to the wave of start-ups, labour would view employment

as having a job with long-term contract and secured wage and benefit However, people now also see freelance, or self-employment, as a type of employment where labour do not work for a firm or an employer, but manage their own business Due to the contractual, short-term nature

of freelancing jobs, freelancers are also seen as job-hopping individuals [C4]: They switch fast between jobs and can work on many jobs at a time The retention rate of freelancers is much lower than of payroll staff, but that does not mean payroll staff do not job-hop Such shifts to flexible working hours and spaces, freelancing, and job-hopping have altered the traditional mind-set for life-long career in one single organization [C5] As society becomes more open to new types of work, it is possible that a person has experience across many positions and organizations

An entrepreneur, whether on payroll or self-employed, in this new scenario also looks different from the one before the start-up trends He is a risk-taking, failure-tolerating [C6] person who desires to have his own business [C7], as well as a self-starter [C8] To do so, one must be aware that an inventor is not necessarily an innovator: A new invention or discovery does not always lead to a breakthrough If one is to characterize the new invention as a codified rule or knowledge, there must also be tacit knowledge to complement and diffuse the invention into an innovation (Leonard & Sensiper, 1998) Tacit knowledge is the knowledge that is

difficult to codified into writing or visualization or transferred between agents Examples of tacit knowledge include interpersonal skills, ability to build network, leadership traits, and intuition Hence, employers in the new scenario place a stronger focus on soft skills to complement the codified knowledge from their academic education [C9] Furthermore, in early stages of operations, start-ups and SMEs do not usually have clear and specialized division of tasks inside the organization [B1, B2] One person may take on many tasks of different functions Therefore, there is also a tendency of employers to develop a diverse set of skills instead of focusing on a narrow specialization [C10] For example, someone who is in charge of communication may also take on marketing, or one who works in the finance department can also do crowd-funding for the organization Because of these changes in the nature of work and division of labour, the internal cognitive rule of economic agents – labour – also experience a change from recognition

of tacit knowledge (soft skills) and multi-tasking ability

Behavioural rules [B]

Behavioural rules are embedded in the subject’s mind, operating his or her interaction with the external environment Vietnam’s employment scene has not stayed out of the world changes

in the way people interact with each other in the workplace As start-ups are brought about by self-starters [C8] who desire to have their own business [C7], these small companies are usually short in finance and thus, lack of staff to cover every area of the business They manage to operate with limited resources by having the small personnel to multi-task different functions This means that the division of labour is not clear between staff [B1]; nor is the task division specialized to suit each person’s capabilities One staff can work on jobs of many functions, and the tasks can intersect with the others, creating a complex personnel structure [B2] Unclear division of labour leads to the need to communicate for better collaboration, resulting in a mind-set toward cooperation and network [B3] Also arise in this behavioural rule change is the notion of appraisal and feedback mechanism [B4]

Along with the rising need to cooperate, another result of the lack in human resources is the requirement of independence [B5] With limited resources and the demand to be multi-tasking, personnel of start-ups must be able to work independently without little supervision This is also the common requirement in job advertisement nowadays For start-ups with insufficient internal capabilities, outsourcing parts of its functions is an option to get the job done [B6] Outsourcing activities not only give rise to freelancing [C3], but also reorganizes the labour market: By introducing new types of jobs, such as part-time, contractual, or voluntary to the market [Mac2], these start-ups become competitors to full-time job companies, competing for labour supply and talents [Mac2]

Changes in labour division and mind-set for cooperation affect the physical organization of interpersonal organization [B7] Previously, each firm would have its own office, however small

it might be For larger firms, it is common to see long lines of desks separated into cubes so that each employee has his own workstation This is because the jobs in large firms are specialized to each staff; there is still the need to communicate, but the interactions do not need to be as intense and frequent as in start-ups With the rise of start-ups and increasing need to collaborate, these small firms have to work around its budget constraint by arranging all its functions in one office space Alternatively, firms can choose to share the workplace with others,

as seen in co-working spaces and hubs [Mic2] where a large office-furnished hall hosts employees from many different start-ups Apart from changes to open, collaborative workplace, there emerges the habit of working from home and round-the-hour work, thanks to advances in technology [T1, T2] In addition to changes in physical workplace, the total time spent on the job also faces tremendous extension from 8 hours to however long the job requires [C1]

Collaborative mind-set also gives rise to the supportive attitude of successful businesses towards start-ups and SMEs In neoclassical economics and in earlier times, firms are seen as competitors to each other, competing for resources and revenue Large, incumbent firms in the market would see new firms as a threat to their profit and would take strategies to hinder their entry into market Beside such substitution view, the late reality has also embraced a complementarity view that both large firms and start-ups can be beneficial from strategic alliances Embedded pedagogic nature [B8], along with expected value in return, drives successful businesses to invest and build capacities in start-ups in many forms, ranging from angel investment, venture capital, to incubation and idea camp [Mic3]

Social rules [S]

Social rules are object rules that bring together people into social organizations While behavioural rules define the way people interact with social surroundings within the subject’s mind, social rules look at it from an external perspective, examining how many subjects influence and get influenced by others Social organizations exist in many forms, from firms, hierarchies, networks, to markets, laws, and other institutions

In Vietnam, there have been dramatic changes in social organizations since the rise of start-ups and SMEs Firms have started to adopt a less hierarchical management system [S1], allowing more communication and feedback between staff and functions [B4] It is less common

to see U-form structure of firm, in which the firm is clearly divided into functions (e.g production, marketing, finance, and research), with management at the top notch More of M-form structure is embraced, in which the firms is divided into sets of miniature U-M-form companies, each handling a particular product line (Williamson, 1991)) In this organizational

structure, each sub-firm acts as a sub-system of the whole one that is independent in terms of making profit and tactical operations The head office remains in charge of overall strategic management to align all sub-firms with overall direction, marketing and funding Just as in start-ups where each staff can be doing various tasks of different functions, sub-firms have sovereignty and flexibility in allocating resources to internal departments For large firms, this decomposable structure [S2] is also a way to reduce risks of shocks on the entire company because the system is composed of sub-systems In case of disturbances, only a part of the firm

is damaged, while the others are not harmed as much

Industrial structure has undergone major changes, too The substitution and competition view is not as dominant as before; rather, actors in industries now have a more open view towards complementarity [S3] Network of firms and start-ups [S4] are formed and serve as platforms for knowledge sharing and exchange between those who would previously compete for resources These networks can be in the form of forum, strategic alliance, partnership, competition, and co-working space [Mac2] This movement has transformed industrial organization into a complex network structure where entrepreneurs and expertise not only compete for financial and human resources but also interact and share ideas together [Mac2] For such networks and alliances to sustain, an essential institution is trust [S5] Trust is an underlying element of interpersonal interaction that helps reduce transaction costs and failure risks In particular, in the case of recruitment, there is a growing trend of recruitment within a network of entrepreneurs who recruiters would expect to be like-minded and passionate about start-ups Cooperation between actors also requires trust as a foundation for them to work together Here, the institution acts to bind actors to their commitment, or else they would face distrust and lose credit in the start-up community

Technical rules [T]

If social rules are rules for organizing human subjects, technical rules are for organizing matter and know-how Changes in these rules are best seen in several advances in technology, especially in information and communication, which have been facilitating the emergence of start-ups and SMEs Technical rules are embodied in electronic device (computer, laptop, smartphone, and tablet) [T1], connection network [T2] (the Internet, wireless connection, and 4G), and websites, applications and social media channels [T1, T2, T3, T4] These rule changes have enhanced the access, processing and communication of information and knowledge in the economy According to Live Stat Internet (Internet Live Stats, 2017), more than 49 million people in Vietnam had access to the Internet in 2016, making a penetration rate of 52% out of total population