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Boosting sustainable development of private manufacturing and processing businesses

Boosting sustainable development of private manufacturing and processing businesses

A series of shortcomings and weaknesses of the private sector were defined and discussed at the fifth meeting of the 12th Party Central Committee recently concluded in Hanoi on May 10. The meeting showed that a majority of private enterprises are small-sized firms with low technology and slow innovation along with poor management, financial capacity, productivity, business efficiency, product quality and competitiveness who mainly participate in the low value-added market segment.


The trend of 'diminishing' size


According to the Vietnam Competitiveness Report, Vietnamese private firms lack a knowledge foundation and capital capacity to meet the needs of the global economy. Small and medium-sized enterprises (SMEs) account for 98.4% of the total number of private enterprises.


The lack of management training and limits in capital accumulation are barriers to improving the capacity of Vietnamese enterprises in order to move from a production economy to a knowledge-based economy. These are the major obstacles standing in the way of enhancing the technology, business and production level of enterprises and the national competitiveness.


Therefore, the acceleration of capital accumulation along with increasing capital efficiency and productivity of the private sector are important pillars to ensure sustainable development, helping Vietnam escape from the middle-income trap towards prosperity in the future.


The process of capital accumulation is of great importance to industrial production, particularly the manufacturing and processing industry which plays a leading role in the growth of the economy in recent years. In the manufacturing and processing industry, the number of SMEs in the private sector has increased rapidly from 10,399 in 2000 to 63,244 in 2014.


The accumulation of the total owner's equity is a solid basis for manufacturing and processing enterprises to increase total capital and form total assets. The total average capital in the manufacturing and processing industry was about VND860.22 trillion (US$37.85 billion) in 2005 and it increased by 3.58 times after 10 years reaching VND3,100 trillion (US$136.4 billion) in 2014. The capital growth rate of private enterprises in the industry recorded significant improvements in the 2008 - 2010 and in the 2011 - 2014 periods.


However, the size of private firms based on owner's equity revealed many problems. In 2006, the total number of micro and small enterprises was 21,926 which was 24.1 times and 9.7 times higher than the number of medium and large enterprises respectively. In 2013, the number of micro and small enterprises rose to 54,220 enterprises which was 38,67 times higher than the number of medium enterprises and 17,68 times higher than the number of large enterprises.


For more than a decade, the number of small and micro-sized enterprises has increased rapidly, overwhelming the number of medium and large-sized enterprises. In other words, private businesses in the manufacturing and processing industries are following the trend of decreasing in size.


Small scale and low level equity will lead to reduced access to new technology and modern knowledge. Compared with other countries in the region and countries with a similar level of development in terms of average income, the accumulation of owner's equity of Vietnamese enterprises is much slower, resulting in the very small size of enterprises despite doing business over the long-term.


This is also the reason why the labour productivity of SMEs in the manufacturing and processing industry in Vietnam is lower than many other countries although the working capacity of Vietnamese workers is not less than that of other countries.


Promoting the formation of private enterprises with medium and large scale


Boosting the process of capital accumulation and increasing the size of owner's equity of SMEs in the processing and manufacturing sector are of great significance.


In addition, the State needs to put forth mechanisms and policies to support SMEs to achieve this goal. The accumulation of owner's equity will bring about numerous benefits including increasing the number of medium and large-sized enterprises and improving the structure between small and micro enterprises and medium and large enterprises.


Improving the size of owner's equity, particularly through the reinvestment of profits will considerably improve the competitiveness of enterprises and the entire manufacturing and processing industry.


Profit is the premise for the accumulation of owner's equity based on internal resources of private enterprises. However, over one third of enterprises in the manufacturing and processing industry have reported losses for many years. Around 21-45.4% of enterprises in the manufacturing and processing industry posted losses in the 2007-2014 period based on the after-tax profit target, according to the annual Vietnam Business Report 2015 conducted by the Vietnam Chamber of Commerce and Industry in 2016.


Losses create negative impacts on the capital accumulation of enterprises in relation to several aspects including diminishing owner's equity of enterprises and reducing owner's equity over the years.


Therefore, corporate development policies should focus on enhancing the quality and performance of private enterprises rather than on the number of registered and newly established enterprises. At the same time, it is necessary to encourage the formation of private Vietnamese firms that have high competitiveness and which are capable of being linked with FDI enterprises.


The key to a higher position in the global value chain in early industrialised countries in East Asia is a dynamic domestic private sector. When Vietnamese enterprises are able to acquire know-how and have a higher global competitiveness due to technology upgrading and advantages of capital and production scale, Vietnam can set the target of having several manufacturing and processing enterprises taking the lead in the global value chain. In such circumstances, profits will be much higher than other positions.


In addition, the State should have policies to encourage and promote the formation of medium and large sized private enterprises and large private conglomerates, especially in the manufacturing and processing industry.


These enterprises will have more favourable conditions to accelerate the transition to a growth model based on productivity, quality and efficiency. They will also help to promote the development of high value-added products and industries along with boosting the connection via the global value chain and enhancing the position and competitiveness of Vietnamese private enterprises.