Analyses & Etudes

Vietnam to facilitate SME growth through financing and tax incentives

Increased access to funding and new legislation are among the measures being rolled out by the Vietnamese government to support the country’s small and medium-sized enterprises (SMEs). 

Late last month the Ministry of Planning and Investment (MPI) announced four preferential loan programmes to be made available to SMEs this year under its SME Development Fund – originally established in 2013. 

Of the VND560bn ($24.7m) set aside for the fund, VND100bn ($44.1m) will be extended to companies with a focus on innovation; VND180bn ($79.4m) to businesses in the agriculture, forestry and aquaculture sector; VND180bn ($79.4m) to processing and manufacturing firms; and VND100bn ($44.1m) to water supply, management and treatment companies.

SMEs will enjoy a 24-month grace period from the time of the original loan approval, though maximum disbursements will vary depending on the programme.

The fund aims to fill part of the financing gap left by conventional banks, which have not traditionally extended loans to smaller outfits due to perceived risks, despite these firms contributing roughly 40% to Vietnam’s GDP, according to the MPI. 

Currently, SMEs make up 97% of all companies operating in the Vietnamese economy, providing employment to more than 50% of the national workforce. 

Supply chain links

While the availability of new lines of credit will be welcomed by many SMEs, the MPI’s development funding is limited.

Another option for smaller firms is to seek private investment from domestic and foreign companies.

Such a route allows enterprises to secure funding by demonstrating viable cash flow and established business connections, rather than having to document hard asset backing for loans, as required by banks.

However, the difficulty of achieving such support was brought to light by reports at a seminar hosted by the International Finance Corporation in Ho Chi Minh City in October, which said that only 21% of Vietnamese SMEs are linked with global supply chains. This compares poorly with regional neighbours such as Thailand, where 30% of SMEs have established connections, and Malaysia, at 46%.

Virginia Foote, president and CEO of business advisory firm Bay Global Strategies, and board member of the American Chamber of Commerce in Vietnam, echoed this sentiment.

“It has been difficult for SMEs to grow business with firms that are 100% foreign-owned, as well as those that operate in industrial parks or manufacturing zones, because smaller firms have struggled to break into the supply chain,” she told OBG.

Seeking to overcome this difficulty  and bolster connections with international markets, close to 110 SMEs from Vietnam took part in a conference in Singapore in mid-March, part of a broader effort to seek investment from Vietnam’s third-largest foreign investor.

Speaking at the event, Nguyen Tien Minh, Vietnam’s ambassador to Singapore, said that Vietnamese firms could better serve regional and global markets via business connections with Singapore, which already has more than $38bn invested locally.

Thian Tai Chew, a representative of the Singapore Business Federation, told media at the conference that the ASEAN region was where Singaporean businesses most wanted to expand their investments, with Vietnam ranked third among South-east Asian nations for targeted investment.

Legislating for growth

Many of the hardships faced by small businesses in the country could be overcome by a draft law submitted by the MPI at the beginning of November. 

Known as the Law on Supporting SMEs, the legislation aims to formalise regulations for smaller companies, as well as their operating environment and support mechanisms, with Parliament expected to vote on the final version of the law later this year. 

Of the 45 articles contained in the draft, one aims to cut the corporate income tax rate for SMEs by three percentage points to 17% between 2017 and 2020.

Some critics have highlighted that this is not a big enough reduction, given that many multinationals are currently subject to a much lower 10% rate on earnings.

Nonetheless, Pham Dinh Thi, director of the Tax Policy Department under the Ministry of Finance, said the plan would “ensure that there are thousands of newly established enterprises every year”.

A proliferation of new small businesses could help offset lower tax earnings and is line with the government’s aim to increase the number of SMEs operating in the country from 600,000 to 1m by 2020.

This Vietnam economic update was produced by Oxford Business Group.