A steel production line at a factory run by the Hoa Sen Group. Viet Nam needs to create medium-sized and large businesses capable of supplying foreign firms and supporting smaller businesses, experts say. — VNA/VNS Photo The Anh

HA NOI  (Biz Hub) — Viet Nam needs to create medium-sized and large businesses capable of supplying foreign firms and supporting smaller businesses, the Viet Nam Development Partnership Forum heard in Ha Noi last week.

Forum discussions focused on ways to promote the development of the local private sector, especially small and medium-sized enterprise (SMEs), and help firms increase their competitiveness and participate more effectively in global value chains. They will also cover the development of supporting industries in a move to reduce imports.

The participation of the Vietnamese private sector in the global production network through closer connections with multinationals and direct export was a good way to step up technology transfer and promote economic development, speakers said.

However, while Viet Nam focused on increasing new business registrations, the country missed the opportunity to improve firms' capacity to take full advantage of global value chains.

About 2 per cent of active firms in Viet Nam are large companies and the figure is similar for medium-sized enterprises, according to the Viet Nam Chamber of Commerce and Industry (VCCI). Micro businesses (those with less than 10 staff members) account for as much as 66-67 per cent of total enterprises. If active household businesses are taken into account, micro businesses may account for as much as 99.9 per cent of firms. Their small size makes most local firms not competitive enough to export to other countries or participate in the global production network.

The lack of a Vietnamese private sector capable of joining global value chains has resulted in the breakdown and segmentation of local supply chains. Having more medium-sized enterprises would help Viet Nam's performance export markets, participants said.

The risk involved is that potential investors may not come to Viet Nam. This will be a more serious problem when labour costs – the key factor for foreign investment attraction to Viet Nam – increase. Unlike China or India, Viet Nam is not large enough to lure FDI enterprises looking for a potential venue for production covering the whole region. Therefore, Viet Nam needs strong supporting businesses to draw investment.

The representation of Vietnamese enterprises in global value chain production networks is low relative to other similar-sized ASEAN economies. Only 36 per cent of Vietnamese firms participate in the production network, while that number is closer to 60 per cent in more developed economies like Malaysia and Thailand. Only 21 per cent of local SMEs participate in global value chains compared to 30 per cent in Thailand and 46 per cent in Malaysia.

SMEs cannot compare to larger firms in participating in production networks. The importance of business size can be demonstrated in the contribution of SMEs to export turnover, which is consistently lower than larger firms. In Viet Nam, SMEs contribute 16.8 per cent – lower than other Southeast Asian countries, except Indonesia – while larger companies contribute 83.2 per cent.

As of January 1, there were 764,374 registered businesses under the Enterprise Law of which 391,547 were active.

In the first ten months of 2014, 60,023 companies with registered capital of VND352.5 trillion (US$16.57 billion) were registered as start-ups, a 6.5 per cent decline of the number of registered firms and a 9.5 per cent increase in registered capital year-on-year.

The private sector accounted for about 96 per cent of active businesses. — VNS