Vietnam Issues Investment Incentives for SMEs
- Vietnam introduced Decree No 37/2020/ND-CP to include small and medium-sized businesses from accessing investment incentives.
- The Decree underlines government support for SMEs and will take effect on May 15.
- Investors should seek the assistance of local advisors to better understand how they can benefit from these incentives.
As the outbreak of COVID-19 hampers business activity, Vietnam introduced Decree No. 37/2020/ND-CP (Decree 37) on March 30 to update the list of sectors and industries access to investment incentives under Decree 118/2015/ND-CP. The move underlines the government’s efforts to support businesses and particularly small and medium-sized enterprises (SMEs) affected by COVID-19.
Decree 37 will take effect on May 15.
The regulation expands the list of business lines eligible for investment incentives. This includes four types of SME business lines which are:
- Small and mediums sized enterprises (SMEs) supply chains;
- Business incubators for SMEs,
- Technical support facilities for SMEs; and
- Co-working spaces of SMEs.
The aforementioned businesses will now be eligible for import duty exemptions on fixed assets as well as other exemptions based on location.
SMEs continue to play a major role in Vietnam, accounting for 98 percent of all enterprises, 40 percent of GDP, and 50 percent of employment or 1.2 million jobs. As per the Ministry of Finance, Vietnam has more than 600,000 firms, with nearly 500,000 private and 96 percent being small and micro-enterprises.
However, SMEs continue to face problems such as access to finance, market access, and competition with foreign firms. We highlight three issues faced by SMEs below.
Access to finance
Credit access is a major concern for the Vietnamese SMEs. Banks providing commercial loans prefer to allocate their resources to larger firms rather than SMEs. According to banks, higher default risks, lack of financial transparency, and lack of assets for a mortgage are the major factors for not providing loans to SMEs. SMEs have to increase transparency and introduce newer production technologies, to reduce risks and increase efficiency to increase their chances of acquiring commercial loans.
Global supply chains
A study by the International Finance Corporation shows that only 21 percent of Vietnamese SMEs are linked with global supply chains, much lower than 30 percent and 46 percent in Thailand and Malaysia respectively. Integrating further with global supply chains in terms of procurement, operations, and sales will allow firms to manage competition, reduce risks, and reduce production costs, which currently is 20 percent higher than those of neighboring countries, such as Thailand and China.
R&D in Vietnam is mostly concentrated in larger firms. Private sector firms invest only about three percent of their budgets in R&D, leading to reduced efficiency and higher production costs. Domestic firms have to focus on digitization and innovation if they want to compete with foreign firms as the global economy moves towards Industry 4.0. The government has to work with organizations to raise the technology capability of SMEs through programs supporting research and technological development.
Vietnam considers SMEs as an important driving force for its economy While concerns remain, the government introduced the Law on Support for Small and Medium Enterprises No 04/2017/QH14 which took effect in January 2018 which seeks to support SMEs. Later in May 2019, the government issued Circular No 06/2019/TT/BKHDT on network consultants for SMEs and Circular No 05/2019/TT/BKHDT on subsidies for training courses for women-owned SMEs. There are also several government and private funded programs and organizations lending support to SMEs.
Despite this, SMEs continue to face challenges due to unclear guidelines, vague supporting policies, and implementation of the laws by local authorities. To address these issues the government has proposed a draft to the new Law on Investment, but this is likely in early 2021. Decree 37 aims to fill this gap and help SMEs during the pandemic.
Decree 37 is also likely to further help startups by attracting more investment including by foreign investors. In Vietnam’s Innovation Ecosystem 2019 report by the Australian Trade and Investment Commission, the report stated that Vietnam has the third-highest rate for startups in Southeast Asia.
The Decree will make it easier to access incentives such as access to land and credit support initiatives. In addition, the regulation will help SMEs aid in recovering the economy as Vietnam looks to restart its economy after COVID-19.