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Startups in Vietnam

Author: Linh Tong, International Eurasia Press Fund

2016 was called ‘the year of the startup’ in Vietnam. Never before has the Vietnamese government shown so much support for startups. Entrepreneurship has been emphasised as a key driver for Vietnam’s economy by the national media and in almost all official speeches made by Vietnam’s new Prime Minister Nguyen Xuan Phuc.

There have been 39,580 new startups with a total registered investment of 369.6 trillion dong (US$17 billion) in the first four months of 2017 alone, which is a 14 per cent increase in the number of startups and a 54 per cent increase in registered investment compared to the first quarter of 2016. According to Vietnam’s Ministry of Planning and Investment, of the 110,000 businesses registered in 2016, more than 90 per cent paid taxes, showing signs of stable operation.

In order to evaluate the real potential of Vietnam’s startups, we must look at the seismic changes in Vietnam’s political economy — particularly the recent fight against corruption. Leaders like Trinh Xuan Thanh, Vu Huy Hoang and most recently Dinh La Thang have been accused of causing millions of dollars in losses during their leadership of PetroVietnam — Vietnam’s largest state-owned enterprise (SOE).

While this anti-corruption trend is widely viewed as Communist Party infighting and an effort to curb growing political distrust among the Vietnamese population, it also signals that the government has recognised the ineffectiveness of SOEs, paving the way for the privatisation process. The government understands economic liberalisation is a must to sustain the regime’s power.

There are also vital economic factors. For instance, the oil price crisis of 2014 led to a 57 per cent drop in state revenue earnings from oil, a loss of US$255.3 million. The Trans-Pacific Partnership is gone while other free trade agreements with Japan, China and ASEAN have matured, making it impossible for Vietnam to delay tax cuts. The flood of Thai goods into Vietnamese supermarkets also exemplifies the rising competition facing Vietnamese local producers, even from within the Vietnamese market. One reason is that Vietnam’s labour productivity lags behind other ASEAN countries and the government needs to implement serious reforms to improve the labour structure.

Vietnam’s public debt is reported to have grown three times faster than its GDP, reaching US$116 billion by the end of 2015, which was 62.2 per cent of the nation’s GDP.

The social factors of unemployment, an ageing population and growth of the internet and social media — which strengthens public opinion and social activism — are also incentives for the government’s promotion of startups and economic liberalisation to lower public dissent. Technological progress, especially in IT, has lowered the barriers to entry for private enterprises and the population’s rising income has provided the ‘market critical mass’ for startups to thrive.

Yet the actual success of startups is another issue altogether. In the first four months of 2017, 4057 enterprises completely dissolved and 27,400 others suspended activities.

The greatest obstacle for Vietnam’s startups is access to finance. Unfair and unequal access to financial resources and contracts, especially government ones, is a long-standing problem in Vietnam, especially for small and medium-sized enterprises. Currently, most funding comes from foreign risk-investment companies since there are not enough local ventures capable of financing startups.

The second major issue is the corrupt practices in the informal sector. While less serious than in surrounding countries, its omnipresence in Vietnam still undermines firms’ operational efficiency and increases the costs and risks for startup entrepreneurs.

The inadequately educated workforce is usually the third constraint within the business environment. But this is hardly relevant to startups, despite being a serious concern for large enterprises. Start-up entrepreneurs tend to be highly educated and motivated so they do not usually face this problem immediately. Instead, it tends to become an issue after they have established the business and need to grow it.

Finally, the absence of a strong startup ecosystem and lack of a win-win cooperative spirit among local firms poses another challenge for the growth of Vietnam’s startups. As most sceptics claim, Vietnam’s best startups are isolated from the nation’s ecosystem.

The National Program to Support Innovative Startup Ecosystem in Vietnam has been approved as a nationwide startup campaign. Yet, it is important that the government does not push to fast-track results that would increase the quantity but not the quality of startups. The government should opt for an appropriate model of an entrepreneurial startup ecosystem rather than trying to imitate the US model and remember its role as a monitor, not an intervener.

While the government should create the most favourable conditions for startups, it should avoid over supporting. Doing this would ease the competition process, leading to the formation of just another generation of state-favoured enterprises, defeating the original purpose to improve the independence and competitiveness of local firms. On the other hand, the government needs to establish a parallel system to mentor and control startup growth, ensuring startups’ healthy development.

Linh Tongis Editor for the East Asian region at Eurasia Diary, International Eurasia Press Fund.

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