Obstacles to Internationalization of Vietnamese SMEs

Major difficulties and obstacles to internationalization of Vietnamese SMEs

Financing problems

Lack of capital to expand production and business are considered as common phenomenon of SMEs. Despite of Vietnamese government’s effort to facilitate SMEs’ process of accessing capital and commercial banks have made great strides in the provision of credit to SMEs, surveyed about the difficulties, more than 60% of SMEs often have difficulty in financing, according to Vietnamese Ministry of Planning and Investment (VMPI, 2009). SMEs usually mobilized capital from relatives, friends or bank loans. Clearly, the poor access and low speed to access to capital is main disadvantage of SMEs compared to large corporations because it stymies the expansion, especially foreign expansion, of SMEs. The fact that only 30% of the capital is borrowed from banks and credit institutions. The main reasons are, most business have insufficient collateral for the institution to borrow money, financial management is not really transparent, and creditors sometimes acquire reputations as credit worthy because of moral hazard and adverse selection problems (TD). Sometimes, in hurry and needing capital, SMEs have to pay for non-financial creditors with interest rates 3 to 6 times higher than common official rates (VMPI, 2009).

Difficulties in land and production premises

Another difficulties that SMEs have to face is land and production premises. To some extend, it is also another financial problems for them. Over half of SMEs have major operations in the field of trade and most of them use their house as office, or lease small offices (VGSO, 2009). Otherwise, many manufacturing SMEs have to rent the land or premises with high cost. Even when they want to have long-term investment, there still is hesitation due to lack of legal guarantee (TD). Recently, many places have carried out many planning and construction of industrial clusters of SMEs aimed at bringing together the business production business. Some provinces such as Ha Noi, Bac Ninh, Vinh Phuc, Hung Yen, Hai Duong, Ha Nam, Thai Binh, Da Nang, Quang Nam, Quang Ngai, Binh Duong, Dong Nai, Ho Chi Minh City…have built many industrial clusters for production and attracting foreign investment. However, due to rent land with inadequate financial capacity of businesses in small scale, so many SMEs still cannot access these zones. SME survey data in 30 northern provinces, showed that 42% of businesses having difficulty in land and production premises.

Imperfect information

Another disadvantage of SMEs’ entry is their information disadvantages about market such as labor market, materials market, and output market conditions. Besides, customers’ poor information about these new entrants also account for blockade new SMEs have to face in foreign expansion procedure. However, there is argument that steady entry might erode the information barriers because later entrants can learn from earlier entrants’ mistakes. The higher steady flow of new entrants, the less dependence of customers and even workers on established large corporations (TD)

Corporate management is not high quality and low quality human resources

Level of production and business management of SMEs which are almost private enterprises, is still limited and largely based on personal experiences of business owners, investment with little application of information technology into management. Skilled workers in SMEs are fewer compared to large corporations because of relatively lower and less stable salary. Especially, new market entrants also may find it difficult to attract good workers because employment and contracts with established large firms are seen as less risky.

Low level of technology, weaknesses in R&D

Most SMEs have the backward technology, equipment. According to VMPI, results of survey for small and medium enterprises in 30 Northern provinces, in the nearly 11 thousand industrial enterprises surveyed, there are only 8% of businesses having advanced technology. Surprisingly, there are 50% of businesses said they could reach the average level of technology, and the remaining 42% of enterprises chose the answer of backward technology (VMPI, 2009).
Moreover, skilled workers in SMEs are few, so the quality of products, goods and services is not high, thus they have weak competitiveness and difficult to dominate domestic and international market. The level of investment in technological renovation of enterprises is still low compared with development requirements. Most SMEs are lack of motivation on the research for technological innovation. Content of technology and knowledge in goods of Vietnam SMEs are low. In fact, the product is made mainly based on capital and unskilled labors. Only some small firms are innovators. Many smaller firms undertake no innovative activity. Some may be serving local niche markets relying on owner’s control. Still other small firms might be unsuccessful innovators (TD)

Awareness and observance of the law is limited

A number of SMEs have not followed strictly the provisions of law, especially provisions on taxation, financial management, labors management, quality of goods and intellectual property. The situation of complaint about the laws compliance of enterprises has been popular even in the period of deeper economic integration with various international commitments. This could even lead to conviction because of tax and financial violations. Therefore, limited awareness of law brings greater barriers to foreign expansion because SMEs need to work with not only domestic but also foreign legal system.

Survey report – The difficulties and benefits to the internationalization of SMEs

1. Difficulties
To find out solutions to promote internationalization, research has to point out the obstacles from the environment inside and outside the enterprises. For SMEs, the main difficulties are often referred to as inside and outside difficulties.
Inside difficulties of Vietnamese SMEs
Inside difficulties: Lack of capital, Lack of quality human resources, Out of date Technology, Difficulties in acquiring land and facilities for manufacturing and trade activities, Lack of knowledge and experiences in international business environment, and Limitation in management capability.

1: Lack of capital
2: Lack of quality human resources
3: Out of date Technology
4: Difficulties in acquiring land and facilities for manufacturing and trade activities
5: Lack of knowledge and experiences in international business environment
6: Limitation in management capability
7: Others
Data from our survey shows that Lack of capital, Lack of quality human resources and Lack of knowledge and experiences in international business environment are main difficulties of SMEs. Especially, there are about 50% of SMEs considering the lack of capital is most important reason inside SMEs, which is the obstacle to the internationalization. Other reasons such as Out of date Technology, Difficulties in acquiring land and facilities for manufacturing and trade activities, Limitation in management capability are not higher but each of them also account for more than 10%.
Outside difficulties of Vietnamese SMEs
Outside difficulties: Highly risky and competitive environment, Unattractive profit, Disadvantages from the Vietnamese Policies, Too many barriers and restrictions to market penetration in many foreign countries.

1: Highly risky and competitive environment
2: Unattractive profit
3: Disadvantages from the Vietnamese Policies
4: Too many barriers and restrictions to market penetration in many foreign countries
5: Others
In terms of outside reasons, almost SMEs (nearly 70%) consider highly risky and competitive environment is the main obstacle to internationalization. One of the special features are drawn from the survey is, in addition to concerns about the risks and fierce competition in the business environment, many SMEs consider the inadequacies of government policies in Vietnam and barriers and restrictions to market penetration in many foreign countries are the main obstacles to their internationalization:
2. Benefits
The main benefits: Helping innovation technology, Business experience gaining, Improving the qualification for employees and leadership skills for the management, Spreading enterprise’s image, brand and prestige, Providing opportunities to attract and accumulate more capital.
Benefits from internationalization:

1: Help with innovation of technology
2: Help with business experience again
3: Improve the qualification for employees and leadership skills for management
4: Help spread your enterprise imagine, brand and prestige
5: Provide opportunities to attract and accumulate more capital
6: Others
In terms of positive effects, according to our survey, most SMEs think that five positive effects mentioned above are the main positive impact on their business. Other positive impacts account only 1.13%. Especial thing is, there are nearly 70% of SMEs believe internationalization will help them with business experience gaining. Actually, in a volatile business environment with many risks and challenges, this is a positive and optimistic signal of SMEs. Furthermore, many of them believe that internationalization helps to expand their business, brand and prestige. Moreover, as discussed in obstacles part, lack of capital is significant obstacle to internationalization, but in the chart above, we can see that they also think internationalization as a way to providing opportunities to attract and accumulate more capital (with more than 50% of SMEs believe internationalization as a way to providing opportunities to attract and accumulate more capital).

Recommendations

The result of this research lead to some recommendations for policy makers and SMEs managers

For policy makers

Create a favorable business legal environment which is equal, transparent, Continue to further economic reform and open the economy policy; Continue to simplify the regulations to create favorable conditions for business registration, market entry and operations of the firms: Enterprise Law, Land Law (Facilitate access to land and production premises for SMEs), Tax Law, Trade Law (Promote the international economic integration through bilateral, regional and multilateral channels), etc.
Create favorable conditions for SME access to finance: Credit guarantee fund, SME financial fund, venture investment fund, get loan from commercial banks, etc. (Ministry of Finance, State Bank of Vietnam, Provinces and central run cities)
Support SMEs to improve their competitiveness: technique innovation, intellectual property protection, training on enterprise management and for human resource, market information (Ministry of Science and Technology, Ministry of Industry and Trade, Ministry of Education and Training)

For SMEs managers

In internationalization process, SMEs need take initiative in preparing the necessary “baggage”, creating a basic capacity of international economic integration and ready to grasp better the opportunities and confront challenges from this process

Map out a strategy to internationalize

SMEs need to carefully research the market, study the strengths and weaknesses, research opportunities and challenges; clearly define the objectives, benefits and risks of internationalization; find out the main factors and conditions deciding the success of internationalization; choose the suitable methods of internationalization.

Take opportunities to attract more capital and innovating technology

In terms of technology, SMEs need to promote its inherent flexibility to capture and take advantage of the opportunity to catch new technology. Besides financial aid from the government, SMEs should actively seek opportunities from other resources such as financial support from the joint venture partnership; establish feasible business projects to attract capital from banks, venture capital funds; conduct joint venture with other firms as needed.

Apply international standards in production and business

One of the challenges or obstacles for Vietnamese SMEs when enter the world market are the technical barriers to trade. Countries have different requirements related to goods and services. When international economic integrating, Vietnam SMEs must also acquiesce by these requirements. Therefore, it is necessary to apply international standards in production and business activities actively, depending on the requirements of markets and depending on the ability of each enterprise.

Emphasis on improving human resources quality

SMEs should be more emphasis on improving human resources quality, focused training and recruitment of talented and knowledgeable managers about the international market, skilled workers who have ability to grasp new technology. SMEs also need stronger links with educational institution for training and retraining of human resources. Moreover, to organize production and marketing in foreign market, managers need to work with new legal system and social customs. Therefore, sending out expatriate managers and experts is also necessary because managers with inexperienced in internationalization may not have necessary knowledge to be efficient international operators.