Credit Accessibility and Small and Medium Sized Enterprises' Growth in Vietnam

(ProQuest: . denotes formulae omitted.)1.IntroductionSmall and medium sized enterprises (SMEs) play a crucial role in economic development, both in developing and developed countries. The contribution of SMEs to the economy can be seen through the value added every year generated by SMEs; SMEs employment, export participation, poverty alleviation, women empowerment, etc. In low income countries, it is undeniable that most of the enterprises are small scale and their labor force also works mostly for small enterprises. For example, 80-90% enterprises in developing Asia are SMEs and attract 50-80% of total employment (Tambunan, 2008). Many studies have found that SMEs create more jobs than large enterprises (de Kok et al., 2011) because SMEs are labour-intensive (Hobohm, 2001). According to a report from the Association of Southeast Asian Nations (ASEAN) Secretary (2011), in Southeast Asia (SEA), SMEs accounts for more than 92% of total enterprises in all countries. They also create a significant number of jobs, ranging from 56% in Malaysia to 97% in Indonesia. In terms of contribution to country's Gross Domestic Product (GDP), SMEs make up for 60% GDP in Singapore, 56.63% in Indonesia, and about 20 - 40% in the other SEA countries.Despite their significant contributions to social and economic development, SMEs confront many obstacles compared to large enterprises. Results from the World Business Environment Survey covering 80 countries in 1999-2000 on constraints facing firms across all sizes demonstrates that financing is the biggest obstacle for SMEs (Beck and Demirguc-Kunt, 2006, p. 2937). In other words, SMEs credit accessibility plays a crucial role for both business start-up and operation. Access to finance is important as credit is considered a factor of production. Access to credit allows SMEs to utilize productive assets to enhance productivity and economy of scale (Kira and He, 2012). Furthermore, credit accessibility encourages market entry, facilitates growth, reduce risks, fosters innovation and entrepreneurial activity (DALBERG, 2011). However, raising external finance is of a great challenge to SMEs because of their limitations in creditworthiness, collateral, profitability, capital management and entrepreneurship (thus the ability to repay). SMEs are generally considered as riskier than large enterprises because they have lower survival rate, larger variance of profitability and growth (OECD, 1998). SMEs are characterized as the "missing middle" because the amount lend to SMEs from banks is too small to offset transaction cost and screening cost (Shinozaki, 2012), while the loan might be too large for the borrowers to borrow from microfinance institutions (DALBERG, 2011). As a result, SMEs often suffer from credit rationing or higher interest rate.Like any other countries in Southeast Asia, SMEs represent 98% of the total enterprises in Vietnam (GSO, 2013). The sector contributed about 48% to the national GDP and has been the main source of employment generation with half million of new jobs each year (MPI, 2012). Despite their dominant number, SMEs did not perform well as expected. They seem to lag far behind other business sectors. They accounted for only 43.9% total gross revenue of all enterprises and 13.6% total profit before tax (GSO, 2013) - a very modest contribution given their dominance in the economy. More importantly, according to MPI (2012), profitability indicators of SMEs fell below the entire business sector1 and have decreased over the years. For instance, return on equity of SMEs was 2.57% in 2007, equivalent to only half of the entire business sector and decreased further in 2008 and 2009 to 1.87%. In the context of the current global financial crisis and recession, the number of SMEs making losses has increased dramatically.Though official figure for the year 2012 has not been published, it is believed that about 50,000 enterprises closed in 2012. …