the report concludes with a section on obstacles to the further expansion of private sector development needed to meet Vietnam’s pressing employment needs.

# **II.  DEFINING THE DOMESTIC FORMAL PRIVATE SECTOR**

8. The fundamental legal framework for what this report refers to as the domestic formal private sector was laid down in the early 1990s with Vietnam’s Company Law (1990) and Law on Private Enterprises (1991).<sup>6</sup> These laws established the legal basis for three forms of private companies: sole proprietorship, limited liability and shareholding companies. Both laws, however, lacked many of the facilities of a modern company law and burdened entrepreneurs with many restrictions and bureaucratic procedures. These problems, and the resulting stunted growth of the formal private sector, led to creation of the more comprehensive 1999 Enterprise Law. The new Enterprise Law expands the legal framework to cover household enterprises and introduces a new company form called a partnership.<sup>7</sup> 9. This report’s definition of the domestic formal private sector includes the original three forms of private companies—sole proprietorships, limited liability and shareholding companies—and the newly added partnership form.<sup>8</sup> Informal enterprises such as household enterprises are not included. Box 2.1 gives a summary of the four types of companies that define the domestic formal private sector. This distinction is important because studies and statistics on the private sector in Vietnam use a broad range of enterprise classifications. The result has been significant confusion in the private sector debate and inconsistency in data and analysis.

10. To illustrate, official statistics use the term non-state sector to include up to seven forms of private enterprises: four types of registered domestic private enterprises, as well as household firms, cooperatives and foreign invested enterprises. Official statistics also refer to the “private economy” ( _kinh te tu nhan_ ), which includes only sole proprietorship companies, while limited liability and shareholding companies are presented separately under the vaguely-titled “mixed economy” ( _kinh te hon hop_ ) category.9 Official statistics on private companies are also very difficult to obtain and flawed by methodological inconsistencies.10 11. Reports on the private sector, in turn, have not always distinguished between formal companies and household enterprises, sometimes referring to both as formal

> 6 The legality of private enterprises was further strengthened by the Constitution in 1992, which recognized the right of freedom of business in various economic sectors, including the right to equal treatment among all economic sectors. 7 Household enterprises were previously covered in a separate piece of legislation (Decree 66). Note that even though they are now included in the 1999 Enterprise Law, they are still subject to different regulations than formally registered enterprises. Household enterprises are now considered as “quasi-formal” private enterprises. They benefit from simple registration procedures but are restricted in certain business operations, such as the right to trade, scope of operation and land use rights. These restrictions are put in place to encourage household enterprises to become formal business entities.  Household enterprises, however, do continue to enjoy significantly lower taxes as they do not pay VAT taxes and are in a better position to negotiate lower taxes with local officials.

> 8 Also included is the newest form: a variation on the limited liability company that allows for single ownership unlike the original form that still is defined to include multiple owners.

> 9 Webster and Taussig (1999), p. 13.

> 10 The GSO’s methods for calculating private sector statistics have varied across recent years.  Methodologies appear to vary across provinces, too.

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