Is bigger always better?

Vietnam appears to be an anomaly where the higher proportion of large firms, at the expense of small and medium-sized enterprises, does not seem to have had an adverse effect on social equality or efficient growth, Paul Shaffer and Le Dang Trung write. 

Inclusive growth is fast becoming a buzzword receiving attention in academic and policy circles. The core idea is that the benefits of growth should be widely distributed and, in particular, reach those at the bottom. Otherwise stated, the objective of inclusive growth is to reconcile the imperatives of efficiency, as reflected in high-quality growth, and equity, as reflected in social and economic outcomes.

In principle, Small and Medium-Sized Enterprises (SMEs) have an important role to play in bringing about inclusive growth. They could facilitate high-quality growth by cultivating entrepreneurship, generating an efficient allocation of inputs, such as land, capital and credit, into production and so forth. They could also promote equity in cases where SMEs are more labour-intensive, and where wages differences are relatively small within and between the sectors in which SMEs operate.

Accordingly, a vibrant and large SME presence could constitute a ‘win/win’ strategy which simultaneously promotes efficiency and equity.

In our research published in Asia & the Pacific Policy Studies, we examined the relationship between SMEs in manufacturing, equity and growth in Vietnam drawing primarily on enterprise census and household survey data. Our analysis did not include household enterprises, in keeping with the comparative literature.

Vietnam is an interesting case not only because it has enjoyed high rates of growth since it embarked on its process of reforms, or doi-moi (renovation), in the mid-1980s. It also has a very significant presence of large firms. Manufacturing firms with 500 or more employees account for almost 60 per cent of total employment which is extremely large by comparative standards and far in excess of that found elsewhere in Asia. By way of comparison, the next closest case in a twelve-country Asian database is the Philippines, with around 50 per cent.

Our research investigated whether this heavy presence of large firms and, by implication, the relatively smaller size of the SME sector, has costs for equity and efficiency in Vietnam. We did not find significant equity costs, when equity is defined in terms of inequality, for four reasons.

First, inequality, as measured by the Gini coefficient, has only increased slightly since doi-moi, unlike in other countries such as the People’s Republic of China. Secondly, wage differences across manufacturing firms of different sizes are quite low by comparative standards and falling over time. Third, employment growth in manufacturing has been quite rapid since 2000, and somewhat surprisingly, large firms appear to be more labour intensive than medium-size firms. Finally, results of statistical analysis, a so-called Gini decomposition exercise, found that the contribution of large manufacturing firms to overall inequality is quite small because they account for a small share of total household income.

We next examined efficiency costs, defined in terms of economy-wide allocative efficiency, or the use of resources which maximises the production of goods and services. Our econometric analysis did not find large efficiency costs associated with the relatively small size of the SME sector for a number of reasons.

First, we did not find that so-called ‘factor allocation biases’, such as the provision of preferential or subsidised credit to large firms, were detrimental to the survival or growth of SMEs. Second, we did not find detrimental effects on SMEs related to institutional barriers to entry in export markets in that there is a negative relationship between exporting and both firm growth and firm survival. In addition, preferable treatment of larger State Owned Enterprises (SOEs) is generally not detected in the data, or has minimal effect, in that SOEs are not typically associated with higher firm growth or survival (relative to foreign or domestic private firms).

While these results must be interpreted with caution for both statistical and data-related reasons, they do present a very consistent story about the efficiency costs of Vietnam’s heavy concentration of large firms.

Overall, these findings are somewhat sobering in terms of the contribution SMEs make to inclusive growth in Vietnam. Our research did not find significant equity or efficiency costs associated with the relatively small size of the SME sector. Otherwise stated, the preponderance of large firms in Vietnam does not appear to have been a drag on growth or an impediment to equitable economic and social outcomes. Additional research is necessary to examine why the Vietnamese experience is different from elsewhere in Asia, such as India, where large equity costs appear to be associated with the relatively small size of the SME sector.

This piece is based on Paul Shaffer and Le Dang Trung’s article in Asia & the Pacific Policy Studies. Read and download the article for free at http://onlinelibrary.wiley.com/doi/10.1002/app5.165/full