State’s red tape-cutting yields business growth

Bui Anh Tuan, deputy director of the Ministry of Planning and Investment’s Business Registration Management Agency, told VIR’s Khanh Linh about the progress made, as well as the issues that still remain.

The first half of 2017 saw a jump in newly-established businesses, but the rate of firms going out of business also remains high. What do you think about this?

Looking on the whole period from 2013 to 2017, newly-established firms are maintaining forward growth momentum. In the first six months of this year, the number of newly-established firms rose 150 per cent, and reached nearly 300 per cent growth in registered investment capital compared to the corresponding period in 2013, while average capital size rose by a multiple of 1.8.

From a macro perspective, the rate of firms going out of business is less than the rate of those entering the market.

Firms exiting the market numbered 72.9 per cent of firms entering the market in 2014. This figure fell to 61.2 per cent in 2015, 57.5 per cent in 2016, and 56.6 per cent in 2017, which is positive compared to other countries that top the Market Facilitation Index.

For instance Hong Kong, which ranked fourth in the ‘doing business’ category for 2017, had 144,883 new business startups last year, with 92,843 businesses exiting the market. So for every 64 firms that went out of business, 100 new ones came into existence. New Zealand, which topped the list for ‘doing business’ in 2017, had 57,870 new enterprises starting up and 55,629 going out of business in 2015, a ratio of nearly 1:1.

But the number of firms entering and exiting a market is not an objective measure of a well-functioning economy. Weak firms with low competitiveness will be ousted by new firms with better business approaches.

To some extent, businesses going bust will help to improve the business climate and create a driving force to push growth, paving the way for more efficient and effective businesses.

Market barriers, including inappropriate business conditions, were said to be among the factors forcing firms to halt their operations. Is this really the case?

There are many factors that can cause a firm to go out of business. Insufficient capital, missed or misaligned opportunities, or unforeseen events can all cause a business to go under.

But the reasons behind more than 90 per cent of exits made by small-sized businesses – firms with less than VND10 billion ($454,000) each in market capitalisation – are market hardships and business plans that don’t materialise. These factors can be found in any market economy.

How are new businesses doing?

Based on data from the national database on business registration during 2015-2016, we can see that businesses are faring well.

For example, of the 110,100 new business startups in 2016, 87.05 per cent [95,842 businesses] are still in operation. Only 8.4 per cent have gone out of business.

According to figures from tax agencies, as of May 2017, of the businesses started in 2015, nearly 74 per cent have generated taxable revenue. Similarly, of the new businesses started in 2016, 60.5 per cent have reported taxable revenue. Such rates are fairly high compared to other regional nations.

Some of the businesses that have yet to generate taxable income are operating in the processing and manufacturing sector. After registration, it takes time for such firms to build workshops and install machinery before production begins, and products or services can be delivered to the market. These firms, however, have also contributed to national development through their investment and procurement activities.

Apparently, the government’s efforts to improve the investment and business climate and eliminate inappropriate business conditions have brought about positive benefits and helped materialise new business opportunities.