Vietnam: Vietnam 39,580 new startups with a total registered investment of 369.6 trillion dong (US$17 billion)

2016 was called ‘the year of the startup’ in Vietnam. At no time before has the Vietnamese government shown so much support for startups. Entrepreneurship has been emphasised as a key driver for Vietnam’s economy by the national media and in almost all official speeches made by Vietnam’s new Prime Minister Nguyen Xuan Phuc.People work at the office of food-finder app Lozi in Hanoi, Vietnam, 7 April 2016.

There have been 39,580 new startups with a total registered investment of 369.6 trillion dong (US$17 billion) in the initial four months of 2017 alone, which is a 14 % increase in the number of startups and a 54 % increase in registered investment compared to the initial quarter of 2016. According to Vietnam’s Ministry of Planning and Investment , of the 110,000 businesses registered in 2016, additional than 90 % paid taxes, showing signs of stable operation.

In order to evaluate the real potential of Vietnam’s startups, we must look at the seismic changes in Vietnam’s political economy— particularly the recent fight against corruption. Leaders like Trinh Xuan Thanh, Vu Huy Hoang and most recently Dinh La Thang have been accused of causing millions of dollars in losses during their leadership of PetroVietnam — Vietnam’s major national-owned enterprise (SOE).

While this anti-corruption trend is widely viewed as Communist Party infighting and an effort to curb growing political distrust part the Vietnamese people, it as well signals that the government has recognised the ineffectiveness of SOEs, paving the way for the privatisation process. The government understands economic liberalisation is a must to sustain the regime’s power.

There are as well vital economic factors. For instance, the oil price crisis of 2014 led to a 57 % drop in national revenue earnings from oil, a loss of US$255.3 million. The Trans-Pacific Partnership is gone while other free trade agreements with Japan, China and ASEAN have matured, making it impossible for Vietnam to delay tax cuts. The flood of Thai goods into Vietnamese supermarkets as well exemplifies the rising competition facing Vietnamese local producers, even from within the Vietnamese market. One reason is that Vietnam’s labour productivity lags behind other ASEAN nations and the government needs to implement critical reforms to improve the labour structure.

Vietnam’s public deficit is reported to have grown three times faster than its GDP, reaching US$116 billion by the end of 2015, which was 62.2 % of the country’s GDP.

The social factors of unemployment, an ageing people and increase of the internet and social media — which strengthens public opinion and social activism — are as well incentives for the government’s promotion of startups and economic liberalisation to lower public dissent. Technological evolution, particularly in IT, has lowered the barriers to entry for private enterprises and the people’s rising gain has provided the ‘market critical mass’ for startups to thrive.

From presently on the actual success of startups is an extra issue all. In the initial four months of 2017, 4057 enterprises completely dissolved and 27,400 others suspended activities.

The greatest obstacle for Vietnam’s startups is access to finance. Unfair and unequal access to financial resources and contracts, particularly government ones, is a long-standing problem in Vietnam, particularly for small and medium-sized enterprises. Currently, most funding comes from foreign risk-investment companies since there are not enough local ventures capable of financing startups.

The second major issue is the corrupt practices in the informal sector. While less critical than in surrounding nations, its omnipresence in Vietnam still undermines firms’ operational efficiency and increases the costs and risks for startup entrepreneurs.

The inadequately educated workforce is usually the third constraint within the business environment. But this is hardly relevant to startups, despite being a critical concern for large enterprises. Start-up entrepreneurs tend to be highly educated and motivated so they do not usually face this problem instantly. Instead, it tends to become an issue next they have established the business and need to grow it.

Finally, the absence of a strong startup ecosystem and lack of a win-win cooperative spirit part local firms poses an extra challenge for the increase of Vietnam’s startups. As most sceptics claim, Vietnam’s best startups are isolated from the country’s ecosystem.

The National Program to Support Innovative Startup Ecosystem in Vietnam has been approved as a nationwide startup campaign. From presently on, it is significant that the government does not push to fast-track results that would increase the quantity but not the quality of startups. The government should opt for an appropriate model of an entrepreneurial startup ecosystem rather than trying to imitate the US model and remember its role as a monitor, not an intervener.

While the government should create the majority favourable conditions for startups, it should avoid over supporting. Doing this would relieve the competition process, leading to the formation of just an extra generation of national-favoured enterprises, defeating the original purpose to improve the independence and competitiveness of local firms. On the other hand, the government needs to establish a parallel system to mentor and control startup increase, ensuring startups’ healthy development.