Subnational home market bias in Vietnam: Evidence from enterprise‐level data

• Published date: 01 November 2019
• Date: 01 November 2019
• Author: Que Nguyet Tran,Thu Kim Nguyen,Tung Nhu Nguyen,Catherine Y. Co
• DOI: http://doi.org/10.1111/twec.12863

World Econ. 2019;42:3319–3349.

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3319

wileyonlinelibrary.com/journal/twec

Received: 4 February 2019

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Revised: 18 June 2019

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Accepted: 30 July 2019

DOI: 10.1111/twec.12863

ORIGINAL ARTICLE

Subnational home market bias in Vietnam:

Evidence from enterprise‐level data

Catherine Y.Co1

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Thu KimNguyen2

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Que NguyetTran3

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Tung NhuNguyen2

1Department of Economics,College of Business Administration,University of Nebraska at Omaha, Omaha, NE, USA

2School of Business,Vietnam National University–International University, Ho Chi Minh City, Vietnam

3College of Education, Health, and Human Development,Montana State University, Bozeman, MT, USA

Funding information

UNU‐WIDER

KEYWORDS

small and medium‐sized enterprises, subnational home market bias, Vietnam

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INTRODUCTION AND BACKGROUND

Small and medium‐sized enterprises (SMEs) are the backbone of Vietnam's economy. They account for

45% of gross domestic product, 97.6% of enterprises and 51% of total employment in 2014 (Malesky,

2016). Globally, SMEs contribute 50% of output and comprise 60–70% of employment and have been the

main contributors to the industrialisation and growth of some countries such as Germany (International

Trade Centre, 2015). Because of their relative contributions to output and employment, SMEs have the

potential to be growth engines if the multitude of internal and external operational challenges they face

are resolved through policies that allow SMEs to "connect, compete and change" (International Trade

Centre, 2015). Recognising this potential, on 12 June, 2017, Vietnam's National Assembly passed the

Law on Support for Small‐ and Medium‐sized Enterprises (KPMG, 2017).1 The new law builds on two

previous plans to develop and increase the competitiveness of the country's SMEs.2 The new law pro-

vides a wide range of general support, from credit access (Article 8) to human resource development

1 English version of the law (National Assembly Law No. 04/2017/QH14) is available at http://vbpl.vn/tw/Pages/ vb-

pqen-toanv an.aspx?ItemI D=11095 . Throughout the paper, SMEs' broad definition which includes microenterprises is used.

2 Decree No. 56/2009/NĐ‐CP dated 30 June, 2009 approved the first comprehensive approach to aid the development of

SMEs in Vietnam while Decision No. 1231/QĐ‐TTg dated 7 September, 2012 approved Vietnam's 2011–15 Small and

Medium Enterprises Development Plan.

This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reproduction

in any medium, provided the original work is properly cited.

© 2019 The Authors. The World Economy published by John Wiley & Sons Ltd

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CO et al.

(Article 15). The new law also provides specific support for household enterprises and innovative SME

start‐ups (Articles 16–20). Most important for our purposes are support for SME market expansion

through product distribution chains (Article 13) and SME participation in value chains (Article 19). For

example, the law provides exemptions or reductions in enterprise income tax for organisations investing

in or operating product distribution chains involving at least 80% SMEs supplying made‐in‐Vietnam

products (Article 13). The law also provides in‐depth training in production technology or help with

product development to qualified SMEs (Article 19). Enhancing SME competitiveness sets the stage for

them to be a major contributor to Vietnam's growth in the coming decades.

Opportunities for foreign and domestic market expansion are options available to Vietnam's SMEs.

Available data show that the country's SMEs are not only domestic‐market oriented, and their activ-

ities are highly localised. As described in detail below, among enterprises in the survey data we use,

27–29% of the sales of their most important product are to entities in their home communes, and

81–84% of sales are to entities in their home provinces. Understanding why SME sales are highly

localised is important as over reliance on a single market exposes SMEs to idiosyncratic risks asso-

ciated with this one locale. Market diversification not only minimises market demand risks but also

makes possible the sourcing of lower cost inputs. However, market diversification is not costless as

it entails additional resource commitments from SMEs. For SMEs to take advantage of opportunities

in foreign markets, there is a need to understand why they have much difficulty in selling beyond

their home markets in the first place. Is this due to size and other enterprise characteristics? Or is the

home (market) bias due to the quality of governance prevailing not only in SMEs' home market (i.e.,

home province), but also in other potential markets (i.e., other provinces) in Vietnam? This last point

is crucial as the new law on supporting SMEs gives provincial administrators responsibilities to carry

out certain provisions of the law (Articles 11, 18 and 25). For example, subject to local government

finance conditions, provincial officials are tasked to develop industrial clusters or processing zones for

SMEs in their jurisdictions, or to provide rental support for SMEs in industrial parks through subsidies

to industrial park investors (Article 11). Complementary policies across Vietnam's provinces are crit-

ical if product distribution chains and value chains are to span the whole country.

If SME sales are highly localised, does this mean that Vietnam's domestic market is highly frag-

mented?3 If so, this by itself has implications on the conduct of macroeconomic policy and develop-

ment of policies to minimise the observed income disparity across regions. Latest data (2016) show

wide variation in monthly current per capita income ranging from a little over VND5.1 million (about

US$230 at the mean rate of VND22,380/US$ in 2016) in Ho Chi Minh City to VND1.2 million (about

US$54) in Dien Bien province (General Statistics Office of Vietnam, 2018). Poverty rates are highest

in the northern midlands and mountain areas with the provinces of Dien Bien and Lai Chau having the

highest poverty rates at 26.1 and 27.9%, respectively. Provinces in the southeast have the lowest pov-

erty rates with Ho Chi Minh City and Binh Duong province achieving zero poverty rate since 2013

and 2014, respectively (General Statistics Office of Vietnam, 2018).

This paper contributes to the home bias (trade) literature where administrative or political borders

limit trade across borders. First documented by McCallum (1995) wherein 44% of Canada's exports

are within province shipments, 23% are shipments to other Canadian provinces, and the balance are

shipments to the United States (24%) and the rest of the world in 1988. Conditional on trade partners'

distance to each other and economic size, McCallum finds that trade among Canadian provinces is

3 Available data show variation in the cost of living across the country's regions. For example, for tradeable items such as

food, prices in the Central Highlands (Mekong River Delta) are 5.41 (5.17) % higher (lower) than food prices in the Red

River Delta in 2015. Garments and footwear prices are 8.73% higher in the Midlands and Northern Mountain areas than in the

Red River Delta (General Statistics Office of Vietnam, 2018).