Vietnam's Economic Entities in Transition

S. Sakata

• Publisher: Palgrave Macmillan
• Year: 2013
• Print ISBN: 9781137297136
• eBook ISBN: 9781137297143
• Topic: Economics
• Subtopic: Business General
• Index: Economics

During the last two decades, Vietnam has been undergoing a process of deregulating economic activities and integrating into the global economy. The passing of the Enterprise Law in 1999, which facilitated the establishment of private enterprises, andthe achievement of membership of the World Trade Organization (WTO) in 2007 were two of the landmark events in Vietnam's rapid growth over this period.In order to cope with such a socioeconomic and institutional transformation, Vietnam's domestic economic entities have employed various measures, including technical upgrading, a shift into new areas of business, the diversification of capital acquisition, the adoption of new models of corporate governance, and other measures. As a result, the reorganization of Vietnam's domestic economic entities, such as the equitization of many state-owned enterprises, the emergence of large-scale private enterprises and the revitalization of rural entrepreneurs have taken place in many areas.This book attempts to analyze economic activity in Vietnam, covering a variety of types and sizes of Vietnam's domestic economic entities from large-scale stateowned enterprises to micro-scale rural entrepreneurs.

1

State Enterprise Groups in Vietnam Following Accession to the WTO

Akie Ishida

Introduction

The state enterprise group (hereafter, SOE group) in Vietnam is classified into two broad types of groups. One is the vertically organized general corporation 91(GC91) which was established on the basis of the Prime Minister’s Decision No. 91 relating to the reorganization of state-owned enterprise (hereafter, SOE) to an experimental SOE group involving key industrial areas, and the other is the horizontally organized General Corporation 90(GC90) which was established on the basis of the Prime Minister’s Decision No. 90, which is the SOE group for all of those industries not included in the key areas of Decision No. 90. Following the enacting of the Company Law of 2005 (which was the integrated common company law for both domestic and foreign-invested companies), the “Business Group” (“tap doan kinh te” in Vietnamese) was added to SOE groups as a new type of SOE group. A part of GC91 and the state insurance enterprise group have now changed their group organization into a business group. It appears that the reorganization of the SOE group led by state policies since 1994 has been affected by the East Asian-style business groups such as the “Keiretsu” of Japan, “Chaebol” of Korea, and the business groups in China, organized following the experience of Japan and Korea (Keister 2000).

In my view, there are three aims for the reorganization of the SOE group in Vietnam: industrial development, the freeing of SOE from administrative control, and the macro management of the economy. The first aim is to restructure industries and enterprises and then to strengthen their competitiveness in the process of opening the door to international economic relations.

The second aim is to remove the function of administrative control from the management of the SOE groups, and to reform them as the leading actors of enterprise management. The important task was to reform SOE groups into profit-oriented management actors through a reorganization of the general corporations and large SOEs under the former regime into state-owned business group holding companies.

The third aim is to implement the state’s macroeconomic policies. In other words, general corporations have a price control function in relation to commodities in the key industrial areas. In the objective areas of state price control policies such as petroleum, coal, electricity, food, and cement, SOE groups played a very important role. There is a close relationship between the function of price control and the monopolistic system of the SOE group. As a result of this relationship, SOE groups were unable to extricate themselves from state (that is, administrative) control.

From the beginning of the 2000s, when the market economy was developing in Vietnam and there was some possibility of the country entering into the WTO, experimental policies aimed at changing the relationship between the state and the SOE groups were pursued actively. The direction of SOE reform in changing the role of the state from the controller of enterprises to the owner of state capital was clearly decided by guidelines advanced by the Vietnam Communist Party.

SOE groups were required to reorganize themselves into a parent-affiliated (“Me-con,” in Vietnamese) group of companies. The intention was to change the relationship between the state and the enterprise group to “a relation based on capital ownership,” and also to change the relationship within an enterprise group to a relation between “a parent company and affiliated companies.” In addition, the diversification of business areas (or reform to a conglomerate) based on the advantage of a large-sized enterprise group, was thought as a new way to advance (Ishida 2008).

The period since 2007, when Vietnam became a member of the WTO, saw the introduction of policies in relation to deregulation or the abolition of state control. During this time, Vietnam has made a commitment to transform SOEs into limited liability companies (hereafter, LLC) and stock companies based on the integrated common company law, which is applied to both domestic and foreign companies, by 2010. However, many SOEs that had planned to transform into stock companies failed to achieve the transformation. In the open market, SOEs have generally lost their privileges and face fierce competition. On the other hand, they have been be able to enter business areas to which they formerly had difficulties in entering, and gained beneficial opportunities to form cooperative relations with both other domestic and also foreign companies. Having followed the guidance in the Government Decree 25/2010/ND-CP issued on 19 March 2010, many of these companies became “one-member limited liability companies” by July 2010.

There is also the possibility that SOE groups will gain a greater degree of independence from the control of line ministries in the management of enterprises. These changes will lead to a diversification of the business activities pursued by SOE groups. In this case, one key point is the independence of management from the state in respect of capital. Up to now, the most important issue in relation to SOE reform in Vietnam has been that the state maintains the indirect capital supply system through state-owned banks and, as a result, SOEs have been unable to extricate themselves from their dependence on the state. In respect of SOE reform, it is stated that SOE management rights were expanded, but the capital of the enterprises was still “owned by all of the people,” and the state played the controlling role on behalf of the people. Under this system, SOEs could receive preferential financial arrangements from state-owned banks. On the other hand, the upper administrative organizations (such as central ministries, local governments and organizations) still intervened in the personnel and management matters of SOEs. The State Capital Investment Corporation (SCIC, Tong cong ty dau tu va kinh doanh von nha nuoc, in Vietnamese) was established as a Special State Corporation to receive and invest the state capital of transformed enterprises in LLCs or stock companies. It also has the purpose of breaking off the hierarchical administrative relations between upper organizations and enterprises. In order to transform administrative relations into the independent management of a business group, it is very important to achieve independence in terms of ownership and finance.

The circumstances surrounding SOEs are now changing rapidly. The first aim of this chapter is to examine the changes in the organization and business areas of SOEs in the process of reorganization under these changing circumstances. According to Keister (2000), the organization of business groups in East Asia are characterized by cross-shareholdings within a business group, interlocking directorships, and finance companies. The advantages of such an organizational system among companies are: (1) a stable stockholder system, which is effective against takeovers from outside; (2) the continuance of long and stable business transactions among group companies; and (3) the function of a finance company complementing the underdeveloped capital market.

In this chapter we will consider the changes in the diversification of business groups and their organization, and at the same time examine the changes in ownership relations, corporate governance, and the financing function of business groups.

The second aim is to consider the meaning of these changes from the context of the relationship between the state and SOE groups. The process of SOE reform is ongoing and is currently at the stage of trial and error. It is therefore difficult to draw clear conclusions from the present situation, but it is at least useful to describe the “process of change.” In this chapter, section 1.1 will overview the present situation of SOE groups concerning capital and investment, section 1.2 will treat the equitization of SOE groups and their entry into the security market, section 1.3 will examine the state of finance and investment in the finance sector, section 1.4 will introduce some concrete cases of business diversification, and section 1.5 will consider the relations between the state and SOE groups regarding ownership, governance and personnel.

In this chapter, the names of major SOE groups are abbreviated as shown in the appended list (Appendix).

1.1 The present situation of SOE groups

We will first offer an overview of the present situation of SOE groups based on the report of the Vietnamese Ministry of Financem (Bo Tai Chinh 2008). As of 2007, it is said that there are about 1,720 SOEs in Vietnam, including 84 SOE groups and GC91 type groups. The two Decisions of the Prime Minister issued in 1994 formed the prototypes of GC91, organized vertically by industry, and GC90, organized as loose and horizontal alliances by the enterprises in an industry. At this stage, GC91 and GC90 were clearly separate organizational types, and GC90 was not established within the organizational structure of GC91.

In the State Enterprise Law of 2003 (an amendment of the State Enterprise Law of 1996), “General Corporations” are classified into three types. The first is the business group for which establishment is decided on by the prime minister (corresponding to the former GC91), and the second is the SOE group established “voluntarily” by concerned member enterprises. This means that the state (or central government) makes no direct decisions about the establishment of a voluntary SOE group. In actual cases of the second type of SOE group, the competent central ministries, local governments or business group has made the decision in relation to their establishment. The third is “the State Capital Investment Corporation (SCIC)” as an organization for ownership and management of state capital. It was the Company Law of 2005 that legally regulated the “business group” as an enterprise group. However, the details of organization and concrete activities of “business groups” are not yet regulated. In other words, the development of the business group in Vietnam is still at an experimental stage, and the existing state business groups are transitional organizations. Regarding the changes in the enterprise regime after 2005, please refer to the interim report of our research project (Ishida 2008: 29–31),

The major business areas of the SOEs that are owned completely by the state are in the areas of state monopoly, public interest, national defense and public order, state farms and forests. The business activities of SOEs account for 40% of GDP. The SOE groups play an important role in the SOEs activities.

It is possible to define various types of SOEs by the scale of capital involved. Table 1.1 shows the amount of capital held by parent companies based on the official documents of establishment at the time of reorganization or at the time of equitization. It is apparent that EVN, PVN and VNPT are the outstanding large-sized groups within the country. By comparison, the capital of SCIC is relatively small.

One noteworthy tendency in the business activities of SOE groups is the rapid diversification into new areas as a complement to the activities in the former business areas. In 2007, the 70 SOE groups and business groups raised capital amounting to 44.82 billion dong – 1.4 times the level of equity capital. Assuming that the state did not supply additional funds, the mobilized capital of these groups was in fact debt. For example, the ...

Table of contents

• Cover
• Title Page
• Copyright
• Contents
• List of Tables
• List of Figures
• Preface and Acknowledgements
• List of Contributors
• Introduction: The Changing Status of Economic Entities in Vietnam
• 1. State Enterprise Groups in Vietnam Following Accession to the WTO
• 2. Vietnamese Local State-owned Enterprises (SOEs) at the Crossroads: The Implications of SOE Restructuring at the Local Level
• 3. The Business Strategy of Vietnamese Enterprises Listed on the Stock Exchange: Change in the Business Strategy of REE after Listing
• 4. Globalization and Development Strategies of Vietnamese Garment Suppliers: Production-Distribution Networks and Enterprise Performance
• 5. The Rise of Local Assemblers in the Vietnamese Motorcycle Industry: The Dynamics and Diversity of Industrial Organization
• 6. Development and Prospects for the Vietnamese Banking Sector: Before and After Accession to the WTO
• 7. Rural Industries in Northern Vietnam: Strategies of Small-scale Business Establishments in the Formation of Craft Villages
• Index