DETERMINANTS OF NEW FIRM FORMATION THE CASE OF VIETNAM. DETERMINANTS OF NEW FIRM FORMATION THE CASE OF VIETNAM. DETERMINANTS OF NEW FIRM FORMATION THE CASE OF VIETNAM. DETERMINANTS OF NEW FIRM FORMATION THE CASE OF VIETNAM. DETERMINANTS OF NEW FIRM FORMATION THE CASE OF VIETNAM.
INTRODUCTION
Rationale of the thesis
The theory of the firm is fundamental to economics, emphasizing the positive impact of new enterprises on economic development through competition Historically, economists, since Adam Smith, have recognized that the entry of new competitors is vital for driving prices toward competitive levels, enhancing technical and allocative efficiency Research indicates a long-term positive correlation between the formation of new firms, productivity, and economic growth (Van Praag and Versloot, 2007; Karlsson and Nystrom, 2008) These improvements in productivity and growth are often attributed to the innovative nature of many new businesses, which serve as a driving force for technical progress and are essential for the commercialization of innovations (Acs et al., 2004).
The establishment of new firms is crucial for structural change, facilitating resource reallocation and enhancing efficiency (Schumpeter 1934, 1942) In recent decades, researchers and policymakers have increasingly recognized the significance of new firm formation as a vital driver of economic growth and development (Baumol, 1968) A thriving economy relies not only on a stable stock of existing businesses but also on a dynamic flow of new business creation Studies indicate that low levels of business ownership can hinder economic growth (Carree et al 2007), while new businesses tend to foster innovation (Colombelli and Quatraro 2018; Wennekers and Thurik 1999) and contribute significantly to job creation (Carree et al 2015; Decker et al 2014) Entrepreneurship plays a pivotal role in evolutionary economics (Schumpeter 1934; Witt 1998; Grebel et al 2003; Metcalfe 2004; Grebel 2007) and is essential for understanding regional economic development (Acs and Armington 2004; Audretsch et al 2006; Fritsch 2008) Consequently, examining regional variations in new firm formation has become increasingly important, particularly given the notable differences in entrepreneurship rates and their determinants both within and between nations (Bosma and Schutjens, 2008).
Most studies on the transition from a command to a market economy have prioritized the privatization of existing firms, often overlooking the significance of new firm creation, which is vital for growth and development New firms stimulate competition, compelling established companies to enhance their products and production methods, leading to the survival of the most capable firms that drive economic growth This dynamic has sparked ongoing interest among researchers, particularly following Birch's (1979) groundbreaking work that highlighted the role of small firm formation in job creation Since then, scholars have begun to investigate the factors influencing entrepreneurship, focusing on the business environment, institutional frameworks, and government involvement.
When establishing a new enterprise, investors must consider various factors that influence business creation Understanding these determinants can aid local governments in recognizing their strengths and weaknesses This article focuses on the topic "Determinants of New Firm Formation: The Case of Vietnam," aiming to provide a comprehensive analysis of the key factors influencing new business formation in Vietnam, utilizing the most recent data Based on the research findings, policy recommendations will be proposed to assist the government in developing more effective investment attraction strategies, ultimately increasing the number of active enterprises in Vietnam.
Object and objective of the thesis
This thesis investigates the key factors influencing new firm formation in Vietnam, identifying the most significant determinants that impact potential entrepreneurs' decisions to establish businesses By providing a comprehensive understanding of these influences, the study aims to offer valuable recommendations for policymakers to enhance the business entry rate in Vietnam.
The research questions in my thesis are as follow:
What is the definition of new firm formation?
Why new firm formation is important to the development of a country?
What is the current situation of new firm formation in Vietnam?
What are the key factors affecting in new firm formation in Vietnam?
Which policy implications can be suggested in order to encourage new firm formation in Vietnam?
Methodology
This study examines the impact of various factors on new firm formation in Vietnam from 2015 to 2018, utilizing three estimation methods: Pooled Ordinary Least Squares (POLS), Random Effects Model (REM), and Fixed Effects Model (FEM) The author employs tests such as the Breusch and Pagan Lagrangian multiplier test and Hausman tests to determine the most suitable estimation method To address endogeneity issues, first-order lag is applied to time-variant independent variables in all models The findings from the linear regression and subsequent analyses will highlight the key factors influencing new business creation in Vietnam.
This dissertation employs secondary data from 63 provinces in Vietnam, sourced from publications and reports by the General Office of Statistics (GSO) as well as official government articles and websites.
Scope of the thesis
This study analyzes the key factors influencing new business formation in Vietnam from 2015 to 2018, focusing on variables such as unemployment rate, population growth, population density, urbanization, income levels, exit rates, foreign direct investment (FDI), mean establishment size (MES), and the Provincial Competitiveness Index (PCI).
Structure of the thesis
In detail, this dissertation is divided into five chapters as follows:
Chapter 1 – Introduction: Giving overview of the current context, introducing the necessity of the topic as well as the overall research method of this thesis General structure of the thesis is also included in this chapter
Chapter 2 – Theoretical framework about new firm formation and literature review:
This section will focus on analyzing the theoretical framework of new firm formation It will summarize global empirical studies on the determinants of new firm formation to identify key explanatory variables for model estimation Finally, the author will present the research hypotheses within the model.
Chapter 3 – Situation of new firm formation in Vietnam: This chapter applies qualitative methods to analyse the current situation of new firm formation in Vietnam Basing on these actual situations, this chapter also assesses intuitively the impact of new firm formation on Vietnam’s economic development during the aforementioned period
Chapter 4 – The model and empirical results: Insights into the research method, the model, data collection and empirical results in the examined period through quantitative analysis The last part of this chapter illustrates the empirical results from the regression estimation of different models including POLS, REM and FEM by using econometrics software STATA
Chapter 5 – Policy implications and conclusions: In this final chapter, after summing up all essential findings of the research based on the discussed regression results in chapter 4, some recommendations shall be suggested to help Vietnamese Government as well as policymakers to promote the formation of new businesses, thereby stimulating the positive influences of new firm formation on economic development of Vietnam.
THEORETICAL FRAMEWORK ABOUT NEW FIRM
Overview about new firm formation
2.1.1 Definition of new firm formation
Enterprise creation involves organizing new organizations by coordinating interdependent actions into effective sequences that yield meaningful results This process typically unfolds in five stages: identifying business opportunities, defining the business concept, mobilizing resources, forming the enterprise, and launching the business However, the dynamic nature of enterprise creation means these stages may not occur in a linear fashion, and entrepreneurs might abandon their efforts if they determine that their business ideas are unviable.
Enterprise creation involves the organization of new businesses by coordinating interdependent actions into logical sequences that yield meaningful results This process typically unfolds in five distinct stages.
Bhave (1994) posits that opportunity recognition can occur before or after the decision to launch a new venture Initially, entrepreneurs may identify unmet needs that are not easily addressed by existing vendors, leading them to perceive these needs as opportunities for new business creation Conversely, personal and environmental disruptions can prompt entrepreneurs to recognize numerous opportunities, often resulting in a decision to start a business In such cases, they seek to align their knowledge, experience, skills, and resources with market demands.
In Stage 2, entrepreneurs must clarify their business concepts to align customer needs with their perceptions, as highlighted by Bhave (1994) This stage involves constructing a business model that includes setting firm objectives, determining size, drafting a vision, assessing risks, and defining success criteria (Ardichvilia et al., 2003; Morris et al., 2005) Entrepreneurs may document these elements in a business plan, either out of personal preference or due to requirements from financial institutions (Honig & Karlsson, 2001) However, the impact of a business plan on project realization remains uncertain, with researchers noting various benefits to creating business plans (Gasse et al., 2004; Filion et al., 2009).
To successfully realize their business goals, entrepreneurs must effectively mobilize essential resources, which include organizational, technological, human, social, financial, and physical assets (Brush et al., 2001) Research indicates that working in teams significantly contributes to entrepreneurial success, with team members often being family, friends, or colleagues (Brush et al., 2001; Ruef et al., 2003; Aldrich et al., 2004) According to Ruef et al (2003), teams comprised of individuals with similar characteristics tend to make collective decisions and share the challenges and triumphs of their entrepreneurial journey.
Stage 4 involves establishing the organization, often located near the founders' homes for convenience and quality of life Entrepreneurs prioritize factors such as proximity and available space over regional advantages or access to research and development In addition to selecting a suitable location, founders must also create an organizational structure for their business After setting up the organization, they can choose to operate informally or formally register it as an enterprise.
Stage 5 marks the crucial launch phase of a business, where the activities undertaken significantly influence the firm's future (McMullan & Long, 1990) Research by Duquette-Labrecque et al (2005) and Filion et al (2006) indicates that the longest intervals occur between the decision-making and execution of key milestones, such as developing the first product, making initial sales, and hiring the first employee This variation in gestation periods underscores the importance of these activities for entrepreneurs.
As the enterprise creation process is dynamic and case-specific, the previous stages do not necessarily occur in sequence (Bhave, 1994; Bruyat & Julien, 2001)
2.1.3 Measurement of new firm formation
Measuring the number of new entrants across different markets can be misleading due to the varying sizes of these markets For instance, if one market has twice the number of new entrants as another but is also twice as large, it would be incorrect to conclude that entry activity is higher in the first market To make meaningful comparisons, the absolute number of entrants must be standardized Two primary approaches for measuring and comparing entry activity across markets are the ecological approach and the labor market approach, as noted by Audretsch and Fritsch (1994b) Additionally, Storey (1991) categorized the literature into two distinct groups.
The first category of industrial organization theory focuses on how industrial structure influences the establishment of new enterprises This approach assesses whether market structure facilitates or hinders new firm formation by calculating entry rates relative to the existing number of firms at the beginning of a period Known as the ecological approach, it analyzes entry activity in relation to the size of the existing business population This perspective is widely used in industrial organization literature, where empirical studies seek to explain the significant variations in entry rates across different product markets.
The second research category focuses on labor market theory, linking annual firm formation to the number of employees within the same region, sector, and year By utilizing integrated data, this approach explores the factors that influence an individual's decision to become an entrepreneur, particularly changes in their labor market status The goal is to standardize the number of new entrants relative to the workforce size, based on the premise that new entrepreneurs emerge from the existing labor pool Grounded in the entrepreneurial choice theory by Evans and Jovanovic (1989), this method assumes that each new firm is initiated by someone already within the labor market it serves While acknowledging cross-market worker mobility, the labor market approach emphasizes that prospective entrepreneurs typically have prior experience as employees before launching their businesses.
Empirical studies on the determinants and economic consequences of regional entry rates often utilize a labor market approach, distinguishing between independent start-ups and subsidiaries of incumbent firms (Van Stel and Storey, 2004) Independent entries are linked to the local workforce, reflecting the availability of labor in the region, whereas new subsidiaries are associated with the presence of existing firms Essentially, independent start-ups emerge from the local labor pool, while subsidiaries arise from the established stock of firms in the area.
This thesis utilizes the labor market approach to examine a country's perspective on entrepreneurship, as it aligns with the theory of entrepreneurial choice A key assumption of this approach is that entrepreneurs operate within the same labor market as their new firms Notably, many new businesses are often founded at home or in nearby locations, highlighting the significance of local context in entrepreneurial activities.
2009), and that most new entrepreneurs will have some work experience in the region, the implications of this assumption were acceptable
2.1.4 The importance of new firm formation
The entry of new businesses into an industry significantly impacts economic performance through both direct and indirect effects Directly, these new ventures generate jobs as they commence operations Indirectly, they influence existing firms in the market, altering competition and potentially driving innovation.
2.1.4.1 Direct impacts of new firm formation on economic development
New businesses play a crucial role in economic development and community well-being, as low rates of new firm formation contribute to uneven regional economic performance These enterprises foster choice, competition, and employment while being locally owned and committed to their communities They serve as a seedbed for innovation and new product development, significantly contributing to long-term economic health Furthermore, high rates of new business creation are linked to increased innovation and new employment opportunities, establishing a direct connection to overall economic well-being.
The emergence of new businesses fosters competition, which is essential for driving innovation and enhancing overall economic well-being Domestic rivalry, coupled with the demand for goods and services generated by numerous individual firms, plays a crucial role in boosting competitiveness and promoting economic growth Additionally, the specific activities and sectors in which these new firms operate are vital in shaping their impact on competitiveness, making this aspect fundamentally important.
Literature review about determinants of new firm formation
Numerous studies have explored the economic significance of new firm formation and the various determinants influencing it Different research methodologies stem from diverse starting points regarding the factors affecting new business creation A range of theoretical models exists, which can be tested through empirical studies to identify these determinants This article focuses on nine key factors impacting new firm formation in Vietnam: unemployment rate, population growth, population density, urbanization, income level, exit rate, foreign direct investment (FDI), mean establishment size (MES), and the Provincial Competitiveness Index (PCI).
Research indicates a complex relationship between unemployment rates and new firm formation While unemployment is often seen as a primary factor influencing the establishment of new businesses, findings in the literature are mixed The recession-push hypothesis suggests that higher unemployment decreases disposable income, leading to reduced local demand for goods and services and consequently hindering new firm formation Conversely, the prosperity-pull hypothesis posits that unemployment can stimulate entrepreneurial activity Some studies, such as those by Tervo and Niitykangas, support the notion that regional firm formation tends to decline as unemployment rises, highlighting the intricate dynamics between these economic factors.
The second perspective posits that rising unemployment rates can drive unemployed individuals to start their own businesses as a means of securing employment This is based on the premise that the potential financial rewards of self-employment often outweigh social benefits Consequently, increased unemployment may lead to a surge in new business ventures out of necessity Additionally, start-up enterprises typically have a greater capacity to hire labor, further motivating individuals to become entrepreneurs (Okamuro & Kobayashi, 2005) For example, Reynolds et al (1995) noted that individuals often resort to entrepreneurship when job opportunities are scarce Storey (1991) also highlighted that a high unemployment rate can result in increased business formation, as jobless workers seek alternatives to unemployment However, Hamilton (1989) cautioned that the link between unemployment and new firm creation is not necessarily straightforward, as it varies based on specific conditions.
Recent studies indicate that a "borderline" level of unemployment has been reached, with many researchers finding a positive correlation between unemployment and new firm formation (Binks and Jennings, 1986; Vivarelli, 1991) However, Storey (1991) and Audretsch and Fritsch (1994) observed both positive and negative associations, while Fritsch and Falck (2002) reported no significant relationship between firm formation and unemployment levels.
Population change significantly impacts new firm formation by creating opportunities for economic activity as larger consumer markets emerge due to growing populations This demand for goods and services can lead to increased start-up activity, as individuals seek to capitalize on new prospects Additionally, population growth may push individuals toward entrepreneurship as it intensifies competition for jobs and lowers the opportunity costs of self-employment While some studies have shown no significant effect of population growth on start-up rates, many others confirm a positive correlation Research by Hathaway and Litan indicates that regions with higher population growth in the 1970s also experienced increased firm formation rates Conversely, Sutaria and Hicks found no significant link but acknowledged modeling limitations that may obscure the expected positive relationship between population growth and new firm formation.
Population density significantly influences the birth of new firms, with research by Reynolds et al (1994) highlighting a positive correlation between urbanization, agglomeration, and new firm formation rates Similarly, Audretsch and Fritsch (1994) identified a strong link between high population density and increased entrepreneurial activity Bosma and Schutjens (2011) further confirmed that urban areas with dense populations tend to exhibit higher levels of entrepreneurship However, Delfmann et al (2014) caution that when a region has fully leveraged the advantages of urbanization, excessive population density may lead to negative consequences for new firm births.
Research by scholars such as Audretsch and Fritsch (1994), Guesnier (1994), Reynolds (1997), Armington and Acs (2002), Bishop (2012), and Fotopoulos (2014) highlights the positive correlation between population density and new business formation An increase in population is likely to boost demand for goods and services, leading to higher rates of new firm creation This phenomenon occurs because densely populated and economically active regions provide better access to diverse markets and essential resources like capital, labor, and services, facilitating the entry of new businesses (Fritsch and Mueller).
Numerous studies indicate a positive correlation between population density and new firm formation, highlighting its significance in regional variations For instance, Gaygisiz and Koksal (2003) found that population density is a crucial factor influencing new firm establishment in Turkey's manufacturing sector Similarly, Guesnier (1994) observed that France experiences higher rates of new firm formation alongside increased population density, a trend also noted by Audretsch and Fritsch (1994) in Germany However, an exception to this trend is Garofoli's (1994) research, which concluded that population density does not significantly impact firm formation in Italy.
The degree of urbanization refers to the percentage of a population residing in urban areas, highlighting the benefits of dense regions for new business formation Urban areas offer labor market opportunities, information flows, and a diverse range of goods and services, which are crucial factors for entrepreneurs when selecting a location for their enterprises The diversity of urban populations leads to varied consumer demands, fostering innovation and increasing the likelihood of new firm start-ups Moreover, densely populated regions provide favorable market entry conditions due to closer consumer proximity and more developed business infrastructures, making them attractive for entrepreneurs.
Agglomeration effects significantly enhance new firm formation by creating increased local market opportunities for both consumers and essential inputs Businesses situated in densely populated areas benefit from reduced transportation costs and proximity to suppliers and customers, which can lead to lower costs and improved product quality Additionally, urbanization fosters a skilled workforce and facilitates the rapid exchange of ideas and knowledge The presence of abundant employment opportunities in urban settings also mitigates the risks associated with starting a business, providing a safety net for entrepreneurs in the event of failure.
The impact of urbanization on new firm formation is debated, as a higher degree of urbanization can drive economies of scale, allowing larger firms to serve clients more efficiently and reducing opportunities for small businesses (Verheul et al., 2001) Additionally, excessive competition in urban areas may lead to increased wages and higher input costs, further deterring new entrants (Nyström, 2007) Research by Van Stel and Suddle (2008) highlights a negative effect on service start-ups in the Netherlands, which are less reliant on the benefits of agglomeration.
Income serves as both a demand and supply factor, influencing entrepreneurial activity While income growth boosts demand, it also provides aspiring entrepreneurs with better access to capital Verheul et al (2001) explored the contradictory effects of wages on start-up rates, suggesting that higher wages create significant opportunity costs for individuals considering self-employment, thereby reducing new firm formation As salaries increase, the likelihood of individuals starting their own businesses diminishes, as they weigh the opportunity cost of leaving stable employment Additionally, high income levels can raise labor costs for companies, potentially deterring market entry in sectors sensitive to these expenses (Nystrom, 2007) Research by Santarelli et al (2009), Audretsch and Fritsch (1999), and Fotopoulos and Spence (1999) indicates a negative correlation between wages and new firm formation in developed nations, while Bosma et al (2008) highlight the adverse effects of high hiring costs on self-employment prospects.
The second hypothesis posits a positive correlation between high wages and start-up rates, suggesting that higher income reflects a thriving economy with better survival rates for businesses This relationship is driven by increased demand for goods and services, which fosters entrepreneurial activity and encourages new business ventures Research by Gaygisiz and Koksal (2003) and Cala and Arauzo-Carod (2010) indicates that low-income markets hinder demand and deter new firms Additionally, Butler and Herring (1991) found that individuals with higher family income tend to have better employment prospects Studies by Armington and Acs (2002) and Lee et al (2004) further support the notion of a positive link between income growth and new firm formation, while Reynolds et al (1995) established a relationship between personal wealth and business creation.
Johnson and Parker (1996) discovered no correlation between exit rates and entry rates However, our findings reveal a statistically significant positive impact of the previous year's exit rate on the current year's new firm formation rate This indicates that when firms exit the market, whether voluntarily or involuntarily, they contribute to the conditions that foster the establishment of new businesses.
The entry of new firms into a market often occurs as a response to existing demand for innovative products and services, enhancing competitiveness Conversely, when firms exit a market, it can lead to a less competitive environment, making it easier for new entrants Research indicates that the entry rate of the previous year is a more reliable predictor of the current year's entry rate than the exit rate This supports the idea of "momentum," suggesting that ongoing trends in business entry are more favorable for new firm formation While regions that saw new business entries last year may continue to attract more this year, it does not necessarily mean that they will compensate for firm exits through new firm formation in the following year.
Research hypotheses 30 CHAPTER 3: SITUATIONS OF NEW FIRM FORMATION IN VIETNAM 33
Based on the theoretical and empirical studies, the thesis entails concepts and research hypotheses as follows:
Hypothesis H1: A region’s unemployment rate is positively related to its new firm formation rate
In Vietnam, regions with higher unemployment rates are likely to see an increase in new business formations, as unemployed individuals may turn to entrepreneurship as an alternative to joblessness Additionally, the ease of hiring labor for start-up enterprises further enhances the motivation to launch new businesses.
Hypothesis H2: A region’s population growth is positively related to its new firm formation rate
Population growth serves as a dual factor in economic dynamics, acting as both a supply and demand driver As the population in a region increases, it not only provides a pool of potential entrepreneurs but also heightens the demand for various goods and services Consequently, it is anticipated that in Vietnam, the formation of new firms will be positively impacted by this population growth.
Hypothesis H3: A region’s population density is positively related to its new firm formation rate
Improved access to diverse and extensive markets for essential resources like capital, labor, and services encourages entrepreneurs to invest more in densely populated and economically active regions Consequently, it is anticipated that there is a positive correlation between population density and the establishment of new firms in Vietnam.
Hypothesis H4: A region’s degree of urbanization is positively related to its new firm formation rate
In Vietnam, urbanization positively influences new firm formation by providing developed business infrastructure, reduced transportation costs, and enhanced opportunities for innovation compared to rural areas Furthermore, urban environments foster a more skilled workforce and facilitate the rapid exchange of ideas and knowledge, contributing to a thriving entrepreneurial ecosystem.
Hypothesis H5: A region’s income level is positively related to its new firm formation rate
The author posits that higher income levels in Vietnam positively influence the rate of new firm formation, as increased regional income enhances demand for various goods and services, thereby stimulating entrepreneurial activity and encouraging new business start-ups.
Hypothesis H6: A region’s rate of firm exit is positively related to its new firm formation rate
This thesis posits that higher exit rates of firms in Vietnam will encourage new firm formation As existing companies exit a market, the competitiveness decreases, creating opportunities for new entrants Consequently, this reduction in competition fosters a more favorable environment for new businesses to emerge and thrive.
Hypothesis H7: A region’s FDI inflows is positively related to its new firm formation rate
Foreign Direct Investment (FDI) inflows are anticipated to positively influence new firm formation in Vietnam This relationship exists due to various channels through which FDI can encourage the establishment of domestic businesses For instance, employees from foreign firms may transition to entrepreneurship by starting their own companies in similar or related sectors, utilizing the skills and knowledge gained during their employment Additionally, the presence of foreign entities can motivate domestic entrepreneurs to enter the market.
The "demonstration effect" occurs when domestic entrepreneurs learn from the successes and failures of foreign firms, fostering innovation and growth Additionally, foreign direct investment (FDI) positively impacts domestic market entry through vertical linkages Foreign firms can boost demand for local inputs and intermediate goods, creating opportunities in upstream industries (backward linkages) Furthermore, these foreign firms can supply new or higher quality inputs to domestic customers, increasing demand in downstream industries (forward linkages) Collectively, these factors represent new business opportunities, encouraging domestic firm entry, known as the demand creation effect.
Hypothesis H8: A region’s mean establishment size is positively related to its new firm formation rate
In Vietnam, the author anticipates that the presence of large firms will positively influence the formation of new businesses This is primarily because small firms often rely on larger companies for opportunities, as new enterprises are drawn to regions with established large firms to supply goods and services Additionally, new firms can also take on jobs that large firms deem inefficient to manage internally.
Hypothesis H9: A region’s PCI is positively related to its new firm formation rate
Provinces with higher Provincial Competitiveness Index (PCI) often see an increase in newly established businesses, as a strong PCI indicates a favorable business environment, effective institutional quality, and successful administrative reforms The confidence in transparent governance by public authorities encourages greater investment from firms, leading to a rise in new business formations Consequently, the author anticipates a positive correlation between PCI and the rate of new firm creation in Vietnam.
General situations of new firm formation in Vietnam
In 2019, Vietnam saw the registration of 138,100 new enterprises, reflecting a 5.2% increase from the previous year, with total registered capital reaching VND 1,730.2 trillion and a workforce of 1,254,400 individuals The average registered capital per new enterprise was VND 12.5 billion, marking an 11.2% rise year-on-year The overall registered capital added to the economy in 2019 totaled VND 4,003.2 trillion, which included VND 2,273 trillion from 40,100 enterprises that increased their capital From 2011 to 2019, a total of 762,207 new enterprises were established, averaging 95,276 new businesses annually, which is a significant increase of 1.46 times compared to the 2006-2010 period, during which approximately 65,000 new enterprises were registered each year.
Figure 3.1 The number of newly established enterprises in Vietnam over the period of 9 years from 2011 to 2019
Number of newly established enterprises
Figure 3.2 Total registered capital of newly established enterprises in Vietnam over the period of 9 years from 2011 to 2019
Figure 3.3 Average registered capital of newly established enterprises in
Vietnam over the period of 9 years from 2011 to 2019
Figure 3.4 Total registered labor of newly established enterprises in Vietnam over the period of 11 months from 2015-2019
In 2019, a total of 177.5 thousand enterprises resumed operations or were newly registered, marking a 15.9% increase from 2018 This equates to an average of nearly 14.8 thousand newly registered and re-operated enterprises each month.
Situation of newly established enterprises by sector
As a whole, the number of newly established enterprises increased sharply in two sectors, including Industry, Construction and Services Specifically, in 2018,
"Wholesales and retails; repairing automobiles, motorbikes and other vehicles”,
The construction and processing industries lead in newly established enterprises, with 46,380 businesses in construction (up 2.1%), 16,735 in processing and manufacturing (a 4.4% increase), and 16,202 in related sectors (a slight rise of 0.07%) Notably, the real estate sector boasts the highest total registered capital among these fields.
Total registered labor business" with VND 430.193 billion This is also the industry with the highest rate of newly established enterprises, reaching 40%
In 2017, several sectors experienced a decline in the number of newly established businesses, including Transportation and Warehousing, which saw a significant decrease of 34% The Arts, Amusement, and Entertainment sector followed with a decline of 9.1% Additionally, Agriculture, Forestry, and Fisheries experienced a 5.5% decrease, while Information and Communication faced a 3.8% drop Lastly, the Mining sector recorded a decrease of 3.1%.
Table 3.1 The number of newly established enterprises by sector in Vietnam over the period of 4 years from 2015 to 2018
Agriculture, forestry and fisheries 1791 1883 1955 1847 Industry and Construction 23589 30713 33939 34725
Water supply, sewerage, waste management and remediation activities
Wholesales and retail trade; repair of motor vehicles and motorcycles 30911 38956 45411 46380
Accomodation and food service activities 4116 5303 6336 6852
Finance, banking and insurance activities 831 1185 1538 1867
Professional, scientific and technical activities 5913 8430 9392 9964
Administrative and support service activities 4085 5541 6742 7631
Human health and social work activities 313 535 741 871
Table 3.2 Total registered capital by sector of newly established enterprises in
Vietnam over the period of 4 years from 2015 to 2018
Agriculture, forestry and fisheries 18267 22175 20042 30647 Industry and Construction 236902 294178 415005 408075
Water supply, sewerage, waste management and remediation activities
Wholesales and retails; repairing automobiles, motorbikes and other vehicles
Figure 3.5 10 types of economic activities with the highest number of newly established enterprises in 2018 in Vietnam
Education Transportation and storage Accomodation and food service activities
Real estate activities Administrative and support service activities
Professional, scientific and technical activities
Manufacturing Construction Wholesales and retail trade; repair of motor…
Thousands Number of newly established enterprises
Situation of newly established enterprises by region
The Southeast and Red River Delta regions lead in the establishment of new enterprises and registered capital, though the growth rate of new businesses remains slow In the Southeast, the number of enterprises reached 55,821, reflecting a 3.9% increase, while registered capital fell to 624.604 trillion VND, a decrease of 8.2% since 2017 In contrast, the Red River Delta saw a rise in the number of enterprises to 38,873, up by 2.1%, with a significant increase in registered capital to 504.110 trillion VND, marking a 64.6% rise.
In Hanoi, the establishment of new enterprises surged to 25,231, reflecting a 2.8% increase Additionally, the total capital raised reached VND 387,372 billion, marking an impressive 87.6% growth and positioning Hanoi as the region with the highest capital increase in the Red River Delta.
In Ho Chi Minh City, the number of newly established enterprises rose to 43,230, reflecting a 3.7% increase However, the total registered capital decreased to VND 508,541 billion, marking a 12.9% decline This drop in capital places Ho Chi Minh City among the two areas in the Southeast region experiencing a reduction, alongside Tay Ninh, which saw a significant decrease of 31.9%.
Table 3.3 The number of newly established enterprises by region in Vietnam over the period of 4 years from 2015 to 2018
Northern midlands and mountain areas 3,272 4,193 5,300 5,271
Table 3.4 Total registered capital by region of newly established enterprises in
Vietnam over the period of 4 years from 2015 to 2018
Northern midlands and mountain areas 33.999 41.586 53.992 47.157
Situation of newly established enterprises by type
In 2017, the number of newly established enterprises saw a significant rise across various types, with Limited companies (1 member), Joint stock companies, and Limited companies (2 members) leading the way Specifically, Limited companies (1 member) recorded 73,118 new businesses, a 22.17% increase, followed by Joint stock companies with 21,197 new establishments (up 16.1%), and Limited companies (2 members) with 29,389 new entries (a 6.15% rise) Notably, Joint stock companies topped the list in total registered capital, amounting to VND 609,971 billion, while Limited companies (1 member) had the highest total registered labor force, employing 668,385 individuals.
The type of enterprise in which the number of newly established businesses decreased was private company with a decline of 27.05% compared to 2016
Table 3.5 The number of newly established enterprises by type in Vietnam over the period of 3 years from 2015 to 2017
Table 3.6 Total registered capital by type of newly established enterprises in
Vietnam over the period of 3 years from 2015 to 2017
Table 3.7 Total registered labor by type of newly established enterprises in
Vietnam over the period of 3 years from 2015 to 2017
Impact of new firm formation on Vietnam’s economy
3.5.1 Impact of new firm formation on Vietnam’s economic growth
Thanks to a significant rise in the number of newly established enterprises, in
In 2019, Vietnam's economy thrived despite a global slowdown, achieving a remarkable GDP growth rate of 7.02%, surpassing the National Assembly's target of 6.6% - 6.8% The quarterly breakdown showed growth rates of 6.82% in Q1, 6.73% in Q2, 7.48% in Q3, and 6.97% in Q4 Although this growth was slightly lower than the 7.08% recorded in 2018, it marked the second consecutive year that Vietnam's economic growth exceeded 7%.
In 2011, the economy experienced overall growth, with agriculture, forestry, and fishery sectors increasing by 2.01% and contributing 4.6% to the total growth The industry and construction sectors saw a significant rise of 8.90%, contributing 50.4%, while the service sector expanded by 7.3%, accounting for 45% of the growth The primary driver of this economic expansion was manufacturing, which grew by 11.29% Additionally, market services such as transportation and storage surged by 9.12%, wholesale and retail trade increased by 8.82%, and finance, banking, and insurance rose by 8.62%.
Figure 3.6 Vietnam’s GDP over the period of 9 years from 2011 to 2019
Figure 3.7 Vietnam’s economic growth rate over the period of 9 years from
Figure 3.8 Vietnam’s economic growth rate by sectors over the period of 5 years from 2015 to 2019
Agriculture, forestry and fisheries Industry and construction Services
Vietnam's economic growth is primarily driven by the "Industry and Construction" and "Services" sectors, which account for 50.4% and 45% of the economy, respectively This substantial contribution can be attributed to a significant increase in the number of newly established enterprises within these sectors.
In 2019, total-factor productivity (TFP) significantly contributed to GDP growth, accounting for 46.11%, with an average of 44.46% from 2016 to 2019, surpassing the 33.58% average from 2011 to 2015 Labor productivity reached VND 110.4 million per worker (approximately US$ 4,791), reflecting an increase of US$ 272 from 2018, while constant price labor productivity rose by 6.2% due to a surge in the labor force and employment Additionally, investment efficiency improved, evidenced by a decrease in the incremental capital-output ratio (ICOR) from 6.42 in 2016 to 6.07 in 2019.
3.5.2 Impact of new firm formation on Vietnam’s employment growth
Between 2015 and 2019, Vietnam experienced significant employment growth, driven by government initiatives aimed at improving the business environment and enhancing competitiveness This proactive approach facilitated the establishment of a record 138,139 new enterprises in 2019, reflecting a 5.2% increase from the previous year Consequently, these new businesses created job opportunities for 1.25 million workers, contributing to the overall positive employment landscape in the country.
In 2019, Vietnam experienced a significant economic boost, with the unemployment rate for individuals aged 15 and older remaining low at 2.05% The total number of employed individuals in this age group reached approximately 54.7 million, marking an increase of 416,000 compared to the previous year Notably, urban employment accounted for 18.1 million, representing 33.1% of the workforce.
Figure 3.9 Vietnam’s number of employed people over the period of 9 years from 2011 to 2019
Figure 3.10 Vietnam’s proportion of employed labors by sectors over the period of 9 years from 2011 to 2019
Agriculture, forestry and fisheries Industry and construction Services
The restructuring of industries has led to a significant shift in the labor market, with a notable decrease in the proportion of workers in agriculture, forestry, and fisheries Concurrently, there has been a marked increase in employment within the industrial, construction, and service sectors Over the past five years, the rate of labor transitioning from agriculture and related fields to other economic sectors has reached its peak In 2019, it was estimated that this trend continued to grow, reflecting the ongoing evolution of the workforce.
As of the latest data, nearly 19 million individuals aged 15 and older are employed in the Agriculture, Forestry, and Fisheries sector, representing 34.7% of the workforce, which marks a 3% decline since 2018 In contrast, the Industry and Construction sector employs 16.1 million people, accounting for 29.4% of the workforce, reflecting a 2.7% increase from 2018 The Service sector has seen the most significant growth, with nearly 19.6 million workers, making up 35.9% of the total workforce and showing a 0.3% increase compared to 2018, surpassing the Agriculture sector in employment numbers.