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PRACTICAL ASPECTS OF DOING BUSINESS IN ASEAN ECONOMIC COMMUNITY ( AEC )

PRACTICAL ASPECTS OF DOING BUSINESS IN ASEAN ECONOMIC COMMUNITY ( AEC ) with focus on Small and Medium Enterprises Author: Trương Đình Tuyển Ho Chi Minh City, 07 April 2016. Trương Đình Tuyển. MODERN ECONOMIC DEVELOPMENT TREND AND EACH NATION’S CHOICE FOR DEVELOPMENT

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PRACTICAL ASPECTS OF DOING BUSINESS IN ASEAN ECONOMIC COMMUNITY ( AEC )

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  1. PRACTICAL ASPECTS OF DOING BUSINESS IN ASEAN ECONOMIC COMMUNITY (AEC) with focus on Small and Medium Enterprises Author: Trương Đình Tuyển Ho Chi Minh City, 07 April 2016

  2. Trương Đình Tuyển MODERN ECONOMIC DEVELOPMENT TREND AND EACH NATION’S CHOICE FOR DEVELOPMENT (This part is to help enterprises understand the flows of general trend and take advantages of this trend in a wider and deeper integration condition, including AEC (Global Mindset, Local Action)

  3. . Trương Đình Tuyển I. MODERN DAY DEVELOPMENT TREND Characteristics: The fast and vigorous developments of science and technology which have created a colossal amount of material properties and spiritual products. Deeper allocation of labor forces requires promotion and more liberalization of trade and investment so that elements of the production process are able to move freely globally. And that leads to a robust development in both scale and form of the trend for the globalization of economies and liberalization of trade, services and investment Sustainable growth is a requirement of the very development process, which combines firmly the growth speed with quality, economic growth with social problem solving, and environment protection.

  4. 2. The transformation process • From machinery era to high technological era under the lead of information technology • From material production to service sectors development • From muscular labor to wisdom labor. • From national market to global market, and not only exporting to individual market but also participate in production networks and supply chains. • With the establishment of multinational and grand conglomerates, there is a trend of individualization of enterprises and the presence of the “sharing economics”. • From labor allocation in accordance with existing resource to optimization of market activities. • From focusing on economic growth speed to growth quality and sustainable development. • From a government that gives commands to a government that initiates developments

  5. Trương Đình Tuyển 3. Consequences: The industrialization process has been shortened, with a right strategy a country (enterprise) that follows may catch up, or take over countries (enterprises) that have already enjoyed much higher development level. (Size is not as important as speed, and thoughts are better than experience) Globalization of the economy, liberalization of trade and hence, international integration is becoming the vast trend of this era and is the condition for development in each country. “Globalization is an immense trend attracting all nations” (Vietnam Communist Party Assembly IX) However, this is a complicated process with pros and cons (the gap between the rich and the poor among nations, and between social classes within each country is threatening to increase – according to Bloomberg the world’s 400 wealthiest persons is controlling approximately 3.900 billion USD, more than GDP of many countries except The US, China and Japan) and competition together with cooperation. (3) Risk level and instability have increased (a flexible policy reaction and risk management are important requirements to managers) Due to fast liberalization and development of the financial market with the operation of derivatives products, changes of an economy will have a quick and profound impact on a global scale.

  6. (Cyprus: Black Monday (14/8): The recent collapse of Shanghai Stock Exchanges on 7/1/2016). Note: In 1980, the total value of global financial market was 12 trillion USD (equivalent to 100% of World GDP). At the point of crisis, the number has reached 140 trillion USD, a increase of 1,166% (and equivalent to 3.25 times of the World GDP) II. CHOICE FOR DEVELOPMENT: Exploit and create comparative advantages, transform comparative advantages to competitive advantages to effectively participate in the international labor allocation and to claim high value added phases in the global value chain, at the same time improve speculation capacity and the ability to quickly and accurately react to policy changes based on the establishment a efficient economic structure and growth model.

  7. AN OVERVIEW OF ASEAN ECONOMIC COMMUNITY

  8. I. ASEAN ECONOMIC COMMUNITY. 1. Foundation process: ASEAN has a population of around 621 million people and a GDP 2,600 billion USD (equivalent to 1,25 times the GDP of India), ASEAN has the potential to become the world’s 4th largest economy in 2050 December 1997, adoption of “The ASEAN Vision 2020” October 2003, issuance of “ASEAN Concord II” (Bali Declaration II) which set the target to form ASEAN Economic Community in 2020 based on 3 pillars: ASEAN Political Security Community (ASC) ASEAN Economic Community (AEC) ASEAN Socio-Cultural Community (ASCC) January 2007, decision on accelerating the establishment of ASEAN community in accordance with ASEAN Charter. ASEAN leaders committed to form the “Community” in 2015 instead of 2020. November 2015, signing the declaration for establishment of ASEAN Community at ASEAN Summit on 31/12/2015, and declaration for ASEAN Community Vision 2025: “Forging ahead together”

  9. 2. The Goal and Implication of AEC: (1) Establishment of single market and production base, where guarantees free flow of goods, services, investments and skilled labor (including the 8 professions: doctors, nurses, dentists, architects, engineers, surveyors, accountants, and those in tourism industry). Consequently, improve competitive strength, promote mutual prosperity with the region, increase attraction to foreign investment (in 2014 ASEAN attracted 136 billion USD while China got 128 billion) (2) A highly competitive region (3) A balance growing region, by efficiently implementing the ASEAN Initiatives for Integration (IAI) (4) And a region that is fully integration to the global economy.

  10. Henceforth, ASEAN community in general and ASEAN Economic Community in particular, hasn’t stayed unchanged one established, but its formation has gone through a long process of implementing agreements, decisions for integration on many fields at a deeper and wider scale, especially after the participation of CLMV countries to ASEAN which would continue deepening this process. For instance, the integration of financial services: integration of banks in the ASEAN-ABIF, toward the liberalization of banking services in 2020; and further is the integration of stock exchanges… However, it is difficult for ASEAN to create a model imitating that of EU due to the differences in political regimes and being at a low development levels and with an enormous gap. (Even though Thailand is among the ASEAN-6 countries with GDP per capita in 2014 at 5,520 USD, that is still less than 1/10th of Singapore at 56,286 USD

  11. II. ASEAN essential Treaties since 1995 • ASEAN Trade In Good Agreement (ATIGA) signed in February 2009; comes into force from 17/5/2010.(Replacing the earlier agreement CPT/AFTA, accelerating tariff liberalization) • ASEAN Service Agreement signed in 1995 and Protocol for ASEAN Framework Agreement on Service (AFAS) signed in 2003 • ASEAN Comprehensive Investment Agreement (ACIA), signed on 26/2/2009 at the 14th ASEAN Summit in Thailand.

  12. VIETNAM IN AEC

  13. I. Population and Size of the economy (in 2013) • Population: 90.7/621 million (in 2014), equivalent to14,6% of ASEAN at an average level compared to other ASEAN members. • GDP: 170,6/2,400 billion USD, equivalent to 0,7/10, average level of the other 10 ASEAN members) • GDP per capita: 1.902/3.822 USD (approximately ½ the average level of ASEAN) • Trade: 265/2,512 billion USD (equivalent to 18%, the average level) • FDI in 2013:11.5/122 billion USD (equivalent to 22% the regional average level).

  14. II. Opportunities and Treats when accessing ASEAN market • Opportunities: (1) ASEAN is a dynamic economic community, with high growth rate (only after China and India) and is forecasted to become world’s the 4th largest economic zone in 2050; is an investment destination for many multinational groups, which promotes the development of production network and regional supply chain. (2) Located on the world’s most important shipping routes, ASEAN has a advantageous geo-economic spot. In such a condition, Vietnam is even on a more favorable spot (the linkage between onshore and offshore routes to ASEAN countries) Vietnamese commodities can connect to the world via transshipment terminal in Singapore (3) Vietnam has higher growth rates in economy and trade than ASEAN-6 countries. (4) Vietnam has stable socio-political environment (5) Vietnam has potential for developing important industries such as: Offshore economy, agriculture, tourism industry and ICT, logistics.

  15. (Vietnam has not only registered its name on the worlds IT maps but also stood high in the rankings, and among the leading nations in software outsourcing services providers, according to the consulting firm Cushman & Wakefield). (6) ASEAN economies which have numerous and diversified demands and require moderate qualities are suitable for Vietnam’s current production level. (7) The majority of ASEAN enterprises are of small and medium scales, with many “niche market”, and Vietnamese companies (most are SMEs) can exploit. (8) The process of implementing commitments on trade liberalization to create a single market is combined with ASEAN’s general integration plan (infrastructures, institutions, humans) to facilitate investments, and reduce transaction costs. (9) Vigorous movements in the restructuring of production, economy help Vietnam implement the ‘flying crane flock’ format growth strategy at the beginning stage of Industrialization (10) Vietnam is among the CLMV countries, receives certain incentives in the integration process.

  16. 2. Threats: (1) In general, the business environment and institutional qualities are lower than that of ASEAN-6 countries (Figure 3,4) (2) Transport infrastructure is underdeveloped. (3) Commodities market in ASEAN is highly competitive. (4) Most of Vietnamese enterprises are established lately and small in size (around 97,85% are SMEs, among which 70% are micro small, 20% are small and 2% are medium; they have low technological and financial capacities, skillfulness in operations, and professional level in doing international business.(Figure 5) For instance: among top 100 companies that have largest market values in ASEAN, Malaysia has 27, Singapore: 21, Thailand: 21, Philippines: 14, Vietnam: 1 (Petro Vietnam) (5) The mastering of English is less than most other countries. (6) ASEAN is a multi-cultural region, but Vietnamese entrepreneurs have a limit understanding of business cultures in each ASEAN member countries. (7) Although AEC has formed, there is a rather strong trade protection trends among ASEAN members.

  17. III. Strength and Weakness of Vietnamese Enterprises 1. Strength: • Young labor force, the population is in the golden age, hard working, fast learner and dynamic if managers know how to encourage his employees. • Low labor costs (short term advantage) • The internet usage rate in population is high which ease E-commerce – a trend that is becoming stronger and stronger • There is certain benefit in establishing a firm late, for theirs is a rule “speed is more important than size” if right strategy is utilized. • It’s easier for small sized enterprises to restructure, change growth models, and at low costs.

  18. 2. Weakness: (1) Limit knowledge about AEC, 70% of SMEs have no idea about AEC. (2) ASEAN is a multi-cultural region, but Vietnamese entrepreneurs have a limit understanding of business cultures in each ASEAN member countries. (3) In Vietnam, customers are not put in the center; businesses are run with short-term vision; and it is unaware that the basic of a growth strategy is the strategy of improving competitive capacity. (4) The quality in conducting business is low: raking in 07-08: 83, 08-09: 84, 09-10:70. (5) Weak in cooperation and integration (6) SOEs constitute high proportion in national total assets and total liabilities but produce low efficiency with high monopoly and compete forcefully with private sector.

  19. IV. Vietnamese Enterprises in comparison with ASEAN’s on essential activities and criteria 1. Import and export between Vietnam and ASEAN (Figure 1) – billion USD Figure 1

  20. Comments: • Vietnam has positive trade balances with ASEAN countries in consecutive years. Since 1996 (the first year after AFTA entered into force) to 2014, export from Vietnam to ASEAN has increased 10.6 times; and at the same period, import has increased 7.66 times. Thus export increased at a higher rate than import. However, Vietnam’s export depended a great deal on the exportation of rice, a high value commodity that is traded mainly to ASEAN market, especially to Indonesia, Philippines and a lesser quantity to Malaysia. From 2010 to 2014, Vietnam exported at an average of 3.35 billion USD of rice annually). In a later scenario, if Indonesia and Philippines reduce their rice import or an increase in rice export volumes from low-cost exporters (India, Myanmar, Cambodia) then Vietnam’s balance trade with ASEAN countries would gradually becomes more and more negative. • Negative trade balance from ASEANimplies that AFTA doesn’t promote growth directly as specified in the formula G= I+ C+ (Ex- Im) although import ensures investment and consumption, and thus also contributes to growth. Moreover, if we use a general formula to calculate competitive capacity = (Ex-Im)/(Ex+Im), we will get a negative results for Vietnam’s competitive capacity.

  21. (2) The ability to exploit tax incentives in AFTA has increased but still at a low level.(figure 2) Figure 2: % C/O incentives in AFTA compared to total import and export • Source: MOIT The reason for the rate of using C/O incentives is low somehow could be traced to rice and crude oil – 2 export commodities that have high proportion in Vietnam’s total import and export, but a more important reason is that Vietnam firms haven’t pay attention to these incentives and only perform as per specified by importers. In addition, many commodities could not ensure the C/O’s required localization proportion due to underdeveloped supporting industry.

  22. 2. Low Global Competitive Index and business environment Vietnam is still among countries in AEC that has low GCI (Figure 3)Figure 3: Chỉ số GCI and business environments.

  23. VIETNAM’S GCI IN COMPARISON WITH OTHERS’

  24. VIETNAM’S GCI IN COMPARISON WITH MYANMAR, CAMBODIA AND LAOS

  25. VIETNAM’S GCI IN COMPARISON WITH MYANMAR, CAMBODIA AND LAOSAmong the CLMV countries

  26. Figure 4: Vietnam’s productivity is low compared to other countries in the region Nguồn : WB và Viện CL

  27. Vietnam’s productivity is low compared to other countries in the region

  28. Biểu 5: Level of Information technology application, innovation, and Knowledge Based Economy Nguồn: VCL số liệu 2008

  29. According to The Procurement on 6/5/2014, quoted from MST: most of our enterprises are using technologies that fall behind 2 to 3 generations compared to the world’s average level; 76% of machineries, production lines are from 1960-1970; 75% of equipment are completely depreciated. This is the main reason why Vietnam’s productivity is low, only higher than Bangladesh, Cambodia, Nepal. • Author Nguyễn Chí Hiếu in his column on Saigon Economic Times publication number 38-2014 named it “capital density”

  30. SOME POINTS THAT SMES SHOULD UTILIZE WHEN DOING BUSINESS IN AEC MARKET

  31. I. THE ROLE OF SMES IN VIETNAMESE ECONOMY The SMEs have contributed 43,2% of the GDP, 31% of export, 29% Budget income, 38% investment capital of the business sector; created jobs for around 5.12 million people, constituted of 45% total job of the business sector (According to The Communist Party’s Central Economic Department) II. GOVERNMENT BUSINESS ASSISTANCE POLICIES TOWARD SMES. The Government has issued the following policies to assist SMEs: - Decision 236/QĐ-TTg on the SMEs development plan for the 2006-2010 period. - Decree 56/2009 dated 30/6/2009 (replacing Decree 90/2001) on assisting the development of SMEs.

  32. Decision No. 1918/QĐ-TTg on the role and function of SMEs Development Council. • Decision No.1231/QĐ-TTg dated 7/9/2012 on supporting SMEs for the 2011-2015 period with action plan attached. • Decision No.644/QĐ-TTg dated 5/5/2014 on approving the project for developing industry link clusters in agricultural value chain. Comments: Policies, Decrees, Decisions are abundant but in practice these policies have very little impact.

  33. - Causes: + Ministries, and local authorities haven’t appreciated accurately the role of SMEs in the economy (generating jobs and momentum for growth; creating the starting point and accumulating resources for the formation of large enterprises), especially in the circumstances of Vietnam’s newly formed private sector. + The resources for implementing the SMEs support programs are indecisively and inadequately allocated; meanwhile, these resources are dispersed and depends a great deal on local budget. + The lack of a central moderation mechanism to ensure efficient support activities. Therefore, it is important that SMEs associations take active roles in negotiating with government authorities to realize these support policies for SMEs.

  34. III. SMES DOING BUSINESS IN AEC- POINTS TO NOTE. 1. Exploit the current trends that have following 3 characteristics:(The fast and vigorous developments of science and technology, with the right strategy, a SME can catch up with a higher level enterprise (speed is better than size, thoughts is better than experiences); participate in the value chain based on comparative advantage; take risk on the basis of adequate information collecting, processing and speculating (not being reckless); paying attention to risk management has become a requirement for all managers. 2. The movement in the structure of the economy and production is robustly being carried out globally and in ASEAN. Hence, Vietnamese enterprises will have enough time to “replace” when other countries’ have advanced to new structure in accordance with the rule “flying crane flock” (Figure 6 on ASEAN investment into Vietnam, figure 7: FDI into ASEAN figure 8 Structural changes of Vietnam’s export to some ASEAN countries, figure 9: Vietnam’s export and import to each ASEAN country to utilize the structural changes of products.) together with the trend- following speeding up strategy mentioned above.

  35. 3. Strongly develop E-commerce in the “enterprises individualization” trend 4. Focus on developing services that have a “speeding up” route, information technology services on ASEAN market, including software services, • Develop tourism services from and to ASEAN countries • Develop distribution systems in ASEAN markets, especially in Cambodia • Choose an accurate competitive strategy based on potential and resources: on market with competitors (diversification), on market without competitors (introduce new products in the same line of products, and business fields), move from competition based cheap price strategy to good quality and after sale services.

  36. 9. Exploit ‘niche’ market ignored by large enterprises. • Learn business culture in other countries, keep ‘trust’ to build strong “win-win” partnerships • Link and cooperate with other SMEs associations in ASEAN to share information, update demand and business trends.

  37. Figure 6: ASEAN FDI to VIETNAM 2014-2015

  38. Figure 7: FDI to ASEAN 2010-2014

  39. Figure 8: Structural changes of Vietnam export to some ASEAN countries (%) Nguồn: Trần Văn Thọ (2016)

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