Non-Farm Household Enterprises in Vietnam A Research Project using Data from VHLSS 2004, VHLSS 2002 and AHBS 2003.

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Non-Farm Household Enterprises in Vietnam A Research Project using Data from VHLSS 2004, VHLSS 2002 and AHBS Wim Vijverberg with Hoang Thi Thanh Huong Nguyen Chien Tang Nguyen Ngoc Que Nguyen The Quan Phung Duc Tung Vu Thi Kim Mao July Public Disclosure Authorized

2 Table of Contents 1. Introduction and summary Contribution of Household Enterprises to Income and Employment The Vietnam Household Living Standard Surveys in 2004 and Non-farm enterprises: characteristics and performance Non-farm enterprises: evidence of survival and growth from panel data Building the enterprise panel database Enterprise survival, growth, start-up, and death Assets and asset growth Household assets and its components Assets over time Household income and changes in assets over time Investment climate MSEFI: An index of micro/small entrepreneur opinions about the business climate Impact on Economic Performance Community information Household enterprise networking strategies Participation in business associations or clubs Contact with functional agencies Sources of information Operation of the business The impact of the investment climate Modeling the impact of the investment climate Impact of community variables Impact of PCI and MSEFI Summary Counting household enterprises: AHBS and VHLSS References Appendix... A-1 A.1 MSEFI and its components for each province... A-1 A.2 Community variables... A-9 List of Tables Table 2.1: Income and sectoral contribution to income growth, by quintile, Table 2.2: Labor force participation of households, by residence and household head's gender, 2004 (%)... 8 Table 2.3: Labor force participation and educational attainment of household members aged 16 and over, 2004 (column %)... 8 Table 3.1: Content of the household questionnaire... 9 Table 3.2: Content of the community questionnaire Table 4.1: Characteristics of non-farm enterprises, VHLSS Table 4.2: Employment and capital assets in non-farm household enterprises, VHLSS Table 4.3: Variation of labor productivity by enterprise characteristics, VHLSS 2004 a ii

3 Table 4.3: Performance of household enterprises in 2002 and 2004 at 2004 prices a Table 5.1. Difference among enterprises in panel households Table 5.2: Growth in enterprise performance, VHLSS Table 5.3: Percentage growth rate in enterprise profit for several enterprise characteristics Table 6.1: Assets per household Table 6.2: Household income and household assets Table 6.3: Total household assets: transitions within the distribution Table 6.4: Transitions in the distribution of assets, by asset type Table 6.5: The Household Wealth Distribution in Table 6.6: Total household income and asset changes by type Table 6.7: Household income by component and asset change by type Table 6.8: Change in household assets over by region & income quintiles Table 7.1: Level of provincial performance on the basis of MSEFI Table 7.2: MSEFI and component scores across regions, VHLSS Table 7.3: Association between MSEFI and farm and non-farm economic performance Table 7.4: Community size Table 7.5: Conditions in the agricultural and non-farm sector, VHLSS VHLSS Table 7.6: Investment climate, VHLSS 2002-VHLSS Table 8.1: Membership in business associations and clubs Table 8.2: Enterprise scale by BAC membership status Table 8.3: Services received from business associations/clubs Table 8.4: Contact with agencies per year Table 8.5: Reasons for meeting with functional agencies Table 8.6: Sources of information for pricing products Table 8.7: Information sources and enterprise operational scale Table 8.8: Delivery process of raw materials and finished outputs Table 8.9: Location of output markets Table 9.1: Impact of economic conditions Table 9.2: Impact of agriculture Table 9.3: Impact of infrastructure Table 9.4: Impact of human resources Table 9.5: Impact of natural disasters, fire and epidemics Table 9.6: Impact of transport conditions Table 9.7: Impact of communication facilities Table 9.8: Impact of financial conditions Table 9.9: Impact of PCI Table 9.10: Impact of MSEFI Table 9.11: Important determinants of non-farm enterprise performance and entrepreneurship. 80 Table A.1: MSEFI aggregate and component indices for each province... A-5 Table A.2: Association between MSEFI and farm and non-farm economic performance... A-7 Table A.3: Definition and descriptive statistics of community (investment climate) variables... A-10 List of Figures iii

4 Figure 2.1: Average household income, by source and area of residence, Figure 4.1: Performance in household enterprises, VHLSS Figure 4.2: Productivity in household enterprises, VHLSS Figure 5.1: Evolving performance: profits in 2002 and Figure 5.2: Distribution of revenue and profit in panel and start-up enterprises, Figure 6.1: Assets varying by household income...27 Figure 7.1: Hurdles to the operation and development of household enterprises...34 Figure 7.2: Urban/rural differences in hurdles to the operation and development of household enterprises...35 Figure 7.3: MSEFI in three provinces...37 Figure 7.4: Correlating MSEFI and PCI as alternative business climate summaries...38 Figure A.1: MSEFI and its components, by province...a.1 List of Text Boxes Box 5.1: Details on the Construction of the Panel Enterprise Sample...19 iv

5 1. Introduction and summary In a country such as Vietnam, non-farm household enterprises play a significant role in the economy. In urban areas, people make seek wage jobs in the public sector or in large private companies, but at this stage of Vietnam s development there are not enough jobs for all who live in urban areas and seek employment. Non-farm self-employment, measured by the existence of household enterprises, provide an alternative: it draws on the creative entrepreneurial abilities of workers, it provides employment opportunities for many who are not able to find wage jobs, and it generates incomes for households who otherwise would live in poverty. In rural areas where agriculture is typically the dominant sector, non-farm enterprises are essential not just for the prosperity of the agricultural sector but also for the economy as a whole (e.g., Reardon et al., 2000; Mwabu and Thorbecke, 2004). Local agriculture cannot survive by selling to the local market: the local market is not large enough. Agricultural products must be sold on regional, national and international markets. Local producers must somehow tie into markets elsewhere, requiring communication, transportation and financial services. They need various inputs such as machinery, repair services, and fertilizer that are supplied by the non-farm sector. Successful farmers need working capital and investment funds to manage their farming operations, thus requiring access to credit. Moreover, rising farm incomes lead to increased levels of consumption, satisfied with commodities brought in by, and services produced by, nonfarm entrepreneurs. Thus, the health of agriculture is intertwined with the vibrancy of the local non-farm sector. 1 There are still other reasons why the rural non-farm entrepreneurship is important for Vietnam. First, a significant part of the rural work force finds employment in non-farm production. The health of rural non-farm enterprises impacts the employment opportunities and the livelihood of large numbers of rural residents. Second, the combination of increasing agricultural productivity, an inelastic demand for food, and growing population pressure leads to a transfer of labor out of the agricultural sector. People will seek employment in the local nonfarm sector, or they will migrate to urban areas. There are good reasons why it is in the interest of urban constituents to ensure that the rural economy flourishes: rural migrants increase crowding, pollution, unemployment, and the cost of public goods. Creating a healthy rural economy is one of the ways to discourage rural-to-urban migration and, more directly, smooth the transition of labor out of agriculture. 2 Third, rural incomes are lower than urban incomes. This in itself is reason enough to pay careful attention to the rural sector, and not merely so from an agricultural perspective (World Bank, 2002). But rural-urban income differentials also provide a powerful migration incentive. Thus, in order to help the poor and at the same time prevent large-scale rural-urban migration and urban congestion, it is an urgent necessity to improve the rural business (investment) climate. This offers an opportunity to achieve primary 1 For example, Mwabu and Thorbecke (2004) argue that rural development in Sub-Saharan Africa has been a failure not merely because public policy was unfavorable to the farm sector, but rather because, in addition to exploitation and inimical treatment of agriculture, policy makers failed to create an investment climate that could support nonfarm entrepreneurship. Neither part of the rural economy was given a chance to succeed. 2 E.g., Zhao (1999, 2002), de Janvry and Sadoulet (2000), Hare (2002), Johnson (2002). However, using 1990 Population Census data of China, Liang, Chen and Gu (2002) found that increased rural employment opportunities failed to deter both intraprovincial and interprovincial migration. 1

6 development objectives simultaneously: employment growth, poverty reduction, and desirable spatial population patterns. 3 This report examines non-farm enterprises in Vietnam as surveyed through the 2004 Vietnam Household Living Standards Survey (VHLSS), supplemented with information from the 2002 round of the same survey. The objective is to paint a full picture of household enterprises and of the entrepreneurship decision and to understand how the investment climate changes this picture. As defined in World Bank (2006), the investment climate consists of the political, administrative, economic and infrastructural conditions for getting a reasonable return on investment as perceived by potential private investors. As such, it includes a subjective appraisal by entrepreneurs of the enabling environment. Households are typically the smallestscale (potential) entrepreneurs in the economy, easily overlooked in discussions of the behavior of and returns in the private sector, but in this report they are the center of attention. The VHLSS is a multipurpose survey that gathers information on topics ranging from education and health to farming operations and non-farm enterprises. The questionnaire for the 2004 round was enhanced with additional queries about household enterprises, which makes this database imminently suitable for the study at hand. The report starts off in Section 2 with a quick examination of the contribution of household enterprises to income and employment. Urban households derive 28.1% of their income from non-farm enterprise operations. This share is even higher for poor-to-median income households. Between 2002 and 2004, non-farm enterprise income grew by 11.4%, with all of this growth going to poor-to-median income households, as the same for high-income household declined. Among rural households, non-farm self-employment income constituted 17.2% of total income. This share is actually lower among low-income households and higher among household at the high end of the rural income scale. Households in the median income range (third and fourth quintile) saw the largest gains in non-farm self-employment income. Combined with the fact that more than half of the urban household and slightly over one third of the rural households have at least one non-farm self-employment member, it is clear that nonfarm household enterprises are important for the standard of living of many households in Vietnam s society. Section 3 describes the VHLSS in more detail, paying attention to the sampling design and the questionnaire instruments. There are small but significant differences between the 2002 and 2004 rounds. In particular, the investment climate variables are more accurately defined in 2004, both through questions directly addressed to the operators of household enterprises and through an extensive community questionnaire administered in rural communes. Thus, the investment climate in 2004 is described better than the change in the investment climate from 2002 to This places limits on our ability to understand the performance of enterprises and the behavior of entrepreneurial households and the change in it in the light of the investment climate. Section 4 turns the focus on the non-farm enterprises. The VHLSS captures 67.8 enterprises per 100 urban households and 44.3 enterprises per 100 rural households. Manufacturing (in particular, food and beverage production) is more popular in rural areas; service enterprises in the service and the hotel and restaurant sectors are more prevalent in urban 3 For further discussion on the concept and importance of the investment climate, see Vijverberg (2003) and World Bank (2006). 2

7 centers. Urban enterprises are larger: a typical urban enterprise generates roughly 125 percent more revenue, value added or profit than a rural enterprise; it uses more labor (1.82 workers on average) than its average rural counterpart (1.61 workers), and it is also more likely to hire employees for pay; and the VHLSS database records capital assets worth 20.8 million VND for an average urban enterprise as compared to 2.6 million VND for an average rural enterprise. Enterprises experienced substantial growth: in real terms, revenue rose by 27 percent, value added by 21 percent and enterprise profit by 15 percent. Growth was a bit faster in urban areas than in rural areas, but it was widespread and not merely concentrated among the largest enterprises. Section 5 goes a step further, asking the question how much turnover and growth exists among non-farm enterprises. This first requires the construction of a link between enterprises that are covered in the 2002 and 2004 rounds of the survey, because the design of the database does not incorporate this information. The best estimate of the annual enterprise survival rate is 83.2%. In other words, 16.8% of the non-farm enterprises cease to exist each year. On the other hand, the best estimate of the start-up rate (the percentage of enterprises in their first year of existence) is 18.1%. Stated in other terms, an average household has an 8.8% chance of starting a new enterprise in These statistics imply that, between 2002 and 2004, the population of non-farm enterprises expanded. Surviving enterprises generated more revenue, value added, expenditures, and profit in 2002 than abandoned enterprises. Comparing surviving enterprises with start-ups in 2004 illustrates the financial challenges that new enterprises face: among start-up enterprises, every financial performance measure (revenue, value added, or profit) is lower than among surviving (or panel) enterprises. Panel enterprises also provide more employment than start-ups. Revenue and profit in the median panel enterprise rose by 20 and 14%, respectively, but there is a large spread around these median values. For example, 39% of the enterprises saw revenue decline, and 43% faced a decrease in profit, whereas one fourth of the enterprises at least doubled their performance compared to Section 6 examines an important ingredient of enterprise growth: accumulation of business assets. The approach is actually broader, as the analysis considers agricultural assets, business assets, and consumer durables. Some assets may fulfill multiple purposes. They may be used on the farm or in the non-farm business (e.g., transport equipment). They may be shared between the household and the enterprise (refrigerators, TVs, furniture, transport, telephones). They may also be sold and exchanged for each other. Thus, assets are fungible, which the evidence in this report indeed indicates. An average household owns about million VND worth of assets (which compares with an average annual income of 8.89 million VND), of which 23% are assets of a type that may be used for business purposes. The share of business assets is larger among higher-income households; 66% of the households do not report ownership of any asset that could be used for business purposes. The rate of growth in total assets among the poor kept up with that among the middle class and the wealthy even if in absolute terms the gap widened. However, the rate of growth in business assets was the faster among middle-class (48%) and wealthy (129%) households than among the poor (17%). Of particular interest is the accumulation of business assets by source of income: (i) low-income agricultural households invest in non-farm household enterprises in an attempt to escape poverty; high-income agricultural households are 3

8 drifting somewhat into non-farm entrepreneurship but mostly improve living conditions for the household; (ii) small-scale business owners invest more in agricultural assets than in business assets or consumer durables, whereas households with high incomes from non-farm selfemployment invest heavily into business assets while reducing holdings of agricultural assets; and (iii) households with low and median wage incomes build more agricultural than business assets, but among those with high wage incomes investments in business assets again dominate, indicating that some high wage earners may be considering transitions into private entrepreneurship. Overall, households with the greatest increase in assets have invested in business assets. Section 7 looks outside the household and examine the investment climate. This is done in two ways. First, the VHLSS questionnaire includes a series of questions about various hurdles that entrepreneurs may encounter. These are summarized into the so-called Micro and Small Enterprise Friendliness Index (MSEFI), which measures how business-friendly the environment is toward micro and small enterprises. The MSEFI may be decomposed into six subindices, pertaining to infrastructure, labor, finance, policy, registration, and corruption and security. Since the VHLSS sample is representative at the provincial level, the responses to each index may be aggregated to a province and generate input for a ranking of provinces or regions. Thus, the province with the fewest complaints is Binh Duong, with Hoa Binh a close second. Ho Chi Minh City ranks 28 th, Da Nang comes in at 36 th, Ha Noi ranks 58 th, and the last place is taken by Can Tho. Judged by region, the Northwest scores the highest in the aggregate and, interestingly, also in every component, and the Northeast and Red River Delta regions achieve the lowest MSEFI values, again both in the aggregate and in every component. A comparison with the recently published Provincial Competitiveness Index (PCI; see VNCI, 2005) indicates that these two indices are complementary, measuring different aspects of the business climate facing the private sector. Second, many community variables are extracted from the wealth of information gathered through the VHLSS commune questionnaires. Communes reported nearly universal access to electricity, improved water quality, improved access to viable roads, and greater proximity to schools. Agricultural wages rose. However, proximity to post offices, to daily or periodic markets, and to health facilities decreased. Extension services diminished, and average land quality dropped as well. Section 8 returns to the enterprises and examines their networking strategies, which is described in four ways. First, very few enterprises participate in business associations or clubs. Second, contacts with functional (governmental) agencies are rather limited: only 14.5% of the enterprises had any contact with a government agency, and the average number of contacts for any purpose is 0.43 times per year. Urban enterprise are somewhat more likely (20%) than rural enterprises (12%) to be contacted, and the rate also varies substantially by industry and enterprise size. Third, the VHLSS questionnaire inquires about sources from which entrepreneurs gather information for pricing their products. Traders and firms operating in the same sector are most important. Urban/rural differences are slight; sectoral differences are more important. Fourth, the survey data indicate that entrepreneurs are able to provide most of the transport of raw materials that the enterprise needs and the products and services they sell to customers. One in ten enterprises sell to customers in other provinces, cities, or countries. Sections 4 through 8, and also section 2, are primarily descriptive in nature. The advantage of this approach is that the evidence is more accessible; the weakness lies in the fact that the evidence may represent biased or, worse, spurious associations. Section 9 therefore 4

9 considers the effect of the investment climate in a multivariate context. The analysis is necessarily broad, since the investment climate has many facets. To give a few examples, it includes quality of labor in the local economy, the formal and informal registration requirements that may hinder the entrepreneur-to-be, inspection guidelines, the availability of credit, the access to markets, the quality of the local infrastructure, natural disasters that have disrupted the economy, proximity to markets, and so forth. In section 9, the investment climate is measured through (i) a set of 50 variables measured at the (rural) commune level; (ii) the Provincial Competitiveness Index and its components that covers 42 provinces; and (iii) the MSEFI and its components that describes all 64 provinces of Vietnam. Enterprise outcomes are equally multifaceted. The analysis considers enterprise performance as measured by (i) revenue, value added and profit (both in total and per employee); (ii) enterprise growth; (iii) the household decision to operate an enterprise; (iv) enterprise survival; (v) new enterprise start-up; (vi) the household s involvement in wage employment as an alternative way to earn a living; (vii) household assets, distinguished into agricultural assets, business assets, consumer durables, as well as the sum of them all; and (viii) sector choice for the operation of the enterprise, covering manufacturing and construction, trading, hotel and restaurant, services, and mining. The investment climate factors that appear to be most important are: population size of the community; proximity to major or large towns; proximity to markets; infrastructure; registration; and policy implementation or economic policy. Within Vietnam, the number of non-farm household enterprises is a subject of great interest, as the society explores ways to achieve higher levels of income, growth and employment. The private sector is undoubtedly important in this process, but the question arises how extensive the private sector is. People are entrepreneurial; as rational economic agents, they seek out opportunities to improve their standard of living. This creates a challenge for any government agency charged with the task of measuring the amount of production and employment in the economy. For this purpose, the Government of Vietnam collects information on household entrepreneurship through the Annual Household Business Survey (AHBS), which is a census of all business households in Vietnam. This allows a unique opportunity to examine whether the VHLSS survey covers the non-farm household enterprise population adequately. Thus, section 10 compares the VHLSS data with the AHBS. The VHLSS estimates that there are more business households (7.5 million) in Vietnam than the AHBS counts (2.9 million). However, the two data sources use different methodologies, which explains between one half and two thirds of the gap in the number of business households captured with the two survey instruments. 4 To turn this into an estimate of the understatement of production and employment, one must make assumptions about the type of business households that are not counted in the AHBS. Depending on the assumptions, the value added in the business household sector is understated by between 5.4 and 80.7% and yearround employment by between 16.0 and 80.7%. More importantly for the purpose of the present study on non-farm household enterprises and entrepreneurship, the VHLSS appears to be a suitable data source. 4 Technically, adjustment for the difference in methodology could have accounted for more than the gap between the VHLSS and the AHBS, which would have implied an undercount in VHLSS. 5

10 Figure 2.1: Average household income, by source and area of residence, VND 000s Other Nonfarm Wage Agriculture 0 Total Urban Rural Source: authors calculation from VHLSS Contribution of Household Enterprises to Income and Employment One of the objectives of the Vietnam Household Living Standards Survey is to accurately measure income and expenditures. Figure 2.1 illustrates the importance of non-farm enterprises to household incomes. The average annual household income in 2004 was 5424 thousand VND, of which 1180 thousand VND (21.8%) derived from non-farm enterprise operations. In urban areas, the average household gained 2543 thousand VND from non-farm self-employment, or 28.1% of the household s total income; in rural areas, 740 thousand VND or 17.2 % of total household income came from its non-farm enterprises. Table 2.1 differentiates the sectoral contribution to average urban and rural household income by quintile and also examines the contribution of each sectoral source (agriculture, wage, non-farm self-employment, and other sources) to the growth in household income between 2002 and Caution is advised when comparing information from two different surveys: the sampling frame is nearly identical but the 2004 questionnaire is somewhat modified, which may impact the inferences drawn from these data. In urban areas, non-farm enterprises contributed roughly 28 percent of the income in each quintile. They also contributed 28.6 to 36.4 percent of the growth in urban household incomes in the lower three quintiles. In the upper two quintiles growth in wage earnings and other income dominated the change in total household income; non-farm enterprises did not fare as well in 2004 as they did in Thus, in urban areas, nonfarm self-employment income growth benefited the poor-to-medium income households. Table 2.1: Income and sectoral contribution to income growth, by quintile, 2004 A. Urban Income quintile Total 6

11 Household income, 2004, VND 000s Share of household income Agriculture Wage Non-farm self-employment Other Total Contribution to total household income growth, (%) Agriculture Wage Non-farm self-employment Other Total B. Rural Household income, 2004, VND 000s Share of household income Agriculture Wage Non-farm self-employment Other Total Contribution to total household income growth, (%) Agriculture Wage Non-farm self-employment Other Total In contrast, rural households in the third to fifth quintile depend for roughly 20 percent of their income on the non-farm enterprise, but for the 40% poorest households, non-farm entrepreneurship is quite unimportant. Growth in non-farm enterprise income was important for households in the third and fourth quintiles. Thus, it was helpful for the rural middle class but it did not benefit the poor or the very rich households. Table 2.2 illustrates the importance of non-farm entrepreneurship to employment, considered from the household perspective. Thus, we find that 61 percent of all households in Vietnam have at least one member who holds at least one wage job; 73 percent engage in some sort of farm production; and 40.3 percent have at least one member who is engaged in non-farm self-employment. Many households are diversified: they draw earnings from several sectoral sources. For example, only 9.6 of the 61 percent of households engaged in wage jobs receive all of their household earnings from wage earnings. Since non-farm enterprises are the primary focus of this research project, the table highlights the diversity of household employment for the 40.3 percent of households engaged in some form in non-farm self-employment. 6.4 of the 40.3 percent do so exclusively; 12.7 percent combine it with farming operations only; 8.3 percent with wage jobs only; and 12.9 of the 40.3 percent have members involved in agriculture, wage, and non-farm self-employment all within the same year. 7

12 Once again, in urban areas, non-farm self-employment is more prevalent: more than half of the urban household have at least one non-farm self-employed member, as opposed to slightly over one third of the rural households. Specialization is more common in urban areas as well: 16.5 percent of all urban households are exclusively engaged in a non-farm enterprise, compared to only 3.0 percent of rural households. Table 2.2: Labor force participation of households, by residence and household head's gender, 2004 (%) Total Urban Rural Wage employment Only wage employment Farming Only farming Non-farm self employment Only non-farm activity With farming only With wage employment only With farming and wage employment Not employed Number of households 9,188 2,313 6,875 Similar to other countries around the world (Van der Sluis et al., 2005), educational attainment strongly influences the type of activity that people are engaged in. Table 2.3 considers the distribution across activities of household members (rather than households, since education is an individualized matter). Overall, 20.2 percent of the individuals aged 16 or older are active in non-farm self-employment. Compared with the total population, (i) adults without any education are more likely not employed or are farming; (ii) adults with a primary education are more likely found in farming and less likely not employed; (iii) adults with a secondary education are slightly more likely in non-farm self-employment and slightly less likely in farming; and (iv) those with post-secondary education are much more likely to hold a wage job. Viewed from another perspective and stated in a black-and-white manner, the least educated tend more towards farming; the most educated are usually employed for a wage or salary; and many of those in between find work in household enterprises. Table 2.3: Labor force participation and educational attainment of household members aged 16 and over, 2004 (column %) Post- No degree Primary Secondary Secondary Other Total Wage employment Farming Non-farm self employment Only non-farm activity With farming only With wage employment only With farming and wage employment Not employed Number of individuals

13 Having illustrated the importance of the non-farm enterprise (or self-employment) sector in Vietnam, this report now proceeds with a more detailed description of the 2004 and 2002 VHLSS surveys, which is the primary data source of this study. 3. The Vietnam Household Living Standard Surveys in 2004 and 2002 The VHLSS survey approach is built around two questionnaires. The first is the household questionnaire, which collects various types of information related to the household and its members. Topics range from education and health to agriculture and non-farm entrepreneurship. The questionnaire underwent a significant change from 2002 to 2004, augmenting the range of questions asked about agricultural and non-farm enterprise operations and polishing many other topics at the same time. The 2004 version consists of 10 modules (Table 3.1). Information on non-farm enterprises appears primarily in modules 4 (income), 6 (fixed assets and durable goods) and 10 (non-farm enterprises: extended questions). Table 3.1: Content of the household questionnaire 2004 module number and title VHLSS 2004 VHLSS : Roster Basic demographic information for all household members 2: Education and training Years of schooling, training, diploma, current study, school expenditures 3: Health and health care Illness and injuries, care (Module 4) Care 4: Income Employment and hours of work, wage income agricultural production, nonfarm enterprise receipts and expenditures, other income 5: Expenditures a Daily expenditures on food and drink, non-food, other; annual consumption expenditures; non-consumption expenditures 6: Fixed assets and durable Assets, durable appliances (separately) goods 7: Accommodation Housing owned or rented, land plots, water sources, electricity, Internet 8: Participation in hunger eradication and poverty reduction 9: Agriculture, forestry and aquaculture (extended) Participation in poverty alleviation and hunger eradication programmes Further questions on agricultural topics Basic demographic information for all household members Years of schooling, training, diploma, current study, school expenditures (Module 3) Employment and hours of work (Module 5) Wage income, agricultural production, non-farm enterprise receipts and expenditures, other income, non-income money flows (Module 6) Daily expenditures on food and drink, non-food, other; annual consumption expenditures; nonconsumption expenditures (Module 7) Assets and durable items (mixed together) (Module 8) Housing owned or rented, water sources, electricity, sanitation, TV, radio, newspapers (Module 9) Participation in poverty alleviation and hunger eradication programmes N/A 9

14 10: Non agricultural, forestry and aquacultural industries (extended) Further questions on non-farm enterprise topics Note: a The Expenditures module was administered only to a subsample of households. N/A The second questionnaire utilized by the VHLSS is the community questionnaire, which is aimed at the commune or ward in which the household resides. As such, it supplements the household questionnaire with information that is common to all residents in a community. Table 3.2 describes the sections of the community questionnaire, which cover everything from population size and infrastructure to agricultural wages and non-farm employment opportunities. Between 2002 and 2004, the community questionnaire was somewhat revised. In particular, the agricultural module is substantially enhanced, and a module on saving and lending institutions was added. One other change is important, though: the 2004 community questionnaire was administered only in rural areas, whereas the 2002 community questionnaire was filled out in both rural and urban areas. Thus, since the item changes are small enough, a comparison of commune conditions between 2002 and 2004 is warranted for rural areas. Table 3.2: Content of the community questionnaire Module number and title VHLSS 2002 VHLSS 2004 a 0: Survey information Description of survey respondents Description of survey respondents 1: Basic features of members and general situation of commune 2: General economic situation and support programs 3: Non-farm employment opportunities 4: Agriculture and land Area type, numbers of households, religion Main income source, general assessment on the changes of living standard, support programs/projects Types of enterprises and factories in and near the commune Commune land fund, land areas, areas of main crops in commune/ward, agricultural wage, difficulties in agricultural production, agricultural extension activities 5: Infrastructure Road, waterway, public transport, water source, electricity, distance to various places such as daily/periodical market, banks, post office Area type, numbers of household registered (temporary, permanent), migration, religion Main income source, general assessment on the changes of living standard, support programs/projects, disasters Types of enterprises and factories in and near the commune Commune land fund, land areas, areas of main crops in commune/ward, agricultural wage, agricultural calendar, difficulties in agricultural production, land right transfer, agricultural extension activities Road, waterway, public transport, water source, electricity, travel time, distance and cost to various places such as daily/periodical market, banks, post office, infrastructure investment projects 10

15 6: Education Schools, difficulties in education, programmes to eliminate illiteracy, kindergarten 7: Health General situation of popular diseases, difficulties for health stations, availability of health care services, difficulties for people in accessing medical services 8: Public security and other social problems Social problems in the commune, drug addiction, prostitution Schools, difficulties in education, programmes to eliminate illiteracy, kindergarten General situation of popular diseases, difficulties for health stations, availability of health care services, difficulties for people in accessing medical services, transport means used Social problems in the commune, drug addiction, prostitution 9: Credit and saving N/A Institutions for saving and lending Note: a New items are highlighted in italics. The VHLSS 2002 sample contains households, of which filled out the expenditure module (Table 3.1). The VHLSS 2004 sample consists of 9300 households that filled out the expenditure module; 4500 of these 9300 were repeaters from the 2002 round. Thus, the two rounds provide a panel sample of 4500 households. This panel sample will be described in greater detail in Section 5. In 2002, the households were divided in four equal groups, with each group surveyed in the first month of each of the four quarters, respectively. The remaining that did not fill out the expenditure module were divided into two groups and surveyed in the first month of the first two quarters. In 2004, all households were visited in the month of March. The samples are representative of the nation of Vietnam overall and also by province. In this context, it should be noted that between 2002 and 2004 the number of provinces grew from 61 to 64: a few provinces were subdivided. This complicates the comparison of provinces over this period somewhat. 4. Non-farm enterprises: characteristics and performance The VHLSS 2004 survey captured information about 4544 household enterprises (Table 4.1). This means that there are 50.2 enterprises per 100 households. 5 As one should expect, the density of enterprises is higher in urban areas (67.8 per 100) than in rural areas (44.3). The industrial composition varies accordingly: manufacturing is more popular in rural areas, with food and beverage production providing all of the difference; service enterprises are found more frequently in urban centers. Hotel and restaurant businesses are also more prevalent in urban areas. About one half of the household enterprises operate from the household s residence. Fifteen percent work from a place at a market; nine percent use another fixed location, which may be at an industrial zone, a trading center, a store location or some other place; nine percent use various fixed locations (e.g., selling from the home and from a market stand); and sixteen percent of the enterprises are mobile. Although spatial distances are larger in rural areas and 5 There are 9188 households in this database. Without the use of sampling weights, this suggests 49.5 enterprises per 100 households, but sampling weights must be applied, yielding the value of 50.2 stated in the text. 11

16 therefore customers are more dispersed, the differences between urban and rural enterprises are surprisingly small. The average age of a household enterprise is 7.7 years. Urban enterprises tend to be a little older: 8.2 versus 7.1 years. More than a third of NFHEs are fairly young. 34.4% and 41.3% of NFHEs in urban and rural areas, respectively, have been in operation less than 5 years. About 30% of all NFHEs have been in operation for 5 to 10 years. Only a few NFHEs have existed for a long time, more than 15 years. This reflects the history of economic policy towards private entrepreneurship in Vietnam. The vast majority of the enterprises are owned by Vietnamese (Kinh) or Chinese (Hoa) households. Other ethnic groups make up 3.0 and 13.5 of the households in urban and rural areas, respectively, but they operate only 1.7 and 8.2 percent of the enterprises. Table 4.1: Characteristics of non-farm enterprises, VHLSS Variables Total Urban Rural Number of enterprises a 4,544 1,532 3,012 Percentage (row) Number of enterprises per 100 households Industrial Composition Mining Manufacturing and construction Food and beverage Fur processing and products Wood processing and products Other manufacturing Construction Trading Hotel and restaurant Services Transport Business services Personal services Other services Total Operation Location b Home Markets Another fixed location Various locations Mobile location Total Age of enterprise Average age (years) Age of NFHE < 5 year

17 5 Age of NFHE < 10 year Age of NFHE < 15 year Age of NFHE < 20 year Age of NFHE 20 year Total Ethnicity Kinh/Hoa Other Ethnicities Total Notes: a Unweighted statistic b There are also 0.15% of enterprises that did not provide information about their location. Of great interest is of course the performance of the household enterprises and the amount of employment that they generate. Figure 4.1 shows the amount of revenue, value added and profit that a typical enterprise generates. The postscript -U indicate an urban statistic, and -R refers to a rural value. In these descriptions, the few really large enterprises tend to distort the mean values, and for this reason the figure also shows the median value. In each case, the median value is substantially smaller. For example, for the overall sample, enterprise revenue has a mean of 28.7 million VND and a median of 9.9; the same for value added is 16.5 and 7.2, and for profit 12.3 and 6.6, respectively. The distribution of these variables is therefore strongly Figure 4.1: Performance in household enterprises, VHLSS 2004 Revenue Value added Profit Revenue-U Value added-u Profit-U Mean Median Revenue-R Value added-r Profit-R million VND Source: -U denotes an urban statistic; -R denotes a rural statistic. Calculations based on VHLSS

18 right-skewed: it has a long right tail. The values presented in the figure also indicate that, regardless of whether one considers revenue, value added or profit, a typical urban enterprise generates roughly 125 percent more than a rural enterprise, for both the mean and the median. It is a bit surprising to see that the ratio of the urban to rural mean values is not much different than the ratio of the urban to rural median: apparently, the typical small and typical large enterprise differs by location to the same degree. Why is this so? There are many possible answers, but the first one is likely to be the quantity of labor and capital that these enterprises use. Indeed, urban enterprises use more labor than their rural counterparts: 1.82 workers on average as compared to 1.61 workers. They are also more likely to hire employees for pay. More importantly, an average urban enterprise utilizes capital assets worth 20.8 million VND, whereas an average rural enterprise has assets valued at 2.6 million VND; moreover, 55.2 percent of urban enterprises and 72.3 percent of rural enterprises reported no capital. (See Section 6 for more information on capital assets.) Table 4.2: Employment and capital assets in non-farm household enterprises, VHLSS 2004 Variables Total Urban Rural Employment: Number of workers Percentage distribution > Average number of workers Enterprises with paid workers Capital assets Average value (000VND) Enterprises with zero capital assets (%) Source: Calculations based on VHLSS 2004 In view of the variation in size of the enterprises, a good measure of enterprise performance is labor productivity: it standardizes for the amount of labor used to generate the output. As Figure 4.2 shows, the average revenue per employee equals 14.1 million VND, leading to a value added per employee of 9 million VND and a profit for the enterprise of 7.6 million VND. The number of employees here counts both household members working with or without compensation in the enterprise and other workers hired by the enterprise. Unfortunately, we are not able to express this labor productivity per day or per hour of work, because the survey information is not adequate. Once again, there is a sizable gap between urban and rural enterprises: the labor productivity in urban enterprises is almost double that of rural enterprises. 14

19 Many factors contribute to the variation in labor productivity. Table 4.3 explores a number of them in a descriptive manner. Sectors with high value added per employee include all services except personal services, trading, hotel and restaurant, construction, and other manufacturing. Manufacturing of food, beverage, fur products and wood products are less rewarding. Labor productivity varies by enterprise location: the highest levels are found among enterprises operating from other fixed locations, in particular in trading zones, industrial zones and independent stores (not shown in the table). As one might expect, the enterprise age is significantly correlated with labor productivity. Young enterprises experience lower productivity; those that survive are more prosperous, as do enterprises operated under Kinh or Hoa ownership, and those that employ more workers. Figure 4.2: Productivity in household enterprises, VHLSS 2004 Revenue / Employee Value Added / Employee Total Urban Rural Profit / Employee million VND Source: Calculations based on VHLSS 2004 Table 4.3: Variation of labor productivity by enterprise characteristics, VHLSS 2004 a Revenue / Value Added / Profit / Variable Employee Employee Employee Total Mean Industrial Composition Mining Manufacturing and construction Food and beverage Fur processing and products Wood processing and products Other manufacturing Construction Trading Hotel and restaurant Services

20 Transport Business services Personal services Other services Operation Location Home Market Other fixed location Various locations Mobile location Age of enterprise 0 Age of NFHE < 5 year Age of NFHE < 10 year Age of NFHE < 15 year Age of NFHE < 20 year Age of NFHE 20 year Ethnicity Kinh/Hoa Other ethnicities Employee scale Number of employees = < Number of employees Number of employees > Notes: a Values given in million VND Source: Authors computation based on VHLSS 2004 We conclude this descriptive exploration of the household enterprise sector in Vietnam with a comparison with The measures of enterprise performance in focus here are revenue, value added and profit as a total rather than per employee, since the 2002 survey did not collect information on employment in the enterprise. To account for inflation, the values for 2002 are expressed at 2004 prices. 6 Thus, in real terms, revenue rose by 27 percent, value added by 21 percent and enterprise profit by 15 percent (Table 4.3). In fact, not just the average but almost the whole distribution of each enterprise performance measure shifted up: only the smallest and lowest-income enterprises around the fifth percentile failed to participate in this growth. Of course, the performance of individual enterprises fluctuates. Enterprises do not stay put at their position in the performance distribution. But for every enterprise that saw a diminishing performance, another saw its performance rise that much more, and a business that had closed its doors was replaced with a more productive start-up. (We shall examine panel enterprises in Section 5.) The message of Table 4.3 speaks about the aggregate: there was a widespread rise in the performance of household enterprises, at least when measured by the three variables of revenue, value added, and enterprise profits. 6 Allowing for percent of inflation over the length of this period. 16