The evolution of economic developments in Vietnam are summarized, followed by a description of the current state of entrepreneurship. Without overthrowing the socialist establishment, doi moi, the Vietnamese version of perestroika, is allowing small businesses to play an increasingly important role in the economic development of the nation. There is a constant buzz of mercantile energy in Vietnam; the self-employed optimize the use of their minimal resources and manage, despite the poor infrastructure. Recent market-orinented development is making entrepreneurship more viable in Vietnam and the trend is bound to accelerate with infrastructural improvements. Given the wage structure in Vietnam, it is likely that the small business sector will eventually dominate labor-intensive industries, while state-owned firms and multicultural enterprises undertake the more complex, capital intensive tasks of development.

In contrast to reform in Eastern Europe and the former Soviet Union, where a market economy was decreed to have replaced communism, liberalization in Vietnam has involved ushering in entrepreneurship as a complement to state enterprise, rather than as a replacement of Marxist ideals. Without overthrowing the socialist establishment, doi moi (literally "renovation"), the Vietnamese version of perestroika is allowing small businesses to play an increasingly important role in the economic development of the nation. New billboards promote doi moi, yet old posters continue to urge workers to follow socialism. This article summarizes the evolution of economic developments in Vietnam, followed by a description of the current state of entrepreneurship.

The lack of published research about Vietnam made this study especially interesting and challenging. Methodology involved document analysis, observation of transactions and interactions among entrepreneurs, and in-depth interviews of entrepreneurs and consultants, on location in Indo-China.

HISTORICAL BACKGROUND

Tonkin, the northern part of Vietnam, was a province of the Chinese Empire from the year 42 A.D. until the fall of the T'ang dynasty in 906. It subsequently became independent in 938, reverting to Chinese rule from 1407 until 1427. Further south, the kingdom of Champa (central Vietnam), was founded in the third century. It was eventually absorbed by the expanding Vietnamese kingdom, but a lengthy civil war split the latter in 1660. The extreme southern part of Vietnam remained under Cambodian rule until a century later. Vietnam was unified for the first time in 1802.

In order to protect missionaries in Vietnam, France invaded the south in 1859. Eight years later, the status of the latter was changed to the colony of French Cochin-China. In 1885, France established a protectorate over the rest of Vietnam.

In 1941, Japan occupied Vietnam. After the Japanese surrender in September 1945, Nguyen That Thanh, calling himself Ho Chi Minh--literally "the brilliant one"--declared himself president of the independent Republic of Vietnam. France sent its military to reassert French rule, and by 1946 France had regained control of its former colony of Cochin-China but not of its former protectorate to the north.

A 1954 armistice agreement in Geneva created the 61,293 square mile Democratic Republic of Vietnam (North Vietnam) north of the 17th parallel with Hanoi as its capital. The Republic of Vietnam (South Vietnam) was limited to 67,108 square miles in the south with Saigon as its capital. When the communist Viet Minh took control of North Vietnam, the government instituted a program of land reform. Consequently, several hundred thousand small-scale landowners fled to the south, where the spirit of entrepreneurship survived.

In 1964, U.S. President Lyndon Johnson sent forces into battle to assure the independence of South Vietnam, but it was overrun by the north in 1975. The Socialist Republic of Vietnam was created in 1976. Hanoi, formerly the administrative capital of Indo-China and later the capital of North Vietnam, became the capital of the new Socialist Republic.

With the merger, even the smallest business in the south was nationalized. All of the bookstores were shut down and their inventory confiscated. Government newspapers replaced the existing dailies. Private homes were raided and "decadent" literature was burned. Schools of bourgeois learning were closed as the Hanoi government tried to spread Marxist ideology.

All bank accounts in former South Vietnam were frozen, and the South Vietnamese were told they had 12 hours to take their cash to the banks because the South Vietnamese currency would become worthless. The savings of each family was limited to the equivalent of 1,000 French francs (approximately $200 U.S.). At the Fourth National Congress of the Communist Party of Vietnam, Trong Chinh declared that:

The State of the Socialist Republic of Vietnam is a proletarian dictatorship state. On the one hand, it represses counter-revolutionaries, eliminates the comprador capitalist class and the remnants of the feudal landlord class, carries out socialist transformation of the... private capitalist economic element; at the same time it effects the socialist transformation of the private economic section...(Chinh 1977, 1).

HETEROGENEITY

Despite the merger, regional differences remained strong. The North Vietnamese are of a Sino-Tibetan race with Han culture; the people of the south have a history of mixing with Polynesian races who tend to have been exposed to slightly more Dionysian and fewer Promethian values. While the people of the north adopted a northern sect of Buddhism, those of Cochin-China included followers of a southern sect of Buddhism with some Hindu influence.

Since colonial times, the south had enjoyed a more developed economy and substantial exports. There were numerous entrepreneurial land holdings in the fertile Mekong Delta. The French, not wanting to deal directly with the Vietnamese, encouraged the Hoa to serve as "middlemen" entrepreneurs. A significant Chinese ethnic minority, the Hoa continued to dominate sectors of the economy. Furthermore, industrial development and urbanization had been accelerated in South Vietnam by the U.S. presence during the war.

In contrast, the people of the north were conditioned over two decades earlier to centralized planning and strong limitations on entrepreneurship. Peasantry in the north was collectivized. Local branches of foreign firms had been separated from foreign counterparts. Factories were constructed in the north but were usually heavily dependent on Soviet aid. While prices in South Vietnam had reflected long-term incremental costs and other market forces, scarcities of commodities in North Vietnam resulted in black market prices being much higher than official prices. Entrepreneurs in North Vietnam were thus concentrated in the unofficial economy.

THE ECONOMY

Industrial policy in the Democratic Republic of Vietnam was traditionally influenced by that of the former Soviet Union, i.e., centrally planned industrialization was aimed at the domestic production of heavy industry such as capital goods. The state supplied the inputs and capital requirements of enterprises and set quantitative output targets. Policy typically leaned towards achieving self-sufficiency but neglected opportunities for trade.

Several problems with this model led to the realization that changes would be necessary. The attempt to be self-sufficient had led to insufficient specialization. Investment had been scattered over too many projects, without priority or complementarity. Despite vertical integration, there was a lack of horizontal integration. Entrepreneurship was restricted by regulation and excessive bureaucratic centralization. Innovation and creativity were stifled. Limited research inhibited technological growth. Energy supplies were lacking. Export-oriented activities were not being given enough attention. Among other factors, the inadequacy of communication did nothing to improve the insufficient links between foreign markets and Vietnamese producers, the latter lacking awareness about international quality, price, and demand. There was more incentive for a farmer to chop down a mango tree and use it for firewood than to harvest the fruit. In addition, there were constant limitations ! on capital resources and raw material and supplies, especially imported ones. Construction periods were typically overrun and numerous projects remained unfinished.

North Vietnam's First Five Year Plan (1961-1965) put emphasis on basic heavy industries and continued to influence industrial policy into the 1980s. State firms in the Socialist Republic of Vietnam continued to lack access to modern technology. Their costs of production were high, relative to the quality of their products which tended to be low. The introduction of centralized planning from North Vietnam into the market economy of South Vietnam in 1975 resulted in a drop in rice and livestock production. With the new regime, there was a shortage of foreign exchange which lead to a shortage of imported inputs, new materials, and spare parts. This, in turn, was the cause of an underutilization of capacity, while domestic supply could not satisfy consumer demand. Further constraints in capacity utilization were brought about by shortages in energy production and a weak transportation network which received minimal maintenance and no improvements since the departure of the Fren! ch in 1954.

The Second Five Year Plan (1976-1980) set a 16-18 percent targeted annual growth rate for industrial production; the actual outcome was less than 1 percent. In 1979 and 1980, there were shortages of basic consumer goods including food, as well as shortages of inputs to the industrial sector. During the period of the Third Five Year Plan (1981-1985), growth was primarily generated by small and medium-sized businesses, some in the private sector. This was made possible by the Three Plan System introduced in 1981:

Plan A: Enterprises operating under this scheme were required to produce using state-supplied inputs and to sell their outputs to the state at low, command prices.

Plan B: This scheme permitted firms to acquire inputs on their own, and to sell their outputs independently, provided that the profits were used to purchase additional inputs.

Plan C: This scheme permitted entrepreneurs to diversify and to sell "minor" products with no centrally planned external control.

In 1982, the Fifth Party Congress officially adopted its "new economic orientation" recognizing the need to: (1) shift emphasis from heavy to light industry, (2) transfer resources to the agricultural sector, and (3) promote exports. As production activities were partially deregulated, individual enterprises were granted some autonomy. In 1984, the government further relaxed restrictions relating to the exportation of manufactured goods.

In 1985, a new currency was introduced. Old dong were exchanged 10:1 but only up to a limit. Most respondents interviewed by this researcher indicated that they had been holding gold and U.S. dollars (obtained in the black market), because of lack of confidence in the State Bank. Also in 1985, consumer subsidies were replaced by wage adjustments. Most prices remained under central control, determined by an average cost-plus formula. However, some costs were not accurately assessed.

Major changes occurred in 1986, when individual entrepreneurs obtained the right to get involved in light industry, and the Sixth Party Congress approved economic reforms eliminating much of the basic apparatus of control. Profits were defined as the difference between the value of sales and allowable costs; enterprises remained liable for taxes on profits. Restrictions on wages were abolished and enterprises were given the right to recruit as per their needs.

In 1987, there was a sharp reduction in internal trade barriers. In December 1987, the Council Minister's Decree No. 217 formalized commercialization and liberalization. Since then, the state is no longer directly involved in production and distribution; furthermore, direct access to foreign markets was made possible, although limited to larger firms. As wages rose in newly industrialized countries, foreign investors became increasingly interested in labor-intensive manufacturing in Vietnam, where low wages proved to be a comparative advantage.

Given a huge gap between official prices and those of the parallel market, compensated price adjustments were made in 1988 but that only succeeded in fueling inflation. Further "renovation" was necessary, and entrepreneurs were singled out as the ones whose tools would be used. Resolution No. 16 of July 1988, also known as "The Resolution of New Regulation for the Non-State Economic Sector," called for tapping entrepreneurs and turning them into important components of the national economy.

On January 21, 1991, Decision 25-CP established that enterprises would develop market-directed business plans. That year, most prices in Vietnam were released from centralized control. Exceptions were electricity, petrol, and transport. This enabled entrepreneurs and the small business sector to begin setting prices as a function of the market, while keeping energy and transportation costs artificially low, thus indirectly subsidizing entrepreneurship. Furthermore, the predominantly rural population was granted the right to own land and to sell output at market prices. Whereas Vietnam had been near starvation prior to this reform, by 1990 the country was the world's third largest rice exporter.

In Ho Chi Minh City (formerly Saigon), Exporting Processing Zones (EPZs) were established specifically to attract foreign entrepreneurs interested in export-oriented foreign direct investment (FDI). These EPZs offer inexpensive land, combined with zero duties and no taxes in an environment with low cost labor.

In May 1992, the Labor Ministry announced a new reform specifically to encourage foreign entrepreneurs to create new jobs. In an effort to assist in the task of job-creation, in 1992 the minimum wage for employees of foreign entrepreneurs was reduced to $30 U.S. monthly.

A major breakthrough occurred in 1992 when Banque Indosuez of France and Bangkok Bank of Thailand became the first two foreign banks to open branches in Ho Chi Minh City. Prior to that, state-owned banks simply made loans to state-owned firms, and entrepreneurial activity was constrained by a tight money supply coupled with the absence of a modern financial infrastructure.

Although state firms continued to have access to low cost credit, the removal of explicit subsidies further reduced their efficiency. Hiebert (1992) reported that 12,000 Vietnamese state enterprises were monopolizing 86 percent of bank credit, owning 76 percent of all assets, and employing 30 percent of the workforce, but producing only 26 percent of the gross domestic product (GDP). By 1993, the banking system was taking shape, and commercial credit was slowly evolving.

THE CURRENT STATE OF ENTREPRENEURSHIP IN VIETNAM

There is a constant buzz of mercantile energy in Vietnam; the self-employed optimize the use of their minimal resources and manage, despite a poor infrastructure. Although the Socialist Republic of Vietnam claims to be retaining socialist ideals, to the ethnographer the country appears to be thriving more on free enterprise than on Marxist ideology.

Upon arriving at the airport of Ho Chi Minh City, incoming passengers are greeted by crowds of drivers offering their services in or on vehicles ranging from antique Mercedes limousines to modern motorcycles. Downtown, one is overwhelmed by teams of peddlers, their arms overflowing with a variety of merchandise for sale, varying from pocket video games, T-shirts, cigarettes, and fans to numismatic items from French Indo-China and collections of Vietnamese or foreign stamps. The vendors follow their prospective clients with seemingly endless persistence.

Meanwhile, a woman sits on the sidewalk feathering ducks, while a man loads fresh pork from a wooden container onto the street. Nearby, fish are being laid out in neat rows of 10, some headless, others still flopping on the hot pavement. On countless street corners, food is served, including chicken, duck, fish, pork, coconut paste, vegetables, and rice soup. Most dishes are served in plastic bowls, not necessarily washed between users.

One shed in Ho Chi Minh City is a pancake restaurant when it is not being used as a bus depot. Not far, "Mr. Fix-it" earns his living by selling a wide variety of inventory, ranging from motorcycles and caviar to tiger-skins for $1,000 U.S.

At the market, entrepreneurs sell oranges, bananas, papayas, coconuts, mint leaves, grapes, guavas, pineapples, red dragon fruits, and jeruk (a green pomelo sweeter than a grapefruit and larger). Fish, duck, and chicken are sold alive or dead, or in-between. Everything else is offered dried, fried, diced, sliced, minced, spiced, roasted, toasted, or marinated. Also for sale is xuxe, a mixture of green peas, cane sugar, and shredded coconut delicately wrapped in palm leaves fashioned into tiny boxes held together by bamboo toothpicks.

On the train from Ho Chi Minh City to Hoi-an, children run along the aisles, fanning passengers for 200 dong (approximately 2 cents U.S.). For 2,000 dong, vendors sell sodas, opening the bottles with their teeth and pouring the contents into a plastic bag, in order to keep the bottles. At various stops, individuals sell bread, fruit, pastries, and drinks, including fresh, green coconuts, through the train windows; others sell water for passengers to wash, while housewives sell raw, fertilized duck eggs which are eaten just prior to hatching, feathers, bones, and all, lightly salted.

At a small village, blind musicians board the train to entertain passengers. A local cook comes aboard to flame a fish-flambe at the seat of his clients. Yet another merchant sells chicken breasts, with rice cooked in chicken fat, served on a palm leaf for 2,000 dong.

In Hoi-an, the market is the life of the city. As people bargain for fruits or vegetables and live ducks, chickens or piglets, a woman sells the intestines of a cow still filled with hay. A trai thon--literally a "sweet smelling fruit," or pineapple--costs 1,000 dong. Pineapple soda is sold in old Sprite bottles imported from Cambodia and on which "Sprite" is spelled out in the Khmer alphabet; an unprofessional label reads 500 ml, on a 350 ml bottle. Nearby, a young girl on a canoe-like vessel offers transportation to the houseboats.

Along the road to Hanoi, stalls display one-liter Coca-Cola bottles filled with kerosene or gasoline, for sale by proprietors of mini-service stations. Other vendors sell fuel for cigarette lighters. A man stands by the roadside with a pump and fills tires, while another rents out the use of a scale. A lady with four teacups holds a tiny teapot as she waits for customers.

On Quang Trung Street in Hanoi, three dozen barbers have set up business, each hanging a mirror along the wall by the sidewalk. Although more expensive than government barbers, these outdoor hairdressers are considered more stylish, innovative, and very popular. On another street, there are 20 vendors selling aluminum pans and other kitchenware. Elsewhere, in a two-block area of the city, close to 50 merchants are clustered together selling identical shoes.

Black market small enterprise such as unofficial money changing is also conducted openly and tolerated by authorities. Everyday, 50,000 peddlers unofficially transport their goods between Vietnam and China. Microenterprises involve exporters piggybacking freight; others use bamboo rafts or the backs of coolies. Women are less expensive porters than mules, and many carry wicker baskets, each balanced at the end of a pole leaning across their shoulders. In the baskets are monkeys and pelicans, vegetables, and coal along with cats and dogs destined for Chinese dinner tables. Other goods include home-bottled perfumes deceptively labeled as "Channel's Five." Going the other way, from China to Vietnam are diesel engines, tractors and water pipes which are transported in pieces and reassembled in Vietnam alongside water buffaloes dragging carved ploughshares made of wood. Even on the farms, entrepreneurial spirit is present, as farmers work long hours waist-deep in rice paddies.

TOWARDS A MARKET ECONOMY

In a country of communist orthodoxy, cooperatives are being converted into companies, but these are not using resources effectively. Bureaucracy clogs the system, and state firms continue to lose money as their market share is eroded by an emerging middle class of nouveau-riche with entrepreneurial energy. Meanwhile, growth of the small business sector appears very promising.

The people are generally industrious, literacy is approximately 90 percent, and there is a high level of computer literacy. Almost everyone speaks Russian, most elderly people speak French, most young people speak English, while Mandarin and German are widely spoken. As a result of historic commercial ties with Europe, the patterns of business thought are closer to those of the West than are those of Japan. Foreign entrepreneurs are already producing quick returns on investment and joint venture negotiations are proceeding swiftly.

All this is not to suggest, however, that transition from a centralized to a market economy is smooth. Although the entrepreneurial spirit is strong, several difficulties should be addressed:

Lack of physical infrastructure. Since the departure of the French in 1954, there has been minimal maintenance of the infrastructure. The poor state of the roads, the trains and the ports contribute to inefficiencies in distribution. Telecommunications are also poor; in 1992 there was one telephone per 537 people in Vietnam (Asiaweek 1992). Furthermore, there is a shortage of office space, the urban water supply and sewage systems are under great pressure, and the hotel condition discourages the hardiest of visitors.

Lack of institutional infrastructure. The government is being faced with the challenging task of dismantling bureaucratic structures no longer relevant to the new economic model of doi moi; simultaneously there is a need for new institutions better suited to the new model. As described above, much of Vietnam's entrepreneurship is spontaneous, with minimal planning if any. Small business development centers and incubators, industrial estates or science parks might be useful to better focus entrepreneurial energy and to facilitate the procurement of inputs, i.e., raw materials as well as capital.

Lack of banking infrastructure. Most small businesses in Vietnam operate on their self-generated capital. Entrepreneurs report significant difficulties with collateral and procedures, when attempting to borrow from banks, and as mentioned above, commercial banking has only recently emerged. A check may take as long as three weeks to clear. Venture capitalists and private investor networks are still virtually unheard of.

Lack of legal infrastructure. The uncertain legal context of investments is a concern. Aggravating this is the absence of established mechanisms for conflict and dispute resolution.

Lack of product quality. Exports of the Socialist Republic of Vietnam were traditionally destined to former East Germany and other socialist countries where demand exceeded supply. In order to increase exports, Vietnamese entrepreneurs should become familiar with international quality standards. In some cases, there is a need to increase labor productivity.

Lack of technology. The small business sector in Vietnam is generally limited to the production and distribution of consumer items requiring minimal technology. In one factory outside of Ho Chi Minh City, barefoot employees use antique Singer machines. One problem is that most entrepreneurs lack the foreign exchange necessary to purchase modern machinery; however, this can be overcome when foreign entrepreneurs engage in joint ventures. Yet the potential for high-tech enterprise has not been developed.

Lack of marketing skills. During decades of socialist rule, marketing and advertising were not concerns. Today, small business in Vietnam is largely ad hoc and lacking marketing know-how. For example, without regard to spelling, one villa advertised "Telex Coffee Dansing Massage." Furthermore, clustering by product line is common, and although this is efficient for wholesalers, lack of differentiation makes it difficult for individual merchants to establish a unique identity in the market.

Lack of free access to export markets. Current legislation in Vietnam regulates the minimum export volume of a firm. This discriminates against smaller enterprises which are required to export via intermediaries, decreasing the profitability of smaller firms.

Lack of international business skills. Before the U.S. lifted its trade embargo with Vietnam earlier this year, South Korean entrepreneurs were ordering textiles in Hanoi, shipping them to South Korea where South Korean labels were put on them and then re-exported to the United States under their quota. Eventually, Vietnamese exporting may wish to play a greater role in the international arena, and, as entrepreneurs increase their share of exports, they will also need to learn about international banking, shipping, insurance, etc.

Lack of tax incentives. There appears to be several difficulties with tax law. Vietnamese entrepreneurs are heavily burdened by overlapping taxes with no exceptions or reductions for new ventures. A local business importing inputs is charged import duties, even when imports are necessary in order to subcontract for export. In contrast, foreign direct investment is encouraged. Vietnamese entrepreneurs are therefore getting persons in Hong Kong to set up "false foreign devil" companies in Hong Kong for them. Profits are thus declared in Hong Kong so the entrepreneur pays less in taxes and has less bureaucratic interference. A reduction in intervention by the Vietnamese government would allow entrepreneurs to concentrate more on business than on avoiding government regulations. Furthermore, given that Vietnam has very high import duties and that large-scale smuggling is significant, the entrepreneur who imports legally finds himself at a disadvantage.

Lack of clarity. Responsibilities and power of state organs tend to be very loosely defined, and organizational structures are often cumbersome and overlapping. Entrepreneurial activity can therefore be delayed and/or inhibited by authorities of different branches or levels.

CONCLUSION

Recent market-oriented development is making entrepreneurship more viable in Vietnam and the trend is bound to accelerate with infrastructural improvements. Given the wage structure in Vietnam, it is likely that the small business sector will eventually dominate labor-intensive industries, while state-owned firms and multicultural enterprises undertake the more complex, capital intensive tasks of development.

REFERENCES

Asiaweek (1992), "Almanac," August 14, 9.

Chinh, Truong (1977), "Firmly Grasp the Proletarian Dictatorship," Vietnam CCXXV, September, 1.

Hiebert, Murray (1992), "Economies," Far Eastern Review, August 20, 50-51.

Leo Paul Dana McGill University Montreal, Canada