Social security and firm performance: The case of Vietnamese SMEs

• Date: 01 June 2017
• DOI: http://doi.org/10.1111/j.1564-913X.2015.00054.x
• Author: Nina TORM,Sangheon LEE
• Published date: 01 June 2017

International Labour Review, Vol. 156 (2017), No. 2

Copyright © The authors 2017

Journal compilation © International Labour Organization 2017

* Special Adviser to the Deputy Director-General at ILO in Geneva, email: lees@ilo.

org. ** Post Doc at Roskilde University, Denmark, email: ninatorm@ruc.dk. This work was sup-

ported by the National Research Foundation of Korea Grant funded by the Korean Government

(NRF-2014S1A3A204 4833).

Responsibility for opinions expressed in signed articles rests solely with their authors, and

publication does not constitute an endorsement by the ILO.

Social security and rm performance:

The case of Vietnamese SMEs

Sangheon LEE* and Nina TORM**

Abstract. This article investigates how social security provision – a key determin-

ant of formality – impacts on small and medium-sized rm performance in Viet

Nam. Based on enterprise census data covering all registered rms from 2006 to

2011, the authors nd that rms which increase their social security coverage by

10 per cent experience a revenue gain of 1.4–2 .0 per cent per worker and a prot

gain of up to 1.8 per cent, depending on the survival time of the rm. However,

given the time lag between “investment” (in social security contributions) and

returns (enhanced rm performance), specic policy measures such as initial

social insurance subsidies for small rms could increase participation in manda-

tory schemes.

Since Viet Nam began its transition from a centrally planned system to a

socialist-oriented market economy in 1986, it has averaged annual growth

of more than 7 per cent, and the incidence of poverty has declined rapidly.

Between 1993 and 200 0, for example, it dropped by more than 40 percentage

points: the fastest reduction in poverty ever recorded, even surpassing that

of neighbouring China. Within two decades, Viet Nam graduated from least-

developed to lower middle-income status, and it is currently one of east Asia’s

most dynamic emerging economies.

Central to its ongoing structural transformation has been the growth

of the private sector, which accounts for an increasing share of employment

and output. During the rst seven years of reform, around 10 million private

sector jobs were created. Between 1993 and 1997, the number of registered

private rms grew by 40 per cent per year on average. This private sector

boom, which occurred in spite of the general absence of market support insti-

tutions, can be attributed almost solely to the entry of new small and medium-

sized enterprises (SMEs), including many household rms. According to the

International Labour Review186

Viet Nam Chamber of Commerce and Industry, SMEs account for more than

97 per cent of all enterprises, providing employment for more than 50 per

cent of the workforce and contributing around 50 per cent of GDP (Le, 2011).

Despite their economic importance, SMEs are often characterized by

poor working conditions and limited social security coverage. Although this

is particularly true of rms operating informally, non-compliance is also wide-

spread in formal rms – which technically operate within the legal framework –

not least when it comes to social protection for their workers.1 In 2010, when

the Government was actively promoting social protection as an engine of

growth and development, less than 50 per cent of all registered private en-

terprises contributed to the Viet Nam Social Security Fund (VSS) (MoLISA,

2010). 2 This situation has raised concerns that the VSS could run into decit

by 2021.3

The observed compliance gap may be attributed to a number of factors,

including lack of knowledge about the regulatory framework and weak en-

forcement mechanisms, which hinder the Government’s efforts to ensure that

the relevant laws are implemented. Moreover, the dynamic environment in

which SMEs operate often means that they are tempted to adopt short-sighted

strategies as the costs of longer-term investments, such as social security con-

tributions, are perceived to outweigh any potential benets. This tendency can

be compounded by the difculty of appreciating the magnitude of such bene-

ts (in contrast with costs, which are immediately clear).

Against this backdrop, this article examines the relationship between so-

cial security provision and rm-level performance among SMEs in Viet Nam.

Based on enterprise survey data, covering all formally registered rms over

the period 2006 –11, our results suggest that rms which increase the social

security coverage of their workforce by 10 per cent boost their average rev-

enue per worker by between 1.4 and 2.0 per cent, and their average prot per

worker by up to 1.8 per cent. We thus nd clear evidence of rm-level gains

associated with the provision of social security. One plausible channel through

which this relationship emerges is the enhanced motivation of the workforce.

But there is a time lag between the incurrence of costs in the form of social

security contributions and the accrual of benets, i.e. enhanced rm perform-

ance. Since the asynchronous workings of the underlying dynamics cannot be

easily addressed at the individual rm level, well-targeted policy interventions

are critical.

The remainder of the article is structured into ve sections. The rst pro

-

vides an overview of the scant literature and of recent policy developments

in Viet Nam. The second presents our data and descriptive statistics, while

1 Also, temporary workers with contracts of less than three months are in any case excluded

from the scope of social security regulation.

2 See Bonnet et al. (2012) for an overview and assessment of Viet Nam’s social protection

strategy.

3 See for instance http://news.xinhuanet.com/english/world/2013-08/23/c_1 32655032 .htm

[accessed 7 June 2017].