introduction

Relevance of the topic

In most developing countries, non-farm activities have become increasingly important to the development of rural areas in particular and the economy as a whole. Non-farm activity performed in rural areas by peasants is an effective way to help diversify the rural economy away from pure reliance on agricultural production. It has the effect to increase rural employment opportunities, diversify income sources, alleviate poverty, improve the living standard, narrow the rural-urban income gap and reduce migration to the cities.

In Vietnam, 77 percent of Vietnam's population resides in rural areas and 74 percent of the total labor force is engaged in agriculture. The population growth rate in Vietnam is rather high at 1.8 percent annually, making the labor force increase by approximately 1 million persons annually (WB 1998a). Vietnam also faces with problems of arable land scarcity, unemployment, poverty, and rural-urban income discrepancies.

There are a large number of Vietnamese villages where people traditionally have a long experience in producing non-agricultural handicraft goods, such as wooden sculptures, ceramics, furniture, cloths, and processed foods. Quite a few of them are doing very well, but, there have also been many cases of failures. If non-farm economic activity is to be developed sustainably, it needs a long-term strategy, a commitment to investing time and effort as well as funds. Thus, a study of villages with specialized non-farm products is useful to understand and support rural development in Vietnam.

So far, quite a few researchers have studied the situation of the traditional craft production in Vietnam.  Most of them focused on what should be done to preserve and promote the villages with specialized non-farm products as aspects of the country's cultural heritage, irrespective of costs. Some researchers have mentioned the economic value of these villages, but mostly about how to preserve non-farm economic activities and provide better access to capital or technology. Matters such as marketability and dynamic trends of development were addressed only in general. There is not yet a clear classification of market niches for these villages.  In other words, the economic realities of preserving them have not been sufficiently addressed. Therefore, a more general empirical analysis, with a more specific classification of potential rural non-farm economic activities, is needed to determine the relative role and future prospect of villages with specialised non-farm products in Vietnam.

Focus of the research

The RRD and the Mekong delta are the two main population centers of Vietnam. The research will focus only in the RRD, the second largest region after Mekong delta in terms of population, with nearly 17 million people. Its population density is the highest in the country: over 1,000 persons per square km. The RRD also has a high concentration of poverty, due to the high population density. In this region, more than anywhere else, it is urgent to draw labor into non-farm activities to reduce the intense pressure of population on land.

Research questions

The research is intended to answer to the following questions:

1/ Why and how is the rural non-farm manufacturing economy organized?

2/ What is the impact of transition to a market economy on the rural non-farm manufacturing sector in the RRD, and the prospects of the SMVs in economic development?

       Classifications of potential non-farm economic activities

       What are the main constraints facing the development of these SMVs

       How do some SMVs become winners, while the others fail?

3/ Identification of policy options to deal with the constraints and the development of SMVs. Should the government help?

 

Chapter 1: Theoretical framework

 

1.1. Definitions & approach

1.1.1. Farm & Non-farm

The definition made by Saith (1992) is relevant:  “farm” refers to a set of economic activities including crop-cultivation, and other auxiliary activities such as fishing and aquaculture, dairying and animal husbandry, poultry-rearing and bee keeping. Non-farm work not included in this range of activities can involve manufacturing, processing, trade and services.

1.1.2. Specialized manufacturing villages (SMVs)

The concept of an SMV differs from different research. In this research, SMVs are understood to be villages where a large proportion of its citizens – from about 30% or 35% - have, or recently had (since about the 1970s) skills and involvement in manufacturing the same line of products. 

1.1.3. Production-unit classification  

Household enterprises

In a SMV, there is usually a mixture of households, more or less dependent on agriculture: agricultural, mixed type and non-agricultural households. According to MARD (1997):

·          Agricultural households are those in which all or most laborers participate in agricultural (forestry/fishery) production and the principal means of subsistence of these household members relies on the returns from their agricultural (forestry/fishery) production activities.

·          Mixed-type households are the households, which do both farm-work and non-farm business at the same time. Both types of productive activities play significant roles in securing employment, incomes and livelihood for the household.

·          Non-farm households are households in which all or most laborers, whether household members or hired outsiders, engage in non-farm occupations in any form of production or service practice, and the main source of household income is from non-farm business activities. Non-farm households may have agricultural land, but the number of laborers from their households participating in the farm-work, and their income from  farming production are small, compared to their incomes gained from the non-farm  activities.

Rural non-farm establishments

These are establishments set up in rural areas, carrying out only non-agricultural production activities, which are granted business licenses in compliance with the laws, regardless of  operational scale and economic sector, except for the SOEs (MARD, 1997).      

1.1.4. The approach

There are two different approaches towards analysing the rural non-farm economy: the locational approach and the linkage approach (Saith A., 1992):

(i) Conventional (locational) approach defines that rural non-farm manufacturing activities are those performed in a location within a designated rural area.

(ii) Linkage approach emphasizes all non-farm activities that generate significant development linkages with the rural dwellers, no matter where they are taken place

As discussed above, this research will focus on rural non-farm manufacturing activities that maintain rural dwellers working in their homeland, not to migrate to cities and towns. Therefore, the conventional approach definition is of relevance to the study.

1.2. Non-farm activities in rural development  

Non-farm sector in rural areas is an alternative to farm work and of crucial importance, in the sense of employment creation, income diversification and generation, and out-migration restriction, to deal with the relative stagnation in the agricultural sector such as risks and uncertainty, land scarcity, etc.

1.2.1. Problems of agricultural development

Risks and uncertainty:

In a market economy, risk and uncertainty surround all economic activities. But to the agricultural sector, they are often of greater degree, since agricultural production is vulnerable to unpredictable climatic and price fluctuations. Even when there are methods to limit uncertainty, they may introduce new problems. For example, pesticides are thought as "risk-reducing" inputs, when we consider only uncertainty about pest density and pesticide effectiveness. But if the uncertainties of other factors such as price and potential yield are considered, pesticides could be either risk-reducing or risk-increasing.

A traditional view is that diversification by generating income from several activities is a key risk management strategy.  

Land Scarcity

Beyond the general environment of risks and uncertainties, several processes of change have facilitated the diversification of rural production activities.

First, it must be recognized that land is a limited resource. New areas of land have been exploited, but it is not enough given the population increase.

Second, the introductions of new technology, and advanced cultivating methods have augmented the cultivable capacity and reduced the need for manual labor. 

Too little land with too many people has been a problem in developing countries, particularly in the RRD. Hence, the need for exploring the potential of the non-farm sector is crucial.

1.2.2. Alternative solutions:

The farmers theoretically have two diversification options away from agriculture as follows:

·        Job-seeking migration to urban areas

·        Employment in rural non-farm activities

Migration:

Dynamic rural - urban migration is a common and inevitable phenomenon in the process of economic development. Rural-urban movement provides a major source of labor force for urban industrialization. They make up the labor shortage in cities, especially in hard, dirty, and dangerous work such as cleaners, and construction workers.

Economically, migration from rural areas seems to generally benefit the migrants, their families and their rural communities. Firstly, it helps relieve the unemployment and underemployment in rural area. Secondly, rural migrants may send remittances back to their families. In the process of development, although rural-urban migration is an inevitable consequence of growth, rapid urbanization is not only associated with successful development, but also associated with negative social consequences such as prostitution, crime, etc. Besides, the rush of millions of floating population adds pressure on urban infrastructure such as housing, transportation, and social security in cities. It adds difficulties on the administration and plan of cities.

Non-farm activities

SMVs have great potential to create jobs in the countryside. Generating employment in non-farm production in SMVs can achieve various objectives:

·          SMVs can utilize agricultural labor available in off-peak periods and provide job opportunities, which reduce seasonal rural-urban migration. 

·          Creating jobs without gender bias: non-farm manufacturing offer employment opportunities for women, who have few chances in other sectors.

·          Reducing the income gap between urban and rural areas, thus reducing the pull factors that make urban places so attractive to rural migrants. It also limits the push factors of unemployment or underemployment in the agricultural sector. 

·          Economically efficient and hence sustainable production.

Families with not enough land need other job opportunities in their own homeland. Rural non-farm activities, therefore, are an effective measure for sustainable rural development.

1.3. Specialized manufacturing villages - SMVs

1.3.1. Characteristics

Across countries, the non-farm sector may be organized differently. In developing countries like Vietnam, at the very beginning periods of rural industrialization, they may have similar characteristics as follows: operation in small scale and household enterprises, concentration and specialization in production.

Small scale & Labour intensive

Rural non-farm activities, as secondary jobs, are usually centered in small-scale household enterprises for appropriateness with its primary agricultural sector.

Small-scale household enterprises are more flexible, bear lower administrative costs, can easily be started and managed, and also minimize risks.

Small scale usually goes together with labor intensive technology. The reason is that capital-intensive technology means production economies of scale of factory is best. SMVs need skilled labour-intensive and few scale economies to be "winners".

Products of small-scale household enterprises in SMVs tend to originate from indigenous craft traditions, which are already skilled labour intensive.

Why are they specialized?

Each village has a different formation history. The concentration of particular industries in certain locations can be explained as a matter of geography, of historical accident, or economics.

Location argument

It is argued that SMVs emerge in proximity to raw material or markets. Villages located close to natural resources and materials usually have special advantages in particular non-farm activities.

The choice of vocation may be made when the village is near a market that demands the products. Transportation sometimes is decisive.

Historical factors are thought to play a part, in some villages that exhausted on-site resources and survived due to the skill and prestige of its artisans.  

However, there are also cases where SMVs were first established in obviously illogical locations. This is explained by the chance that ingenious entrepreneurs tend to start manufacture of a product in their native village. With the success of this "founder", other villagers set to work imitating him and thus a SMV is born (Gourou, 1936). The location of particular SMV may be due to a combination of various factors above.

Specialization argument

It can be a matter of tradition, especially in the village society of Vietnam, where social and economic lives are deeply intertwined. 

Rural non-farm activities usually take place in small-scale households. Small industry is an easy entry sector. However, village membership is not an automatic privilege, but a complex identity that encompass the history, customs, ethics and common aspirations of its inhabitants. Following this pattern, artisans within a village would often organize themselves into a guild, which shares knowledge within the group, but guards it from outsiders (Gregory Booth, 1996).

Households become involved in the same business for various reasons:

Firstly, from the demand side, consumers in "bargaining markets" prefer to have as many sellers in one location to maximize their bargaining .

Secondly, from the supply side, as Alfred Marshall analysed (S. Mundle and B. Van Arkadie, 1997), there are advantages as follows:

·          Labor market externalities: These relate to the advantages which a production unit may take from the easy availability of workers and trainers with particular skills, by locating in an area where there are others specializing in the same business, and requiring workers of similar skills. On the other hand, the workers also gain advantage to move to areas where there are several firms requiring labor with a particular skill, thus increasing their chance of finding another job if they lose employment in one firm, and affording them the advantage of market opportunities for improved wages and working conditions

·          Intermediate goods economies of scale and externalities: These relate to the cheaper and easier availability of particular intermediate goods as well as services and information. The entry of the new production units to produce the same products in the same area will expand the volume of demand for intermediate goods suppliers, who will reap the benefits of large scale production, in turn enabling them to bring down their prices.

·          Technology externalities: Technology spillover occurs because of the easy circulation of information due to proximity. Much of the technological progress takes place in the form of innovative incremental improvements, which are diffused informally through discussions and demonstrations among peers in the same sector. Production units located in specialized clusters can take advantage of such information to reduce costs, improve product quality and efficiency, bringing about a competitive advantage vis-a-vis units located in isolated areas.

·          Market access and economies of wholesaling

When enterprises of the same type locate close together, they may benefit from an easy access to skilled labor, an exchange of technical information, and from lower costs of inputs & marketing.

1.3.2. Factors affecting the prospects of SMVs

All factors related to manufacturing and distributing a product can cause the enterprise to win or lose. They can be classified as follows:

Marketability

Production exists only if demand for the product can be secured. Discovering a market niche and investing in a marketable product is the key to being a winner or a loser. Whether the products are marketable or not depends on various factors, such as the taste and income of consumers, the introduction of substitute products, and technology improvements. All of these factors can change over time.

·           Changes in income and taste:

The income argument that non-farm-manufacturing activities increase along with an increase in income level of the local population is plausible for "normal" and luxury goods.  The greatest part of the items produced by the rural non-farm sector, however, are usually rather inferior, and exhibit a negative income elasticity of demand.

As income rises, demand for inferior goods declines. People prefer better quality products to traditional goods. The transition in tastes and consumption patterns pushes some villages with specialized non-farm products into losses, as their products are no longer marketable.

However, higher incomes could provide a boost, not a disincentive, to the growth of some other rural industries where up-market products such as silk and wooden furniture are made. Others, such as pottery producers, can move to produce new "up market" products.

·           Technology improvement: 

When technology improves, and well-organized industrial mass production takes place, large quantities of standardized high quality products appear at low prices. Industrial mass production benefits from economies of scale and thus is usually more productive and standardized. Also, as most of the products of SMVs are in the nature of inferior goods. With development, these products are gradually replaced by better substitutes. Therefore, with an expansion of modern industry, some craft SMV products tend to disappear.

Nevertheless, technology improvement for SMVs can also be a decisive factor for success. The main reason for the low levels of labor productivity in SMV households is the simple nature of technology used. Small investments in equipment may increase manufacturing productivity and release labor for higher value jobs, but the distorted nature of rural financial systems. 

Agriculture

The agricultural sector has a close relationship with the non-farm sector in rural areas in at least three ways: through production, through consumption and through labour market linkages.

Many rural non-farm economic activities are characterized by the use of agricultural produce as raw materials, and production of goods for use in agricultural production or rural consumption.

A fast growing agriculture sector may create impetus for non-farm economic activities. Higher levels of income in the agricultural sector, however, may also decrease demand for some existing non-farm production, as explained above.

In addition, in the agriculturally better-developed villages, processing of agricultural products seems to be getting reduced in importance in rural areas. The larger volumes to be processed see economies of scale work to shift food processing activities towards large-scale factories.

Furthermore, a growing agricultural sector can raise agricultural wages, and these in turn raise the opportunity cost of labor in non-farm activities. This induces a shift in the com of non-farm activity into more skilled, higher return activities (P. Hazell and S. Haggblade, 1993).

Availability of credit & finance

In addition to the competitive problem in production and marketability with larger scale industries, the competitive of SMV household enterprises is often weakened by the lack of access to institutional credit.

SMV household enterprises come from very poor economic backgrounds. It is natural for them to face serious shortages of finance in establishing and operating enterprises, despite the low capital requirement (R. Islam, 1987).   

The problem of capital may lead non-farm enterprises to stagnation or dependence on informal borrowing at high rates of interest. Increased access to credit would facilitate expansion of the non-farm economy and the application of new technology.

Human Resources            

Labor is probably the most important factors in SMVs. It is the comparative advantage of the villages: cheap and skillful. Most producers in SMVs learn their craft over many years, acquiring skills, which have been passed along through the generations. Very few of them take formal training. Craft making is the same as any other business or trade in that continued education and training are essential to compete and survive. The common low education level of labor in rural areas in developing countries is often regarded as a problem. The poor will get poorer, as they either cannot afford school costs or need their children to work to help the family. It is a kind of vicious circle as they rarely get rich without basic education.

Literacy enhances the productivity of the workforce and makes it easier to master skills provided through on-the-job training. Education stimulates entrepreneurial capacity. Skillful labor is not enough as to drive a business to sustainable development. Managing skills, marketing skills, awareness of business and accounting practices and other "human resource skills" are important. 

The supply of raw material

The availability of raw materials is an important factor determining the production and sustainability of many SMVs as for many other manufacturing industries. 

Since most raw materials for SMV production come from the agricultural sector, stagnation or decline in the production of relevant crops can constrain further expansion of processing capacity for such crops.  Besides renewable inputs, shortages in non-renewable inputs can make future production unsustainable.  Moreover, there are industries using imported materials, like textiles, fabric and thread for embroidery. Availability of such inputs to SMVs depends on factors like the import policy of the government, and access to foreign exchange (R. Islam, 1987). 

Infrastructure

One way that the government can encourage the development of rural industry in general or SMVs in particular is by providing infrastructure in industrial areas.

The expansion of roads, transport, and communications infrastructure leads to specialization of labor by rural households. It promotes the development of trade, marketing, and distribution networks, including subcontracting arrangements linking farm and non-farm sectors to local towns or big cities.  The expansion of transport and communication facilities linking the rural sector with the cities may also have a negative impact on the rural non-farm sector. As rural areas become more accessible, competition from cheaper urban or imported products and changes in rural consumption patterns may also result. On balance, however, the net effect of improved infrastructure is beneficial because it stimulates the growth of an efficient and competitive rural sector.

To conclude, factors affecting SMVs can be divided into two groups as illustrated in figure 1:

·          The first group includes external dynamic processes that decide the competitiveness of the product, like science and technology improvement, introduction of better substitute products, changes in consumer tastes, and an increase in people's incomes.

·          The second group are constant internal inputs (e.i. human resources, credit, capital, material supplies, technical improvement, infrastructure, and government policies).

The first group can be considered determinants of the existence and development of SMVs in the long run, while the second group is basic factors that either weaken or strengthen all sorts of business activity overtime. Success requires elements from both groups of factors.  

2.1. General socio-economic features

2.1.1. Geography

The RRD lies in the northern coastal areas of Vietnam, with 16,644 square km, framed by branches of the Red River, the longest in North Vietnam.  It includes 11 provinces. The whole areas of all 11 provinces are called the RRD Region, with 27,898 square km (MOSTE, 1998)

2.1.2. Population & employment

The population of the RRD was 16.8 million persons in 1997, of which 81% were living in rural areas. The population density averages 1,010 persons/km2, making it one of the most densely populated regions in the world. 

The official unemployment rate in Vietnam's rural areas was low (at 3.9 percent in 1997), but there was also substantial underemployment - 25 percent (WB, 1998a).  This fact can be explained that in spite of a low per capita land area, almost all farmers have land to cultivate, although often not enough. They have their jobs for a certain period of the year and are not finding themselves unemployed. According to a MOLISA report in 1996, 2.04 million rural people in Vietnam go to urban centers for jobs during slack seasons, accounting for 7% of the total rural working population.

Facing the reality of little land, dense population, underemployment and problems when migrating, most households try other economic activities apart from farming to guarantee their food security. Throughout North Vietnam, today, about 68% of rural households can be considered purely farming ones. Up to 24 % of rural households are engaged both in agriculture and in other professions, of which 11% started non-farm jobs before 1981, 14% from 1982 to 1988, 31% from 1989 to 1992 and 44% from 1993 to 1997. This shows the growing number of families shifting to non-farm activities. (MARD, 1997).

2.1.3. SMVs development history

When the North of Vietnam declared independence in 1954, the State took complete control over production by starting collectivization efforts in every sector of the economy. This led to a period of massive restructuring in SMVs. During this period, exports were mostly to the socialist bloc, primarily to the former Soviet Union and Eastern Europe. Until 1978, officially, all craft workers belonged to cooperatives. In fact, there was a private sector, but oppressed and illegal. State enterprises and cooperatives - as the only official sectors - dominated the economy. Due to the structure of ownership and the lack of work incentives, production was weak and cooperatives began disbanding. The central planning mechanism became even more irrelevant when export markets in the Soviet bloc collapsed in 1989.

The renovation policies of 1986 were initially aimed at improving the productivity of all sectors by recognizing private ownership. Production cooperatives from the planning economy had little or no flexibility to respond to changing circumstances. Consequently, the number of handicraft cooperatives in Vietnam declined from 13,087 in 1990 to only 1,648 in 1994, while the number of private craft enterprises increased from 770 to 4,909 (MARD, 1997).

However, since 1988, the withdrawal of state support, the introduction of the market economy, and competition from Chinese smuggled goods created a shock leading to collapse for some non-farm manufacturing activities. Nevertheless, for some entrepreneurs the reforms were a springboard to use their ability and potential. For those who can identify market demand, who can develop product variety and choice for the customers at a high quality, who can complete work on time and at competitive rates, the transition to a market economy afforded opportunities.

 

2.2. Assessment of internal factors affecting SMV's performance

Factors considered main difficulties affecting SMV activities ranking in order of volume, which can be grouped as follows:

1 - Lack of capital 

2 - Poor technology and working condition

3 - Human factor

4 - Raw material supply

5 - Infrastructure

2.2.1. Capital & credit

The MARD survey in 1997 shows that lack of capital is by far the most frequent main constraint to the growth of enterprises, at least, according to enterprise managers. About 80% of total non-farm production units claimed credit availability as a constraint to their business. In fact, over 55% of non-farm establishments need borrowed capital to their business performance. But the number of borrowers of non-farm and mix type households is at only around 22%-32%. These figures as well as a large network of commercial banks in the RRD seems either to contradict their claims, or to be explained that these entrepreneurs do not have much capital for investment and operation, but the legal environment for lending is a bottleneck, especially as it relates to collateral requirements. Short of fixed assets, enterprises can not qualify for loans. Borrowing from the bank and other financial institutions is difficult, but people try not to get loans from informal lenders, which is usually with high interest rate. Loans from friends and relatives without interest rate are not sustainable solutions.  

However, it also should be noted that shortage of capital may not be the biggest obstacle. Most craft SOEs fail despite a favorable business environment in terms of capital availability and foreign market access. This raises the question that whether shortage of capital is a major problem or just a constraining factor to business growth.

Capital is necessary for business operation and business expansion, but more important is a flexible effective operating mechanism. Capital could be a problem, but neither difficult nor costly to overcome (Refer to Chapter II. Material supply and Chapter III. How are they organized?). Lack of capital may just be the symptom of more fundamental constraints on business development.

2.2.2. Production conditions and technology

Non-farm households generally use their houses as production places. In comparison with the whole country, production conditions in RRD households are considered rather good, where nearly half of them live in permanent houses.  However, business places are small for household enterprises, often failing to meet technical requirements, product quality and environment hygiene.

Mechanized production is evident in only 27-37% of SMV households[1], while manual work accounts for 63-73% of non-farm manufacturing and processing SMVs (MARD, 1997). It is difficult for non-farm SMVs to compete with similar products produced by well-organized factories. This is also the reason for SMVs being normally called "handicraft villages".

2.2.3. Human resources 

The labor force

Vietnam's most valuable economic resource is its abundant relatively skilled and competitively priced labor.  Literacy rates of household labor in the RRD are rather high. These are favorable conditions for "on-the-job" vocational training, and internalizing and disseminating knowledge of new technology. But the well-trained labor of non-farm and mixed-type households is still limited, and the proportion of trained labor with certificates is low.

The working skills of labor in SMVs are usually passed on through generations by “learning-by-doing”. This unofficial training is effective in popularizing handicraft production.  However, some important skills in art craft SMVs (e.g. design) could hardly develop just by "on-the-job" training. Therefore, official research on skill-requirements and then additional formal training courses may assist human resources development in targeted SMVs. 

The managers

Household heads direct the economic activities of households. They help non-farm establishments succeed or fail.

Training at vocational schools is important for businesses of SMVs. But literary is a basic requirement for filling the "skills gap" of management, marketing and information for running any business. Especially as for the majority of household businesses, only less than 8% college graduated managers is a low rate. Although learning from experience, overcoming problems as method of understanding work well, this way seems too expensive. Losing a contract, a relationship, is a much higher cost than a VND 1 million training course. Thus, this leads to limited efficiency in production and business activities and  limits the scope for the development of this sector.

2.2.4. Material supply

A large part of raw materials for RRD SMV production comes from within the region, and are agro-fishery-forestry products. The rest is imported either from other countries, or other areas of the country or from other sectors of the economy like fabrics and thread for embroidery, and wool for carpentry.

Agricultural productivity influences non-farm activities, as agricultural products account for a large proportion of inputs. Increased agricultural output also stimulates forward production linkages by providing raw materials that require milling and processing by the non-farm sector. Overall, the RRD has a net surplus of rice, sweet potato, cassava, soyabean, peanut, jute, reed and tobacco.

For seafood processing, the RRD has a long coastline. For construction input manufacturing, principal materials found in the RRD are limestone for crushed rock in roads and in the building industry, and clay for manufacturing bricks and tiles. Good quality limestone and clay outcrops occur over large areas on the flanks of the RRD.  

Supply of raw materials for carpentry villages is more constrained. The wood carving and furniture sector is particularly hard hit. Due to overcutting, good quality teakwood has become scarce. Together with teak, a long list of high quality wood is banned from exploitation for environmental protection. The scarcity has led to price increases making the business more difficult. Prices of raw materials from agro-fishery-forestry sectors tend to fluctuate seasonally, which also results in output price fluctuations. However, SMV costs might be saved by buying up input stock at times of low prices and storing them. Prices also vary according to quantities purchased. Bulk purchases might be beneficial. But lack of capital to finance stocks of materials, or limited storage areas may stop this. Mutual benefit "forward contracts" between material suppliers and buyers, under which seasonal material will be traded at an agreed prior fixed price, reduce risks. This method is based on trust and contracts. If promises are broken, it becomes very difficult for such procurement deals to work again.

2.2.5. Infrastructure

Infrastructure includes transport facilities like roads, railways, waterways, ports and communication facilities. According to the RRD Master Plan, the road network in the RRD is adequate. The average road density of 1.18 km/km2 is well above the national average of 0.32 km/km2.

In common with the road network, railways in the RRD were constructed over 50 years ago and have seen little investment. However, for transporting commodities, the current status is fine.

The RRD has a large number of rivers and branches. The extensive network of wide and deep waterways in the RRD provides an efficient means of transport. However, the condition of the fleet and port facilities is poor and needs upgrading.

In the RRD, there are three airports: Noi Bai international airport in Hanoi, a small airfield in Gia Lam, and Cat Bi airport in Hai Phong.

Communication facilities in the RRD have improved considerably recently. In  1994, there was already a wide-spread network of 572 post offices in the Delta Region, representing 30% of the total number in Vietnam.

In short, the overview above on the current situation of various factors affecting the operation of SMVs proved that although the situation needs much improvement if SMVs are to be promoted, they are not major constraints and decisive factors that can cause the SMV to "win or lose". Those operational problems experienced by the SMV sector, seem to be common with the rest of the developing world (Malek M. El Ashker, 1987).

The above factors are "basic conditions" to boost SMVs development. However, it is necessary that they are profitable first before development. The following section will look at the decisive factors towards SMV prospects - the story of winners and losers.

2.3. The prospect of SMVs in the RRD: the winners and losers

2.3.1. The markets

For craft production, the local market is the biggest outlet, followed by exports and tourist sales. More than 90% of craft products are sold domestically (RRD Master Plan, Volume II, 1995).

Domestic market

Crafts for the local market are utilitarian, like sleeping mats, bamboo and rattan baskets. With its high population, Vietnam has a large market for consumption goods, foodstuffs, and for construction and agricultural production tools. In the short run, as incomes of most rural people in Vietnam are still so low, after meeting the basic needs, they have very little left for purchasing manufactured goods. Inferior goods still find many buyers. However, when living standards rise, people become more attentive to quality, design, and qualities other than price. Industrial mass production and open trade add competitive pressure. Cheap imports from China and elsewhere overwhelm markets. Nevertheless, the domestic market should not be ignored, and producers responding to market demands by focusing on new standards and products will succeed.  

Export markets

Popular products for export and tourist sales in Vietnam are lacquerware, embroidery, woodcarvings, rattan ware, jute and woolen carpets (RRD Master Plan, Volume II, 1995). With cheap and skillful labor as a comparative advantage, and potential agricultural-forestry-fishery products, this market is promising for art crafts, and semi-finished products.

Greater exposure to world market enhances the opportunities to observe and adopt new technology. Export-oriented industries create favorable conditions for product improvements as export market introduces big demand for quality products.

Before, the state had controlled exports and imports of the whole economy through its SOEs. This was one of the difficulties for SMVs to expand markets. However, as of 1998, a big stumbling block to trade has been removed by allowing private enterprises to export products directly related to their business (VET issue 66). Opening up the business of foreign trade to private sector could greatly boost SMV growth.

Tourist market

This market can be considered an in-situ export market. Although many tourists are drawn by scenic attractions, visitors are increasingly drawn by cultural features, which place an area on the map as firmly as any landmark. Bat trang pottery village and Van Phuc silk village are examples. The tourist market is small in comparison with the two markets above, but important for stimulating the exchange of ideas and information. The number of tourists coming to Vietnam has increased from 670.000 in 1993 to 1.7 million in 1998, with over 2 million expected in 1999. 

2.3.2. Classification of the products and their prospects

A large proportion of SMV production is for household basic consumption and production, which is mainly agricultural work. In general, production of the rural non-farm sector can be usefully divided into the following main categories:   

Group 1:      Consumption goods                  Group 2: processed foods

Group 3:      Construction material                Group 4: production tools

Group 5:      Components/Intermediaries

However, the product range of SMVs is long and hard to clearly classified, e.g. a pottery bowl can be either a final consumption item, or an artistic item depending on the design.

Category 1 – Final consumption goods

Final consumption goods can be divided into artistic and non-artistic products.

1a. Art crafts are those that require much involvement of skillful hands to make the items artistic, distinctive and unique. Art crafts often compete with industrial mass-produced items. This artisan sector forms an important in the non-farm economy in Vietnam. In today’s discriminating market, basic skills are  essential, but they need to be elevated to a higher creative level where products are an expression of individual creativity and imagination. Craft producers need to adapt traditional skills to modern demands for diverse and imaginative artistic products.

1b. Low-end goods for consumption purposes

In the case of many non-farm products for final consumption, income elasticity of demand seems to be negative. Most non-farm manufacturing established spontaneously in a closed economy.  Due to the low local living standard, they mainly produced a variety of simple inferior goods for local needs. The negative income elasticity of demand for inferior goods brings the production to an end as people get richer, unless it can evolve in response to the new conditions.

When industrialization proceeds rapidly, these SMVs face competition difficulties. Inferior goods manufacturing tends to die out due to factory mass production of better substitutions in terms of quality, durability, design and price.

To be the winners in the long run, market niches must be identified. Producers need to know how to efficiently use their resource and capital, and how to respond to market needs(E.g. the most simple consumption goods like paper fans can be developed into artistic items with different sizes and designs for wall decorations).

Category 2 – Processed foodstuff

2.a. Fully processed foods such as noodle, sugar and sweets, fish sauce, wine

2.b. Semi-processed foods like raw sugar, polished rice, shelled peanuts

Except SMVs that hold monopolistic processing know-how, gain reputation in the market place, fully processed foods have difficulty in competing with factory-made foods.  

The open door policy allowed foreign investment and advanced technology to enter Vietnam. Hiwever, large-scale food processing factories still face problems relating to lack of appropriate equipment, limited technology, incorrect designs of factories, incorrect stacking of product in cold storage, poor quality control measures, and even unhygienic conditions (RRD Master Plan, Volume II, 1995). These problems are even bigger for household enterprises. In the short and medium run when people’s living standards are still low, food processing by SMVs can meet local nutritional needs. But in the long term, the rising GDP and standard of living will enable people to purchase higher quality and more hygienic foodstuffs. Household food-processing enterprises in villages will be under pressure in a wealthier and competitive market economy.

However, agricultural products are often perishable or bulky and as a result, require processing before being transported. So it is economically necessary to process some products locally to reduce transport costs. Semi-processing food industries could be important, because they add value to local farm products and avoid post-harvest losses. Semi-processing of specific products is probably viable for SMVs not only in the short run, but also in the long run. 

Category 3 – Construction material

3.a.  Finished products: bricks, tiles, etc.

3.b. Raw materials and secondary material: crushed limestone, cement forming      bamboo sheet, construction steel, etc.

The increasing scale of construction activities in Vietnam gives rise to construction material industries.  However, except for limestone/sand quarried and sold in the form of raw material for road and buildings, others like bricks and tiles are products that also face mass production competition as mentioned above. Brick and tile manufacturing factories have gradually replaced little kilns near rural towns and cities. Small brick and tile kilns tend to be for local use only, and this is strongly limited by local demand.

Stone quarrying of crushed rock for roads requires hard manual work. Low labor costs in the countryside enable such products to be produced at very competitive prices by seasonal workers in villages. However, this activity does not have a promising future as it may face problems of limited unrenewable natural resource.

Category 4 - Production tools

A large agricultural sector requires much input either produced or serviced by the non-farm sector. Manufacturing of agricultural production tools by SMVs meets some of this big demand.

For the short and medium term, these products are still marketable and suitable for the conditions of the Vietnam agricultural sector. With small size farms, it is not economical to use machines, and farmer’s low incomes limit capital investments. There is often room for the small-scale manufacture of relatively simple tools like hoes, spades, watering cans, wheelbarrows, etc. 

RRD farms are small, averaging 0.3 hectares per household, and fragmented (6 to 10 lots up to 2 km apart). A Land Law, effective in mid October 1993, allowed the transfer and leasing of land up to a maximum of 3 hectares (RRD Master Plan, volume II, 1995). This could lead to considerable land consolidation during the next decade. Farm sizes are adjusting towards efficiency. In addition, because the sector is important, it gains much attention and appropriate equipment is researched and developed for this market. Durable heavy production tools are mostly produced in heavy industries in cities and towns.  Thus, in the long run, as the people’s living standards increase, SMV manufacturing of primitive production tools should decline.

Category 5 – Components for other industries

Developing forward and backward linkages to specific industries or items of manufactures is one way to expand SMV activities.

The rural non-farm sector usually has strong ties to the urban sector. While some rural small-scale industries compete with urban industries, others have a complementary relationship: they produce components for the production of the main industries or assemble their products, either by producing on a sub-contract basis by providing semi-finished goods or materials. Large-scale industry may require components and parts, which may be more economical for production on a small-scale. This type of ancillary development of SMVs may change the character of a nation’s industry that strengthens both large-scale industry and small scale craft production in general.

Intermediate goods manufacturing is a backward linkage from regional industries which creates a stable market.

The slow development of SMVs making components for other big industries in Vietnam is due to the absence of linkages between SMVs and other sectors. Especially, it is due to the lack of a comprehensive industrialisation policy at a macro level, the bias in favor of capital intensive industrial development, resulting in poor generation of labor intensive industrial activities in rural areas. Labor intensive goods accounted for only 34 percent of total exports, which was substantially lower than in China, where they accounted for about 50 percent of total exports (WB, 1998a).

In short, except for SMVs that have gained great reputation for their monopolistic production know-how, potential SMVs are those where production linkages are strong and where product diversification is focused on the basis of market niches, bringing about a better match between supply and demand. 

2.3.3. Summary of market structures and forces 

Table 1 summarizes the analysis above that to be the winners, group 1a, 2a and 3a and group 5 should be their target products where there is a promising market in the long run.

Table 1: The marketability prospects of each SMV product group

The product	Classification	The  markets	Opportunities
1. Final consumption goods	1a. Artistic & decorative items	-           - Potential export & tourist   markets -           - Future domestic market
	1b. For consumption purpose only	-         - For local consumption only -         - Marketable in the short and medium terms. -         - Hardly marketable in the long run	Not competitive with industrial mass manufacture of the same products made from the same materials. Can survive if the advantages of the material is taken into consideration and improved to compete with substitutes made from different materials. Need innovation in terms of both style,  quality, or even type of products to marketable ones like art-craft or semi-finished goods/components for other industries.
2. Food	2a. Have traditional secrecy in technique	-         - Loyal local consumers	May be exportable if hygienic and other standards are improved
	2b. Simple recipe food	-         - Marketable domestically in the short and medium run, not in the long run.	Not competitive with advanced technological food processing factories. Thus, semi-processed food, with further processing and quality control in those factories, may succeed.
3. Construction material	3a. Low volume item	-         - Marketable for its unique decorative value
	3b. Normal	-         - Not marketable in the long-run due to poor standardization	May shift to produce low volume items
4. Production tools		-         - For domestic comsumption in the short & medium run, not in the long run.	May shift to produce components for other industries
5. Component/  Intermediarie		-         - Sustainable market, both domestic and export	Long-run potential Not yet developed in Vietnam SMVs Need guidelines from policy makers

 

However, table 2 shows that households shifted to non-farm activities mostly due to stagnation of the agricultural sector. Being pushed from the agricultural sector, households look for any non-farm activities that can earn an income. The low figure of around 9% for high market demand as a reason can be attributed to the fact that very few people have knowledge and experience about markets. This factor is of much less importance, and few care to foresee whether their products are marketable in the longer term. This is the reason why the non-farm products have been developed rather spontaneously.

     Table 2: Main reasons why households become involved in non-farm activities

(Unit: %)

Reasons for starting NFA	Non-farm households	Mixed type households
Under employment	52	58
Low income	33	32
High market demand	9	8
Others	6	2

Source: MARD, 1997

2.4. The case study of Ninh Binh

Section 3 has classified SMVs in the RRD into winners and losers. Section 4 will look at the case study of Ninh Binh province, which will illustrate the analysis in details.

2.4.1. General features

Ninh Binh is the second smallest province in the RRD. It is also the least densely populated of the provinces due to the relatively large areas of rugged hilly terrain and poorly drained land.

In common with most other provinces, it is largely dependent upon agriculture, although many areas are low-lying and prone to flooding in the rainy season. Agricultural activities are therefore not a secure source of food. However, there is potential for considerably increasing farmer incomes in this province by engaging in non-farm activities, building upon a large number of traditional vocations.

With extensive limestone outcrops, Ninh Binh has the potential for building material production, and stone carving.

2.4.2. An overview on SMVs in Ninh Binh[2]

Agriculture employment is limited due to the low land per capita of 0.1ha/ head (Report of Industrial Department), and the unsecured income from agriculture. Consequently, non-farm activities in Ninh Binh have developed.

They include:

·           Bamboo weaving of basketry and household utensils

·           Reed weaving of mats, rugs, cushions for cars and others

·           Embroidery of more than 1,000 different items

·           Artistic stone carvings of plant pots, portraits, temple decorations, etc.

·           Stone quarrying for construction

·           Carpentry of furniture

·           Smithmaking of hoes, sickles, knives, hinges

·           Pottery

·           Seafood processing                 

Among the SMVs classified above, some vocations have a sustainable future, while development of others faces a lot of difficulties.

Embroidery and reed weaving in Ninh Binh is considered remarkably successful. Meanwhile, smithmaking in Thach Quy village is declining because plough machine is used, it is now difficult to sell their products. There are only three blacksmithing places left in the village. The same holds true for bamboo weaving village.

According to SNV vocational survey results in 1997, the most popular remaining non-farm SMVs throughout the province are embroidery and reedweaving, with 29 reedweaving villages (up from 20 in 1996), and an increasing number of embroidery villages. One of the reasons for the rapid popularization of some high skill vocations in the area, despite artisan resistance is that during the subsidized time the cooperatives organized vocational training classes and spread vocational skills to cooperative members. Thus vocations spread beyond the border of traditional villages.

Bamboo weaving

In Duc Hau bamboo-weaving village, the main products are all kinds of baskets. Today competition with substitute goods made of plastic and other artificial materials is quite fierce. The villagers want to change their livelihood activities, although basket weaving is a 200-year tradition. However, in the country, there is still certain preference for bamboo due to low incomes and "inferior" good qualities. 

In general, bamboo weavers are dispersed and facing declining demand. 

Van Thi bamboo-weaving village in Gia Vien district used to make rice baskets. Recently, they have moved to making cot ep (cement-forming material for construction and fibreboard), as they see this production having rising demand and a stable market.

Two years ago, Phuong Lam village turned to produce artistic bamboo ware for exports to Korea, and the number of households working on the vocation was much higher. This confirms the two promising options for this type of handicraft to catch up with dynamic development for sustainable growth: art craft and intermediaries for construction.  

Reed weaving

The abundance of saltwater reeds has brought about the development of the industry of rush mats in the coastal zones of Ninh Binh.

Reed products such as mats and cushions for cars are popular exports to China, Taiwan, South Korea, Japan, Germany, Poland and others. Domestic sales of reed mats, however, is experiencing competition from plastic fibre mats imported from China.

Carpentry

Carpentry vocation has been practiced in Xom Trong village for a long time. This SMV is having difficulties due to the lack of material and declining. The price of wood has increased very quickly within the past two years due to the government ban on forest harvesting. The increase in the price of wood has limited the increase in wage and income. Agriculture is considered a more stable and consistent income. If the wage falls too low, they said to cease production and engage in agriculture only.

 

Chapter 3: Key determinants of successful SMV entrepreneurs

 

While there are successful and unsuccessful vocations, within any vocation there are exceptions to the trend. In this chapter, factors that may influence SMV actors and make them succeed or fail will be analysed.

Constant operational inputs for SMVs like capital, technology, human resources and raw material supply are important to boost the production development. Lack of capital usually results in difficulties in technology transfer, raw material purchase and others. However, as far as capital is concerned, previous studies in the development of this sector have tended to suggest that capital might not be the most crucial bottleneck in the development of these industries. Kilby and W.A. Lewis argued and identified that deficiency in managerial skills as the greatest impediment to the entrepreneurs. The business can not be built-up by lending capital alone. People with entrepreneurship, sound business and management know-how are the key to success over time.

3.1. Entrepreneurship

According to Schumpeter (Palgrave Dictionary), entrepreneurs are the prime movers in economic development and their function is to innovate. Entrepreneurship, energy to do business, is the most important characteristic of successful business actors in SMVs, which without it, other factors could not help.

There tend to be always two different groups of SMV enterprises: those seeking to just survive, and those having growth aspirations. The former are household enterprises with a survival character, who fear for being at risk and just look for an acceptable wage, not the ups and downs of a business. Meanwhile, the latter is profit-growth oriented and tends to be small and medium enterprises (SMEs). As entrepreneurs, they are committed to the process of developing their business. The enterprise is managed by persons with long term vision, entrepreneurial spirit and a business orientation aiming at capital accumulation (Chris Smith, 1999).

What affects entrepreneurship in Vietnam is hard to clarify because it deals directly with the perceptions of  human beings on the role of non-farm economic activities and government attitudes towards the private sector

3.1.1. The farmer's perception of the role of non-farm economic activities

It is evident that the less dependent on agriculture, the more successful the enterprises. When non-farm activity is only a secondary occupation, complementary to agriculture, SMV households give less thought to increasing their profits by a better utilization of their efforts, capital and raw materials. There are specifically SMVs in which industry is the main occupation of the households, who devote to it all their time, thought and effort. Bat Trang pottery village belongs to this case, where there is no cultivated land at all, and making pottery is their main livelihood.

3.1.2. The market economy and recognition of the private sector

The market economy

In the centrally planned economy, entrepreneurs did not have favorable environment to be prime movers as the whole economy was planned by the government. Egalitarism in income distribution caused the farmers not to be eager to work. Subsidiaries gave poor incentives to entrepreneurs. Shifting to a market economy, different producers would be able to carry out production process on their owns, and thus break the regime of central planned economy, where the state intervened directly deep into the economy. Competitiveness in the market economy has a push effect that makes SMV enterprises more dynamic.    

 

Private ownership

In other countries, non-farm activities in SMVs are best handled by private businesses, among which SMEs play an important role. Private enterprises generally use labor intensive technology. The labor/capital ratio of non-state enterprises is about 10 times that of SOEs, while income per worker of the former is much higher than that of the later. Vietnam's government formally recognized the private sector as part of a multi ownership economy when the reform program was launched in 1986. A survey by MARD in 1996 showed that the average net profit for non-farm establishments was 53.2 million dongs and 14 million dongs for non-farm households yielding profit/capital ratios of 20% and 17% respectively. The comparable average ratio for SOEs in the same year was 11 percent. (WB, 1998a).  

3.2. How are they organized?

Production organization of different patterns of goods is various. To be a success, linkages in production process should be strong.  

3.2.1. The sub-contract system (vertical linkage)

One feature of SMVs in Vietnam is that there are very few truly independent producers. From the largest to the smallest enterprise, an elaborate network of contacts and contracts exist between different producers, contractors and traders. Sub-contracting is very popular in SMV production, for the following factors:

·          From demand side: Contractors ensure production reliability and meet supply deadlines more effectively than do households. These are important features of successful marketing, and holdups undermine customer confidence and possibly losing orders.  Opportunities are often lost this way, and it is more difficult to get back into the market as a supplier if a reputation for unreliability has been acquired.

·          From supply side: Most contractors minimize and transfer risks to households through subcontract as their production is based on orders which fluctuate depending on the external market. Most contractors are not involved in collecting products but have a network of sub-contractors or collectors. They usually take care of quality control and finishing processes, which is very weak at households (e.g bleaching, ironing and packaging for embroidery items).

·          Market access, trade and marketing skills: Contractors are usually members of Management Board of the former cooperatives, or staff of trading companies that involved in the same products as in their new business. Thus, most enterprises, mainly household enterprises, rely primarily on the tradition of using these contractors, who have a more comprehensive knowledge of marketing and access to markets.

       Nevertheless, all producers should access market information to know whether they are treated well by contractors, although it is thought that strategic market access might be not be necessary and economical at the household level, due to economies of scale in such services.   

·          Quality control: An understanding of the quality required by external markets is usually lacking at the household enterprise level.

       In some cases, there is no incentive to improve quality, as local people do not yet prefer more expensive high quality products. In other cases, facilities at the household level cannot ensure that products are kept clean or stored free of pests or humidity. For such reason, the embroidery industry in Ninh Binh has to refuse big orders from Japan to embroider white silk kimonos. Collectors/Sub-contractors are those who first take liability for quality.

·          Capital access and technology transfer: Under the sub-contract system, raw materials, the major operating expense of households, are bought through cash advances provided by the contractor. Contractors help producers with new technology and skills. Thus, under sub-contracting, households do not face problems of capital access and technology transfer.

       In general, vertical linkages of SMV's businesses, from production to distribution, are illustrated in figure 2 below. Sub-contracting harmonizes the market relationship between large and small enterprises. One major advantage of the compactness of SMVs is that village units are more manageable than a widely spread workforce.

 

3.2.2. Production specialization (horizontal linkage)

Successful SMV households are those that coordinate with each other as a big production unit, and where the manufacturing process is well organised and divided for efficiency. Production of single products and use of material inputs are divided among a network of households and villages.

Division of labor is associated with specialization and cooperation and their consequences for labor productivity (Palgrave dictionary).

It is argued that economic gains could be had when small enterprises within a specific industrial activity clustered in close proximity to each other, partly because of the savings in transport and communication costs such concentration entailed. In such settings, individual households could specialise in a particular stage of the production process resulting in a deep inter-firm division of labor (K. Nadvi & H. Schmitz, 1994). 

A village/or a group of households in the village normally does not fully carry out the whole manufacturing process of the product but stops at one stage of manufacture and sells the output to another village/or group of households that would either perform another operation or complete manufacture of the product (M. DiGregorio, 1994). This especially holds true for sophisticated made products like metal casting, silk, pottery. This division of manufacture is striking in Da Hoi village in Bac Ninh.

A pattern similar to the division of manufacture is also found in the use of raw material. A village sometimes uses only a part of the raw material needed for their particular purpose and sells the unused part to other villages that need it for manufacturing products of a different category. For instance, households in villages that manufactured raincoats from lantania leaves used only the tips and resold the remaining portion to households in different villages that made hats (Gourou, 1936).

There often exists, from the industrial point of view, an interdependence of villages/and households in the village. Many SMVs require that other SMVs have a normal activity if they wish to find an outlet for, or a source of supply of unfinished products, to buy by-products indispensable to their own manufacture, or to rid themselves of unused products the sale of which often contributes the better part of their profits (Gourou, 1936).    

These linkages and interdependent relationships are often resulted in manufacturing experience and long term tie between actors within a complex and delicately adjusted system. However, the unfortunate consequence of this system is its vulnerability to breaks in the network. If a certain village within the network ceases to manufacture its traditional product, other villages within the network would be place at risk of collapse (M. DiGregorio, 1994).

3.3. Current problems relating to SMV production

3.3.1. Uneven playing field facing the private sector

Following the formal recognition of its role in the economy in 1986, the private sector has grown rapidly. However, at present, private SMEs are playing only a minor in Vietnam, although there could be extensive ender-reporting of their activities due in large part, it is claimed, to the distorted tax system (WB, 1998a). 

The fundamental constraints impeding the development of the sector stem from government policies that give preferential treatment to SOEs (WB, 1997). In terms of capital access, private enterprises are limited to borrowing 70% of their collateral value, usually in the form of land use rights. Meanwhile, SOEs hold most of the land but donot have to satisfy collateral requirements. The effect of this uneven economic environment is that SOEs have little incentive to improve their efficiency. Although the peasants show great adaptability and are easily moved by any impetus given them, most of them fear the risks of business development. Many private businesses prefer to keep a low profile as they think: "Being well-known results in more hassles from local officials" (VET, issue 60).

3.3.2. Weak product improvement and design

Art craft products must be competitive in cost, but the design component is very important. Household producers and contractors are generally not innovative in the style and design of products. 80% of embroidery enterprises in Van Lam village produce in orders directly by clients. Even the materials are imported. The process of finding out what customers will buy and then producing, promoting and distributing is lacking. A very limited number of producers are accessing new markets through design innovation. Lack of mobility and lack of access to relevant information means it is difficult for people to develop such marketing knowledge. 

Vietnam handicrafts are cheap, but if they are to become a significant sector in the future, increased emphasis will have to be given to quality and design.  However, this is one of the most difficult processes of marketing.

 

Chapter 4: Conclusions and recommendations

 

4.1. Conclusion

Understanding the history of SMVs foundation and development, its characteristics as well as the prospect of the SMVs in the RRD in economic development, the above analysis about the successes and failures of the sector could be summed up and illustrated in figure 4 below:

Figure 4 shows that basis production factors such as the people, capital, working condition, technology, infrastructure, etc. are important, but seems to be common with any other businesses, and thus, are not major constraints and decisive factors that can cause an SMV to win or lose in economic development. External factors are the most important factors in determining the prospects of SMVs. The segment of SMVs that is largest and hardest to develop needs to catch up with external dynamic processes, including changes in consumer tastes, income increases, introduction of new technology and substitute products. These processes of external pressures forcing change are moving with great speed in Vietnam.

Following the trend, some handcrafted goods are being replaced by industrial mass produced goods. It is extremely important for the villagers to minimize risks by adopting a variety of earning options, which shield against external forces over which they have no control. These options may be in different skills, or in different products, such as a variety of designs, or sales in different markets. Some products need only slight modifications, but others need fundamental improvements.

Advantages of the village should be exploited, like traditional skills, or local raw materials. In these cases, traditional products may be developed to new standards and designs to fit with new circumstances. For instance, rattan and bamboo basket making villages can turn to make decorative rattan and bamboo wares, such as rattan furniture, to avoid stagnation due to plastic wares competition.

Without valuable skills and resources, villagers may look to produce completely new products or components/intermediaries for major industries.

To reduce conflict between SMV products and the entire industrial economy, three types of products of SMVs do not generally face competition from large industry.

·          One, typified by artistic handicraft, is by and large independent of large industry. Its success depends upon the development of special human skills to meet individual demands.

·          The second type of SMVs in this category is that which works or can be channeled into working as a complement to large industry on which it depends for its inputs or market. They are semi-processed foods, semi-finished construction material, components of large industry products, and so on.

·          As for SMVs where there is a well-known special traditional production know-how, their products usually stay over time for its competitive secrecy and reputation.

As for the right-choice takers, entrepreneurships and their choices of operating mechanism is the key to success or fail.  Also, basic production inputs are always important to boost SMV' businesses. 

4.2.  Should the government help?

It is rather inappropriate to attempt to define a list of SMVs that should be promoted in rural areas, firstly because economic conditions and opportunities vary from place to place, and secondly because in a market economy, individual economic actors recognize and profit from the opportunities.

Some enterprises and producers have an awareness of their target market and pro-actively themselves by focusing on a market niche. However, in fact, most producers’ comprehension of markets, production techniques, and future trends has altered very little from the past. If the market for a product stagnates or declines, producers may still not see a need to change the product, production techniques, and method of sales or marketing. They may either return to agriculture or find irregular and unsustainable jobs like snail catching, etc. In fact, former markets that have disappeared will be difficult, if not impossible, to resuscitate. Other markets have appeared, but because they are unfamiliar, their demands and how to meet them have not yet filtered through to the SMV producers. To a large extent, such market constraints can be attributed to lack of market information, the poor linkages that exist between the small-scale industry in SMVs and the large industrial establishments. Thus, information and guidelines, targeted support and modifying the industrialization policies of the government can help farmers to find market niches, diversify products, improve quality, etc.  

Some SMV households return to agriculture due to weak management skills or business background, or shortage of start-up capital. The present rural industrial spectrum of Vietnam consists of a weak-linkage SMV sector, surviving on its own resources and efforts, and a fairly large and mostly state industry sector attracting the concern of all.  It is the government’s role to facilitate the enterpreneurial process by providing credit, infrastructure, and relevant training to all sectors. However, state-supporting policies should not make SMV enterprises passively rely on state help, thus not being able to operate effectively.

4.3. Recommendations

A strategic vision is needed for a macro economic management, especially industrialization policies, which should take advantage of the country comparative advantages and be able to carve the niches for SMV development.

Able to forecast the development trend of SMV production, the government may help farmers to find market niches, diversify products, improve quality, etc by sampling method. Examples and models as a guideline can be taken in certain families. The winners will have followers, and even the losers also help farmers not to have risk so costly. Also new-activity "start up" funds either for founders or followers are needed at this initial stage. Failure brings success, and this way can work effectively.

Important market information not only domestically but also internationally such as pricing,  consuming trend, export-import policies of Vietnam and the rest of the world should be publicized to the SMVs so that they could have a long strategy for their development. Besides organizing trade fairs where SMVs producers can exchange ideas and businesses, these information may come through the mass media as well as in the form of free newsletter, leaflets to this sector.

Government support and interventions such as creating an even playing field to all sectors, paying attention to human resource development, and so on, are also required. Unless the effort is put into developing human resource's knowledge and skills, the prosperity of the industry and the economy as a whole would be secured.

In short, SMVs count for a large proportion of Vietnam's economy and thus, should have great attention from the government as well as others to help them to be on the right tracks to development.