As Vietnam fights to beat back raging inflation, many of its small and mid-sized businesses – disadvantaged even in good times – are struggling to survive the battle.Just ask Ngo ThiBau, the general director of Nguyen Tam Foci Garment, which a Vietnamese consumer magazine for years dubbed one of Vietnam’s 100 strongest brands.This year, plunging revenue has led Bau to lay off 60 percent of her Ho Chi Minh City-based firm’s 400 workers. Her business has been battered by sharply higher consumer prices and the sky-high interest rates – up to 20 percent – that borrowers now face.“It’s impossible to make a profit in manufacturing,” says Bau.Small businesses matter; in the past decade they have become a key part of Vietnam’s economy. They account for 96 percent of all companies and account for 40 percent of gross domestic product, according to the Small and Medium Enterprises Association.Bau says sales at her garment business have cratered because people have skipped non-essentials as they have been forced to spend more on basic needs. Annual inflation in June was nearly 21 percent.In May and again in June, food costs surged nearly 30 percent from a year earlier, while transport was up about 20 percent. National retail sales were up a paltry 6.4 percent in the January to May period, discounting for inflation, state media reported. In 2010, full-year retail sales rose 24.5 percent. “We are in a tough situation, like others,” Bau says. “Many factories have closed down since earlier this year. My factory is running irregularly.”But the pain that Vietnam’s small and medium-sized enterprises (SMEs) are enduring runs deeper than this latest macroeconomic rough patch, with roots in policy shortcomings that experts say need to be addressed if the country is to shift to a more balanced and dynamic economic model.Vietnam’s reform drive has spawned hundreds of thousands of small and medium enterprises, whose association says these account for half of all non-farm jobs.But these firms are underdogs of the business world, third-class citizens behind state-owned and foreign invested firms, and they are bearing the brunt of inflation and tight monetary policy.For the past five years, the government has tried to create state-owned conglomerates similar to South Korea’s chaebols. These get preferential access to capital and have tight links to officials, valuable in Vietnam’s environment of vague regulations. Firms in which foreigners are investors generally are bigger, have higher profiles and get support from their embassies.Former central bank governor Cao Si Kiem believes a third of the workers at small enterprises could lose their jobs this year, at least temporarily. An ex-government adviser thinks 30 percent of such firms have stopped operating just this year.Vu Kim Hanh, the director of the Business Studies and Assistance Centre, Vietnam’s first privately run business promotion agency, says she has been shocked by the volume of complaints, even from companies that normally avoid making noise.Smaller businesses “are being ambushed from 10 sides”, she says.Last month a deputy director of a centre promoting small and medium-sized businesses at the state-backed Vietnam Chambers of Commerce and Industry challenged a conference room full of company bosses to climb the value chain, but was swiftly reminded why that isn’t happening.“Why don’t we make photocopy machine parts with higher profits instead of competing in the production of dustbins?” DinhManh Hung asked. A retort rocketed back. “We don’t have money to buy technology,” said Nguyen Van Nghi, the director of an iron casting and machinery company.A recent Ministry of Planning and Investment survey reported that only a third of SMEs, were able to access bank credit while three quarters wished to. “SMEs are stuck,” said Pham Thi Thu Hang, the director of the SME promotion centre. “They cannot grow beyond their small size due to lack of credit and technology.”In many countries, smaller businesses drive innovation in sectors like hi-tech and biotech and are supported by institutions, from incubators and banks dedicated to helping them to clear bankruptcy laws and strong industry associations.Vietnam has almost none of these, experts say. Its small companies are chronically underfunded and undersupported, with industrial policy favouring large firms usually linked to the state.The smaller businesses “are generally in sectors with very small margins and very low tech. So, where are those businesses that are going to start moving into higher value-added, more sophisticated products and services?” says Jonathan Pincus, the dean of the Fulbright Economics Teaching Programme in Ho Chi Minh City.“Those are bigger companies, but to get big is very difficult here. If you want to get into sectors where the margins are a bit bigger it’s quite difficult for these little firms to both get the capital and then also to fend off the incumbents.”Vietnam’s biggest firms are state-owned or otherwise close to the government and benefit from those connections, Pincus saysMarco Breu, the managing partner of McKinsey & Company’s fast-growing Vietnam office, says the “low hanging fruit” that has fuelled Vietnam’s growth in the reform era has mostly gone.The government’s new challenge is to do more to foster SMEs as it tries to reposition the economy.“If you look at Thailand, Indonesia and some of the other Association of Southeast Asian Nations (Asean) markets, they have all successfully established institutions and opportunities that are helpful to the SMEs,” Breu says.“To be competitive, Vietnam needs to take up the challenge of creating a dynamic SME sector.”Vietnam’s macroeconomic woes are only making matters worse.Inflation has soared, hitting an annual rate of 19.8 percent in May, and is likely to rise. The government has responded aggressively, cranking up interest rates by hundreds of basis points and ordering banks to slow credit growth. The net effect on inflation so far has been very limited, creating a kind of worst case scenario for companies struggling to cope with high inflation and high interest rates.Even small companies that could get bank credit might not dare.“Taking bank loans is like drinking poison for SMEs,” says Kiem, the former central bank governor who is chairman of the Small and Medium Enterprises Association.Only companies that could not afford a fine for breaking contracts have been borrowing.The government has offered some support, and some business owners find encouragement in a debate over the favoured position of state-owned enterprises.But the effects are likely to be minimal. Finance Minister Vu Van Ninh has said that small enterprises and state enterprises have a level playing field.To help her garment business, Bau hopes the government will delay collection of compulsory employee insurance payments, which add up to 28 percent of wages a month.In April Vietnam agreed to delay collection of income tax for private companies, but Kiem said that was more of a “morale booster” than a move with real impact.