UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS DETERMINANTS UNDERLYING INCIDENCE AND AMOUNT OF BRIBERY: AN EVIDENCE FROM MANUFACTURING FIRMS IN VIETNAM BY VU THI THUONG MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, November 2015 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS DETERMINANTS UNDERLYING INCIDENCE AND AMOUNT OF BRIBERY: AN EVIDENCE FROM MANUFACTURING FIRMS IN VIETNAM A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By VU THI THUONG Academic Supervisor: DR. LE VAN CHON HO CHI MINH CITY, November 2015 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Declaration “I declare that this thesis entitled “Factors influencing the propensity to bribe and size of bribe payments: evidence from manufacturing firms in Vietnam”, which is submitted by me in fulfillment of the requirements for the degree of Master of Arts in Development Economics to the Vietnam – The Netherlands Programme (VNP). The thesis was done only my original work and under the guidance of my supervision and acknowledgement has been made in the text to all materials used.” Vu Thi Thuong LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Acknowledgments This thesis could not have been completed without the support and encouragement that I have received from many people. First of all, I would like to express my deepest gratitude to my advisor, Dr.
Le Van Chon for his enthusiastic guidance and mentorship. He has oriented and supported me to break a deadlock in times of finding new ideas for a new topic. He also always listens to my ideas and discussions with me to figure out the way to solve problems. Moreover, he provided me with essential skills for doing research, especially the skills of using econometric tools.
Besides, I truly appreciate the time he devotes to this thesis to carefully review my final thesis draft and help me rearrange thesis structure reasonably as well as correct errors and inappropriate words usages. It must take me a longer time to complete this project without his invaluable sources of help. From my sincere heart, I would like to thank all lecturers in VNP who equipped me with useful knowledge to conduct this thesis as well as to serve my job in the future. Especially, I would like to express my special thanks to Prof.
Nguyen Trong Hoai, Dr. Pham Khanh Nam and Dr. Truong Dang Thuy who always travel with me during the two years of my Master program, share their practical profound insights and inspire the love of scientific research. Next, I would also like to thank all my friends here at VNP, especially Vu Thi Khanh, Le Huu Nhat Quang for their enthusiasm of sharing data processing techniques with me; Bui Minh Khoi, Nguyen Huong Nguyen for their spiritual encouragement during these stressful and difficult moment.
I also want to say thanks to VNP officers for their restless assistance. I would like to express my special thanks to Da Nang University Campus in Kon Tum who has given me advantages to accomplish my Master program. I also want to thank my colleague – Nguyen Thi Phuong Thao for her great support me during my writing of this thesis. I am deeply and forever indebted to my parents and my sister for their love, support and encouragement throughout my entire life.
LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Abbreviations CIEM Central Institute for Economic Management CPI Corruption Perceptions Index OLS Ordinary Least Squares PCI Provincial Competitiveness Index SMEs Small and medium enterprises TI Transparency International WB The World Bank UNDP United Nations Development Programme LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Abstract Using a panel data set from the Small and Medium Enterprise (SME) Surveys from 2005 - 2013, this study investigates the factors which influence the incidence of bribery and the size of bribe payment among formal and informal firms in Vietnam. Due to censored nature of the data on bribes and sample selection bias, this paper applies Heckman two - step procedure which was proposed by Heckman (1979) to correct these problems. This study finds strong evidence that the propensity to bribe as well as the variation in the amount of bribe is highly positively correlated with the interaction level with public officials, the firm‟s ability to pay and the burden of regulation that firms face. In this paper, the interaction with public officials is looked at different types of interaction.
Besides, this study also points out that company without official business registration licenses are more likely to avoid paying the informal costs. These results are robust when the lagged values of profit are used as instruments for profit. Keywords: firms, bribery, Vietnam. LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Table of contents Chapter 1: Introduction .4 The scope of the study .5 The structure of the study.
4 Chapter 2: Literature review .1 The definition of corruption .2 The Forms of Corruption .1 Factors influencing the propensity to bribe .2 How much must graft-paying firms pay? .3 Basic framework to estimate the incidence and level of bribe. 18 Chapter 3: Corruption in Vietnam. 20 Chapter 4: Data and Econometric Model .2 Descriptive statistical analyses. 33 Chapter 5: Empirical results .1 Factors influencing the propensity to bribe .2 Factors influencing the size of bribe payment.
47 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.3 Limitations and further research .2 Directions for further studies. 55 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com List of tables Table 2. 1: Definitions of corrupt activities. 2: Summary of features of measures of corruption.
1: Vietnam‟s annual CPI result. 2: Average cost of bribes paid, by sector. 1: Panel data structure. 3: The descriptive statistics of the size of bribe payment by location.
4: The descriptive statistics of the size of bribe payment by the legal ownership form and sector. 5: The purpose of bribe payment. 6: The summary statistics of key variables. 8: The Expected Variables in Heckman two step.
1: Heckman two-step regression analyses the incidence of bribery and bribe amount. 2: Heckman two-step regression analyses the incidence of bribery and bribe amount, using instrument variable. 44 List of figures Figure 3. 1 The most serious Economic & Social Issues for Vietnam.
2 Perceptions of the prevalence of corruption across sectors. 3 Key Indicators of Informal Charges (2006 to 2014). 4 The purpose of bribe payment. 5 Awareness about the government's anti-corruption efforts.
6 Willingness to report an incident of corruption (Southeast Asia). 25 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com List of appendix Appendix 1: Heckman two-step regression on the incidence of bribery and the size of bribe. 55 Appendix 2: Heckman two-step regression on the incidence of bribery and the size of bribe (corrects errors for heteroscedasticity). 57 Appendix 3: Heckman two-step regression on the incidence of bribery and the size of bribe (using instrument variable).
59 Appendix 4: Heckman two-step regression on the incidence of bribery and the size of bribe (correct heteroscedasticity and using instrument variable). 61 Appendix 5: Heteroskedasticity test using Breusch-Pagan / Cook-Weisberg - the Heckman two-stage model. 63 Appendix 6: Heteroskedasticity test using Breusch-Pagan / Cook-Weisberg - the Heckman two-stage model when using instrument variable. 63 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Chapter 1: Introduction 1.1 Problem statement Corruption occurs in both developed and developing countries with various degrees and has impacted on almost all parts of society (Lawal, 2007; Rohwer, 2009).
Amundsen (1999) described corruption as “a disease, a cancer that eats into the cultural, political and economic fabric of society, and destroys the functioning of vital organs”. Besides, World Bank (2009) identified corruption as “among the greatest obstacles to economic and social development”. In Vietnam, this problem is seriously alarmed for the government‟s failure to reduce corruption over past years. In particular, the Corruption Perceptions Index (CPI) 2014, conducted by Transparency International ranked Vietnam at 119 out of 175 in global and at 18 out of 28 in the Asia Pacific region.
It is worthy to note that Vietnam‟s CPI score is unchanged in three consecutive years from 2012 to 2014 whereas a positive change was recorded in neighboring countries. Besides, according to a report of Provincial Competitiveness Index (PCI) 2014, Vietnam witnessed a significant decline in controlling informal cost that firms have to pay for running a business smoothly. More specially, the proportion of companies paying bribe jumped from 41% in 2013 to 66% in 2014. 10% of firms showed that more than 10% of their revenue spent on bribes.
These pieces of evidence reflect the seriousness of corruption in Vietnam despite the effort of reducing it over the past years. A massive body of academic research on corruption in the past decade divided into two segments: the determinants of corruption and the effect of corruption on growth 1. Regarding the determinants of corruption, some typical studies include Ades and Di Tella (1997, 1999), Svensson (2000), Persson, Tabellini, and Trebbi (2003). Related to the effect of corruption, a list of study can be seen Mauro (1995), Wei (1997) and Johnson et al.
Except for few studies, most of preceding studies share three common features. First, these studies have primarily based on cross-country analyses. Second, they use perceptive data rather than quantitative data due to the higher cost of collecting the later 1 For a review and summary, refer to Bardhan (1997), Jain (2001), Reinikka, Svensson (2002) and Aidt (2003) 1 LUAN VAN CHAT LUONG download : add luanvanchat@agmail. Third, the interpretation of corruption was based on a function of macro-factors such as countries‟ policy or institutional environment.
This branch of the literature with above-mentioned characteristics such as Kaufmann and Wei (1998) and Hellman et al. Kaufmann and Wei (1998) examined the nexus between informal cost in the form of time spent by managers with bureaucrats and cost of capital. To do this, they employed the firm-level data from three different surveys covered around 48 - 73 countries. In this study, information about corruption is based on perception indices constructed from questions related to country characteristics.
Also, Hellman et al. (2000) used a sample of 3300 firms in 20 countries that were obtained jointly by the World Bank and the Office of the Chief Economist in 1999. They explained the validation of corruption based on the function of the political- institutional environment, including protection of property rights and civil liberties. These existing pieces of literature have provided important knowledge about the aggregate determinants of corruption.
However, the interpretation based on cross-country analyzes as well as using perceptive data caused some drawbacks. Firstly, the exploiting perception data on corruption can suffer from bias. In particular, certain studies suggest that small firms are more likely to perceive their environment to be more corrupt than their counterparts (Batra, Kaufmann, & Stone, 2003; Bennedsen et al. Similarly, more productive companies tend to complain about their business environment more than less productive companies do (Malomo, 2013).
Secondly, macro- determinant of corruption constrains the interpretation of variation in corruption within the country. In the other word, country-level research cannot explain the variation of the level of corruption across firms within a country (Svensson, 2002). To avoid these problems, Svensson (2003) exploited the quantitative data on corruption, derived from the Uganda enterprise survey in 1998 which was designed to represent the population of private enterprises, operating in manufacturing and processing sectors. However, there are two striking features in such data set.
Firstly, not all firms in the sample reported that they need to pay the informal cost.