BANKING ACADEMY FACULTY OF FINANCE BACHELOR THESIS TITLE: BUSINESS ENVIRONMENT AND FIRM PERFORMANCE: A STUDY ON LISTED COMPANIES IN VIETNAM Student: Tran Lan Nhi Class: K19 CLC TC-A Grade: 19 Student ID: 19A4000460 Lecturer: MSc. Le Quoc Tuan Hanoi, May 2020 Acknowledgement Foremost, I would like to give my special thanks to all professors of the Faculty of Finance for their passion and dedication to imparting knowledge and encouraging students. During my university years, I have acquired both professional knowledge and practical skills from their interesting lectures and helpful advice. Further, I would like to express my sincere gratitude to my advisor Prof.
Le Quoc Tuan for his continuous assistance and dedicated involvement throughout the thesis- writing process. Without his enthusiastic support and immense knowledge, this thesis would have never been accomplished. Pledge I hereby declare that I have read, understood, and complied with the Banking Academy regulations regarding plagiarism. I confirm that this thesis is the result of my personal research under the guidance of Prof.
Le Quoc Tuan. I have clearly stated the contributions and work of a third party in the citation references. Theoretical framework and literature review. The impact of business environment on firm performance.
12 Provincial Competitiveness Index (PCI). 12 Worldwide Governance Indicators (WGI). 15 Doing Business database from World Bank. Results and discussion.
26 Provincial Competitiveness Index (PCI). The role of CEO in current business environment. 48 List of tables and figures Table 1. PCI components description.
Institutional Quality components. Doing Business components description. Summary Statistics of key variables. Overall PCI and firm performance – Baseline regression.
PCI components and firm performance - Baseline regression. Institutional Quality and firm performance - Baseline regression. Institutional Quality components and firm performance - Baseline regression. Overall PCI & IQ and firm performance - Interaction term.
PCI components and firm performance - Interaction term. Institutional Quality components and firm performance-Interaction term 39 Table 13. Easy Business and firm performance - Interaction term. Easy Business components and firm performance - Baseline regression.
Easy Business components and firm performance - Interaction term. Overall PCI of Vietnam, 2011 - 2018. Average IQ index of some ASEAN countries, 2011 - 2018. Ease of doing business and ranking of ASEAN countries, 2018.
19 Abbreviations Abbreviation Meaning CEO Chief Executive Officer DB Doing Business FDI Foreign Direct Investment IQ Institutional Quality PCI Provincial Competitiveness Index ROA Return on Asset USAID United States Agency for International Development VCCI Vietnam Chamber of Commerce and Industry WGI Worldwide Governance Indicator Business environment of developing countries and firm performance – a study on listed companies in Vietnam Abstract Using a 5-year panel data of 291 listed companies operating in Vietnam, this research examines the relationship between the business environment and firm performance. Given the current business conditions in Vietnam that are measured by three different datasets (Provincial Competitiveness Index, Worldwide Governance Indicator, and Doing Business), the empirical results consistently suggest that the business environment is negatively associated with firm performance. In other words, firms may face several constraints in legal, finance and accessibility to resources that hinder their growth. Our further study indicates that experienced CEOs are more likely to help their firm overcome the difficulties of current business environment to achieve better financial performance compared to inexperienced ones.
These findings reveal the important role of the CEO in taking advantage of the current business conditions in Vietnam and provide important policy implications on how to improve the business environment for better performance of Vietnamese firms in the future. Key words: business environment, firm performance, CEO experience, listed companies, developing countries 1 1. Introduction The quality of institutions and governance has shaped the business environment that firms operate in, resulting in direct and indirect impacts on performance and growth both at the firm and aggregate levels (Shawn and Tran, 2017). Firms operating in a poor business environment are likely to deal with more administrative burdens, excessive regulations, as well as financial and legal constraints (Beck et al., 2005; Dollar et al.
These obstacles divert firm resources away from productive use toward non-productive use, leading to a waste of precious resources for development and reduction in overall firm performance. In contrast, a strong business environment characterized by sound policies and regulations, adequate infrastructure, and efficient resource allocation fosters firm performance and development. Thus, understanding the context in which firms develop is of great importance to examine the causes of economic growth. This issue is even more vital in developing countries, where the institutional environment is less developed (Nguyen et al, 2017).
In a transition economy such as Vietnam, the business environment is partially shaped by the market systems but remains mostly subject to actions of the government. As such, ambiguous regulations and weak formal institutions are likely to lead to uncertainties hindering private sector development. There is a growing strand of literature studying the effects of the business environment on firm performance, but few have examined this relationship in developing countries, especially in Vietnam. Using a firm-level database covering 54 countries, mostly are developed nations, Beck et al.
(2005) suggested that legal and corruption obstacles, particularly the amount of bribes paid, time spent with regulators, and corruption of bank officials adversely affected firm growth. Farole et al. (2017) focused on the ease of doing business (i. starting a business, dealing with construction permits, registering property, and enforcing contracts) in the regional business environment in a group of European countries.
Although these 2 studies provide insightful findings of the relationship between the business environment and firm performance, the authors often focus on a few specific aspects of the business environment, but not use a comprehensive set of measurements. Existing empirical evidence from Vietnam suggests that a better business environment, driven by a reduction in corruption levels, the risks of land expropriation, and entry regulations, increase firm productivity levels (Shawn and Tran, 2017). McCulloch et al. (2013) concluded that changes in the overall business environment and individual aspects of the business environment have an insignificant impact on firm investments, with the exception of the transparency measure.
Although researches in the scope of Vietnam do shed light on the reviewed topic, they mostly give attention to the impact of the local business environment on firm productivity and investment levels, neglecting the impact of business conditions on firm financial performance. Additionally, these researches devoted to using Provincial Competitiveness Index as an indicator of the business environment. This dataset provides a general view of the provincial business environment regarding economic governance and administrative procedures, but it might not present a comprehensive picture of the business environment, lacking the view on some institutional aspects. Furthermore, while some literature may concern that the impact of business conditions varies substantially across firms of different sizes or regions (Beck et al., 2005; Aterido et al., 2009; Choi et al.
There is a scarcity of literature that pays attention to the role of CEO in the current business environment. Few existing studies suggest that domestic CEOs perform better in improving firm performance, thanks to their better understanding of the local business environment (Selmer, 2004; Vo et al. While the experience of the CEO appears to be a key factor relating to his/her management ability and social network, the relationship between CEO experience and firm performance-business environment is often neglected. 3 This research contributes to the previous literature by examining the role of CEO in the current business conditions of Vietnam, especially CEO experience.
Because a CEO with more accumulated experience appears to have extensive knowledge about the business environment and sufficient skills to run a firm effectively. This research pays particular attention to the interaction of CEO experience and the business environment in hopes to reveal the important role of CEO in taking advantage of business conditions to accelerate firm performance. Moreover, to provide a better understanding of the impact of the provincial and national business environment on firm performance, this research exploits three comprehensive datasets covering an array of business environment dimensions, including the Provincial Competitiveness Index, Worldwide Governance Indicator, and Doing Business. This research uses a panel dataset of 291 listed companies from 2014 to 2018 and three different datasets (one of which is unique) that measure several dimensions of the business environment to explore firm performance in the business context of Vietnam.
The data is analyzed using the firm and year fixed-effects regression model and corrected by the clustered robust standard error. Results reveal that the current business environment in Vietnam does not reinforce firm performance, but rather adversely affect firm growth. Nevertheless, when introducing the interaction between the business environment and firm management, a contrastive finding reveals that firms led by experienced CEOs can take advantage of the weak business conditions in Vietnam to foster their firm performance. This finding can be potentially explained by the fact that, the accumulated experience of a CEO often comes along with his/her management ability and social network, which are key features that impact firm development.
The remainder of this paper is organized as follows. The next section considers the previous literature review on the topic. Section 3 provides descriptions of data and variables, while methodology and model specifications are depicted in Section 4. Section 5 reports the results and analysis, and Section 6 closes with conclusions.
Theoretical framework and literature review 2. Business environment Business environment is a broad concept that is hard to define precisely. In the broadest sense, business environment is the sum of all external and internal factors that directly or indirectly influence the production and business activities of enterprises. Jaunch and Glueck (1988) argued that business environment consisted of multiple layers.
The internal layer of the business environment includes a number of factors controlled by enterprises, such as capital, labor, information, ideas, land, equipment, and output decisions. Meanwhile, the external layer is related to broader conditions, such as industry-level, country-level, and region-level factors. This external level is the type of environment that businesses cannot control but can only respond or interact with. Businesses need to adapt their internal environmental components to seize opportunities as well as to face challenges from the external business environment.
The majority of current studies define the business environment as a group of external factors affecting enterprises. These factors are out of control and have a great influence on the operation of the business. Further broadening the concept of Wood (2000), a number of other authors divide environmental factors into 5 groups, including social, technological, economic, environmental, and political factors (STEEP) (Cartwright, 2002; Campbell et al. Among a variety of papers studying the business environment, Stern’s argument (2002) remains the most popular ones although it has a narrower approach.
Stern referred the concept “business environment” to the “policy, institutional, and behavioral environment, both present and expected, that influences the returns, and risks, associated with investment”. In other words, the business environment 5 includes three aspects, namely macroeconomic factors, governance, and infrastructure. The first aspect related to country-level issues, such as fiscal, monetary and exchange rate policies, clearly affects firm performance. For instance, a high tax rate would greatly reduce net income, leading to a lower profit margin and profitability ratio.
The second aspect covers institutions of economic governance and political stability. For example, administrative transparency is considered as an important determinant of firm performance (Collier, 2002) and a factor fostering corruption. Lack of transparency typically concerns that the uneven distribution of information would lead to uneven distribution of resources for different economic entities (Du and Mickiewicz, 2016). It may result in increases in the cost of acquiring information or failed accessibility to resources, which are constraints for business growth.
The last aspect mentions the foundation of basic infrastructures, such as power, transport, telecommunications, etc. Clearly, frequent power outage could prevent businesses from operating, resulting in late orders delivered or customer loss.