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 EVALUATION OF THE IMPACT OF PRIVATIZATION ON ENTERPRISE'S PEFORMANCE THE CASE OF VIETNAM A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOP.MENIECONOMICS BQ GiAO .l HQC KINH r{TP.HC, 11-IU\liEN r I /11tt a. NGUYEN TRONG HOAI Student : NGUYEN NGUYEN THUC OANH TRUONG D~l HOC I<INI-J TE TP.HCM CHUdNG TRINH HQt- 1 ~C 8AO T~O CAO HOC KINH Tl PHAT T~lt~ 1/I~T N•M. t-<ft L-\N (UEH-ISSl HOCHIMINH CITY, OCTOBER 2008 AN VAN CHAT LUONG download : add luanvanchat@agmail.co CERTIFICATION "I certify that the substance of this thesis has not already been submitted for any degree and has not been currently submitted for any other degree. I certify that to the best of my knowledge and help received in preparing this thesis and all sources used have been acknowledged in this thesis." NGUYEN NGUYEN THUC OANH Date: October, 2008 AN VAN CHAT LUONG download : add luanvanchat@agmail.c TABLE OF CONTENTS Table of Content.
v List of Abbreviations. vi List of Tables. vii List of Figures. vii CHAPTER ONE: INTRODUCTION .1 Background and problem statement .4 Research objectives and hypotheses .6 Research units and scope of data.
7 Structure of the study. 4 CHAPTER TWO: LITERATURE REVIEW .2 Privatization: history and definition .1 History of privatization term .4 Objectives of privatization programs .1 Fundamental economic theories. Principal-Agent Problem or Agency relationship. 19 UAN VAN CHAT LUONG download : add luanvanchat@agmail.com CHAPTER THREE: PRIVATIZATION PROCESS- THE CASE OF VIETNAM.1 "Equitization" terminology in Vietnam context .2 Major characteristics of Vietnam's equitization program .3 Empirical studies for Privatization in Vietnam.
28 CHAPTER FOUR: RESEARCH METHODOLOGY .1 Impact valuation methods .1 Description of data collection .2 Statistical data description. Structure of the sample. Size ofthe samples. 40 CHAPTER FIVE: DATA ANALYSIS AND FINDINGS .2 Results from the method of reflexive comparison .5 Employment and compensation.
55 ii UAN VAN CHAT LUONG download : add luanvanchat@agmail.6 Summary of impact valuation analyses .4 Summary of regressions analyses. 60 CHAPTER SIX: CONCLUSIONS AND POLICY IMPLICATIONS .1 Conclusions and policy implications from impact valuation .2 Conclusions and policy implications from OLS regressions. 73 lll UAN VAN CHAT LUONG download : add luanvanchat@agmail.com • ACKNOWLEDGMENTS These acknowledgments must begin with, and I cannot thank enough, Dr. Nguyen Trong Hoai, my supervisor, for scientific instructions and encouragements to undertake this project.
Behind my efforts are my parents, sister and husband whose daily patience, sympathies and encouragements were very essential. I wish to express my enormous love and appreciation to my parents who have tacitly and unconditionally created the best conditions for me and to my husband who has shared with me the highs and lows in preparation of the thesis. I am also grateful to several friends for providing the data as well as valuable ideas and comments. IV UAN VAN CHAT LUONG download : add luanvanchat@agmail.com ABSTRACT This paper studies impacts of equitization on firm operating performance in Vietnam.
By comparing financial results of 38 enterprises equitized in 2005 and early 2006 in pre and post privatization periods, the study has found dramatic increases in profitability and efficiency as well as sharp declines in leverage following equitization. Unexpectedly, gains in output growth and decreases in employments are statistically insignificant. Nevertheless, it is difficult to conclude that those improvements are sole impacts of equitization since the study is unable to control concurrent effects of structural reforms and economy-wide changes that are frequently encountered in the transition economies like Vietnam. Notwithstanding the vague answer on impacts of equitization, the author gives favors to equitization in the sense of creating incentives for managers, in tum, encouraging them to be more focused on improved profit and efficiency targets.
From multiple regression analyses, the study points out determinants of changes in profitability and leverage including listing status, firm size, directorship changes, and privatization modes. The OLS analyses lead to implications that the government should strengthen its managements over equitization process, impose mandatory requirements on getting listed after equitization, promote directorship replacements, reduce its holdings or shift the representative role of relevant authorities to State Capital Investment Corporation. v UAN VAN CHAT LUONG download : add luanvanchat@agmail.com ABBREVIATIONS BOD : Board of Directors CEO : Chief Executive Officer ClEM : Central Institute for Economic Management CPI : Consumer Price Index HASTC : Hanoi Securities Trading Center HOSE : Ho Chi Minh Stock Exchange IPO : Initial Public Offerings OLS : Ordinary Least Square SCIC : State Capital Investment Corporation SIP : Share Issuance Privatization SOE : State Owned Enterprise TVEs : Township and villages owned enterprises VND : Vietnam Currency vi UAN VAN CHAT LUONG download : add luanvanchat@agmail.com LIST OF TABLES Table 2.1: Various Privatization models .2: Summary of financial indicators used in MNR approach .1: Number of equitized firms and average ownership structure in 1992- 2006 .3: Summary ofthe hypotheses for impact valuation .1: Variables' definitions and their expected signs .2: Variables' definitions and their expected signs .4: Size of samples .7: Structure of Directors .1: Tests of predictions for profitability of equitized firms .2: Tests of predictions for output growth of equitized firms .3: Tests ofpredictions for efficiency ofequitized firms .4: Tests of predictions for leverage of equitized firms .5: Tests of predictions for employment and compensation of equitized firms. 59 LIST OF FIGURES Figure 2.1: Three layers of privatization definition .1: Structure of samples by sectors and regions .3: Roles of non-executive BoD members .39 vii UAN VAN CHAT LUONG download : add luanvanchat@agmail.com • CHAPTER ONE INTRODUCTION 1.
Background and problem statement Privatization has been widely promoted as a mean of restructuring the economy in both developed and developing countries from 1980s. The program has been launched under expectation to create long term benefits to both firm and entire economy levels. Over two decades since Thatcher's government first introduced modem policy of privatization have provided efficient time for researchers building up theoretical frameworks as well as empirical evidences for privatization outcomes. Nevertheless, nowadays, impacts of privatization remain one of the most controversial economic issues.
Recent reviews of impacts of privatization have shown the favor to privatization as an important tools to help allocate resources, restructure the economy and then facilitate the economic growth. In contrast, there are some authors pointing out some failure evidences and drastically criticizing methodologies employed to generate these conclusions. They argue that performance changes may be mixed effects of privatization and contemporaneous events including more macroeconomic stability, fiscal prudence, freer capital movements, promotion of competition and regulatory changes (Parker and Kirkpatrick, 2005). Following the international trend, Vietnam launched the privatization program m 1992 as a major part of State-Owned Enterprise (SOE) Reform Program.
Privatization program, called as "equitization" in Vietnam, is an interesting case when the state retains the voting control and holdings of insiders are fairly substantial. From theoretical point for view, performance of a privatized firm where the state remains the controlling role is not far different from that of a SOE (Boycko et al. Therefore, the program outcomes remain in question. Unfortunately, the equitization program has been executed for over ten years, though, till now there are a limited number of empirical studies to evaluate appropriately the consequences of the program except reports of ClEM (2002 and 2005) and Truong et al.
ClEM studies report improved firm's performance following equitization by using descriptive analysis on 256 equitized firms across Vietnam during 1992 and 2003. UAN VAN CHAT LUONG download : add luanvanchat@agmail.com However, the studies have not come to a clear conclusion that changes are the sole impact of equitization. Whereas, Truong et al. (2007) using data of 92 SOEs and 147 equitized firms in southern provinces indicate positive impacts of equitization on firm's operating performance.
By employing a hybrid methodology, the latter study not only controls concurrent effects of structural reforms but also points out determinants of performance changes which include firm size, ownership, listing status, location and corporate governance. However, because most of firms selected for studies of ClEM (2002 and 2005) and Truong et al. (2003 and 2007) had been equitized before 2003, they have brought the characteristics of the program in the early stage, which are small firm size, low state concentration and high participation of workers. These studies could be seriously suffered from endogenous bias as just firms, with profitable and growth potential, were selected to be equitized.
Therefore, their conclusions somewhat can not reflect the outcomes of whole equitization program in general and the latter stage, which is featured by larger firm size, high state concentration and high involvement of outsiders, in particular. For that reason, it is necessary to conduct a research with a different observation base in order to evaluate impact of equitization on SOEs participating in it during the accelerating stage in terms of operating performance. This study aims at investigating the effects of equitization on the performance of newly equitized companies in Vietnam regarding to profitability, efficiency, leverage, and employment and compensation. Research questions The questions will be answer in this study are ( 1) whether or not there is any positive impacts of equitization on the operational performance of newly equitized firms in Vietnam in the accelerating stage; and (2) What are the determinants of changes in equitized firm's operational performance? 1.
Research methodology Descriptive analysis, reflexive comparison and multiple regressions are three methods employed in this study. While the description is used to provide the structure of the database and describe the concern issues, reflexive comparison, which is widely known as an approach ofMeggison, Nash and Randenborgh (1994) (henceforth MNR), is to evaluate 2 UAN VAN CHAT LUONG download : add luanvanchat@agmail.com impacts of equitization on firm's operating performances. This method measures the effects of equitization by making subtraction of financial indicators between before and after equitization times of the program participants. In addition, to test the statistical significance of the differences in performance indicators between two periods, two tailed Wilcoxon signed rank test is applied.
Finally, we adopt multiple OLS regressions to test hypotheses on determinants of operational performance changes following equitization. Research objectives and hypotheses The major objectives of this study are (1) to assess the impact of equitization on the firm operating performance; and (2) to test determinants of performance changes following equitization. We examine firm's operational performance through five aspects which are profitability, efficiency, output growth rate, leverage and employment and compensation. The study has six hypotheses which are separated into two folds.
Firstly, for accessing impacts of equitization, there are four hypotheses as followed (1) It is expected that equitization will ead to improved profitability and efficiency; (2) Going along improved efficiency, equitization is expected to stimulate investments and therefore, new growth; (3) Debt level is projected to decline in response to equitiation; (4) Number of employees are also forecasted to decrease as the managers now shift from political or social goals to profit and efficiency maximization, which implies, in turn, an increase in employee's incomes; Secondly, followings are two hypotheses for identifying causal factors ofthe changes in firm's performance after equitization. (5) Profitability and efficiency: it is expected that listing status and directorate replacements have positive relationships with differences in profitability and efficiency while state ownership and firm size have negative effects after equitization. 3 UAN VAN CHAT LUONG download : add luanvanchat@agmail.com (6) Leverage: state ownership is projected to have positive impacts on leverage declines the post equitization period whereas listing status, directorship changes and the model of share issuance privatization are positive determinants. Research data The data are extracted from firm's IPO prospectuses and annual reports which are obtained by various ways.
Research units and scope of data This study only focuses on SOEs equitized in 2005 across Vietnam. However, the research unit has some restrictions due to limited data access.