UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM – THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS INNOVATION AND PRODUCTIVITY IN SMALL AND MEDIUM ENTERPRISES: A CASE STUDY OF VIETNAM By PHAM DO TUONG VY MASTER OF ART IN DEVELOPMENT ECONOMICS HCMC, NOVEMBER 2016 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com University of Economics International Institute of Social Study Ho Chi Minh City The Hague Vietnam The Netherlands VIETNAM – THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS INNOVATION AND PRODUCTIVITY IN SMALL AND MEDIUM ENTERPRISES: A CASE STUDY OF VIETNAM by Pham Do Tuong Vy A Thesis Submitted in Partial Fulfilment of the Requirements for the Degree of Master of Art in Development Economics Academic Supervisor: Dr. Vo Hong Duc HCMC, NOVEMBER 2016 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com DECLARATION I hereby declare that this thesis entitled “Innovation and Productivity in Small and Medium sized Enterprises: A case study of Vietnam”, which is written and submitted by me in accordance with the requirement for the degree of Master of Art in Development Economics to the Vietnam – The Netherlands Programme. This is my original work and all sources of knowledge carried in this thesis have been duly acknowledged. HCMC, November 2016 PHẠM ĐỖ TƯỜNG VY LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ACKNOWLEDGEMENT I would like to take this opportunity to express my deepest gratitude for the help, support and encouragement of the following people, who have contributed to the completion of this thesis in their very own ways.
Above all, I would like to express my immeasurable appreciation to my supervisor – Dr. Võ Hồng Đức for his precious time, support and advices to make this thesis completed. Furthermore, I would like to send my great thanks to all the lecturers and staffs at the Vietnam – The Netherlands Programme for their knowledge and supports during my time joining in the program. In specific, I am extremely grateful to Dr.
Phạm Khánh Nam and Dr. Trương Đăng Thụy for their valuable guidance and support in the courses and thesis writing process. To all of my friends in Class 21 and my colleagues at TPF, I could never thankful enough for your encouragement and support until the very end of this thesis. Last but not least, my deepest thanks and love to my parents, who have always been beside me.
Without their unconditional love, none of this would have been possible. LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ABBREVIATION 2SLS Two Stage Least Squares. CDM Crépon, Duguet and Mairesse. FE Fixed Effect.
GMM Generalized Method of Moments. GSO General Statistic Office. IV Instrument Variables. LP Levinsohn and Petrin.
OLS Ordinary Least Squares. OP Olley and Parker. R&D Research and Development. SMEs Small and Medium-sized Enterprises.
TFP Total Factor Productivity. LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ABSTRACT The majority of enterprises in Vietnam is categorized as small and medium sized (SMEs) firms which play an important role to the sustainable growth of the Vietnamese economy. As such, improving the productivity of the SMEs is essentially needed and this request becomes a crucial mission for the governments. It is generally accepted that innovation and technology improvement are key drivers of productivity (Bartelsman & Doms, 2000).
However, they have not been well-acknowledged by the SMEs in Vietnam even though their huge contribution to firm’s productivity is unarguable. This study aims to examine the relationship between innovation and productivity in the Small and Medium-sized Enterprises (SMEs) in Vietnam. To establish and quantify this relationship, this study employs the two-stage process: (i) the estimation of total factor productivity for each firm; and (ii) a determination of an innovation – productivity relationship. In the first stage, total factor productivity is estimated based on production function using the input and output approach.
However, firms might adjust their input level according to expected productivity shock. As such, a potential endogeneity caused by possible relationship between input decision and productivity shocks (unobserved productivity shock) might exist. To deal with this problem of endogeneity, an approach developed by Levinsohn and Petrin is applied to estimate firm’s total productivity. In the second stage, the system- GMM approach is adopted to examine the relationship between innovation and productivity.
An unbalanced panel dataset from five Small and Medium-sized Enterprises surveys from 2005 to 2013 is used in this study. Findings from this study indicate that, in the context of Vietnam, when innovation is measured as innovation expenditure intensity and high-quality labor share in total firm’s labor force, innovation activities provide positive and significant impact on firm’s productivity. In addition, past value of firm’s productivity also has significant relationship with its current level. This finding implies that higher (lower) level of current productivity LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com could lead to higher (lower) level of productivity in the future.
The study also provides empirical evidence to confirm that larger firms might perform better than the relatively smaller firms. In contrast, capital structure provides negative impact on firm’s productivity. However, this study fails to provide any evidence to support the view that longevity of firm does provide significant impact on productivity of firms. Key words: Vietnam SMEs; Total factor productivity; Productivity Shock; Innovation, GMM.
LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com TABLE OF CONTENTS CHAPTER 1. Research scope and data. The structure of this study. Schumpeter Theory of Innovation – How does Innovation play its role in economic development?.
Productivity: concept and measurements. General productivity determinants. Innovation: concept and measurements. How has the relationship between innovation and firms’ performance been analysed in the literature?.
An overview of Vietnamese Small and Medium-sized Enterprises. Research hypotheses and concept measurements. Concept and variable measurements .34 LUAN VAN CHAT LUONG download : add luanvanchat@agmail. Total Factor Productivity of Vietnamese SMEs.
Total factor productivity from production function estimation of Vietnamese SMEs. Innovation – Firm’s productivity relationship. The relationship between innovation expenditure intensity and firm’s productivity. The relationship between high-quality labor share in total firm’s labor force and their productivity .52 CONCLUSION AND POLICY IMPLICATION.
Limitation and potential future research .56 APPENDIX 1: Empirical studies on general productivity determinants .62 APPENDIX 2: Empirical studies on relationship between innovation and firm’s performance .65 APPENDIX 3: Durbin – Wu Hausman test for endogeneity .69 APPENDIX 4: Durbin – Wu Hausman test for endogeneity .71 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com LIST OF TABLES AND FIGURES Table 3.1: Classification of SMEs in Vietnam Table 3.2: Concepts and measurements of variables used in the study Table 3.3: Number of observation in selected industries in dataset Table 3.4: Number of observation after filtering Table 3.5: Number of observation after filtering in stage 2 Table 4.1: Descriptive statistics of production function variables Table 4.2: Comparison of OLS, Fixed Effect and LP estimators in Foods, Woods and Rubber and Plastics Table 4.3: Comparison of OLS, Fixed Effect and LP estimators in Non-metallic mineral, Fabricated metal and Furniture Table 4.4: Descriptive statistics of TFP and its determinants Table 4.5: Regression results of innovation expenditure intensity and firm’s productivity Table 4.6: Regression results of high-quality labor share in total labor force and firm’s productivity Figure 3.1: Number of enterprises at 31/12 (by size of employees) Figure 3.2: Conceptual framework LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com CHAPTER 1 INTRODUCTION This chapter introduces the research topic and presents research objectives, research questions and motivation. Research scope and data requirement also are discussed in this chapter. Problem statement In line with Decree No. 56/2009/ND-CP regarding assistances for the development of small and medium – sized enterprises (SMEs) in Vietnam, the SMEs defined as firms with total employee between 10 and 300, and total equity less than 100 billion dong.
Following these criterion, up to Mar 2015, total SMEs in Vietnam account for over 90% of all enterprises. These firms have created more than half a billion of jobs every year. These firms also contribute appropriately 40% overall GDP. SMEs play an important role to the sustainable growth of the economy.
Improving the productivity of SMEs is essentially and urgently needed and this need becomes a crucial mission of the Vietnamese Government because the growth of the economy depends significantly on the productivity of firms in the economy. Key drivers of firm’s productivity are innovation and technology improvement (Bartelsman & Doms, 2000). However SMEs in Vietnam have still struggled in their operations and therefore lead to inefficiency. One of the obstacles facing SMEs in Vietnam is the process of acknowledging the important role of creating innovation and applying new technology in production to increase their productivity.
Innovation has not attracted great attention from the SMEs themselves even though huge contribution to firms’ productivity is widely confirmed. The common measurement for innovation in empirical studies is R&D expenditure of a particular firm. Various empirical studies have been conducted to quantify the relationship between R&D expenditure and firm’s performance. 1 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Conclusions vary from these studies including strong correlation between the two (Siedschlag, Zhang and Cahill (2010); Belderbos, Carree and Lokshin (2004); Crespi and Pianta (2009)).
However, in the Vietnamese context, small and medium-sized firms have not widely reported their spending on research and development activities. In addition, innovation activities of SMEs is less formal and involved in many different exercises as compared with larger firms. As such, research on the impact of innovation on SMEs productivity faces many obstacles in the Vietnamese context. A lack of interest in relation to the relationship between innovation and SMEs productivity in Vietnam has opened up the interest of deep investigation.
It is especially essential in the context of the economy dominated by SMEs and technology level is still low. Therefore gaining further knowledge in this field is needed for policy makers to orient the development creation and application of innovative activities toward the growth of firms as well as country. Research objectives This study is conducted to provide an additional evidence on the relationship between innovation and firms’ productivity for the Vietnamese SMEs. The main objective of this study can be summarized as Defining and quantifying the relationship between innovation and productivity in firm level in the context of Vietnamese SMEs.
Research questions The study aims to provide empirical evidence for the main questions emerged: Is there any relationship between innovation and productivity in the context of SMEs in Vietnam? If yes, then how does innovation can affect SMEs productivity? 1. Research motivations This study aims to provide the closer look at the Vietnamese SMEs’ productivity using the approach of Levinsohn and Petrin (2003), how it could be changed due to changes in the level of innovation making. Despite the fact that innovation play a crucial role in the development, the outcome of innovation activities are uncertainty. We do not know beforehand whether these activities would success 2 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com in creating value added to the firms.
Research results provide policy makers some evidences on how to appropriately allocate the available resources to obtain the target productivity. This topic is interesting in the context of developing countries such as Vietnam for two reasons as suggested by Indjikian and Siegel (2005). Firstly the benefit of innovation might not be fully exploited in developing countries. Secondly, in these countries, national resources allocated to creating new innovation still are restricted despite the fact that innovation plays an important role in global growth.
Research scope and data The study aims to determine the relationship between innovation and productivity in Vietnam SMEs from 2005 to 2013 in six selected industries include: (1) foods; (2) wood and wood-related products; (3) rubber and plastic products; (4) non-metallic mineral products; (5) fabricated metal products and (6) furniture.