VIETNAM NATIONAL UNIVERSITY, HANOI VIETNAM JAPAN UNIVERISTY HOANG VAN TRUNG THE RELATIONSHIP BETWEEN SMALL AND MEDIUM-SIZED ENTERPRISES’ CHARACTERISTICS AND THEIR INNOVATIVE CAPACITY: EVIDENCES FROM FIRMS IN QUANG NINH PROVINCE MASTER’S THESIS VIETNAM NATIONAL UNIVERSITY, HANOI VIETNAM JAPAN UNIVERISTY HOANG VAN TRUNG THE RELATIONSHIP BETWEEN SMALL AND MEDIUM-SIZED ENTERPRISES’ CHARACTERISTICS AND THEIR INNOVATIVE CAPACITY: EVIDENCES FROM FIRMS IN QUANG NINH PROVINCE MAJOR: PUBLIC POLICY CODE: 8340402.01 RESEARCH SUPERVISOR: Dr. VU HOANG LINH Hanoi, 2021 PLEDGE This Master thesis represents my own work in accordance with Vietnam National University regulations. All sources, both cited and paraphrased, are properly acknowledged throughout the thesis. All translations are mine or taken from a source is clearly identified in the main text and the references.
Student signature Student name July, 2021 ACKNOWLEDGMENT I would like to express my sincere gratitude to my supervisor Dr. Vu Hoang Linh. He has been accompanying me in each stage of the thesis, from discussing the right approach to commenting on the final draft. I also want to thank Vietanalytics and MASSEI, where I am currently affiliated with, for allowing me to access the DDCI Quang Ninh 2019 data for the purpose of academic research.
I really appreciated those informal discussions that I had with the directors of the companies. Those discussions have cumulated in the topic of this thesis. I owe a big thank to the Thesis Defense Committee Members, especially Dr. Nguyen Thuy Anh, Dr.
Dang Quang Vinh, and the Referees, for giving me lots of constructive comments and questions. Finally, I am thankful to the tremendous encouragements from my family, friends, and colleagues. They have been the reasons why I can work so persistently in completing the thesis. TABLE OF CONTENTS LIST OF TABLES.
i LIST OF FIGURES. ii LIST OF ABBREVIATION. iii CHAPTER 1 : INTRODUCTION.3 CHAPTER 2 : LITERATURE REVIEW. Innovation Value Chain.
Explanatory variables for SMEs’ innovation value chain in Quang Ninh. Continuous explanatory variables. The probit model .23 CHAPTER 4 : RESULTS AND FINDINGS. Relationship between firms’ characteristics and each phase of the IVC.
The relationship between firms’ characteristics and the overall IVC .29 CHAPTER 5 : DISCUSSIONS AND POLICY IMPLICATION. Limitation of the research .38 LIST OF AUTHOR’S PUBLICATION .41 LIST OF TABLES Table 3. The set of questions evaluating the IVC links in the DDCI Quang Ninh 2019 survey (Original Vietnamese - English translation). Descriptive statistics of the binary variables (%).
Descriptive statistics of the continuous variables. Estimation Results of Simple Probit Model and Marginal effects (ME). Estimation Results of the OLS model .30 i LIST OF FIGURES Figure 2. The Innovation Value Chain framework.
Distribution of the sample .23 ii LIST OF ABBREVIATION DDCI: District and Department Competitiveness Index GSO: General Statistics Office IVC: Innovation Value Chain PAPI: Provincial governance and Public administration performance Index PAR Index: Public Administration Reform Index PCI: Provincial Competitiveness Index SMEs: Small and Medium-sized Enterprises WB: World Bank WBES: World Bank Enterprise Survey iii CHAPTER 1 : INTRODUCTION 1. Context The World Bank’s “Vietnam 2035” report (WB, 2016) recommends that enhancing the capacity of the demand side of innovation, particularly for the private sector, is the key solution for Vietnam to develop an innovation-led economy. The rationale for this direction is that all efforts on science and technology development should be demand-pushed, otherwise, in the worst case, they would be costly and create worthless ventures. Therefore, to support innovative capacity of the businesses, the government should facilitate factors that will help them to be more adept at creating and absorbing innovation.
In general, Vietnamese enterprises, especially small and medium-sized enterprises (SMEs), are less innovative than expected at the country’s level of development (based on current GDP per capita)1 (WB, 2020). Although SMEs have been increasingly recognized as central contributors to the economy since they account for about 96% of Vietnamese firms and employ 47% of the labor force, they appear to be weaker in terms of innovation when compared with other types of enterprises. A World Bank Enterprise Survey between 2014 – 2016 (WBES, 2015) showed that Vietnamese SMEs’ involvement in innovation activities was quite common (53% carrying out at least one type of innovation), but most of them were not R&D-backed and relatively small in investment (median of investment is only 100 million VND). Most of their product innovation is of “frugal nature” and focuses only on minor adjustments of the existing products rather than creating entirely new products to the market (OECD, 2021).
This is understandable since most of the Vietnamese SMEs lack adequate resources and capacities to be able to conduct fundamental/radical innovation activities. However, the experiences of successful economies like Taiwan, Germany, and Singapore prove that SMEs can become the engine of national innovation and economic growth. The boom of high-tech sectors in the U. during the post-World War 1 There were also some selected countries including China, Indonesia, Thailand, Malaysia, Turkey for comparison.
1 II period can also be attributed to SMEs, and many of which have become global brands such as Google, Microsoft, Intel (Nguyen, et al. In recent years, the government of Vietnam has carried out many policy incentives to enhance national innovation, and SMEs, especially startups are increasingly receiving attention. The first law on supporting businesses, passed by Congress in 2017, was for SMEs and largely focused on startup businesses2. For SMEs that apply, operate, or develop high technologies, there are some types of incentives but mostly come in the form of preferential taxes (WB, 2020).
In addition, there are some specific national initiatives that are particularly aimed at startups like Project 844 from 2016 and Vietnam Silicon Valley from 2013. These projects represent the efforts to create linkages between innovators and investors, addressing the financial obstacles to innovative startups in Vietnam. Moreover, Project 844 by the Ministry of Science and Technology has involved a large number of provincial governments. This is the main initiative by the government to support the developing innovative startup ecosystem in Vietnam until 2025.
As for the role of provincial governments in improving the local business environment, Quang Ninh province has recently emerged as a role model in Vietnam. The province has been successful in keeping its leading positions in multiple sets of indexes that measure the effectiveness of the local authorities, such as the PCI (Provincial Competitiveness Index), PAPI (Provincial governance and Public administration performance Index), or PAR INDEX (Public Administration Reform Index), in four consecutive years. Moreover, the province is also famous for its fast- growing economy. From 2016 to 2020, its GRDP has been standing at over 10%3 per year; and its GDP per capita was 6,135 USD in 2019, roughly 3 times higher than that of an average Vietnamese.
Currently, Quang Ninh has become one of the major economic hubs in the North of Vietnam and will likely play more important roles in the upcoming years. 2 However, so far, there is no separate formal legal documents to support startup businesses since they are generally treated as a category of SMEs. 3 Despite severe impacts of the COVID-19 pandemic, in 2020, the growth rate was 10.05% 2 Having been committed to improving its business environment and enhancing the constructive roles of the local authorities in supporting local enterprises, in 2019 the provincial government continued to conduct the DDCI (District and Department Competitiveness Index) survey project. The main purpose was to evaluate the performance of the district and department authorities in the province in creating a more favorable environment for the local businesses.
In 2019, the survey included a set of questions that is based on the IVC framework (Innovation Value Chain) as the local government has begun to realize the importance of innovation to their economic development. So far, Quang Ninh is the only province in Vietnam that has successfully applied the IVC framework to assess the innovation capacity of firms. However, the data has only been analyzed at the district level for comparison and ranking among the local districts. No research has been conducted for the analysis at firm level.
This research takes advantages of the data and fills the gap of research. It aims at drawing more insights into factors that influence firms’ innovative capacity. The findings may inform policy makers on appropriate solutions to be more effective in their supporting policies. Enhancing innovative capacity for local businesses is crucial to sustain long-term economic growth in Quang Ninh province.
Given its huge potential, the local government can play an active role in promoting this trend. So far, its economy relied too much on the expansion of capital and labor factors, and the part of the total factor productivity was dwarf. To change its growth model, the local government needs to encourage and facilitate the rise of innovation in business sector. Within this context, this research explores the relationship between some characteristics of SMEs and their innovative capacity based on a broad IVC process.
In other words, it seeks to provide some insights into how some SMEs’ characteristics can influence their innovation value chain. Objectives This research aims at exploring the relationship between some characteristics of SMEs located in Quang Ninh province and their innovative capacity based on the IVC 3 framework. Specifically, we assess firms’ innovative capacity through the process of innovation rather than the output of the activity. The Innovation Value Chain framework provides the conceptual frameworks to assess firms’ innovative capacity.
The findings can help policy makers better understand the determinants of SMEs’ innovative capacity, so that they can find appropriate solutions to increase the effectiveness of their supporting policies. To achieve this, the research seeks to answer the question: What are the characteristics that influence SMEs innovative capacity based on the IVC framework? In detail, this study first reviews the main findings in the IVC and SMEs’ innovation literature. Next, based on the analysis of the data, it identifies what factors have impacts on the firms’ innovative capacity in Quang Ninh. If there are any, what impacts do they have on each stage of the IVC? Finally, from the findings, what are the policy implications for the province to enhance the innovative capacity of its SMEs? To answer the research questions, we deploy simple logit models to analyze each phase of the IVC.
The results may show the relationship between each characteristic of the SMEs and their innovative capacity: the probability of being strong or weak in each type of the capacity: (1) ability to source new ideas from different channels; (2) capability to translate the ideas into valuable products, services, or processes; and (3) ability to distribute and protect the innovative results. Next, we also run an OLS regression to investigate the impacts of the characteristics on SMEs’ overall IVC. The result may show a linear correlation between innovation capacity and each of the explanatory variables. Scope of research The unavailability of the data renders us unable to study SMEs’ innovative capacity in other provinces in Vietnam.
So far, Quang Ninh is the only province that has adapted the IVC framework-based questions in their DDCI survey. The content of the Quang Ninh DDCI survey has also been annually revised to meet its policy priorities; so at the time we begin this research, we only have the data from the DDCI survey in 2019. Therefore, we limit the scope of this research in Quang Ninh province. 4 Concerning the data, we combine two data sets: the DDCI Quang Ninh 2019 survey, and the Enterprise Survey in 2019 of the General Statistics Office (GSO) of Vietnam using firms’ Tax ID.
While both surveys provide information related annual revenue and investment in 2018, the DDCI Quang Ninh 2019 survey collects the other data at the time being: in July 2019. Therefore, the timescale of the data is between July 2018 and July 2019. 5 CHAPTER 2 : LITERATURE REVIEW 2.