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 INNOVATION AND PRODUCTIVITY OF VIETNAMESE SMALL AND MEDIUM ENTERPRISES FIRM LEVEL PANEL DATA EVIDENCE BY HO THI MAI ANH MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, December 2013 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 INNOVATION AND PRODUCTIVITY OF VIETNAMESE SMALL AND MEDIUM ENTERPRISES FIRM LEVEL PANEL DATA EVIDENCE A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By HO THI MAI ANH Academic Supervisor: Dr. PHAM DINH LONG HO CHI MINH CITY, December 2013 DECLARATION This is to certify that this thesis entitled “Innovation and Productivity of Vietnamese Small and Medium Enterprises: firm level panel data evidence” which is submitted in fulfillment of the requirements for the degree of Master of Art in Development Economic to the Vietnam – The Netherlands Programme. The thesis constitutes only my original work and due supervision and acknowledgement have been made in the text to all material used. CERTIFICATION ii | P a g e ACKNOWLEDGEMENT Above all, I would like to thank and gratefully express the special appreciation to my supervisor - Dr.
Pham Dinh Long for all of his guidance, useful recommendations and valuable comments. I could not be able to complete this thesis without his help and support. I would like to acknowledge the great works from the Vietnam – The Netherlands Programme team, especially all of lecturers who have put their enthusiastic into the lectures for students. Personally, I would like to thank Dr.
Truong Dang Thuy and Dr. Pham Khanh Nam, who have greatly supported me in the courses and in thesis writing process. Special thanks go to my family, friends and colleagues for their motivation and encouragement during my study in this program. iii | P a g e ABBREVIATIONS SME Small and Medium Enterprise CDM Crepon Duguet Model CIEM Central Institute of Economic Management FE Fixed effect model GDP Gross Domestic Products GSO General Statistics Office of Vietnam HCMC Ho Chi Minh City ISIC International Standard Industrial Classification ILSSA Institute of Labor Science and Social Affairs MFP Multi Factor Productivity OECD Organization for Economic Co-operation and Development R&D Research & Development RE Random effect model SFA Stochastic frontier analysis TFP Total Factor Productivity WTO World Trade Organization iv | P a g e ABSTRACT Innovation is considered an essential factor for motivating the productivity of nations and firms.
Innovation and productivity are connected by multidimensional relationships and investigated in many countries. However, there is very limited research in this field for Viet Nam. This paper examines the relationship between innovation and productivity of Small and Medium Enterprises (SMEs) by using Viet Nam SMEs survey balanced panel data in 2007 and 2009. Cobb-Douglas production function and the fixed effect model are employed throughout the thesis.
The author has found that the presence of innovation has positive effects on a manufacturing firm’s productivity. In addition, this study also looks at the impact of firm size, firm location and manufacturing sector on the relationship between innovation and SMEs’ productivity. Key words: innovation, productivity, SMEs Viet Nam v|P a g e TABLE OF CONTENTS LIST OF TABLES. VIII LIST OF FIGURES.
IX CHAPTER 1 INTRODUCTION .4 SCOPE OF THE STUDY .5 STRUCTURE OF THE STUDY. 3 CHAPTER 2 LITERATURE REVIEW .1 PRODUCTIVITY: CONCEPTS AND MEASUREMENTS .2 INNOVATION: CONCEPTS AND MEASUREMENTS .3 RELATIONSHIP OF INNOVATION AND PRODUCTIVITY .3 EMPIRICAL REVIEW OF INNOVATION AND PRODUCTIVITY RELATIONSHIP .4 DETERMINANTS OF THE INNOVATION IMPACT.5 INNOVATION AND FIRM PRODUCTIVITY IN VIET NAM. 16 CHAPTER 3 RESEARCH METHODOLOGY AND DATA .1 AN OVERVIEW OF SMES IN VIET NAM .2 CONCEPTUAL FRAMEWORK AND MODEL SPECIFICATION .4 DEFINITIONS OF VARIABLES AND CONCEPTS .1 RANDOM EFFECT REGRESSION MODEL (RE).2 FIXED EFFECT REGRESSION MODEL .3 SELECTION BETWEEN RE AND FE MODEL BY HAUSMAN TEST .7 MEASUREMENTS OF VARIABLES. 31 CHAPTER 4 DATA ANALYSIS.
41 vi | P a g e CHAPTER 5 CONCLUSIONS .1 CONCLUSION AND POLICY IMPLICATION .2 RESEARCH LIMITATION AND FUTURE STUDY. 46 APPENDIX A:DESCRIPTION OF DATASET. 49 APPENDIX B: REGRESSION RESULTS. 50 APPENDIX C: HAUSMAN TEST RESULTS.
54 APPENDIX D: INDUSTRY CLASSIFICATION. 57 APPENDIX E - EMPIRICAL STUDIES ON RELATIONSHIP BETWEEN INNOVATION AND PRODUCTIVITY. 58 vii | P a g e LIST OF TABLES Table 1: Summary of main definitions of SME in selected economies .17 Table 2: Number of Enterprises by Sector 2006 – 2011 .19 Table 3: Labor Productivity by Firm size and Location .20 Table 4: Labor Productivity by Sector .20 Table 5: Innovation Rates in Manufacturing SMEs .21 Table 6: Diversification and Innovation Rates (%) .22 Table 7: Diversification and Innovation Rates, by Sector (%).22 Table 8: Definitions & Measurement of Variables and Expected Sign of Coefficients .27 Table 9: Descriptive Statistic of Variables .34 Table 10: Regression results.36 Table 11: Hausman Test Results .37 Table 12: Regression results with regards to employee size .37 Table 13: Regression results with regards to employee size - 2 groups.38 Table 14: Regression results with regards to firm location .38 Table 15: Regression results with regards to firm location - 2 groups.39 Table 16: Regression results with regards to manufacturing sector .40 Table 17: Regression results with regards to manufacturing sector- 2 groups .40 viii | P a g e LIST OF FIGURES Figure 1: Production Frontier And Technical Change .5 Figure 2: Process of Innovation .7 Figure 3: Crepon Duguet and Mairesse Model - CDM Model .10 Figure 4: Number of Enterprises by Size of Employees 2006 - 2011 .18 Figure 5: Conceptual Framework .23 Figure 6: Shares of enterprises by provinces .32 Figure 7: Numbers of enterprises by industries .33 ix | P a g e CHAPTER 1 INTRODUCTION This chapter introduces the research topic, problem statement, research objectives and research questions. It also summarizes the research scope and data, and then ends with the thesis structure.1 PROBLEM STATEMENT Small medium enterprises (SMEs) have played an important role in economic development.
They are also an essential source of job creation, innovation, increasing the competitiveness and thus the engine of developed and developing countries (Europeia 2005). In Viet Nam, with more than 300,000 registered enterprises (General Statistics Office - 2011), SMEs play a crucial role in the economy reform, not only representing the major percentage (97,6%) of businesses of the country, but also significantly contributing to Gross Domestic Product (GDP) and achieving sustainable economic development. How could we motivate the development of this sector by enhancing SME’s performance? Within a firm’s scale, it is important to foster its operational efficiency and productivity for increased competitiveness in the global market. Innovation was found to be essential for increasing productivity.
The evidence in Crespi and Zuñiga (2012) shows that applying technological advances led to a more effective use of productive resources, and the transformation of new ideas into new economic solutions such as new products, processes, and services. Innovation will be the basis of sustainable competitive advantages for firms and the crucial source of permanent increases in productivity. A large amount of research has been completed in this field for many developed and developing countries such as:Chudnovsky, López et al. (2006), Griffith, Huergo et al.
(2006), Masso and Vahter (2008), Roper and Love (2002); however, firms in developing countries, especially in SME sector, do not always properly consider the impact of innovation on their performance. It is no surprise that there is a lack of studies on this subject in Asian countries, especially Vietnam. Two authors have studied a similar topic. The first one is Nguyen, Quang Pham et al.
(2008), investigated the relationship between innovation and export performance by using Viet Nam SME survey in 2005; and another research was done by Lang, Lin et al. (2012), studied the effects of innovation capabilities on the firm’s 1|P a g e performance. Therefore, the main purpose of this paper is to contribute the findings of the relationship between innovation and a firm’s productivity, which does not seem to be investigated for Vietnamese SMEs before. This paper examines the impact of innovation on the firm’s productivity using micro data from Vietnam SME survey for the period from 2007 - 2009.
The empirical model used Cobb-Douglas production function and fixed effect model and produced a lot of interesting results. In line with the literature, the author has found a strong association between innovation and productivity in Vietnamese SMEs. The results have also highlighted the impacts of other influencing factors: firm size, firm location and manufacturing sector on the relationship of innovation and a firm’s productivity. Regarding the firm’s location, the results have shown that impact of innovation on productivity in the big cities such as Ha Noi and Ho Chi Minh City is lower than the smaller cities in Vietnam.
More interestingly, the author was not be able to find any effects of firm size and high-tech industry on the relationship between innovation and firm’s productivity. No significant difference was found between the impact of innovation on productivity of micro firms, who have less than 10 employees and those who have more than 10 employees. In addition, the high-tech and low-tech industry seem to have similar productivity when they are innovative.2 RESEARCH OBJECTIVES With the above problem statement, this thesis aims to investigate the relationship between innovation and a firm productivity, and the influencing factors on this relationship, to assist with a firm’s decision about investing in innovation for productivity benefits. Specifically, this thesis has two main objectives: (i) To identify the role of innovation on a firm’s productivity using Cobb-Douglas production function model (ii) To analyze the impact of innovation on SME’s productivity by firm size, firm location and manufacturing sector 1.3 RESEARCH QUESTIONS In order to meet the above objectives, this paper attempts to answer the following two questions: 2|P a g e (i) Is there a positive relationship between technology innovation and productivity of a firm? (ii) What are the roles of firm size, firm location, and manufacturing sector on the impact of innovation and firm productivity? 1.4 SCOPE OF THE STUDY To answer above research questions and meet the research objectives, the study relies on data from the Small and Medium Enterprises (SMEs) in Viet Nam for the year 2007 and 2009.
In the survey, there are approximately 2500 enterprises of 10 provinces in Viet Nam; most of them are micro and small enterprises, as the majority of SMEs numbers, thus they can represent for SMEs population. The study has also focused on manufacturing sector, which is considered to have higher technological intensity and innovation involvements than other sectors.5 STRUCTURE OF THE STUDY Followed by this introductory chapter, chapter Two provides the literature review with both theoretical and empirical findings from previous studies. It presents meaning of key concepts, the measurements, the debates about relationship between innovation and productivity and other influencing factors at micro level and findings in Viet Nam. Then it will specify the conceptual framework.
Chapter Three describes the data and research methodology. The first part defines the variables and concepts which are used in the thesis and their measurements. The second part introduces the empirical models and research hypotheses that will be tested. It will finally present the estimation strategy or regression methodology for panel data.
Chapter Four presents the research findings which are obtained from the estimation results. This chapter also analyzes how the regression results can answer the research questions, how the research hypotheses in chapter Three will be tested and how it relates to the previous findings. The next chapter is the conclusion, which summarizes all of above chapters and based on the finding results in chapter Four, it also suggests some strategies to Vietnamese enterprises for the long-term development and growth.