The influence of subcontracting activities on the innovation December 5, 2017 UNIVERSITY OF ECONOMICS ERASMUS UNVERSITY ROTTERDAM HO CHI MINH CITY INSTITUTE OF SOCIAL STUDIES VIETNAM NETHERLANDSTHE VIETNAM – THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS THE INFLUENCE OF SUBCONTRACTING ACTIVITIES ON THE INNOVATION IN VIETNAMESE SMALL AND MEDIUM-SIZED ENTERPRISES A thesis submitted in partial fulfillment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By NGUYEN QUANG HUNG Academic Supervisor: LE VAN CHON PhD. HO CHI MINH CITY, December 2017 TIEU LUAN MOI download : skknchat@gmail.com The influence of subcontracting activities on the innovation December 5, 2017 ABSTRACT This study investigates the impact of subcontracting activities on the innovativeness of Vietnamese subcontractors in Small and Medium-Sized Enterprise (SME) sector. The study approached two main theories of transaction cost (TCE) and knowledge-based theory. The data was drawn from the rich data set of Vietnamese SMEs in 2015.
The empirical test used the probit model to examine 271 subcontractors to give the evidence that subcontracting activities with the foreign-invested contractor are likely to innovate rather than with domestic contractors. In addition, the results have suggested that the absorptive capacity is very important for innovation of a small firm. In this thesis, based on the paper of Cohen and Levinthal (1990), the formation of the absorptive capacity is generated by skilled staffs and training activities in the firm. The findings showed that the innovative probability of subcontractors is positively affected by subcontracting activities in foreign-invested sectors and the absorptive capacity.
Key words: knowledge, innovation, subcontracting activity, Vietnamese SME ABBREVIATION FDI Foreign direct investment LEs Large firms MNCs Multinational Corporations OECD Organization for Economic Co-operation and Development R&D Research and Development SOEs State-owned enterprises SME Small and Medium-sized Enterprise TCE Transaction cost economics TFP Total factor productivity TIEU LUAN MOI download : skknchat@gmail.com The influence of subcontracting activities on the innovation December 5, 2017 CHAPTER 1.5 Scope of the study .6 Structure of thesis.2 Innovation in subcontracting .3 The role of the subcontractor in the supply chain and its innovative capability .4 Transaction cost theory (TCE) .5 Knowledge-based theory. DATA AND RESEARCH METHODOLOGY. Data and sample .1 Small Medium – sized Enterprises (SMEs) .2 Data of Vietnamese Small and medium-sized enterprises. Definition and classification .1 Definition of Innovation .2 Definition of Subcontracting .1 Transaction cost approach .2 Knowledge-based approach.
Variables and measurement. 51 1 TIEU LUAN MOI download : skknchat@gmail.com The influence of subcontracting activities on the innovation December 5, 2017 3.4 Description of variables and expected sign .1 Empirical model, estimation method.2 The identification strategy. CONCLUSION AND POLICY IMPLICATION. 87 2 TIEU LUAN MOI download : skknchat@gmail.com The influence of subcontracting activities on the innovation December 5, 2017 List of Figure Figure 1 Theoretical framework.
The mutual benefit relationships between contractors and subcontractors. Structure of subcontracting system. Knowledge-creation process - SECI model. The level of subcontractor in chain structure.
48 List of Table Table 1. Summary of advantages of star- and tier-shaped structure. Classification of Small-, and Medium-sized enterprises. Sample of Vietnamese subcontractors.
The rate of innovation of subcontractors. The rate of innovation of subcontractors of foreign-invest enterprises of the sample. Statistic of number of innovators of the sample by type of enterprise. Statistic of enterprises of the sample classification by total labor force.
Summarizing the variables. 62 3 TIEU LUAN MOI download : skknchat@gmail.com The influence of subcontracting activities on the innovation December 5, 2017 CHAPTER 1.1 Research context After nearly three decades, Vietnam officially began to adopt ‘Doi Moi’ (renovation) policy under the pressure in economic reform but until the year of 1989 Vietnam implement indeed a comprehensive and radical reforming program; Vietnam has shifted from centrally planned economy to socialist- oriented market economy, aims to stabilization and openness. As a result, the economy experienced rapid growth during the period of the 1990s, Vietnam became one of the fastest-growing countries in the world with the annual average growth rate of this period was up to 7. Vietnam has attained impressive achievements and succeeded to process of international economic integration.
Since launching the renovation programme in the early 1990s, small and medium-sized enterprises (SMEs) emerge as a dynamic force, they account for a large proportion of Vietnamese enterprises. In line with renovation policy, they are on top of structured transformation. In the meaning of development, the reform of economic environment has positively affected entire Vietnam economy in general and on the development of small and medium-sized enterprises in particular. Vietnamese small and medium-sized enterprises and the private sector are continuously the main engines of contribution to growth in Vietnam economy.
With the dominant force in the economy, small and medium-sized enterprises are playing a critical role, which has overwhelmed Vietnam economy’s development. At end of 2015, the number of small and medium- sized enterprises accounts for 98%2 of entire enterprises in nationwide; the velocity of the number of small and medium-sized enterprises in the period 2000 - 2015 is averagely 18. They are a prime source of job creation, 1 Statistic from Work bank data (2016) 2 45th Small and Medium Enterprises Working Group Meeting organized 13 September 2017 in Ho Chi Minh City (link: https://apecceosummit2017.vn/45th-small-and-medium-enterprises- working-group-meeting-104.html) 4 TIEU LUAN MOI download : skknchat@gmail.com The influence of subcontracting activities on the innovation December 5, 2017 wealth distribution, poverty alleviation, and innovation as well. Therefore, they become an important part of the national development and have been viewed as the backbone of the economy.
In the early stage of transition, Vietnamese small and medium-sized enterprises were facing many inherent constraints on an underdeveloped country, such as lack of production land, capital for business activities, market information, skilled labor force, modern technology, and investment, etc. Thanks to the open-door policy, traditional barriers were gradually detached. Vietnamese enterprises have approached opportunities for integrating with the rest of the world. In the globalization and technological information era, the challenge also increases the threat from their counterparts in international play-fields.
These are public issues debating in many literatures and it is also concerns of many researchers and policymakers. Theorists and scholars have shown that the innovation is an appropriate solution for firms to create and maintain the competitive advantage. So, studying in innovation is necessary for Vietnamese Small and medium-sized enterprises in the context of globalization.2 Problem statement In Vietnam, Small and medium-sized enterprises account for a large portion of total enterprises. The major roles of Small and medium-sized enterprises in the economic development of a country are job creation, nurturing the growth of the labor market, and reducing the development gap among localities, and countries.
In their evolution progress, small and medium-sized enterprises have faced almost constraints and significant challenges such as high production costs, poor quality of products and services, low degree of innovation, many difficulties in access finance, weak management skills and expertise, lack of market information, and so forth. Competitive abilities of Small and medium-sized enterprises in local and global markets are also weak due to obstacles of information, domestic and 5 TIEU LUAN MOI download : skknchat@gmail.com The influence of subcontracting activities on the innovation December 5, 2017 international regulations, absorbing and accessing technological advantage, and so on. The globalization process has dramatically changed. This process increases abilities of countries to access new information and markets in both domestic and international.
Vietnamese economy has integrated into the international economy that has opened a great opportunity for Vietnamese small and medium-sized enterprises to take part in the production chains. However, they did not develop full awareness and did not pay adequate attention to the participation in and appreciate the benefits of participation in production chains nor take into account it as a tool, a means of survival, of adding value and of improving the efficiency of their production process. Moreover, the globalization process gives rise to the capital flows move in the developing countries, and thus it also increases the opportunities for foreign countries to take part in the exploitation of the domestic market size, as a result, the competitive degree becomes larger in the host countries. However, the globalization and competition commonly do not always create the threat for enterprises in the host countries.
In a certain aspect, the challenges from the globalization produce motivation for firms to development by enhancing operational effectiveness and productivity. For this reason, the ideal ways for the firm to survive are the innovation and participation in regional and/or global production chains (Harvie, Narjoko, & Oum, 2010). The innovation is extremely important for development and sustaining the productivity, growth, and development of a country in general as well as a firm in particular. In the macro level, the innovation is the shortest way to fill the development gap between countries.
For firm level, the recognition of innovation is a vital factor. A large number of studies have documented that innovation is a key driver to lead an increase in competitive advantages. In the last decades, most studies of creativeness and/or innovativeness in enterprises concentrate on exploiting the relationships between innovation 6 TIEU LUAN MOI download : skknchat@gmail.com The influence of subcontracting activities on the innovation December 5, 2017 and trade, innovation and productivity, or finding the determinants effect on innovation. In fact, studies of the relationship between the innovation and subcontractor are a little, especially in the developing world.
Subcontracting activities are becoming a key factor of industrialization in most countries in the world. In the Organization for Economic Co-Operation and Development (OECD) countries, subcontractors are crucial elements for establishing production value chains. The integration companies require their subcontractors having the innovativeness to contribute to value chains. Contractors and subcontractors together set up an ecosystem, which is formed industrial clusters for development and enhancing competencies.
In which, innovative activities are a primary concern. In Vietnam, subcontractors are firms that almost take part in the processing, assembling, or manufacturing peripheral products for large companies (e. multinational corporations), or foreign direct investment (FDI) enterprises. Excluding several industries that involved the foreign- invested sector, most domestic manufacturing enterprises have operated in the low added-value industries.
In addition, most subcontractors lack the cohesion or it is very weak. Accordingly, their competitive and innovative capabilities are low (even in cognition). Due to low innovative ability, Vietnamese small and medium-sized enterprises concentrate on low labor- cost or labor-intensive production activities that they have the competitive advantage compared to regional counterparts. Many papers focus on analyzing the role of the subcontractor in developed countries (e.
OECD countries) where the development and the technological degree are very high, and they involve into global value chains from the initial stages (e. design stage) to ultimate stages (e. end-used product stage). Studies of the manufacturing subcontractors in Vietnamese small and medium-sized enterprises sector are virtually rare.
Most research of Vietnamese small and medium-sized enterprises accrue to the subcontracting activities in supporting industries (automobile, electronics, and electricity). In 7 TIEU LUAN MOI download : skknchat@gmail.com The influence of subcontracting activities on the innovation December 5, 2017 these industries, enterprises are relatively mature and larger than small and medium-sized enterprises. Besides, some existing theories cannot be applied to examine the innovativeness of the Vietnamese small enterprises due to the knowledge and technology gap. Therefore, this study will contribute significant findings and open the new direction to attract policy-makers, scholars for deeply study in this field in order to enhance competencies of Vietnamese small and medium-sized enterprises in general and the subcontractor in particular.3 Research objective Since the innovation plays the important role in the survival and maintains the competitive advantage for the subcontractor, so the main objective is to explain the innovativeness of them through subcontracting activities.
For that reason, the thesis will discuss the issue involved the subcontracting activities of Vietnamese subcontractor in the SME sector through subcontracting agreements and investigate their knowledge-creation abilities through the absorptive capacity that enhance the innovation likelihood of the firm.