UNIVERSITY OF ECONOMICS ERASMUS UNIVERSITY ROTTERDAM HO CHI MINH CITY INSTITUTE OF SOCIAL STUDIES VIETNAM THE NETHERLANDS VIETNAM – THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS OUTSOURCING AND TOTAL FACTOR PRODUCTIVITY: EVIDENCE FROM VIETNAMESE SMALL AND MEDIUM-SIZED ENTERPRISES BY PHAM THI HOA TIEN MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, December 2017 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 OUTSOURCING AND TOTAL FACTOR PRODUCTIVITY: EVIDENCE FROM VIETNAMESE SMALL AND MEDIUM-SIZED ENTERPRISES A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By PHAM THI HOA TIEN Academic Supervisor: PHAM THI BICH NGOC HO CHI MINH CITY, December 2017 DECLARATION This is to certify that this thesis titled “Outsourcing and total factor productivity: evidence from Vietnamese Small and Medium-sized Enterprises”, which is submitted in fulfillment of the requirements for the degree of Master of Arts in Development Economics to the Vietnam Netherlands Program (VNP). The thesis constitutes only my original work and due supervision and acknowledgement have been made in the text to all material used. Page i ACKNOWLEDGEMENT First, I would like to thank my supervisor - Dr. Pham Thi Bich Ngoc for her support, advice, and valuable guidance during the thesis process.
Secondly, I would like to thank Dr. Truong Dang Thuy who also gave me useful advice for my thesis. I also would like to extend my thanks to the Vietnam – Netherlands program, professors, staffs, and classmates, for their help, encouragement and incredible knowledge. Finally, I would like to thank my family and friends, who always unconditionally supported me in not only the thesis writing but also my whole life.
Pham Thi Hoa Tien Ho Chi Minh City, December 2017 Page ii ABBREVIATIONS SMEs : Small and Medium-sized Enterprises R&D : Research and Development GDP : Gross Domestic Product ROE : Return on equity OECD : Organization for Economic Co-operation and Development ILSSA : Labor Studies and Social Affairs MOLISA : Ministry of Labor, Invalids and Social Affairs SSE : Stockholm School of Economics GSO : General Statistic Office TFP : Total Factor Productivity TCT : Transaction Cost Theory RBV : Resource-Based View RDT : Resource Dependency Theory GMM : Generalized Method of Moment 2SLS : Two Stages Least Square CDM : Crépon, Duguet and Mairesse IV : Instrument Variables OP : Olley and Parker LP : Levinsohn Petrin OLS : Ordinary Least Square FE : Fixed Effects RE : Random Effects FEM : Fixed Effects Model REM : Random Effects Model Page iii ABSTRACT This study aims to examine the impacts of outsourcing activities on firms total factor productivity of 4,549 Vietnamese enterprises by using a panel dataset of Small and Medium- sized Enterprises during the period from 2005 to 2013. It is supposed to contribute to existing empirical, literature by employing the complementarity and substitutability test to investigate the effect of outsourcing on firms’ total factor productivity. The total factor productivity in this study is calculated based on Levinsohn Petrin method. Furthermore, the Fixed Effects with Driscoll Kraay standard error model, which has the advantage of correcting the problem of autocorrelation and heteroskedasticity is applying to get the better result of outsourcing and firms’ total factor productivity relationship estimation.
The finding proves a significant positive nexus between outsourcing and firms’ total factor productivity and confirms that firms spend more on outsourcing will get higher total factor productivity index. These results are supported by a majority of empirical papers about relationship of outsourcing and total factor productivity and outsourcing’s theories. From the findings, this study will give some discussion as well as some policy recommendations for firms to enhance their productivity. Key words: Vietnamese SMEs, Total factor productivity, Driscoll Kraay.
Page iv TABLE OF CONTENT ACKNOWLEDGEMENT. iv TABLE OF CONTENT. v LIST OF TABLES. viii LIST OF FIGURES.
ix CHAPTER 1 INTRODUCTION .2 Research objectives and questions .3 Data and methodology. 4 CHAPTER 2 LITERATURE REVIEW .1 Definition of outsourcing .2 Theoretical background for outsourcing .1 Transaction Cost theory .2 Resource dependency theory .3 Resource-based view theory .2 Total factor productivity .2 Measurement of total factor productivity .3 Empirical studies- outsourcing and TFP. 14 CHAPTER 3 DATA AND RESEARCH METHODOLOGY .1 Method for step 1 .2 Method for step 2 and step 3 .1 Ordinary least square .2 Fixed effects model .3 Fixed effects model with Driscoll Kraay standard error. 28 CHAPTER 4 EMPIRICAL RESULTS .1 Summary statistics and analysis .3 Model specification and diagnostic testing .1 Step 1: Calculate total factor productivity at the firm level .2 Step 2: The difference between firms with and without outsourcing .3 Step 3: The relationship between outsourcing expenditure and firms’ TFP.
39 CHAPTER 5 CONCLUSION AND DISCUSSIONS .2 Discussion and suggested policies .3 Limitation and potential future research. 52 Page vii LIST OF TABLES Table 3.1 Number observations in dataset 2005-2013 .1 Observations by type of firms. Error! Bookmark not defined.2 Observations by type of firms in the period 2005-2013 .3 Firms types with and without outsourcing.4 Firms sizes in the period 2005-2013 .5 Descriptive statistics of TFP and other variables .6: Firms sizes with and without outsourcing .7 Correlation between variables .8: Comparision of OLS, Fixed Effect and LP estimation .9 : Regression results of different TFP between outsourcing firms and none outsourcing firms .10: Regression results of TFP within outsourcing firms. 39 v Page viii LIST OF FIGURES Figure 2-1 Conceptual Framework.
15 Figure 3-1 Empirical study stages. 25 Figure 4-1 Firm sizes with and without outsourcing. 34 Figure 4-2 The trend of average total factor productivity from 2005-2013. 37 Page ix CHAPTER 1 INTRODUCTION 1.1 Research problems Outsourcing or the act of contracting out internal activities to foreign suppliers, has rapidly become a critical approach in the modern economy, especially for manufacturing firms.
Despite being a widely used concept, outsourcing might originate from the late 1970s to early 1980s as a mean to search for external resources to maximize the firm’s profit (Corbett, 2004). While outsourcing allows the companies to focus on their strength in maintaining and developing core competencies, it also mitigates the expertise shortage in the less well- developed part of company in which that want to outsource (López, 2014). Through the decades, outsourcing delivers many benefits for business actors such as reducing cost, improving productivity, enhancing efficiency and concentrating on the core business operation which lead to lower resource cost and higher quality products (Gilley & Rasheed, 2000). These advantages of outsourcing were demonstrated through many empirical studies.
For example, outsource information technology helped reducing operational cost (Loh & Venkatraman, 1995); outsourcing non-core activities would develop service organizations’ capability and flexibility to adapt to the rapidly changing economic environment (Lankford & Parsa, 1999; Sia, Koh, & Tan, 2008). Despite many positive aspects, outsourcing also poses serious risks to the firms (Weidenbaum, 2005). For instance, the unbalance between the actual demands from outsourcing users and outsourcing contractor’s products, the high product’s price or the leakage of core competency could potentially affect the firm (Lutchen, 2004). This could be explained by the inflated information on the vendor’s capability on which they could offer, the misunderstanding in product’s requirement between the employers and partners, or the lack of control on the subcontract.
Or in another word, the positive impact of outsourcing could be bounded by their threat (Antonietti, Ferrante, & Leoncini, 2016). While firm’s technology might be stolen by their outsourcing vendor due to the lack of controlling in legal systems (Weidenbaum, 2005). Page 1 In fact, a variety of multinational companies include Apple, Boeing, Nike, Mattel, Calvin Klein, Kodak are practicing outsourcing successfully (see Quinn and Hilmer (1994); Doh (2005); and other). For some identical samples, it is worth mentioning Nike, which is not only a famous footwear company also a successful firm by applying outsourcing.
Since they outsource all their core products to the third party, Nike increased 20 percent in growth rate and earned 31 percent return on equity (ROE) for its shareholder (Quinn & Hilmer, 1994). Another outstanding case of using outsourcing efficiently is the cooperation between IBM and Kodak Eastman in 1989. This pushed Kodak to become a favorite brand in the photography industry (Dickson, 2011). Implementing outsourcing successfully in the multinational company is undeniable (Doh, 2005; Landefeld & Mataloni, 2004).
However, the effect of outsourcing on small and medium-sized enterprises (SMEs) remains unclear. This raises the question: how do the small and medium enterprises apply outsourcing to maximize efficiency and profits? From an empirical perspective, outsourcing is studied too broadly. Previous studies focused on the internal factors that impacts on outsourcing decisions, which are connected to agency cost theory, resource dependency theory, transaction cost theory (Michael & Michael, 2011). Other researchers measured the impact of outsourcing on productivity.
However, most of the measurement collected information at the industry level and from input-output tables, rather than firm-level data (López, 2014).Therefore, the number of research studies about the impact of outsourcing on productivity at firm level is limited. Particularly, for the case of Vietnam and Organization for Economic Co-operation and Development (OECD) economies where SMEs contribute over 40% and 55% to overall Gross Domestic Product (GDP), respectively. Besides, there is lack of research about the outsourcing effect on firm’s productivity in the context of SMEs in Vietnam. Therefore, the shortage of outsourcing studies on the firm’s total factor productivity for the case of Vietnam opens a new line for enquiry.
Insights gained from studying outsourcing in small and medium enterprises provide promising prospects for benefiting Vietnam’s overall economy in which SMEs are dominant. This study is expected to give a closer look at the Vietnamese SMEs’ total factor productivity using the Petrin et al. Besides Page 2 that, this study also investigates how outsourcing impact SMEs’ total factor productivity. Moreover, the impact of outsourcing on firms’ productivity is analyzed under the effect of other fundamental factors such as labor force, capital, technology, innovation, and other.
Therefore, this study aims to contribute to the existing literature by adding some perspectives to empirical evidence to fully understanding the impact of outsourcing and other factors on SMEs’ total factor productivity. The result may help the policymakers in deciding appropriate agenda for supporting outsourcing to obtain the target productivity.2 Research objectives and questions 1.1 Research objectives The primary purpose of this study is to investigate the effect of outsourcing on firms total factor productivity in the case of Vietnamese small and medium-sized enterprises during the period of 2005 to 2013.2 Research questions These following questions will be answered to deal with this objective: (1) Do firms with outsourcing activities have higher total factor productivity? (2) For Vietnamese SMEs with outsourcing activities, does expenditure outsourcing positively effect on total factor productivity? 1.3 Data and methodology This study employs the data from Small and Medium Enterprises (SMEs) of Vietnam (2005-2013). These surveys are conducted every two years by the collaboration of educational organizations and government agencies: Stockholm School of Economics (SSE), Department of Economics- the University of Copenhagen, the Institution of Labor Studies and Social Affairs (ILSSA) in the Ministry of Labor, Invalids and Social Affairs (MOLISA). Ten Vietnamese provinces or cities are included in the survey project: four cities or provinces in the North (Ha Noi, Ha Tay, Hai Phong, Phu Tho); four provinces in the central (Khanh Hoa, Nghe An, Lam Dong, Quang Nam) and two cities or provinces in the south (Long An, Ho Chi Minh).
The survey is completed by containing a sample of 2500 firms, in which 8% are Page 3 repeated from the previous survey. For firms who do not respond or not in operation, data is replaced, these numbers account for 20% data. Thus, data is considered represented for the Vietnamese SMEs population.