UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLAND VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS The Relationship between Internationalization and Manufacturing Firms’ Performance in Vietnam: The Moderating Effect of Organizational Slacks BY HUYNH THI NGOC HIEN MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, Dec 2014 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 The Relationship between Internationalization and Manufacturing Firms’ Performance in Vietnam: The Moderating Effect of Organizational Slacks A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By HUYNH THI NGOC HIEN Academic Supervisor: NGUYEN VAN PHUONG PhD. HO CHI MINH CITY, Dec 2014 CERTIFICATION “I certify that the substance of this thesis has not already been submitted for any degree and have not been currently submitted for any other degree. I certify that to the best of my knowledge and help received in preparing this thesis and all sources used have been acknowledged in this thesis.” HUYNH THI NGOC HIEN ACKNOWLEDGEMENTS In order to successfully complete this thesis, I received unconditional helps from many people. I very appreciate the contribution of everyone involved and apologize to those I do not mention by name.
Firstly, I would like to express my gratitude to my supervisor, PhD. Nguyen Van Phuong. His instructions as well as encouragements are the key factor of my dissertation completion and enabled me to turn my concerns into a serious academic research. He was not afraid of time-consuming to hold frequent meetings and response timely to my thesis problems.
Moreover, he also took time to review the STATA programming and offer many flexible ways to support me in data processing step – the most challenging part in my study. Secondly, I am also grateful for PhD. Nguyen Trong Hoai and PhD. Tran Tien Khai because their valuable comments and suggestions for my TRD at the beginning helped me to orient and revise my research design in a proper way.
Next, I also received the surprising help from PhD. Truong Dang Thuy who appears to be available on email regardless day or night. Then, I want to say thanks for the moral support from my peer - Ms. Vu Thi Khanh.
She was very patient in applying many different approaches to find the most appropriate model for her research. Therefore, I have learned from her too much, both econometric knowledge and a serious attitude toward addressing the thesis issues. Finally, I wish to express my sincere thanks to my parents, my younger brother, my relatives and my friends for their continual encouragements, love for my progress and success. ABSTRACT As the world moves toward global expansion, the global enterprises in both developed and developing countries have been becoming the main drivers of this process.
Although there are many empirical studies on the actual relationship between internationalization and performance, the question is still relatively ambiguous due to controversial findings. Thus, this study uses a panel sample of 45491 unlisted Vietnam manufacturing enterprises during the six-year period (2007-2012) surveyed by GSO (General Statistic Office) to investigate the impact of internationalization degree on firm performance. It is widely admitted that the Vietnamese economy is mainly based on the credit market which is relatively frail and frequently affected by the changes in the local fiscal and monetary policies. Under these contexts, firm’ abundant slack resource is a miracle tool to enable the successful implementation of internationalization strategies.
After conducting the fixed effect analysis, the study finds a significant S-shaped relationship between degree of internationalization (DOI) and firm performance. Specifically, the performance firstly decrease then increase and decline in the later stage. Furthermore, the regression depicts that the higher level of slacks on both kind of high-discretion and low-discretion is, the better the firm performs. Especially, the sufficient slacks contribute to enhance the relationship between internationalization and performance.
ABBREVIATIONS ASEAN Association of Southeast Asian Nations DOI Degree of internalization EU European Union FDI Foreign direct investment FEM Fixed effect model REM Random effect model FS Foreign sale IFs Internationalized firms OLS Ordinary Least Squares R&D Research and Development ROA Return on assets TS Total sale US United Joint Stocks VIF Variance Inflation Factors TABLE OF CONTENTS I. Problem Joint Stockment. Organization of the Study. Concept of Internationalization.
The degree of internationalization and firm performance. Internationalization and firm performance. Organizational slacks, internationalization and firm performance 23 III. Data and Sample.
Variables and measures. Organizational slacks – the moderating variables. CONCLUSION AND RECOMMENDATIONS.56 REFERENCES APPENDIX LIST OF TABLES Table 1: Summary of variables, measures and expected sign .34 Table 2: Variables definition.41 Table 3: Descriptive statistic and correlations .44 Table 4: The comparison between the FEM models with different added variables .45 Table 5: Fixed effect analysis .49 Table 6: Results of OLS, fixed-effect and random-effect regression analyses on firm performance.50 LIST OF FIGURES Figure 1: Structure of Vietnam export turnover in 2012 .2 Figure 2: Vietnam’s export destination has changed little in the last ten years.3 Figure 3: Internationalization process.9 Figure 4: Three-stage theory (S-shaped) of international expansion (Contractor et al, 2003).13 Figure 5: Role of slacks within an organization .18 Figure 6: Firm’s internationalization and performance: the moderating effect of high- discretion slack (Lin, Liu & Cheng, 2011) .27 Figure 7: Firm’s internationalization and performance: the moderating effect of low- discretion slack (Lin, Liu & Cheng, 2011) .27 Figure 8: Illustration of moderating variable. Problem statement In the early twenty-first century, the world witnessed a spectacular change that the firms from developing countries have started to play an important role in the global market (Chittoor, 2009).
However, it was also admitted that most of these new internalized firms are still in the early stage of internationalization process and mainly focus on the market exploration and export activities (Aulakh, Kotabe & Teegen, 2000). In recent years, Vietnam has also developed the important steps in the global integration by the increasing level of international sales. The total export turnover in 2012 reached an impressive number of US$ 114.6 billion thanks to the sustainability of labor-intensive manufacturing industries and the dramatic rise of high-tech manufacturing industries. Especially, in 2012, the export volume of high-tech items (US$12.7 billion) such as computers, cell phones and parts, accessories, automobile components tend to gradually outperform than the key traditional export items such as garments, footwear, furniture and processed agricultural products as the figure 1.
In the first quarter of 2013, the export volume continued to increase by 16% compared to the same period in 2012 (World Bank, 2013). These are the good signals for Vietnam toward our global expansion strategy. Undoubtedly, a wide range of manufacturing industries from handicraft to high-tech have been becoming the key sectors for promoting the global 1 integration process in Vietnam. The manufacturing industry also relates many stakeholders in the supply chain and uses inputs such as materials, tools, machines, chemical & biological methods, etc.
to make the final goods for consumption or sale (Porter, 1985). Therefore, this study takes into account the case of Vietnamese manufacturing firms due to their considerable contributions to Vietnam’s internationalization process in recent years. Figure 1: Structure of Vietnam export turnover in 2012 Although there is a very brilliant picture for Vietnamese firms toward the global expansion, Aulakh, Kotabe & Teegen (2000) believed that most of newly internationalized firms from emerging world are still in the early stage of global expansion. The three-stage theory of Contractor, Kundu, & Hsu 2 (2003) pointed out that at the early stage, IFs suffer the instability of importing markets and arise an urgent demand to increase market knowledge.
The figure 2 depicts that the export share of Vietnamese manufacturing firms to the large markets such as Europe, United Joint Stocks, Japan, ASEAN countries is relatively stable during the past decade from 2002 to 2012. However, in fact some giants in the manufacturing industry have been accounted for a major proportion of total export volume rather than the new IFs who have little chances and inadequate financial resources to sustain their new ventures. So far, the gains of internationalization, specifically the gains from export intensity, are still ambiguous for domestic IFs. That is the reason why many enterprises choose to be safe in the local market without taking risks to expand globally.
Figure 2: Vietnam’s export destination has changed little in the last ten years. 3 It is widely accepted that internationalization occurs when the domestic enterprises get involved in the international markets (Johanson, & Vahlne, 1977). In this way, these firms will take competitive advantages from company brand identity and market expansion (Hutchinson et al. However, the internationalization process contains both benefits and costs, especially; it is a big challenge for domestic firms to deal with fierce competition, transaction cost, market volatility and cultural diversity (Eriksson, Johanson, Majkgård & Sharma, 1997).
Further, many Vietnamese enterprises must consider the tradeoff whether only operating locally or entering the international markets. Especially, under the Joint Stock of Vietnam’s tightening monetary policy and relentless crises, the available financial resources for firms to internalize become too scarce to invest on global expansion. Bourgeois (1981) introduced the concept of organizational slacks referring to the availability of financial resources used for implementing internal and external changes. Once the firms possess the high level of organizational slacks, they are more willing to invest on new chances, for instance, invest to expand the markets globally (Sharfman, Wolf, Chase & Tansik, 1988).
Moreover, organizational slacks also directly contribute to firm performance by providing the capabilities to handle the uncertainties and sustaining the competitiveness (Tan, 2003). Organizational slacks are divided into 2 kinds: high discretion and low discretion based on the level of flexibility for use (Sharfman, Wolf, Chase & 4 Tansik, 1988). High-discretion slacks refer to liquid resources such as cash and receivables that can immediately meet the financial needs. Low-discretion refers to more illiquid resources such as debt and fixed assets that can be transferred to borrowing power.
Therefore, the relationship between internationalization and firm performance under the moderating effect of organizational slacks should be investigated thoughtfully to have a more obvious perspective on this issue. The study is also expected to raise some practical recommendations for Vietnam manufacturing firms. In the research aspects, many previous studies have investigated the internationalization-performance relationship in various industries. However, it was undeniable that the findings are very controversial and even raise more question than answers (Glaum & Oesterle, 2007).
In addition, the issue mostly supported by data from developed world rather than emerging world because of the penetration of diverse international activities from multinational corporations (Chittoor, 2009). Also, no study researching on this issue in Vietnam was found. Moreover, the controversial results from these studies continue to attract the concerns of international business community. Under firm’s behavior perspective, this study aims to explore the relationship between internationalization degree and firm performance and how the availability of organizational slacks influences on the internationalization-performance relationship as in Lin, Liu & Cheng (2011).
Research objectives: Investigate the impact of internationalization degree on Vietnam manufacturing firms’ performances. Estimate how organizational slacks affect the relationship between internationalization and firm performance. Research questions: This study is expected to clarify the three main research questions as follows: 1. Does higher internalization degree lead to higher Vietnam manufacturing firms’ performances? 2.
Does higher level of high-discretion slack have a positive effect on internationalization-performance relationship in Vietnam manufacturing firms? 3. Does higher level of low-discretion slack have a positive effect on internationalization-performance relationship in Vietnam manufacturing firms? I. Research Methodology This study conducts the quantitative analysis on the unbalanced panel data of 45,491 Vietnamese manufacturing firms in various manufacturing industries from 2007 to 2012. Using panel data is more reliable because the behaviors of the enterprises are observed thoughtful across a period of six 6 years.