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 influence of labor market size and social capital to outsourcing decision: Empirical study for Small and Medium enterprises in Vietnam A thesis submitted in partial fulfillment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By LE DUY MINH Academic Supervisor: Dr. PHAM KHANH NAM HO CHI MINH CITY, DECEMBER 2016 1 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com DECLARATION “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.” HCMC, December 2016 Signature LE DUY MINH 2 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ACKNOWLEDGEMENTS For the completion of this thesis, I would like to express my gratitude to the University of Economics Ho Chi Minh City in Vietnam and the Institute of Social Studies The Hague in The Netherlands for developing the Vietnam – Netherlands Programme for M.A in development economics. I would like to express my thanks to my teachers and family who have given me tremendous encouragement for completing this thesis.
I wish to express a special gratitude to my supervisor, Dr. Pham Khanh Nam, for all of his supports and advices during the process of completing this thesis. Last but not least, I wish to say thanks to all of my friends during my time in the VNP for being a source of great encouragement. 3 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ABSTRACT The purpose of this paper is to provide an insight to the impact of labor market size and social capital on the outsourcing decision in Vietnam Small and Medium enterprises, using the data collected in 2013.
Logit binary model is employed to explore the effect of labor market size and social capital on firm’s probability to outsource. The result indicates that there is connection between firm’s social capital and outsourcing decision. While the link between labor market size and outsourcing in Vietnam is not proved to be significant in this research, the study does not reject the importance of market environment to outsourcing but suggest finding a more appropriate variable to quantify market condition. Keywords: outsourcing, social capital, labor market size, Vietnam SMEs 4 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com TABLE OF CONTENTS CHAPTER 1 INTRODUCTION.2 Research Objectives and Questions .3 Scope of Research.
10 CHAPTER 2 LITERATURE REVIEW .1 Review of Theory .1 Concept of Outsourcing .2 Theoretical studies on outsourcing .3 Factors of Outsourcing Decision.4 Benefits and Risks of Outsourcing .5 Determinants of Outsourcing .2 Review of Empirical Studies. 21 CHAPTER 3 RESEARCH METHODOLOGY. 30 CHAPTER 4 RESEARCH RESULT.1 Overview of SMEs in Vietnam. 40 5 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com CHAPTER 5 CONCLUSION .1 Conclusion and Policy Implication.
48 6 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com CHAPTER 1 INTRODUCTION 1.1 Problem statements Outsourcing is defined as the practice of one firm to contract out their value-creation activities to a third-party vendor, ranging from design, research development and service provision (Hindle, 2005). While this concept is widely thought to be recently prominent, its root may have dated from the 1970s and 1980s in an effort by several firms to raise their efficiency and to look for outside assistance for their peripheral processes (Corbett, 2004). Among the earliest practices of this concept, the outsourcing deal between Kodak Eastman Company & IBM in 1989 received major global attention as Kodak decided to obtain services from the famous IT specialist. This agreement, while initially receive criticism and doubt, gradually proved to be effective as Kodak could focus all their resources in their core competency and become a major player in the photography industry (Dickson, 2011).
More than 25 years after that business deal, more so with the emergence of information industry, outsourcing has become an integral part in the highly-competitive modern business due to its capability to capture scale economy that results in availability of low resource cost and higher quality due to full attention in the core value-creation process. Narayanan (2009) identify four strategic purpose of outsourcing: managing cash flow, managing control over payment, scaling resources and improve the end-product quality. Magretta (2003) research in the car industry during 1990s show that firms that take most advantage of outsourcing, like Toyota, Honda & Chrysler earns a considerably higher profit compared to more traditional firm that relies more on their own capability, such as General Motors. On the other hand, firms are also exposed to the risk of outsourcing which is the difference between what the outsourcing employers require and what is actually produced by the outsourcing contractors.
This difference is created due to different reasons, which 7 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com includes unrealistic expectation from the employers due to inflated information on the capability of the outsourcing subcontractors, misunderstanding between the employers and the contractors over the requirements of the products, generally poor performance by the subcontractors due to the lack of control, conflicting interests. Some firms also avoid outsourcing to protect and boost their knowledge knowhow (Hamel & Prahalad, 1994). The benefits that outsource provide, thus, could be greatly restricted by the threats associated with it. Outsourcing therefore is a difficult decision to make that requires clear analysis of different influencing factors (Antonietti, 2016).
Several studies have focused on the firm’s internal elements that determine an outsourcing decision, which is mostly linked to the transaction cost theory (Michael & Michael, 2011). On the other hand, very limited studies concentrate on the macroeconomics factors that favor or discourage outsourcing environment. A positive business environment will foster collaboration based on fostering trust, softening the difference between the outsourcing parties and presenting the firm with wider choice for outsourcing options. Social capital is considered as an integral element of the business condition to support outsourcing.
Bourdieu (1986) defined social capital as “the sum of the resources that the firm can access by virtue of having a durable network of relationship”. Another important factor that contributes to the outsourcing decision is labor market size. Labor market size is related to the firm’s direct access to human skill and infrastructure thus affects its decision to outsource. Vietnamese economy has experienced a major amount of changes from its centrally planned economy until “Doi Moi” policy that replace the inefficient subsided economy with an open and market integrated model (Beresford, 2008).
Economy greatly improved during 1990s with the country removing economics border with foreign business partner. Growth continues to improve to the peak of 8.5% in 2007, in part due to the Government’s regulation to encourage private sector and improve export and high foreign investment. During these years Vietnam emerged as an ideal destination for 8 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com outsourcing production for foreign companies because of cheap labor with high level of education. Local social capital during this time immensely benefited from the knowledge shared by international companies and generally better access to the global resources, even more so after the membership of Vietnam into the WTO in 2007 (Hays, 2014).
On the other hand, Vietnamese companies have started to outsource its operation. In principle, when a company makes an outsourcing decision, its aim is to maximize profit by comparing costs and benefits stemming from the decision. However, there are many barriers and drivers to this decision. Understanding these barriers and drivers could help companies to make better decision on outsourcing.
The study will look into the year of 2013, five years after the economic slump in 2008 due to high inflation and global economy crisis that hampers the economy and sink the annually growth to the bottom in 2012. This paper aims to contribute to the existing literature about the determinants of outsourcing.2 Research objectives & questions: The purpose of this research is to analyze the influence of local labor market size and social capital to the outsourcing decisions of Vietnamese small and medium enterprises. The main questions that will be answered at the end of this study are: For Vietnam small and medium enterprises, does labor market size affect the outsourcing decision? For Vietnam small and medium enterprises, does social capital affect the outsourcing decision? 1.3 Scope of research This research focuses solely on Vietnamese firms as outsourcing employers, not as outsourcing subcontractors. It analyzes the impact of social capital and local labor market size to the decisions of Vietnamese firm to outsource or not by employing the logistic regression model.
Data is collected on Small and Medium Enterprises (SME) of Vietnam for the year of 2013. 9 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.4 Thesis structure The research is categorized into 5 separated chapters: Chapter 1: Introducing the research This chapter offers a background for outsourcing as a global business practice and a review of Vietnam economy. The research gap, question and scope are also identified. Chapter 2: Literature review This chapter examines the existing literature regarding the factors that surrounds the outsourcing decision as well as the role of local labor market size and social capital in outsourcing.
Theoretical and empirical evidences are analyzed. Chapter 3: Research methodology In this chapter, the econometrics model will be determined with the purpose of answering the research question. The dataset and variables used in the model will be presented and explained in full detail. Chapter 4: Research Results This chapter presents the important information regarding each individual variables and their connection after conducting the research methodology.
Chapter 5: Conclusions and policy implementation Key findings and areas of possible improvement for future research will be identified. 10 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com CHAPTER 2 LITERATURE REVIEW 2.1 Review of theory 2.1 Concept of outsourcing Outsourcing is a concept that has been differently defined in the literature. Early definition of outsourcing includes the study of Kotab (1992), who describes outsourcing as the practice of a firm to get supplied products and product components from other independent firms around the world. Lei and Hitt (1995) views outsourcing as the firm’s dependence on resources and components for their value-adding activities.
However these definitions are considered as too general and easily to be confused with normal procurement activities, as none of the firm is excluded from transaction activities with the others (Gilley & Rasheed, 2000). Gilley and Rasheed categorize outsourcing into two types: substitution and abstention outsourcing. In substitution outsourcing, the firm replaces one of its former internal activities to seek for external supply. This “vertical disintegration” withdraws the firm’s resources in the outsourced activity to focus in other area.
In abstaining outsourcing, the firm also relies on external party for goods/services purchase; however these products have not been internally produced by the firm before. This method is still considered outsourcing, which differs from normal procurement in the way that the managerial and financial capacity of the firm allows them to internalize these goods/services should they wish to do so. In general, we can differentiate outsourcing and normal transaction by the firm’s ability to conduct the outsourced activities on their own. This study employs the adequate and clearly-defined term of marketing from Sanders et al (2007): Outsourcing is defined as the firms’ practice to contract out part of its activities to a third party firm; with the purpose of concentrating its own financial 11 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com capacity, personnel, facilities and resources into their main value-creation activities that is considered essential.2 Theoretical studies on outsourcing Among the in-depth studies of outsourcing, two theoretical perspectives that have the most association with outsourcing are transaction cost theory and resource-based view theory.