INTRODUCTION
Problem Statement
The remarkable merger and acquisition (M&A) narratives of renowned Vietnamese brands often perplex financial analysts As reported by Kinhtedautu magazine in April 2014, foreign firms negotiated these acquisitions at surprising prices, significantly exceeding the total tangible assets of the companies involved, exemplified by Phở 24.
Many businesses, such as those valued at $20 million or higher, like ICP with over $60 million, raise questions about the true source of a firm's intrinsic value Companies often struggle to accurately assess the benefits of intangible assets and may underestimate the importance of investing in these invisible resources This miscalculation can lead to inaccuracies in evaluating operational efficiency and the payback period of projects For example, a strong brand, as an intangible asset, can significantly boost a firm's product sales and allow for higher pricing If analysts fail to properly assess the strength of a brand, they risk encountering challenges in forecasting future revenue.
Proper evaluation of intangible assets is crucial due to the volatile nature of the economy, impacting both company management and investor decisions As companies evolve through operational and expansion activities to maintain market share and revenue, traditional financial statements often fail to capture these efforts accurately Research by Baruch Lev and Paul Zarowin (1999) indicates that the effectiveness of current reporting systems, including balance sheets and income statements, has declined, as significant investments in R&D and advertising are often recorded merely as expenses Additionally, with the rapidly changing economic landscape, firms must innovate to retain customers, making investment in intangible assets a strategic choice Furthermore, inaccurate assessment of intangible asset values can lead to violations of the matching principle in accounting, where revenues must align with the expenses incurred to generate them.
Valuating intangible assets is crucial in sectors like financial reporting and commercial strategy, as it impacts a company's financial position and shareholder expectations When these factors are communicated effectively, shareholder loyalty increases, potentially lowering the cost of equity Additionally, intangible assets such as brand equity and intellectual capital contribute to a firm's ability to achieve higher returns by enhancing customer loyalty and enabling better profit margins A well-known brand can command premium pricing and negotiate favorable input costs with suppliers, thereby strengthening its market position.
(2014), manager of company could plan their investment strategy, how much for factory constructing and what proportion for marketing…
The demand for measuring the value of intangible assets is evident, and selecting the right method is crucial for effective research in this area As noted by Parble Fernandez (2013), we are still in the early stages of evaluating intangible assets Currently, three methods exist for calculating the total value of these assets, and this research aims to introduce a new approach to enhance this evaluation process.
Research Objective
This research examines the impact of intangible assets on company performance across various industries, providing valuable insights for firms to strategically allocate resources among different asset types Utilizing a novel indirect approach with panel data methods, the study aims to quantify the total value of intangible assets for selected companies in Vietnam.
This thesis also solves another objective related to development policies It rises a problem about supporting policies between small and medium enterprise (SME) and larger companies.
Research Questions
Base one research objectives above, this research will solve two questions:
Why should companies allocate their resources in both tangible and intangible assets?
What policies control market power of both SME and large companies?
Structure of Thesis
This study will encompass four key components: a literature review, a conceptual framework, an econometric model, and an empirical study The initial section will focus on a review of prior research conducted by various authors regarding intangible assets.
This article explores various approaches to evaluating intangible assets, analyzing the strengths and weaknesses of each method while emphasizing the advantages of T Yamaguchi's 2014 model It discusses improvements made to Yamaguchi's framework and generalizes the valuation concept presented by the author A diagram in section two visualizes the evaluation process, while the econometric model section highlights qualitative methods used in the study and interprets the calculation approach The final section details the application of the intangible asset evaluation method for businesses in the Vietnamese stock market, providing specific calculations to illustrate the value of intangible assets across different industries and examining how these assets impact business performance.
LITERATURE REVIEW
What Are Intangible Assets
Intangible assets are defined differently based on varying perspectives, leading to diverse interpretations From an accounting standpoint, a conservative approach results in a stricter definition of these assets In contrast, investors and managers tend to adopt a broader assessment and definition of intangible assets, reflecting their unique viewpoints.
International Accounting Standard 38 (IAS 38) defines an intangible asset as "an identifiable non-monetary asset without physical substance." A key characteristic of intangible assets, as outlined by this standard, is the expectation of future economic benefits.
According to OECD project (2011), with a different perspective, OECD defines
Intangible assets are non-physical assets that lack a tangible or financial form According to the OECD, there is a distinction between intangible assets and intellectual assets, with the latter being a subset of the former Intangible assets encompass various categories, including computerized information.
“innovative property”; “and economic competencies"
In this research, we will follow OECD’s definition to estimate aggregate value of intangible asset It means that we will use the word “intangible asset” instead of
“intellectual property” or “intellectual asset” This definition allows us not to have problem with matching concept and undervaluation of current financial reporting system.
Types Of Intangible Assets
Intangible assets can be categorized in various ways, with researchers often focusing on specific types such as brand names, customer lists, and corporate culture A notable classification is presented by Petros A Kostagiolas and Stefanos Asonitis (2009), who outline different types of intangible assets that contribute to a company's value.
Table 1: Category of Intangible Asset
This research focuses on the impact of total intangible assets on a company's income, while also emphasizing the importance of categorizing these assets Understanding the classification of intangible assets will aid in selecting the appropriate valuation approach and provide insights into the underlying factors driving industrial growth rates in subsequent sections.
Intangible Asset Valuation Approaches
According to the book Valuing Intangible Assets of Reilly, R F., and Schweis, R P
In 1999, three primary approaches were established for evaluating intangible assets: the cost approach, the market approach, and the income approach Each of these methods utilizes distinct data sources and involves various procedures, resulting in a range of reasonable values for intangible assets Typically, researchers tend to adopt a single valuation approach due to constraints related to the availability of information and the costs associated with data collection.
Lev and Sougiannis (1996) propose that the cost approach to valuing intangible assets involves assessing the total expense required to recreate or construct a similar asset with equivalent functionality They analyze the value of research and development (R&D) activities in relation to a company's earnings, necessitating the calculation of intangible asset value based on historical R&D expenditures While this method can accurately reflect certain intangible assets like R&D and advertising costs, it poses challenges in valuing other intangibles, such as brand reputation, employee experience, and customer lists.
Assessing the useful life of intangible assets presents a significant challenge, as it requires ongoing evaluation to identify the appropriate lag period for research and development expenses that impact operating earnings.
The market approach evaluates the value of intangible assets by comparing them to the market price of similar assets available for sale Kossovsky (2002) utilized this method to indirectly assess the value of intellectual assets by analyzing the difference between a firm's book value and its market equity This approach offers an objective measure of intangible asset value, as it relies on actual market prices However, a company's stock price reflects not only its intrinsic value but also investor perceptions of future prospects, which can be influenced by temporary speculation Additionally, the effectiveness of this approach is limited if appraisers cannot identify comparable assets, as finding two similar intangible assets can be particularly challenging.
The income approach evaluates the value of intangible assets by comparing the significant benefits of possessing these assets to the scenario where they are absent Specifically, the value of an intangible asset is determined by subtracting the net present values of cash flows in both situations.
Interbrand's valuation method utilizes an income approach to determine a brand's worth by assessing various earnings linked to a new variable, known as brand strength However, Paulo Fernandez highlighted several issues with Interbrand's methodology in his paper, "Valuing Intangible Assets and Intellectual Property."
In 2013, Interbrand highlighted the significant advantages of intangible assets by comparing the EBITs of well-known brands to those of private label companies However, identifying private label companies poses a challenge, as these firms lack market power associated with their brand names, making them difficult to recognize Additionally, alongside Paulo Fernandez, it was noted that the methods used to assess brand strength are subjective and susceptible to manipulation by appraisers.
The panel data approach leverages panel data analysis to assess unobservable firm effects, which Motohashi (2005) attributes to factors such as management ability, employee motivation, and R&D expenditure While R&D expenses can be distinctly identified, Motohashi incorporates them as an independent variable in his model His methodology utilizes components of the production function to analyze the impacts of labor, capital, and internet networks on a firm's value added However, in this framework, Motohashi focuses solely on the effects of internet networks, with other intangible assets accounted for within the error term He also advocates for the use of cross-sectional data, as well as fixed and random effect estimations.
Ramirez and Hachiya (2006) introduced an alternative method utilizing fixed effects to assess the value of intangible assets, employing sales growth rate as the dependent variable This approach incorporates various production factors, including R&D expenses and sales and general administrative costs, while maintaining a connection to the firm's market value However, it may still exhibit bias similar to that of market approaches, despite its foundation in production functions and the inclusion of production variables.
In their 2003 study, Sadowski and Ludewig utilized panel data to analyze added value as the dependent variable, incorporating explanatory variables such as capital, labor, human capital, and social capital Similarly, Tomohiro Yamaguchi's 2014 research also employed panel data, focusing on measuring intangible assets through the firm's fixed effects Yamaguchi's approach distinguishes itself by employing both production and cost functions to assess a firm's added value, with and without the consideration of intangible assets.
Conceptual Framework
T Yamaguchi's 2014 study offers a more effective method for assessing the intangible value of companies by utilizing panel data and indirect approaches, addressing the limitations of previous research His methodology involves a series of calculations starting with the production and cost functions to determine a firm's equity, excluding the influence of intangible assets The value of intangible assets is then derived by subtracting the total value of tangible assets from the enterprise's overall value This practical approach relies on realizable data, avoiding speculative assumptions about future economic value The final analysis includes regression to examine the relationship between enterprise value—measured through revenue or stock price—and various asset types, allowing for a comprehensive evaluation of the significance of intangible assets in business.
Equity of firm Equity of firm withour Intangible Asset
Book Value of Equity Tangible Asset
Calculate α and β in production function
ECONOMETRIC MODEL
This research utilizes Tomohiro Yamaguchi’s methodology to evaluate the value of intangible assets, subsequently analyzing their impact on a firm's added value and equity in relation to tangible assets.
The formula of growth of company is based on Cobb and Douglas production function (1928):
𝑄 𝑖𝑡 = 𝑎 𝑖 𝐾 𝑖𝑡 𝛼 𝐿 𝛽 𝑖𝑡 𝑒 𝜀 𝑖𝑡 𝑄 (1) Where: 𝑄 𝑖𝑡 is added value of firm i in year t,
𝐾 𝑖𝑡 stands for capital of firm i in year t,
𝐿 𝑖𝑡 is labor of firm i in year t
The parameter \( a_i \) in equation 1 represents the impact of total factor productivity (TFP), which encompasses various elements such as internet advantages, buyer and seller power, intellectual capital, and employee motivation These factors collectively influence the growth rate of a company, highlighting the significance of intangible assets Moreover, a company's value growth is not solely dependent on its total assets; it also varies over time (Hulten, 2000) Consequently, the effects of intangible assets \( a_i \) incorporate firm-specific factors \( A_i \) and the industry growth rate \( \lambda \) over time \( t \).
𝑄 𝑖𝑡 = 𝐴 𝑖 𝑒 ∑ λ 𝑀 ℎ ℎ 𝐷 ℎ (𝑖)𝑡 𝐾 𝑖𝑡 𝛼 𝐿 𝛽 𝑖𝑡 𝑒 𝜀 𝑖𝑡 𝑄 , ℎ = 1, … , 𝑀 (2) Where: λ ℎ presents growth rate λ of industry h
𝐷 ℎ (𝑖) is dummy variable of firm i in industry h
To estimate the function, we take the logarithmic form of equation 2 T Yamaguchi (2014) simplified the equation by substituting β with 1-α, assuming that the companies studied exhibit constant economies of scale In contrast, this paper aims to estimate α and β separately to analyze the aggregate market, under the assumption that we can identify the type of economies of scale present.
The added value of a firm is derived from its financial statements, beginning with operating profit This value encompasses depreciation, personnel expenses, and operating profit itself Furthermore, it is essential to adjust the firm's added value for inflation, as it will be utilized in deflator form.
𝑝 𝑡 𝑄 𝑖𝑡 = 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑃𝑟𝑜𝑓𝑖𝑡 + 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝐶𝑜𝑠𝑡 + 𝑃𝑒𝑟𝑠𝑜𝑛𝑛𝑒𝑙 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠 (4) With p t is deflator in year t
The primary focus of this research is to assess the value of intangible assets, which prevents us from regressing Equation 3 without the value of \( A_i \) To address this, we will first estimate Equation 3 to derive the parameters α and β By utilizing the difference form of the variables in this equation, we expect the mean of \( \ln A_i \) to be zero, allowing us to extract fixed effects effectively.
Where d(…) is difference form of variables
Because firm’s added value includes cost of production factors, we couldn’t compute value of company by discount just firm’s added value flow Instead, we will use company’s profit
= Operating Profit – Interest Rate – Tax (6)
= 𝑝 𝑡 𝑄 𝑖𝑡 – (Depreciation Cost + Personnel Expense + Interest + Tax) (7)
We also have the firm’s total cost C excluding cost of goods sold:
So that, firm’s profit is available to compute via formula:
The cost of a company can be analyzed through the duality approach, a key concept in microeconomics that examines the relationship between production and cost functions This approach has been discussed by notable economists such as Samuelson (1947), Shephard (1953, 1970), and Uzawa (196) By employing the duality approach, manufacturers can optimize production by effectively combining various production factors to minimize costs Consequently, the cost function is derived from the production function, ensuring a comprehensive understanding of the cost structure in relation to production efficiency.
Where 𝑅 𝑖𝑡 is nominal cost of capital of firm i in year t
𝑊 𝑖𝑡 is nominal wage of firm i in year t
We will calculate cost function through equation 10 After that, firm’s added value
𝑄 𝑖𝑡 and α, β will be obtained from estimating equation 5
The next step involves estimating the nominal value of equity (E_it), which accounts for the impact of intangible assets This estimation is derived from the net present value of two key financial flows: the firm's added value flow and the total cost flow.
𝑟 𝑖 is cost of equity of firm i in year t
To determine the value of intangible assets, we start with the total equity value, denoted as 𝐸 𝑖𝑡, and subtract the value of tangible assets The nominal value of equity excluding intangible assets, represented as 𝐸 𝑖𝑡 𝑛𝑜𝑛𝐼, can be calculated using a specific formula.
Where: 𝑅 𝑖𝑡 𝑛𝑜𝑛𝐼 is nominal cost of capital without intangible assets
𝑊 𝑖𝑡 𝑛𝑜𝑛𝐼 is nominal wage of labor without intangible assets
𝑅 𝑖𝑡 𝑛𝑜𝑛𝐼 and 𝑊 𝑖𝑡 𝑛𝑜𝑛𝐼 are able to be identified by:
𝑝 𝑡 𝑄 𝑖𝑡 𝑒 λ ℎ (15) From equations 12 and 13, we could calculate value of intangible assets 𝐼 𝑖𝑡 by the difference between 𝐸 𝑖𝑡 and 𝐸 𝑖𝑡 𝑛𝑜𝑛𝐼
Equation 16 illustrates the proportion of intangible assets relative to a firm's total assets Based on this interpretation, we will analyze and compare the impact of intangible assets versus tangible assets on a firm's market value and overall performance.
Where: 𝑇 𝑖𝑡 is value of firm’s tangible assets,
𝑌 𝑖𝑡 is firm’s stock price or firm’s added value.
EMPIRICAL RESEARCH
Data Sources
This research will be conducted for Vietnam listed companies in different industries These are 214 chosen companies and data are collected from 2008 to 2012
We chose this time range to lower effect of economic recession from previous period
The firm's operating profit multiplier, known as the deflator, represents the firm's added value and can be calculated using Equation 4 Various studies have estimated the Cobb-Douglas model with different proxies for added value For instance, Hsing and Yu (1996) utilized value added as a measure of output, while Lev and Radhakrishnan (2003) opted for revenue as a proxy Additionally, Yamaguchi (2014) employed earnings before tax, depreciation, and amortization to represent output in his research on intangible assets In this study, EBIT will be used as the output measure since it reflects added value after accounting for raw input costs The necessary components for calculating Equation 4 will be sourced from the VEC database, including account TS131, TS132, TS161, TS162 (depreciation), TN11 (personal expenses), and KQKD8, KQKD12.
Capital K and Labor L will be sourced from the VEC database, with net plant, property, and equipment (PP&E) representing capital K, as defined by B Lev and S Radhakrishnan (2003) The account for construction in process is excluded, as it does not currently generate profit Labor is quantified by the number of employees in the firm, following the methodology of T Yamaguchi (2014) This research will enhance previous studies by calculating total labor expenses to represent L, as this metric more accurately reflects the impact of labor on a firm's added value when using the Cobb-Douglas function in its logarithmic derivative form This approach effectively interprets the relationship between labor and capital factors in relation to EBIT Additionally, K and L will be utilized to assess equity values, making total labor expenses a more suitable metric than simply the number of employees Data for K and L will be gathered from various accounts in the VEC database, including TS11 and TS12 for capital K, and LD11, LD13, TN11, and TN12 for labor L.
The nominal cost of capital (R) is calculated using the Capital Asset Pricing Model (CAPM), with the firm's rate of return (r) being the initial step in this process This return, also known as the cost of equity, reflects the expectations of common shareholders regarding the firm's operational performance Unlike the nominal cost of capital, which represents a weighted average of various capital flows including equity, debt, and liabilities, calculating the firm's rate of return presents challenges due to the unpredictability of future cash flows Accurate forecasting of a company's inflows and outflows is complicated by their inherent variability in both amount and timing To address this uncertainty, we will employ the Capital Asset Pricing Model as our primary method in this research.
Base on CAPM approach, William Sharpe (1964) find out expected firm’s rate of return from relationship between risk-free rate and premium from bearing the stock’s market risk (beta*(r m -r f ))
𝑟 = 𝑟 𝑓 + 𝑏𝑒𝑡𝑎 ∗ (𝑟 𝑚 − 𝑟 𝑓 ) With: 𝑟 is firm’s cost of capital,
The risk-free rate is derived from assets with minimal default risk, commonly represented by Treasury bonds or government debt instruments The challenge lies in determining the appropriate bond for calculating a firm's rate of return Typically, we choose a Treasury bond that matches the duration of the firm's stock However, considering the accounting assumption of going concern, which implies that a firm's stock has infinite duration, we opt for a long-term Treasury bond, specifically a ten-year bond, to represent the risk-free asset.
Understanding risk premium involves addressing various factors such as inflation, business cycles, and credit risk The Fama-French three-factor model (Fama & French, 1992) is one approach that attempts to capture multiple risks However, the historical equity risk premium method is a reliable indicator, utilizing long-term data to estimate risk premium by analyzing the average market return and risk-free rate of a country It is crucial that the data collection period encompasses significant economic cycles, including both expansion and recession phases Dimson, Marsh, and Staunton (2003) employed this method to calculate risk premiums for 16 countries, including the United States, over the period from 1900 to 2002 Their findings provide a clear understanding of equity risk premiums in relation to Treasury Bonds, enhancing readers' comprehension of risk premium dynamics.
This research utilizes the historical equity risk premium approach to calculate equity’s risk premium, while acknowledging several key limitations Firstly, the stock index is subject to constant changes, leading to fluctuations in market returns over time Secondly, investor risk aversion is unstable, impacting the consistency of the risk premium Additionally, the historical period covered by the data poses another limitation Despite these challenges, the approach has demonstrated its validity over time and has been widely adopted by researchers For this study, the IFS database will provide the necessary deflator data for the analyzed years.
First estimation: Calculate α and β
To determine the parameters α and β, we will utilize equation 5, starting with the derivative form of the data The challenge lies in managing the large number of companies across three industry categories, which complicates the processing of time series data linked to their tax ID numbers I employed both SPSS and Excel to address this issue Initially, we will gather and categorize the necessary data into specific industries Subsequently, each firm will have its derivative calculated individually, and dummy variables will be created for the company’s industries After deriving the forms of K, L, Q, and the dummy variable D (with 49 dummy variables for 50 industries), we can proceed with equation 5.
In this study, we apply the panel data fixed-effect model to analyze the relationship between added value, capital, labor, and industry growth rate, following the Hausman test to determine the most efficient model The fixed-effect model is deemed more appropriate after the test, focusing on firm-level data due to the inability to maintain consistent industry IDs and time periods We incorporate an industrial dummy variable to assess the impact of industry growth on firm performance, utilizing the Panel Least Squares Method with Fixed Effects The regression results indicate similar coefficients for labor and capital; however, the Hausman test reveals that the random-effects model better explains the relationship among the variables Heteroskedasticity and multicollinearity tests confirm the presence of heteroskedasticity, which is addressed in the regression analysis Meanwhile, the VIF index indicates no multicollinearity issues Notably, the random-effects model results show that the sum of α (0.63) and β (0.24) is less than 1, suggesting that listed companies in Vietnam experience decreasing returns to scale, meaning that increasing labor and capital investment leads to diminishing operating profit turnover.
Table 3: Result of equation 5 using fixed-effects and random-effects model α β R 2
(1) Fixed effect model without industrial dummy variables
(2) Random effect model without industrial dummy variables
(3) Random effect model with industrial dummy variables
Table 5: Testing for heteroskedasticity using Wald test
Modified Wald test for groupwise heteroskedasticity in fixed effect regression model
H0: sigma(i)^2 = sigma^2 for all i chi2 (214) = 3.4e+37
Table 6: Testing for multicollinearity using VIF index
Table 7: Effect of Industry on Firm’s Output
Despite the sum of α and β being less than one, the dummy variables for various industries indicate that many sectors are experiencing positive growth rates This is a promising sign for the Vietnamese economy, suggesting that the development of listed companies is driven not only by tangible assets but also by intellectual contributions As T Yamaguchi (2014) points out, the primary source of long-term, high growth rates is expected to stem from intangible assets Table 9 illustrates the growth rates across Vietnamese industries, and we will analyze several industries with notable growth in recent periods to uncover the underlying reasons for their success.
The five high-growth industries—consumption, industrial machinery, chemicals, banking, and steel—experienced significant development from 2008 to 2012 due to various factors Understanding these factors is essential for grasping the business environment within these sectors By recognizing the forces driving industrial growth, we can better interpret the scope of intangible assets associated with a company's activities.
Vietnam's consumption market is rapidly developing, outpacing its neighboring countries with a strong growth rate in recent years According to the Global Retail Development Index (GRDI), Vietnam's retail market ranking fluctuated from 23rd in 2011 to 32nd in 2012, before rising to 28th in 2014, indicating significant potential for future growth in this sector Several factors have contributed to the industry's past progress.
Vietnam's population growth is a key driver of the country's retail market development As the population continues to rise, so does the demand for retail products According to the Vietnam General Statistics Office (GSO), the population reached approximately 87.84 million in 2011, reflecting a 1.04% increase from the previous year, with around 26.88 million citizens, or 30.6% of the total population, residing in urban areas By 2012, the population was estimated to be around 90 million, highlighting the expanding market and its significant potential for retail growth.
- Spending on consumption: Average income per capita in 2002-2007 periods was about 7.3% per year and lead to 10.3% per year in the next period from
From 2008 to 2012, increased earnings enhanced customers' purchasing power, positively impacting the consumption industry's revenue During this period, the proportion of consumption relative to total personal income remained steady at approximately 14.8%, ultimately generating $89.7 billion by the end of 2012.
Vietnam's economic development plays a crucial role in the growth of its retail market, with a GDP growth rate of approximately 6-7% annually From a GDP of 31 billion dollars in 2000, Vietnam's economy surged to 140 billion dollars by 2011 Despite global economic recessions, Vietnam's growth is projected to remain around 5%.
Urbanization is a significant driver of Vietnam's high-growth economy, as it leads to increased demand and a higher level of consumer engagement Retail models are primarily focused on urban areas due to their larger market size and the tendency of urban residents to adopt new products more readily than those in rural areas This trend presents a substantial opportunity for the robust development of Vietnam's retail market According to the World Bank, Vietnam's urbanization rate is approximately 3.4% per year, further emphasizing the potential for growth in this sector.
Vietnam's young population structure significantly contributes to its economic growth and creates sustained demand in the labor market According to the General Statistics Office (GSO), the labor force in Vietnam was approximately 46.48 million in 2013, and it is projected to continue growing in the coming years.
Travel significantly boosts Vietnam's retail market, particularly in the food, beverage, and clothing sectors Despite low economic growth, the country attracts approximately 6 million international visitors annually, alongside catering to around 30 million domestic travelers In 2010, the travel industry generated total profits of about 130 trillion Vietnamese dong.
Vietnam's retail market is becoming increasingly open due to its engagement with the WTO, despite the government's strict control over foreign companies As of January 1, 2009, foreign investors were allowed to establish wholly-owned firms in the retail sector Following this, from November 1, 2010, foreign service companies gained the ability to introduce new brands and franchises in Vietnam This influx of competition is driving domestic retailers to enhance their technology, boost productivity, improve management systems, and adopt new business strategies that prioritize advertising and after-sales services.
- Development of Banking System: Having more payment facilities helps
Vietnam is actively working to attract foreign retailers, as indicated by the State Bank of Vietnam By the end of 2010, the country had approximately 11,000 ATMs and over 24 million banking cards in circulation The trend of cash payments is rapidly declining, dropping from 31.6% in 1991 to just 15% in 2010, and this decrease is expected to continue in the coming years.
A strong distribution channel is a crucial intangible asset for success in the consumption industry, enabling firms to significantly boost revenue and improve their chances of success when launching new products.
Building a distribution channel in Vietnam necessitates significant investment and involves various factors, leading to increased distribution and administrative expenses that can reduce company profits Firms with extensive distribution channels typically exhibit a distribution and administration expense ratio to revenue ranging from 15% to 33%, as highlighted in the HSC analysis report.
Estimate Cost Function
According to Samuelson (1947), firms prioritize achieving maximum profit, which is influenced by production and costs To maximize profit, companies can either increase revenue or reduce total costs Utilizing the Cobb-Douglas formula, firms can determine optimal output based on the combination of labor and capital This combination is crucial, as it is aligned with the goal of maximizing profit, which remains the primary objective of any company The profit function of a firm can be described accordingly.
We take first derivative to find out maximizing profit point
Firm will come to maximum profit when (19) and (20) equal zero We will change these two equation a little bit and have two equations as below:
We multiplied K in both side of equation 21 and L in both side of equation 22, then
𝛽𝐴 𝑖𝑡 𝐾 𝛼 𝐿 𝛽 = 𝑊𝐿 (24) From equation 23 and equation 24, factor labor L could be expressed via factor capital K:
The marginal products of capital and labor are derived from equations 21 and 22, leading to the cost minimization condition where the ratio of the marginal product of capital (MPK) to the marginal product of labor (MPL) equals the ratio of the cost of labor to the cost of capital This relationship highlights the balance between the inputs in production to achieve optimal efficiency.
𝑊 (26) Base on equation 2 and substitute L for K as equation 25, formula of target output will become:
𝑊] −𝛽 𝑒 𝜀 𝑖𝑡 𝑄 (28) Take power 1/(𝛼 + 𝛽) for both side of equation 28, we have:
It comes to number of labor (number two input), we will replace equation 29 to equation 25:
Up to now, we could measure cost of company base on cost function as below:
With B in equation 30 is expressed as:
Equation 30 is similar to equation 10 Data for calculating cost function includes𝛼, 𝛽, 𝑅 𝑖𝑡 , 𝑊 𝑖𝑡 , 𝑄 𝑖𝑡 and 𝐵 ℎ 𝛼, 𝛽 and 𝑄 𝑖𝑡 are regression results of equation 5 𝑊 𝑖𝑡 could be collected from VEC database and 𝑅 𝑖𝑡 will be computed using CAPM model
It is another input we need to compute for equation 30, 𝐵 ℎ 𝐵 ℎ is presented in equation
31 and data we need to finish this computation is [𝐴 𝑖 𝑒 ∑ λ 𝑀 ℎ ℎ 𝐷 ℎ (𝑖)𝑡 ] −1/(𝛼+𝛽) We can use formula of equation 2 to do this calculation
Equation 30 show total cost of company with effect of both intangible asset and tangible asset To determine value of intangible asset, value of intangible asset need to be subtracted from total firm’s equity We will calculate equity with and without intangible asset to compute intangible asset value in the next steps.
Compute Firm’s Equity Value
The equity value of a firm represents the total value it can generate throughout its lifetime, calculated as the present value of future operating profit flows While the calculation method is straightforward, accurately forecasting operating profits poses a significant challenge Additionally, selecting an appropriate discount rate further complicates the valuation process.
In 2014, T Yamaguchi's research on discounted cash flow assumed an infinite growth rate, simplifying calculations amidst fluctuating economic conditions However, applying this method to Vietnamese listed companies reveals challenges, particularly regarding the unrealistic expectation of sustained high growth While companies may currently experience strong sales, external factors such as competition, substitute products, and changing macro policies can disrupt this momentum Each product has a defined life cycle, and although some firms extend their growth through effective management and mergers and acquisitions, these cases are rare Most industries are in an expansion phase, but this trend is unlikely to last Consequently, the long-term growth rate assumption lacks robustness To address this, I propose that companies will maintain their current growth rate for the next five years, aligning with the Vietnamese government's five-year economic plans Following this period, firms are expected to stabilize, capturing market share and achieving consistent annual profits, leading to adjustments in the formula for calculating firm equity value.
𝑟 𝑖 (1 + 𝑟 𝑖 ) −𝑛 (33) With n is the number of year that company still remains it growth speed
The weighted average cost of capital (WACC) is commonly employed to discount a company's cash flow In this study, we adopt WACC as other researchers have, assuming that variations in the cost of equity and cost of liability are minimal and do not significantly affect WACC This assumption is crucial as it simplifies the model.
Compute Firm’s Equity Value with Non Intangible Asset
The total value of a firm's equity reflects its potential for future profitability, which is influenced not only by physical assets like property, plant, and equipment (PP&E) and workforce size but also by intangible assets such as intellectual property In the early stages of a business, the company is typically smaller, allowing for easier management of daily operations and quicker decision-making However, as the firm grows, it must explore new markets, expand its brand, and hire additional staff, leading to more complex management challenges that encompass financial and marketing strategies Each decision made can significantly impact profitability, necessitating careful budgeting for projects and marketing efforts Therefore, alongside building a strong brand and company culture, hiring exceptional executives like CEOs and CFOs becomes crucial as they represent valuable intangible assets Additionally, the growth impact varies between small and large companies, and to assess a firm's equity value without considering intangible assets, we focus on its labor and capital inputs.
13 In the left-hand side of equation 13, added value of firm’s equity is computed using Cobb-Douglas model with just two components, L and K We also use WACC as discount rate to discount future added value flow In formula of added value of firm’s equity with non-intangible asset, company’s growth rate will not exist Cobb-Douglas function indicates optimal output with each combination of K and L In the rest of equation 13, total firm’s expense with non-intangible asset will be calculated by the same formula as total firm’s expense These two expenses are just different from nominal cost of capital and nominal cost of labor Cost of capital and cost of labor in non-intangible asset condition will be adjusted from cost of capital and cost of labor in normal condition
Evaluating Firm’s Intangible Asset
To determine the value of intangible assets, we can use the formula derived from Equation 16, which states that the value of intangible assets is equal to the total asset equity value minus the firm's equity value excluding intangible assets Upon calculating, we can ascertain the firm's intangible asset value Figure 5 illustrates the proportion of intangible assets relative to total assets across various industries.
Examine Relationships among Firm’s Revenue, Intangible Asset and
In this final analysis, we explore the significance of intangible assets in relation to a firm's value Yamaguchi (2014) established a connection between a firm's revenue and its intangible assets through a regression analysis that initially focused on the relationship between revenue and book value of equity By incorporating additional variables such as industry growth rate and intangible assets, the findings revealed that intangible assets exert a greater influence on a firm's value than book value alone While the growth rate of the industry also positively affects a firm's value, its impact is less pronounced than that of intangible assets Japanese firms, in particular, demonstrate a stronger reliance on their asset structure rather than industry trends Companies with renowned brand names, efficient control systems, and diversified distribution networks, or those that invest significantly in intangible assets, tend to achieve superior growth compared to their industry counterparts.
Figure 4: Change of total factor of production (TFP)
Figure 5: Ratio of Intangible asset on Total asset
This study investigates the impact of intangible assets on the added value of publicly listed companies in Vietnam, focusing on the distinct effects of tangible versus intangible assets To enhance clarity, we will utilize the value of tangible assets instead of the book value of equity A non-linear model will be employed for estimation, acknowledging that firms make simultaneous decisions regarding inputs to optimize revenue and minimize costs However, as highlighted by Samuelson (1947), practical application of non-linear estimation is complex; therefore, a linear approach with logarithmic transformation of variables will be implemented The estimation process will initially include all variables, followed by a reduction in variable count to better understand the influence of each factor on the firm's added value.
This analysis utilizes data from 214 companies across various industries to assess the variables influencing earnings before interest and taxes (EBIT) in 2012 A notable limitation of this dataset is its exclusive focus on the year 2012, which may not account for business cycle effects or seasonal factors Expanding the data range in future studies could address these limitations and provide a more comprehensive understanding of the variables at play.
Table 8: Estimation with all variables
REVENUE Coefficient Std Error t-Statistic Prob
Table 9: Effect of intangible asset and industry development on firm’s added value
REVENUE Coefficient Std Error t-Statistic Prob
Table 10: Effect of intangible asset on firm’s added value
REVENUE Coefficient Std Error t-Statistic Prob
The results indicate that intangible assets significantly enhance a firm's added value, while tangible assets have a less clear impact A positive correlation exists between intangible assets and profitability; specifically, a 1% increase in intangible assets can lead to a 0.04% rise in profits This effect is likely to extend beyond a single year, although data limitations restrict our analysis to one year For instance, when a consumption firm expands its distribution network into new markets, it initially attracts a younger demographic, who are more willing to adopt new products This group, known as innovators, represents about 2.5% of customers (Rogers, 1983) As more young consumers use the product, older customers become increasingly curious, leading to greater future revenue for the firm This pattern holds true for investments in various types of intangible assets.
The growth rate of industries significantly influences a firm's EBIT, differing from findings in Yamaguchi's research The development resources for Vietnam's listed companies are affected by unstable factors, particularly the industry's profitability The attractiveness of each industry varies based on its position in the economic cycle; for instance, financial and transportation sectors thrive during the recovery phase, while technology and capital goods excel in the middle stage, and basic industries and energy peak at the cycle's height Conversely, certain industries, like utilities, perform better during economic recessions, particularly in the middle stages, while financials may excel at the trough Consequently, the growth rate of listed companies in Vietnam remains unstable and unpredictable.
In analyzing the market value of a company, we explore the relationship between independent variables and stock price, as illustrated in Table 11 The findings reveal an inverse relationship, indicating that tangible assets hold significant value, while intangible assets and industry growth rates do not play a substantial role.
Table 11: Association among intangible asset, tangible asset, industrial growth rate and stock price
Stock Price Coefficient Std Error t-Statistic Prob
Table 12: Association between tangible asset and stock price
Stock Price Coefficient Std Error t-Statistic Prob
Stock prices are influenced by various factors, including company performance, financial position, cash flow, and policies Each country's stock market has unique characteristics, and in Vietnam, the market is relatively small, allowing large financial entities to easily control price trends A significant number of investors in the Vietnamese stock market prioritize short-term gains, which can skew investment decisions away from a company's long-term profitability and core value Consequently, certain critical information, such as administrative expenses and brand value, may be overlooked in investment analyses, impacting overall investment strategies.
Tables 8 and 11 reveal differing impacts of intangible assets on a company's performance and stock price Intangible assets represent the potential for future profits, highlighting their significance in a firm's growth strategy Therefore, in addition to expanding production capabilities, companies should prioritize the accumulation of intangible assets to ensure sustainable long-term development.
4.8 Firm’s Intangible Asset and Policy Implications
Intangible assets hold significant value in a company's operations, closely linked to its potential for future growth Understanding why these assets have such a profound impact on businesses requires long-term analysis of specific cases A key concept to consider is "market power," which is often associated with monopolistic markets In a perfectly competitive market, individual businesses have minimal market share and do not influence market dynamics, resulting in limited market power However, when certain firms or groups of firms can dictate prices, they exhibit market power, marking a shift in the competitive landscape.
Market power, as defined by Lawrence (May 2012), refers to a company's ability to earn excess profits, which arise from the disparity between price and marginal cost The sources of market power stem from product differentiation, as highlighted by Bain's (1956) research, which identifies barriers to entry and the challenges of distinguishing products In the absence of differentiation, products become indistinguishable in the market, leading consumers to prioritize the lowest price, which ultimately drives the market toward equilibrium and negates excess profits Lawrence emphasizes that product differentiation is akin to the creation of intangible assets, with several factors contributing to the uniqueness of products.
A resources-owned monopoly refers to exclusive inputs, such as proprietary trade rights granted by the government or exclusive patents, which are vital for businesses For instance, companies may require unique raw materials or minerals, necessitating strong social capital and financial stability to secure exclusive agreements with suppliers Additionally, a positive relationship between businesses and government is crucial for obtaining proprietary trade rights Patents, often resulting from research and development or acquisitions, are significant intangible assets that reflect a firm's commitment to long-term growth Overall, a portfolio of patents demonstrates a company's focus on structural capital and innovation.
- Economic of scale: This is the origin of "natural monopoly" To participate in the industry, enterprises have accumulated an amount of capital needed and thereby create barriers to entry
Entering the beverage industry demands substantial investment, with businesses facing significant "sunk costs" that cannot be recovered if they exit the market This high financial commitment includes expenses related to research and development, market research, advertising, and brand building, making it a capital-intensive sector Iconic brands like Coca-Cola and Pepsi exemplify the challenges of market entry, as their strong brand identities and extensive advertising strategies create formidable barriers for new competitors According to game theory, potential entrants must be prepared to allocate considerable financial resources for branding and advertising to compete effectively against these established giants, underscoring the critical role of brand equity in overcoming entry barriers.
Lawrence's 1956 study highlights the strong connection between a firm's intangible assets and its market power To leverage this market power for greater profitability, businesses must focus on developing strategies that enhance their intangible assets.
Market power significantly influences a company's operations, sparking diverse opinions among economists regarding its economic effects While some view market power positively, highlighting its potential benefits, others express concerns about its negative implications for market dynamics.
Market power has a significant negative impact, particularly in monopoly markets where competition is eliminated Unlike the ideal perfect competition market, where prices align with optimal economic benefits and no entity can secure excessive returns, monopolies like Microsoft in the web browser market wield substantial pricing and output control Microsoft's integration of Internet Explorer (IE) into the Windows operating system effectively overshadowed other browsers, leading to an overwhelming 95% market share in 2004, which persisted at 85% even after competitors emerged This dominance illustrates the formidable barriers monopolies create for industry innovation In response, policymakers have implemented antitrust laws to mitigate monopoly power and foster competition, as evidenced by Microsoft's legal challenges in Europe, resulting in fines totaling nearly $2.2 billion These antitrust efforts have yielded results, with IE's market share plummeting to 24% by 2013, while competitors like Firefox and Chrome gained ground, holding 35% and 29% market shares, respectively.