Credit access and innovation activity in vietnamese SME

UNIVERSITY OF ECONOMICS STUDIES HO CHI MINH CITY VIETNAM INSTITUTE OF SOCIAL THE HAGUE THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS CREDIT ACCESS AND INNOVATION ACTIVITY IN VIETNAMESE SME BY TRƯƠNG BẢO DUY MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, JANUARY 2015 UNIVERSITY OF ECONOMICS STUDIES HO CHI MINH CITY VIETNAM INSTITUTE OF SOCIAL THE HAGUE THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS CREDIT ACCESS AND INNOVATION ACTIVITY IN VIETNAMESE SME A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By TRƯƠNG BẢO DUY Academic Supervisor: NGUYỄN HỮU DŨNG HO CHI MINH CITY, JANUARY 2015 ABSTRACT In the wake of Vietnam banking crisis 2008-2010, there has been more focus on access to finance for small and medium sized firms Even though some studies has already suggested that limit access to credit might stagnate innovative process, scarce studies has put their focus on small firms in developing countries For this reason, our study is tended to reduce that gap by analyzing how credit could have affected innovation activities of Vietnamese’s small and medium sized enterprises (SMEs) using data between 2007 to 2011 Our hypothesis is having access to credit allows Vietnamese SMEs aid their innovation process Since, it would allow them to import new machineries, upgrade outdated production line, to cut cost, produce new products and/or improve their old products In this paper we uses logit models and Fixed-effect models to test the hypothesis Among others, logit models allow us analyzing effect of credit on firms each year, and fixed-effect models help us take advantage of our Vietnamese SMEs panel data sets This study increased the results likelihood suggest of that introducing easing new credit access technology or applying new production line of Vietnamese SMEs However, the effect of credit access on other types of innovation, like introducing new products and improving old products inconsistent over the year, thus it needs to be studied further Key words: Vietnamese SMEs, credit access, innovation is TABLE OF CONTENTS CHAPTER I INTRODUCTION5 8 CHAPTER II 10 10 16 21 CHAPTER III 24 24 24 29 CHAPTER IV 32 32 39 40 CHAPTER V 53 53 54 REFERENCE: 56 APPENDIX: 56 LIST OF TABLES Table 3.1: expected sign of independent variables 27 Table 4.1: the share of Vietnamese SME by ownership category for the period 2000-2008 31 Table 4.2: the share of SMEs on total number of firms in Vietnam 33 Table Table Table Table Table Table Table Table 4.3: the share of SME by kind of economic activity 4.4: SME Average share of debt 4.5: Debt average of Vietnamese SMEs 4.6: Average SME innovation activity 4.7: Logit model, marginal effects - year 2007 4.8: Logit model, marginal effects - year 2009 4.9: Logit model, marginal effects - year 2011 4.10: Checking for Multicollinearity 34 36 37 38 41 42 43 46 LIST OF FIGURES Figure 2.1: Interest rate and expected return Error! Bookmark not defined Figure 2.2: Enterprise Innovation – Offensive strategy Figure 2.3: Enterprise Innovation – Offensive strategy 14 Figure 3.1: Analytical Framework 13 23 CHAPTER I INTRODUCTION For better audience experience, introduction chapter is used to state out the causes and the range of this study Problem statement section is used to briefly describe theories and empirical studies behind firm innovation as well as reveal any possible connections between credit access and innovation It also indicates the need to conduct this research in Vietnam as well as the research objects and the scope of the study They, therefor, determine the goals and the scope of this thesis Problem statement Although firm innovation got its very first attention in the early twentieth century via the book of Schumpeter’s book (1934), yet public and research interest is disproportionate Unsurprisingly, large and multinational enterprises got the most attention from both governments and scholarships around the world It is properly because when it comes to innovation, we tend to think about breakthrough technologies, which might be creating a whole new industry or dramatic changes of an old industry For example: internet industry or big jumps of agriculture Innovation is also seen as the result of heavy R&D investment which can only be done by large enterprises Yet, innovation is not necessarily breakthrough technologies (Hadjimanolis, 2000) In fact, more studies and better definition (Archibugi & Iammarino, 2002) pointed out that innovation is not large enterprises’ exclusive right, instead it happens anywhere despite size and region through self-learning or adapting That opened the gateway for more recent studies toward innovation activities in small and medium enterprises (SMEs) Nevertheless, most research around this topic (Beck & Demirguc-Kunt, 2006; Hoffman, Parejo, Bessant, & Perren, 1998; March-Chorda, Gunasekaran, & Lloria-Aramburo, 2002) were still conducted primarily in developed countries, for instance in Western Europe and North American countries Their contribution as a result were limited within the developed countries’ boundary Thus, there are many areas around this topic need to be explored Investigating innovation in the effect developing of credit countries is access an on SMEs’ interesting yet challenging task It is interesting because a clear connection between them seems to exist While credit is a main external financial resource of SMEs; Innovation is an indicator of firm’s adaptation ability and sometime growth ability, but it may require heavy investment Yet in developing countries, credit application process may not be transparent thus may require personal connection Beside a firm can use credit for multiple reasons not just innovation, for instance, enlarging instead of investing on automatic its machine labor This force topic is challenging because while many studies has been done so far, they are still limited partly because they only used data of developed countries The reason could be due to the nature of developing countries, data of SMEs is not collected easily As a result, it is difficult to measure credit access and firm’s innovation For this reason, our study tries to narrow that gap by investigating the link between credit and enterprise innovation using Vietnamese SME dataset conducted by the Central Institute for Economic Management (CIEM) of the Ministry of Planning and Investment of Vietnam (MPI); the Institute of Labour Science and Social Affairs (ILSSA) of the Ministry of Labour, Invalids and Social Affairs of Vietnam (MoLISA); and the Development Economics Research Group (DERG) of the University of Copenhagen This dataset provides rich information about Vietnamese SME from 2005 to 2011, thus allowing us to build our panel models We hope that our result can be used as reference for government intervention then There is one more reason that urged us to this study There was a banking crisis in Vietnam from 2008 to 2010 which might limit access to credit from small firm After the crisis, a report of Rand et al (2012) used 2011 Vietnamese SME survey data implied a reduction in number of SME innovation activities Although this might have been an coincident and did not necessarily reflect the real connection between those factors, since credit is just one of many barriers of firm’s innovation Many studies (Hall, 2005; Hoffman et al., 1998; Madrid‐Guijarro, Garcia, & Van Auken, 2009) shared the same result where it indicated that financial resource are one of the main causes However, it should be noticed that most of the studies were conducted outside developing countries’ boundary therefore we not expect our study would share the same result Though there are only a small number of study investing the role of innovation in Vietnam, this study considers it to be an important factor of firm growth for two reasons It is claimed to give firm a temperate absolute advantage in the market (Schumpeter, 1934) and also increasing firm survival chance (Christiansen, 1997) Consequently, our study finds its duty to further investigate the existence of credit access and innovation relationship in Vietnam environment Research objects The first step of our study was finding the best measurement for firm credit access This was considered as a crucial step due to the fact that credit access was difficult to measure and there was still no broaden accept on the way to measure it After that we investigate to see if the firm had better credit position would have innovated more than the firm who did not We were also take into account difference between high technology and low technology firms which consequently influence decisions of the head of the enterprises on innovation Thus, in the end we separated the firms in our data into two groups to see how credit access had affected innovation within each group Logit model with Total credit growth (2009) - Innovation 1: Introducing new product - Innovation 2: Improving old product - Innovation 3: Introducing new technology or apply new production line Logit model with Total credit growth, marginal effects (2007) - Innovation 1: Introducing new product - Innovation 2: Improving old product - Innovation 3: Introducing new technology or apply new production line Logit model with Total credit growth, marginal effects (2009) - Innovation 1: Introducing new product - Innovation 2: Improving old product - Innovation 3: Introducing new technology or apply new production line Logit model with Total credit growth, marginal effects (2011) - Innovation 1: Introducing new product 11 - Innovation 2: Improving old product - Innovation 3: Improving old product Logit model with Total credit growth, fixed effects model - Innovation 1: Introducing new product - Innovation 2: Improving old product - Innovation 3: Improving old product ... introducing easing new credit access technology or applying new production line of Vietnamese SMEs However, the effect of credit access on other types of innovation, like introducing new products and. .. firms in our data into two groups to see how credit access had affected innovation within each group In more detail, this study tries to unveil the link between credit access and SME innovation. .. drawing attention on the importance of innovation within firms In his book he defined types of innovation as following: 1.Introducing a new product or adjusting old product 2.Introducing a new industrial