Innovation and productivity in small and medium enterprises a case study of vietnam

Problemstatement

C P r e g a r d i n g a s s i s t a n c e s f o r t h e developmentofsmallandmedium– sizedenterprises(SMEs)inVietnam,theSMEsd e fi n ed asfirmswithtotalemployeebetwee n10and300,andtotalequitylessthan1 00billiondong.Followingthese criterion,uptoMar

2015,totalSMEsinVietnama cco u n t forover90%ofallenterprises.Thesefirmshav ecreatedmorethanhalfab i l l i o n o f j o b s e v e r y y e a r T h es e firmsa l s o c o n t r i b u t e a p p r o p r i a t e l y 4 0 % o v e r a l l G D P

Small and medium-sized enterprises (SMEs) play a vital role in the sustainable growth of Vietnam's economy Enhancing the productivity of SMEs is an urgent priority for the Vietnamese Government, as the overall economic growth significantly relies on the efficiency of these firms Key drivers of productivity include innovation and technology improvement However, many SMEs in Vietnam continue to face operational challenges, leading to inefficiencies A major obstacle is the lack of recognition of the importance of innovation and the adoption of new technologies in production processes Despite the well-established link between innovation and increased productivity, SMEs have not prioritized this aspect, hindering their potential for growth.

Thecommonmeasurement forinnovationi n empiricalstudiesi s R&Dexp enditureofaparticularfirm.Variousempiricalstudieshavebeenconductedtoq u a n t i f y therelationshipbetween R&Dexpenditure andfirm’sperformance

Conclusionsvaryfromthesestudiesincludingstrongcorrelationbetweenthet wo(Siedschlag,ZhangandCahill(2010);Belderbos,CarreeandLokshin(2004);Crespia n d P ianta(2009)).However,intheVietnamesecontext,smallandmedium- sizedfirmshavenotwidelyreportedtheirspendingonresearchanddevelopmentactivities.I n a d d i t i o n , i n n o v a t i o n a c t i v i t i e s o f S M E s i s l e s s formala n d i n v o l v e d i n m a n y differentexercisesascomparedwithlargerfirms.Assuch,researchontheimpactofinnov ationonSMEsproductivityfacesmanyobstaclesintheVietnamesecontext.

AlackofinterestinrelationtotherelationshipbetweeninnovationandSMEsp r o d u ct iv i t y i n V i e t n a m h a s o p e n e d u p t h e i n t e r e s t o f d e e p i n v e s t i g a t i o n I t i s e s p e c i a l l y essentialinthecontextoftheeconomydominatedbyS MEsandtechnologyleveli s s t i l l l o w T h e r e f o r e g a i n i n g f u r t h e r k n o w l e d g e i n t h i s f i e l d i s n e e d e d f o r p o l i c y makerst o o r i e n t t h e d e v e l o p m e n t c r e a t i o n a n d a p p l i c a t i o n o f innovativeactivitiestowardthegrowthoffirmsaswellascou ntry.

Researchobjectives

Thisstudyisconductedtoprovideanadditionalevidenceontherelationship b e t w e e n i n n o v a t i o n andfirms’p r o d u c t i v i t y fort h e V i e t n a m e s e S M E s T h e maino b j e c t i v e ofthisstudycanbesummarized asD e f i n i n g andquantifyi ngtherelationshipbetweeninnovationandproductivityi n f i r m l e v e l i n t h e c o n t e x t ofV i e t n a m e s e SMEs.

Researchquestions

Thestudyaimstoprovideempiricalevidenceforthemainquestions emerged:I s thereanyrelationshipbetweeninnovationandproductivityinthecontextofSMEsinV ietnam?Ifyes,thenhowdoesinnovationcanaffectSMEsproductivity?

Researchmotivations

Thiss t u d y aimst o p r o v i d e t h e c l o s e r l o o k a t t h e V i e t n a m e s e SMEs’p r o d u ct iv i t y usingt he a p p r o a c h o f L e v i n s o h n an dP et ri n( 20 03 ), ho wi tc ou ld be ch an ged d u e t o c ha n g e s i n t he l e v e l o f i n n o v a t i o n making.D e s p i t e t h e f

3 ac t t h a t innovationplayacrucialroleinthedevelopment,theoutcomeofinnovationactivities a r e uncertainty.Wedo notknowbeforehandwhethertheseactivitieswouldsuccess

3 increatingvalueaddedtothefirms.Researchresultsprovidepolicymakerssome e v i d e n c e s onhowtoappropriatelyallocatetheavailableresourcestoobtainthetargetproductivity ThistopicisinterestinginthecontextofdevelopingcountriessuchasV i e t n a m fort w or easo nsass ug ges ted byIndjikianandSi eg el (2 00 5) F ir st ly theb en efit ofi nnovationmightnotbefullyexploitedindevelopingcountries.Secondly,i n thesecountries,nationalresourcesallocatedtocreatingnewinnovationstillarer e s t r i c t e d de spitethefactthatinnovationplaysanimportantroleinglobalgrowth.

Researchscopeanddata

Thestudyaimstodeterminetherelationship betweeninnovationand p r o d u c t i v i t y in VietnamSMEsfrom2005to2013insixselected industriesinclude: (1)foods;(2)woodandwood-relatedproducts;(3)rubberandplasticproducts;

(5)fabricatedmetalproductsand(6)furniture.Ther e a s o n whythesesixinsuctriesarese lectedinthestudyisthatdataoftheseindustriesi s biggestandhaveaccountedfornearly70%oftotalS MEsinthefive- roundsurvey,t h e r e f o r e canberepresentativeforthewholedataset.Atthetime datausedinthisst ud y wascollected,thedatasetof2015surveywasnotfullygatheredandpubli shed.A s such,datausedinthisstudyonlyendsin2013.

Thestructureofthisstudy

Chapter2providestheoreticalandempiricalstudiesontherelationshipbetweeninnovationandp roductivity.Chapter2beginswithSchumpeterTheoryofInnovationthatexplainstheroleofinnov ationtoeconomicgrowth.Thenthischapterreviewstheconceptofproductivityandthe methodsofhowproductivitycanbeestimatedasw e l l a s i t s d e t e r m i n a n t s I n a d d i t i o n , t h e d e f i n i t i o n o f i n n o v a t i o n a n d h o w i t i s measuredare discussedinthe chapter.Therelationshipbetweenthesetwo conceptsh a s beenreviewedthroughliterature.

Chapter3presentsthemethodologywhichisutilisedinthestudy.Anoverviewo fVietnamSMEsisdiscussed.OnthegroundofliteraturereviewinChapter2,theconceptualframe workis co ns tr uc ted T h e measurementof r e l e v a n t v a r i a b l e s an d regressiontechniquesaredescribed.Inaddition,thissectionalsoincludestheprocesso f howtofilterd ata.

Chapter4presentsempiricalresults.Statisticaldescriptiveofdataispresentedinthisc hapter.Then,thefindingsonVietnamSMEs’productivityaredescribedandd i s c u s s e d T heresultsofregressioninrelationtotherelationshipbetweeninnovationan d productivityareprese ntedinthischapter.

Chapter 5 providesthe summaryofthemainresults and proposessomepolicyimplicationsbasedonthe resultsdescribedinChapter 4.This Chapteralso includesresearchlimitationandsuggestssomefurtherresearchdirectioninthefuture.

Thischapterprovidesthe literaturereview ontherelationshipbetwee ninnovationandproductivity.Atfirst,SchumpeterTheoryofInnovationthatexplaint h e r o l e o f i n n o v a t i o n i n t h e e c o n o m i c g r o w t h i s p r e s e n t e d T h e n t h e c o n c e p t , calculationa n d d e t e r m i n a n t o f p r o d u c t i v i t y i s r e v i e w e d A f t e r t h a t , t h i s c h a p t e r p r e s e n t s thedefinitionandmeasurementmethods ofconceptinnovation.Intheendo f thechapter,therelationshipbetweeninnovationan dproductivity hasbeenr e v i e w e d throughempiricalstudiesinthepast.

SchumpeterTheoryofInnovation– HowdoesInnovationplayitsroleineconomicdevelopment?

Schumpeterwasseenasapersonwhobuiltveryfirstbasicfoundationtothet h e o r y ofinnovation andeconomicdevelopment.Inhis famousbookTheTheory ofE c o n o m i c Development(publishedfirsttimein1912),hehasarguedthatthewholee conomy h a s itso w n b u s i n e s s cyclei n w h i c h t e c h n o l o g i c a l i n n o v a t i o n s playanimportantrole.Whenanewtechnologyhasbeenintroducedandtheeconomyisreadytoa daptthentheeconomywouldalteritselftofullyemploythenewtechnologyandr e s u l t e d int heupwardtrendofthebusinesscycle.Ifthatnewtechnologyhasbeenintroduceattheti metheeconomyissaturatedandbecamemorevulnerabletotheanyn e g a t i v e shockandeasil ygetintodepressionthenonlynewtechnologymightnothelpoutthewholeecono my.Schumpeteralsoarguedthatfirmsshouldwillingtot a k e riskandinvestinne wtechnologiestotakeadvantageoftheprofitattheearlystageofthesenewtechnological innovationswhentheotherfirmshaven’tapplied.

EconomicDevelopment(1934),Capitalism,SocialismandDemocracy(1942)andBusine ssCycles:ATheoretical,HistoricalandS t a t i s t i c a l AnalysisofaCapitalistProcess(1939),Schu mpeterhascontributedtotheeconomicstheorieswiththeroleofinnovationandentrepreneurshipi ntheeconomicd e v e l o p m e n t Hebelievedthatinnovationisthecoredriverofdevelop mentaswell ase m p h a s i z e d t h e r o l e o f e n t r e p r e n e u r o f s m o o t h i n g t h e m e c h a n i s m i n w h i c h r ev o l u ti o n ar i l y technicalchangesoccursviainnovationandpushthe economyoutofitssteadystate.

Schumpeterexplained t h e development o f t h e economy ism a i n l y drive nbyinnovationwhichhecategorizedintofivetypes:

According to Schumpeter (1942), innovation occurs in four key steps: invention, innovation, diffusion, and imitation While the first two steps have limited impact, the latter two significantly influence economic growth Schumpeter argued that early-stage innovations yield vague economic achievements, but as economies enter the diffusion and imitation phases, they recognize the potential for increased sales and cost reductions, leading to greater investment in these innovations However, ideas alone are insufficient; they require effective implementation Entrepreneurs play a crucial role in this process by allocating resources to replace outdated technologies with new ones, a concept Schumpeter termed "creative destruction." Ultimately, Schumpeter's framework explains economic development as a result of innovations driving creative destruction.

Productivity:conceptandmeasurements

Generalproductivitydeterminants

Appendix1provides thesummariesontheempiricalstudiesaboutgene rald et erm in an t s ofproductivity.

Innovation: concept andmeasurements

Measurements

R&Dinnovationactivitiesthatfirmsmighthave.Theyc a n buypatents,payroyaltiesorscient ificinformationthenmodifyincompliancew i t h t h e i r n e e d Theyc a n i m p r o v e t h e i r l a b o r k n o w l e d g e a n d s k i l l v i a i n t e r n a l training.Theycanbuyne wequipment,softwareorimprovetheirfacilitiesthataffectinnovativeprocess.Theycanimpro vetheircurrentmanagementstructureorcreatingn e w methodtointroduceproductstoth emarket.TogetherwithpurelyR&Dactivities,t h e s e a b o v e n o n -

De x p e n s e s AnothersuggestionfromOsloManual(2005)aboutmeasuringinnovationwit htheinputapproachisbytheskilledemployeesoffirm.Asskilledemployeesisc o n s i d e r e d askeyassetsfor innovationactivitiesinwhichtheyhelpto facilitatethep r o c es s ofadoptnewtechnologies,managemanufacturingoperationsandresolvethe technologicalproblemsmightoccur.

Intheoutputside,innovationisgenerallymeasuredbasedonitsqualitywhichcanbereprese ntedthroughrevenue.Thepercentagerevenueshareofnewproductso r currentproducts withaddedvaluethroughinnovationprocessisaproperindicatorf o r showingtheresultsofin novationinoverallfirm’sperformance.Thisindicatorh a s beenusedtoproxyfo rinnovationinmanystudiessuchasMiguelBenavente(2006),Jeffersonet a l (2006),S ie dsc hla g eta l.

(2010) An ot her m e a s u r e m e n t of innovationeffectonfirm’sperformanceiscostde ductionduetoprocessinnovation( P e t e r s , 2008).

Howhastherelationshipbetweeninnovationandfirms’performancebeenanalysedin theliterature?

Therelationshipbetweeninnovationandfirm’sperformancehasbeen wellanalysedinth e literature H o we v e r t he conclusion abo ut this r ela ti on s hi ph as notcometotheconsensus.Inonehand,innovationcanpositiveinfluencefirm’s performance,whichcanbemeasuredbyseveralindicators.Inanotherhand,manystudies pointedoutnegativeimpactcausedfrominnovation.

Frominnovationtofirm’sperformancei s a r g u e da s process i n w h i c h in no va ti on i nputsgenerateinnovation o u t p u t andthentheseoutputcontributestotheoverallfi rm’sperformance(Crépon,D u g u e t a n d M a i r e s s e c , 1 9 9 8 ) C r é p o n , D u g u e t a n d M a i r e s s e c ( 1 9 9 8 ) p r o p o s e d a methodtoestimatetherelationshipbetweeninnovationa ndperformancecalledCDMmodelwhichisappliedanddevelopedbymanyresearchersove rtheworldsuchasMiguelBenavente(2006),Janz,Lửửf,andPeters(2003),Mairesse,et al.

(2005).Inth e researchofSiedschlag,ZhangandCahill(2010),CDMmodelalsoisempl oyedw i t h paneldataof723firmsfromCommunityInnovationSurveyofIrelandinperiodo f 200 4-

2008andcontrolfor foreignownershipand i nt er na ti ona l tradeactivities. CDM modelwiththreestagesofestimation:(i)firm'sdecisiontoinvestininnovation;

(ii)determineinnovationoutputusinginnovationinputsand(iii)innovationoutputa n d otherproductioninputsintherelationshipwithfinaloutputproduction.Throughtheseth ree s te p, theyconcludes th at :

(i)f o r e i g n o w n e d firmsand domesticf ir ms involvedinexportactivitiesaremorelikel ytoinvestininnovationthanfirmswithdomesticactivities only;

(ii)foreign owned f ir ms andd om est ic firmsinvolved ine x p o r t activitiesare morelikelytohaveinnovationoutput.Innovationexpenditureh a v e nosi gn if ic a nt effect o ninnovation o ut pu t; and(iii)innovation o u t p u t s have positiverel ationshipwithlaborproductivity.

The relationship between innovation and firm performance is often viewed as causal, as highlighted by various studies (Belderbos, Carree, and Lokshin, 2004; Lokshin, Belderbos, and Carree, 2008; Parisi, Schiantarelli, and Sembenelli, 2006; Santos, Basso, Kimura, and Kayo, 2014) Innovation not only leads to the development of new products and the enhancement of production processes but also improves a firm's efficiency and overall performance Conversely, firms that perform better are more likely to invest in innovation Due to this causal link, many studies have employed IV or GMM estimation techniques to address the endogeneity issues that arise in this context.

20 activitiesb u t a l s o e x t e r n a l i n n o v a t i v e c o l l a b o r a t i o n h a v e t a k e n i n t o a c c o u n t i n d e t e r m i n i n g thisrelationship.Theymeasurefirm’sinnovationbytw osetofvariables:

Internal innovation activities, represented by expenditures on innovation, and external collaboration through R&D partnerships with competitors, suppliers, customers, and research institutions, play a crucial role in a firm's performance This performance is measured through labor productivity growth and sales of new market products A regression analysis has been conducted to explore the causal relationship between innovation and productivity, controlling for factors such as firm size, industry classification, ownership status, and market influences Additionally, past productivity levels are considered to assess their impact on current growth The findings indicate that various types of R&D collaboration and innovation intensity significantly and positively influence productivity growth; however, there is no notable effect of innovation intensity on sales growth from new products.

Alsou s i n g i n t e r n a l a n d e x t e r n a l i n n o va t i v e a c t i v i t i es t o r e p r e se n t f o r innovation,L o k s h i n , B e l d e r b o s a n d C a r r e e ( 2 0 0 8 ) f o u n d t h e s i g n i f i c a n t p o s i t i v e r elat io nship betweeninternalinnovationandlaborproductivity.Int ernalinnovationi s definedin- firm’sR&Dexpenditurewhileexternalinnovationisexpenditureonc o n t r a c t ed R&Dwithotherfirms.TheyappliedGMMestimationforthedynamicp an el e q u a t i o n fromaugmentedC o b b -

D o u g l a s p r o d u c t i o n f u n c t i o n f o r 3 0 4 N e t h e r l a n d s manufacturingfirms from1996to2001.I n n o v a t i o n variablesincludedi n themodelbesideinternalandexter nalR&Dexpenditurearetheirquadraticformsandinteractionform.T h e a u t h o r s c o n c l u d e d t h a t i n t e r n a l a n d e x t e r n a l R & D areco mp lemen t intherelationshipw ithproductivitywithdecreasingreturnstoscaleseffect,internalR&Dplaysimp ortantroleinfirm’sproductivityandexternalR&Donlyhave significant impact inthecircumstanceinwhichfirm has invested enoughininternalR&D.

21 xaminet h e innovation– firm’sperformancerelationship.Theyusedproductandprocessdummiesa n d R &

D e x p e n d i t u r e a s p e r c e n t a g e o f o u t p u t t o r e p r e s e n t f o r firm’s innovationeffort.Thestudyuse two approaches to identifyimpactofinnovation onf i r m p e r f o r m a n c e A t f i r s t , Cobb-

Douglasp r o d u c t i o n f u n c t i o n i s a p p l i e d a g a i n s t o u t p u t g r o w t h a n d i n n o v a t i o n v a r i a b l e s , i n s t r u m e n t e d byl a g o f l n ( o u t p u t / l a b o r ) , ln( mat eri al/ lab or ), ln(capital/ labor),R&Dintensity,size) Inthesecondapproach,T F P (calculatedusingLe vinsohnandPetrin(2003))isregressedagainstinnovationv ar i abl es, instrumentedbyt hesamesetofvariablesinthefirstapproach.Theresultsshowedpositiveimpactofprocessandpro ductinnovationonproductivity.Indetails,theimpactofprocessinnovationisbiggerthanproduct innovation.Theseresultsarer o b u s t i n b o t h a p p r o a c h e s : T F P g r o w t h a n d C o b b - D o u g l a s p r o d u c t i o n f u n c t i o n estimation.

Incontrast,manypapersfoundnosignificanteffectofinnovationonprod uctivity.S a n t o s , B a s s o , K i m u r a a n d Kayo( 2 0 1 4 ) c o n c l u d e d t h a t i n n o v a t i o n e f f o r t s frominnovativeinvestmentdonotsignificantexplainfirm'sperformance. Inaddition,LiandAtuahene-

Gima(2001)explainedtheinsignificantimpactofinnovationonfirm’sperformancet h r o u g h t h e u n c e r t a i n t y c h a r a c t e r i s t i c o f innovation.Theyarguedthat innovationactivitiesareriskywhileconsumingconsiderabler e s o u r c e s b u t w e d o n o t k n o w b e f o r e h a n d w h e t h e r t h e s e a c t i v i t i e s c r e a t e s valueadd edtothefirms.Furthermore,itisrequiredspecialresourcesandcapabilitiesinter msoforganizationalstructureforinnovationactivitiestogeneratep o s i t i v e outcomet othefirmsassuggestedbyBranzeiandVertinsky(2006).

In Vietnam, there is a growing interest in exploring the relationship between innovation, productivity, and related concepts Research by Nguyen et al (2007) examined the connection between innovation and the exports of Vietnamese SMEs, utilizing dummy variables to represent new product introductions, new processes, and improvements to existing products Similarly, Vu and Doan (2015) employed these dummy variables alongside marketing changes to investigate the link between innovation and SME performance, measuring performance as gross profit within a year Their study also addressed the issue of endogeneity in the innovation-performance relationship by applying a two-stage least squares (2SLS) model The findings indicate that innovation efforts in product development, production processes, and marketing positively influence firm performance.

ProductivityforVietnamesefirmshavebeenanalysedwidelyintheliterature.HaandKiy ota(2014)useddatafromAnnualSurveyonEnterprisesfrom2000to2 0 0 9 andn on- parametricmethodtoestimatefirm’sTFPwhenanalysingther e l a t i o n s h i p betwee nfirmproductivityandturnover Y a n g andHuang(2012)has a p p l i e d Levinso hnandPetrinapproachtoestimatefirm’sTFPforVietnameseSMEs.H o w e v e r theyfocusedont heeffectoftradeliberalizationonproductivitywhichisdifferent withthisstudy.

Thisstudyexpectstohaveacloserlookattheimportantofinnovationtofirmprod ucti v it yofSMEsinVietnam– atransitioneconomy.Innovationeffortoffirmisr e p r e s e n t e d i n b r o a d e r measurement si n c l u d i n g : i n n o v a t i v e e x p e n d i t u r e intensity,d u m m y f o r i n n o v a t i o n a n d shareo f h i g h - q u a l i t y e m p l o y e e i n t o t a l l a b o r force.P r o d u c t i v i t y inthestudyismeasure dusingLevinsohnandPetrinapproachwhichcans o l v e theproblemofendogeneity arise nduetothepotentialrelationshipbetweeninputd e c i s i o n a n d p r o d u c t i v i t y s h o c k T h i s methodo f estimatingT F P i s rarelyemployedintheliteratureofVietna mcontext.

Appendix2providesthesummariesontherelatedempiricalstudiesonth erel atio nshi p betweeninnovationandfirm’sperformance.

2 , t h e s t u d y ’ s c o n c e p t u a l frameworkis constructedanddescribed.Theregressiontechniquesthena r e discussedtogether withconstructionofrelatedvariablesemployedinthemodel.Thehypotheseso f t h e r e l a t i o n s h i p b e t w e e n i n n o v a t i o n a n d p r o d u c t i v i t y a r e determined.Intheendofthec hapter,sourceandprocessoffilterdataarepresented.

AnoverviewofVietnameseSmallandMedium-sizedEnterprises

Statisticoverview

Thecommonc l a s s i f i c a t i o n s a b o u t S m a l l a n d M e d i u m - s i z e d e n t e r p r i s e s o f mostinternationalinstitutionsandcountryoverthewallareusuallybased onnumbero f employees,totalrevenuesand/ ortotalassetsorequity.InlinewithTheDecreeN o 56/2009/ND-

–s i z e d e n t e r p r i s e s i n Vietnam,s m a l l a n d m e d i u m – s i z e d e n t e r p r i s e s h a v e b e e n d e f i n e d asfirmswithtotalemployeebetween10an d300,andtotalequitylessthan1 00billiondong.ThedetailsoftheclassificationfollowingDecreeNo.56/2009/ND-CPispresentedinTable3.1below:

Source:Government’sdecreeNo.56/2009/ND-CP

ThenumberofenterprisesinVietnamhasbeenincreasedsignificantlyafteri m p l e m e n t i n g EnterprisesLawin2005(Figure3.1).Togetherwiththeincreas eoftotale n t e r p r i s e s , t o t a l S M E s a l s o g o n e upd r a m a t i c a l l y , f r o m 2 0 0 6 t o

2 0 1 3 t o t a l VietnameseSMEshasbeendoubledup,from120,074(in2006)to367,300(in2013).I n Vietnamcontext,thenumberoftotalmicro,smallandmedium– sizedfirmsisthelargestandaccountedforapproximately96%to98%totalfirmseveryyearfro m2006to2013.Thenumberoftotalenterpriseshasbeenincreasedyeartoyear,butthesizeo f enterpriseshasbeengraduallytightendown.Infurtherdetails,in2006,61%ofto ta l firmsaremicrofirms(whichhave1-

10employees)comparedwith66%in2006,i n thesecondrankissmallfirmswith35%in2006and3 2%in2013,andlargefirmsd e c r e a s e d from4%in2006toonly1.6%in2013.Thedownsizin gtrendofVietnamenterprisesleadstotheinsufficientmediumandlarge– sizedenterprisestoguidethee c o n o m y intheinternationalintegration.

Micro Small and Medium Large

SMEshasbeengrowingsignificantly,accountedforthebiggestpartoftotalenter prisesandcontributedsignificantlyfortheeconomy.AccordingtotheMid- termE v a l u a t i o n ReportoftheImplementationofDevelopingSmallandMedium– sizedenterprisesPlanintheperiodof2011-

2015,SMEshasfourmaincontributionstotheeconomy:GDP,governmentbudget,totalinvestm entandemployment.

InthestructureofGDP,non- stateownedenterprises(whichSMEsaccountupto98.6%)hasbeencontributedthemosttothe totalGDPofthewholeeconomyint h e periodof2009-2012,ataround48-

49%.Inthesecondrank,thecontributionofstat eownedenterprises,inwhich59.3%areS MEs,hasbeendecreasedfrom37.32%( 2 0 0 9 ) to32.57%(2012)duetothegovernment privatizationplanappliedforthiskindoffirm.Foreigndirectinvestedenterprises(inwh ich78,8%areSMEs)isinthethirdrankwiththestablecontributiontototalGDPataround17- 18%during2009to2 0 1 2 BecauseofthisGDPstructureandtheprivatizationprocess,itisexpe ctedthatSMEsinthenon- stateownedenterprisessectorwouldbecomemoreimportantinthegrowthofGDPinthefuture.

The totalamount oftaxes andfeesthatSMEs hascontributed accountingfora largepartingovernmentbudgetsincetheyarethekeysectorintheeco nomy.In2 0 1 0 ,SMEscontributedoverVND181,060billiondongtothestatebudget,ac countingfor41%totalcollectedtaxesandfeesfromallenterprises.In2011and2 0 1 2 , thesefiguresareVND181,210billiondong(34%)andVND205,260billion dong(34%).

Intermofthecontributiontothetotalnationalinvestment,SMEsaccountedf o r alargepartoftotalinvestmentofthewholeeconomy.Forfurtherdetails,in2010total investmentofSMEs wasVND236,119billiondong,accountingfor

32%totalinvestmentofenterprisesector.In2011,thisamountofinvestmentincreaseds i g n i f i c a n t l y toVND699,690billiondong(57%)

(almostfrommicroandsmall– s i z e d enterprises)thendecreasedtoVND235,463billiondongin2012(29%).Inthestructureo ftotalinvestmentf r o m enterprisesector,investmentf r o m s m a l l - s i z e d firmsaccountsforthelargestproportion,61%-68%from2010to2012.

Small and medium-sized enterprises (SMEs) play a vital role in the Vietnamese economy by generating and sustaining jobs In 2010, Vietnamese SMEs provided over 4.35 million jobs, representing nearly 45% of total employment in the enterprise sector By 2012, this number had risen by 16.83% to 5.09 million jobs, accounting for 47% of total jobs Additionally, worker income in the SME sector has seen significant growth; the average annual income for employees in SMEs was VND 42 million in 2010, increasing to VND 46 million in 2011, and reaching VND 61 million in 2012, which is approximately 90% of the average income in the entire enterprise sector.

Iti s o b v i o u s t h a t S M E s playi m p o r t a n t r o l e s i n t h e e c o n o m i c g r o w t h o f Vietnam.Theyhavehadhugecontributionsinnationalincome,governmentbudge t,a n d totalinvestmentandcreatingmorejobs,stabilizeworker’sincomeandimprovingtheirlivingsta ndards.HoweverVietnameseSMEsarestillfacingalotofdifficulties

Difficulties

Insufficienti nt ern al capital, hardtoaccess ex t er n a l capital:be c a us e thesefirmsareinsmalland medium–sized,sotheirinternalcapitalstockarelimitedand usuallyinshortage In a d d i t i o n theyfoundi t i s hardt o accesstoe x t e r n a l capit alsourceslikebanksandotherfinancialinstitutionsduetolackofcollateral,u n t r u s t w o r t h y f i n a n c i a l o p e r a t i o n orc o m p l e x p r o c e d u r e s o r l a c k o f i n f o r m a t i o n T h e r e f o r e theyusuallyfailtoraisecapital whentheywanttoexpandthem arket, c h a n g e technologyorinvestinnewprojects.

Outdatea pp li ed technology:technologyusedinmos t oft hese firmsis n ot u p d a t e d ascomparedwithothercountriesovertheworld.AsurveyofUND PhaspointedoutthattechnologyimportpercentageofVietnamonlyat10%totalexp orta n d importwhilethis averagefigurefor theotherscountryis40%.ThelowleveloftechnologyappliedinVietnameseS ME s couldb eexplainedbythreereasons:

Vietnamese SMEs face challenges in accessing government preferential programs and supportive policies Many of these businesses remain outside established supply chains and are concentrated in underdeveloped sub-industries Additionally, the low level of applied technology within Vietnamese SMEs negatively impacts labor productivity, product quality, and overall competitiveness.

Lowlevelofmanagementandlaborforce:in2012,75%workersarenotgoingthroughtechnical trainingprocessinofficialfacilities.Intermofmanagers,only40%S M E s o w n e r s h a v e u n i v e r s i t y d e g r e e M o r e o v e r n o t m a n y managersh a v e b e e n trainedinecon omicknowledge,managementbusiness andlaw;managementdecisionsare mostlybasedonexperience.ThereforeVietnameseSMEs’operationale f f i c i e n c y isstilll owerthanothercountryintheregionandovertheworld.

Methodology

Modelidentification

Asmentionedinthepreviouschapters,innovationcouldhavepositiveimpacto n firm’s p r o d u c t i v i t y ( Belderbos,C a r r e e andL o k s h i n ( 2 0 0 4 ) , C r e s p i an dP i a n t a (20 09),Rosenbusch,BrinckmannandBausch(2011);andLokshin,BelderbosandC a r r e e (2008)).Thisstudysuggeststhehypothesesofpositiveinnovation– firm’sp r o d u c t i v i t y relationshipinVietnameseSMEs context.Theinnova tionconcept isanalyzedintwocomponents:(i)innovationexpenditureintensityand(ii)high- qualitylaborshareoftotallaborforce.

HypothesisH 2 : High- qualitylaborintotalfirm’slaborforcehavepositiveimpacto n firm’sproduc tivity.

Thisstudyemploystwo-stageestimationtodeterminetheinnovation– firm’st o t a l factorproductivity.Variablesusedinclude:

Stage1:t h r e ei n p u t v a r i a b l e s (labor,i n t e r m e d i a t e i n p u t s a n d p h y s i c a l c ap i t al ) andoutput(valueadded).

Stage2:dependentv a r i a b l e ( t o t a l f a c t o r p r o d u c t i v i t y ) , i n n o v a t i o n vari ables(innovationexpenditureintensity,dummyforinnovatio n,shareofhigh- qualityemployeeinlaborforce),controlv a r i a b l e s (firm’sage,firm’ssizea ndfirm’scapitalstructure)andpastlevelofproductivity.

Researchhypothesesandconceptmeasurements

Conceptandvariablemeasurements

This study utilized data from surveys conducted in Small and Medium-sized Enterprises (SMEs) in Vietnam between 2005 and 2013 The surveys were a collaborative effort among four organizations: the Institute of Labor Studies and Social Affairs (ILSSA) under the Ministry of Labor, Invalids and Social Affairs (MOLISA), the Stockholm School of Economics (SSE), and the Department of Economics at the University of Copenhagen The research focused on ten selected provinces and cities, including Hanoi, Ho Chi Minh City, Ha Tay, Hai Phong, Phu Tho, Khanh Hoa, Nghe An, Lam Dong, Quang Nam, and Long An Each survey sampled 2,500 firms, with 80% of these firms being repeated from previous surveys The remaining 20% were replaced due to various reasons, such as firms no longer being operational or not responding to the survey This data can be regarded as representative of the Vietnamese SME population.

Ofaroundfiftyreportedindustries(2- digitVSIC2007),thestudyfocusestoanalyzeinsixlargest in dus tr ie s whichare: (1)foods; (2)woodandwood-related p r o d u c t s ;

( 5 ) f a b r i c a t e d metalp r o d u c t s a n d ( 6 ) f u r n i t u r e T h e s e i n d u s t r i e s h a v e a c c o u n t e d f o r nearly 70%oftotalSMEsinthefive- roundsurvey,thereforecanberepresentativef o r thewholedataset.

Year Noofobs.inselectedindustries Totalobs.inrawdata %

Datasources

This study analyzed data from surveys conducted on Small and Medium-sized Enterprises (SMEs) in Vietnam during the years 2005, 2007, 2009, 2011, and 2013 The surveys were a collaborative effort between four organizations: the Institute of Labor Studies and Social Affairs (ILSSA) under the Ministry of Labor, Invalids and Social Affairs (MOLISA), the Stockholm School of Economics (SSE), and the Department of Economics at the University of Copenhagen The research focused on ten provinces and cities, including Hanoi, Ho Chi Minh City, Ha Tay, Hai Phong, Phu Tho, Khanh Hoa, Nghe An, Lam Dong, Quang Nam, and Long An Each survey involved a sample of 2,500 firms, with 80% of the firms being repeated from previous surveys The remaining 20% were replaced due to reasons such as firms ceasing operations or not responding to the survey, making this data representative of the Vietnamese SME population.

Ofaroundfiftyreportedindustries(2- digitVSIC2007),thestudyfocusestoanalyzeinsixlargest in dus tr ie s whichare: (1)foods; (2)woodandwood-related p r o d u c t s ;

( 5 ) f a b r i c a t e d metalp r o d u c t s a n d ( 6 ) f u r n i t u r e T h e s e i n d u s t r i e s h a v e a c c o u n t e d f o r nearly 70%oftotalSMEsinthefive- roundsurvey,thereforecanberepresentativef o r thewholedataset.

Year Noofobs.inselectedindustries Totalobs.inrawdata %

(i) InStage1:estimatingTFPbyLPapproachrequiresfullinformationa b o u t o u t p u t (revenue)andinput factors(labor,intermediateinputs,capital).Thusfirmswithmissinganyof thoseinformationareremovedf r o m thedataset.Thesummary descriptivestatisticforremainingdataisp r e s e n t e d asinTable3.3below:

Obs with ava i.da ta

(ii) InStage2:somev a r i a b l e s u c h asfirm’sa g e , firm’st o t a l a s s e t s ( p r o x y fo r firm’ss i z e ) h a v e a w i d e r a n g e v a l u e s I n c l u d i n g t h e w h o l e d a t a s e t inestimationw ithoutremovingoutlierscouldleadtobiasedresultsduetothepossiblewrongmeasureme ntorrecord.Thereforethestudyhasimposedbasicfilterprocesstoeliminateoutlier s.Anyobservationhavingvaluegreaterthanthemeanvalueplustwostan darddeviationvalueisc o n s i d e r e d asoutliersandshouldberemove doutofthedata.Thisfilterprocessisappliedforvariablefirm’sagethenfir m’stotalassets foreach

Thischapterprovidestheempiricalresultswith analysis.Atfirstthest udypresentsthedescriptivestatisticsofdatawhichisusedinthefirststage.Then,ther e s u l t s o f estimatingTFP usingLPapproacharediscussed.Inthenext section,datad e s c r i p t i o n andregressionresultsforthesecondstageofestimatingtheinnova tion–productivityrelationshiparepresentedandanalyzed.

TotalFactorProductivityofVietnameseSMEs

Datadescriptions

In the first stage of the study, a LP approach is utilized to calculate Total Factor Productivity (TFP) for each firm over the reported years This method requires data on output and a set of inputs, detailed in Chapter 3 The output measurement is based on the firm’s net revenue from sales during the fiscal year, while the input factors consist of labor, intermediate inputs, and capital Labor is quantified as the total number of employees at the end of the year, and intermediate inputs represent the total expenditure on raw materials and indirect factors involved in the production process Capital is measured as the average value of physical capital at both the beginning and end of the fiscal year, serving as a suitable proxy for actual capital used in production Table 4.1 summarizes the variables used in this initial stage, including net revenue, labor, capital, and intermediate inputs.

Year Variables Mean Std.Dev Max Min Mean Std.Dev Max Min Mean Std.Dev Max Min

Industry Non-metallicmineral Fabricatedmetal Furniture

Year Variables Mean Std.Dev Max Min Mean Std.Dev Max Min Mean Std.Dev Max Min

TotalfactorproductivityfromproductionfunctionestimationofVietnameseSM

Table4.2andTable4.3comparetheparameterofproductionfunctionestimatedus ingOLS,FixedEffectandLPregressionacrosssixindustries:Foods,Woods,Rub berandPlastics,Non- metallicmineral,fabricatedmetalandFurnituref r o m 2005to2013.

Thestudy’sresultsofhigherestimationonfreelaborinputinOLSregressionascompa redwithLPregressionconfirmedtheconcernofMarschakandAndrews(1944)inL evinsohnandPetrin(2003).Inthepresentofcorrelationbetweeninputsf acto r sa n d u n o b s e r v e d p r o d u c t i v i t y s h o c k, estimationoni n p u t f a c t o r s w o u l d beu p w a r d b i a s e d H o w e v e r , t h e e s t i m a t i o n f o r c a p i t a l i n p u t w o u l d b e u p w a r d o r downwardb i a s e d s t i l l b e d e p e n d o n i t s c o r r e l a t i o n w i t h u n o b s e r v e d p r o d u c t i v i t y sh o ck I f t h e r e i s n o orw e e k c o r r e l a t i o n b e t w e e n t h e m ( b u t f r e e v a r i a b l e l a b o r ) , parameterestimatedfromOLSwouldbebiased downward.Thestudy’sresultonc a p i t a l e s t i m a t i o n s h o w e d t h e d o w n w a r d b i a s e d i n O L S a s c o m p a r e d w i t h L P r eg ression Theseresultsarec onsistentacrosssixselectedindustriesinthesample.

TheFEestimationsacrosssixselectedindustriesquitedifferfrom bothOLSa n d LPestimations.Thepossibleexplanationforthisisthenotconstantfixedeffect f l u c t u a t i o n ofunobserved productivityshocksofea c h firm.Inaddition, FE estimationi s n o t e f f i c i e n t i n t h e p r e s e n t o f c o r r e l a t i o n b e t w e e n i n p u t f a c t o r s a n d u n o b s e r v e d productivity.

Table4.3: ComparisonofOLS,FixedEffectandLPestimatorsinNon-metallicmineral,FabricatedmetalandFurniture

Int h i s s t a g e , firm’sp r o d u c t i v i t y w i l l b e r e g r e s s e d a g a i n s t i t s p astv a l u e , innovationvariables(dummyforinnovation,innovationexpenditur eintensityandh i g h - qualitylaborshareintotallaborforce)andcontrolvariables(firm’sage,firm’ssi z e andfirm’sc apitalstructure).Table4.4providesthesummarystatisticsforthev a r i a b l e s usedi nthisstage.

No.ofobs Average Std.Dev Max Min

ThemajorofSMEsinselectedsamplearemicroandsmall- sizedwithaveragelo goftotalassetsis13.12whichisnearly2billiondong.Thisdominantofmicroa ndsmall-sizedfirmsiscompliantwiththestatisticsonVietnameseSMEsof

GSO.Thea v e r a g e yearofoperationforthesampleis14yearswhichcanbeconsideredasquitel o n g timehorizon.Intotal8,374observation,thereare4,509observationsreportedt h e i r spendingoninnovationactivitieswhichequivalentto54%totalsample.Intotal4 ,5 09 observatio nsreportedtheirexpenditure oninnovationactivities,65%ofthosehave reportednon- zeroinnovationexpenditure.

4.5showstheresultsfromestimatingmodel(16)inwhichinnovationvariablesis innovationexpenditureintensity(Inv_exp)bythreemethods:PooledOLS,FEands y s t e m -

Table4.5:Regressionr e s u l t s o f innovationexpenditurei n tensitya n d firm’sp r o d u c t i v i t y

AsmentionedinthepreviousChapters,themodelmightincurthepotentiale n d o g e n e i t y problem.There couldbeexistthesimultaneousrelationshipbetw eeninnovationvariable(innovationexpenditureintensity)andfirm’sproductivity(TFP).

Wu Ha usm an testo f en d o g e n e i t y T h e r e s u l t s ofDurbin-

WuHausmantestarepresentedinAppendix3.Accordingtother esu lts, t h e studyc o n f i r m s t h a t i n n o v a t i o n e x p e n d i t u r e i n t e n s i t y v a r i a b l e isendogenou s.Asaconsequence,OLSandFEestimatorsbecomebiasedandinconsistent.Ther efore,GMMapproachwouldbetheappropriatemethodtosolve thep r o b l e m o f e n d o g e n e i t y a n d l a g g e d o f e n d o g e n o u s v a r i a b l e ( i n t h i s c a s e i s innovationexpenditureintensity–Inv_exp)areusedasinstruments.

GMMapproachisshowedinthelast columno f T a b l e 4 5 I n n o v a t i o n v a r i a b l e isin novationexpenditureintensity(Inv_exp);controlvariablesarefirm’sage(Age),firm’ssize(S ize)andfirm’scapitalstructure(Cap_struc)anddependentvariableisfirm’sTFP(TFP).

ThecoefficientofInv_expisfoundtohavesignificantlystatisticandimpliedt h e p o s i t i v e i m p a c t o n f irm’sT F P A n i n c r e a s e o f o n e p e r c e n t a g e i n i n n o v a t i o n expenditureintensitycouldleadtoanincreaseof0.79infirm’sTFP,ceterisparibus.T h i s posi tiverelationshipisinaccordantwithSchumpeterTheoryofInnovationando t h e r empirical studiessuchasBelderbos,CarreeandLokshin(2004);CrespiandP iant a (2009)

;Rosenbusch,BrinckmannandBausch(2011)andLokshin,Belderbosa n d Carree(2008).

Tesingforautocorrelationin AR(1) and AR(2)havep-valueequal 0.027and0.924respectively.TheautocorrelationinfirstorderAR(1)isexpectedt oexistasd is c u s se d i n C h a p t e r 3 T h e m o r e i m p o r t a n t i s t h e t e s t i n g f o r c o r r e l a t i o n i n f i r s t differenceinAR(2)becausedetectingautocorrelationinAR(2)m eansinvalidityofinstru men t al variables.Thereforehigherp- valueinAR(2)testisbetter.Thestudyr e s u l t s showexistautocorrelationinAR(1)butA R(2)whichsupporttotheargumento f validinstrumentalvariables.

Size)wouldhavehigherTFP.Firm’scapitalstructure(Cap_struc)imposesthesignificantn egativeeffectonfirm’sTFP.Lastly,lagonetimeofTFPhaspositivea n d significanteffectoncurrentTFPlevelwhichprovidetheevidencetoconfirmtheargumentofpastlevelofTFPdoaffectcurrent levelofTFP.

Thesecond hypothesis willbetestedbyincludinghigh- qualitylaborshareint otal firm’slaborforce(Share_L)insetofinnovationvariablesinequati on(16)thata p p l i e d intheprevioussection.

Table4.6belowpresentsthecomparisonamongOLS,FEandGMMestima tionsw h e n f i r m ’ s T F P i s r e g r e s s e d a g a i n s t i n n o v a t i o n v a r i a b l e s (Inv_exp,Share_L),c o n t r o l v a r i a b l e s (Age,S i z e , C a p _ s t r u c)a n d l a g g e d one timeo f T F P (L_TFP).

Table4.6: Regressionresultsofhigh- qualitylaborshareinTotallaborforcea n d Firm’sproductivity

Thestudyalso conducts the Durbin-Wu Hausman test for endogeneityofthev a r i a b l e shareofhigh- qualitylaborintotallaborforce(Share_L).TheresultrevealsthatS h a r e _ L ise n d o g e n o u s ( d e t a i l o f D u r b i n -

W u H a u s m a n t e s t isp r e s e n t e d i n App en dix 4).Therefore

GMMestimationwouldbecomeappropriatesolutiontothee n d o g en ei t y issue.Intheresult sshowedinTable4.6,lagofendogenousvariables(int h i s caseareInv_expandShare_L)are usedasinstrumentstodealwiththeproblemo f endogeneityinGMMestimation.

Share_LandInv_expbothhavepositiverelationshipwithTFPandthisresultsissignificantly statistic.Onepercentageincreaseinshareofhigh- qualitylaborintotall a b o r forceleadtoincreaseof5.54infirm’sTFP,otherthingsunchanged.Sim ilarly,innovationexpenditureintensitya l s o havepositiveimpactonfirm’sTFP.T h e esti mationr e v e a l s t h a t ani n c r e a s e o f o n e percentagei n i n n o v a t i o n e x p e n d i t u r e intensitywillresultedin1.06unitincreaseinfirm’sTFP,ceterisparibus.

M M estimationisapplied.Inparticular,p- valueoftestingautocorrelationinAR(1)andA R ( 2 ) are0.093and0.881respectively. ThestudyacceptsthenullhypothesisofnoautocorrelationinAR(2)whichstrengthenthev alidityofinstrumentalvariables.

Firm’sleverageandfirm’ssizealsohavesignificantrelationshipwithfirm’sp r o d u c t i v i t y a n d i n theo p p o s i t e w a y s I n f u r t h e r d e t a i l s , f i r m ’ s leve rageh a v e n e g a t i v e effectontheirproductivity whichmeansfirmsoperatewithhigherdebttot o t a l assetsratiointheirsectorwouldexp eriencethedecreaseintheirproductivity,o n e morepercentageindebttototalassets ratioleadstoadecreaseof0.5intotalfactorproductivity.Meanwhilefirm’ssizehavepo sitiveimpactontheirproductivityt h a t largerfirmswouldhavehigherproductivity,ceterisparibu s.Howeverfirm’saged o e s nothavesignificantimpactontheirproductivity.

Thischapterpresentsthesummaryofmainmethodemployedinthisstudyandr e s u l t s obt ained.Basedontheempiricalfindingsachievedfromthisempiricalstudy,somepolicyimplicati onsarerecommended.Thischapteralsodiscusseslimitationsa n d recommendationstot hefutureresearchontheissue.

Thisstudya i m s t o examinet h e r e l a t i o n s h i p b e t w e e n i n n o v a t i o n a n d p r o d u c t i v i t y inthecontextoftheVietnameseSMEs.Thisrelationshipisdeterminedthrou ghthetwostagesprocess:

(i)estimatingtotalfactorproductivityforeachfirmi n thesampleand(ii)determining theinnovation-productivityrelationship inwhichp r o d u c t i v i t y isp r o x y byatotalfactor p ro du ct iv it y obtainedf ro m f irst stage.The innovation-productivityisexamined intwo measurementsofinnovation,including:

The relationship between innovation expenditure intensity and the share of high-quality labor within a firm's workforce remains complex and debated While some argue that innovation can enhance productivity by fostering the development of new products, production processes, and marketing channels, or by restructuring organizational frameworks to improve efficiency, others highlight the inherent uncertainties associated with innovation These uncertainties can pose risks, potentially harming productivity as firms invest significant resources without guaranteed returns in value creation.

Thetwostagesapproachisimplementedtoexaminetherelationshipbetweeninnovati onandfirm’sp r oductivityi n t h i s s t u d y First,a simpleC o b b -

D o u g l a s p r o d u c t i o n functionisadoptedtoprovidetheestimatesoffirm’stota lfactorproductivity.LevinsohnandPetrinapproachhasbeenusedtodealwiththepotentialp r o b l e m ofendogeneitycausedbypossiblerelationship betweeninputdecisionandprod uctivi ty shocks(unobservedproductivityshockintheerrorter m).Second,firm’s totalfactorproductivity obtainedfrom firststageisregressedagainstthepastvalueo f i t s e l f , i n n o v a t i o n v a r i a b l e s a n d t h e s e t ofc o n t r o l v a r i a b l e s I n c l u d i n g l a g g e d dependent variableinth emodelandthepotentialendogeneityproblemcausedfromt h e simultaneousinnovation- productivityrelationshipleadtobiasedandinconsistentresultsfromtheOLSandFEestimati ons.Assuch,GMMisusedtoquantifyther e l a t i o n s h i p becauseitcansolvet heproblemofheteroscedasticity andautocorrelationinamoreefficientman nerwhiletheapproachdoesnotreducethesamplesize.

From theresultsgeneratedinthesecondstageinwhichinnovationvariablesincludedinnovatione xenditureintensityandshareofhigh- qualitylaborintotalfirm’sl a b o r force,threemainfindingsareobtainedfromthetwostagesofestimati onswhichc a n besummarizedasbelow:

 First,innovationexpenditureintensityprovidesasignificantlypositiver e l a t i o n s h i p o n firm’sproductivity.A n i n c r e a s e o f o n e p e r c e n t a g e i n innovationexpenditureintensitycouldleadtoanincreaseof0 7 9 infirm’s TFP,otherthingsremainunchanged.

 Second,high- qualitylabordoesprovideasignificantlypositiveimpacto n firm’sp r o d u c t i v i t y H i g h - qualityl a b o r s h a r e i n t o t a l firm’sl a b o r f o r c e i s a d d e d t o t h e m odela n d i n n o v a t i o n e x p e n d i t u r e i n t e n s i t y i s confirmedtoha vepositiverelationshipwithproductivity.

 Third,pas tv a l u e o f firm’sp r o d u c t i v i t y alsop r o v i d e s s i g n i f i c a n t r e l a t i o n s h i p withitscurrentlevelwhichimpliesthathigher(lower)levelo fcur rentproductivitycouldresultinhigher(lower)levelofproductivityinthefuture.

 Inisalsonotedthatothercontrolvariablesalsoprovidesignificanteffecto n firm’sprod uctivityexceptfirm’sage.Theresultsrevealthatfirm’ssizepositivelyim pactsproductivitywhichmeansthatlargerfirmsmightp e r f o r m moreefficient.I ncontrast,capitalstructurehasnegativeimpacto n firm’sproductivity.Inotherword s,firmswithlessdebttototalassetsr a t i o areexpectedtowell- performthanfirmswithhigher.

Thisstudyisdesignedtodeterminetherelationshipbetweeninnovationandp r o d u c t i v i t y inVietnameseSMEs.O n thegroundoftheempiricalfindingsachievedf r o m thi sstudy,somepolicyimplicationsforfirm’smanagersandpolicymakersarep r o p o s e d asbel ow.

First,astheVietnameseeconomyisdominatedbysmallandmedium- sizedenterprisesa n d t h e s e S M E s playveryi m p o r t a n t r o l e i n r e l a t i o n toe m p l o y m e n t , c o n t r i b u t i n g totheoverallGDP,policieswhichcreatethefavora bleconditionstoenhancetheproductivityoftheVietnameseSMEsarenecessary. TheGovernments h o u l d designspecialprogramsaimingdirectlytoSMEstohelpthemi mprovetheirefficiency.SpecificpoliciesmayincludeprovidingtheSMEswithcapita lattachedr e d u c e d i n t e r e s t r a t e s a n d f l e x i b l e t e r m s a n d c o n d i t i o n s

The empirical results from this study indicate that higher intensity of innovation expenditure positively impacts a firm's productivity Therefore, managers should allocate more funds towards innovation activities within their overall investment strategy These activities may include investing in research and development, acquiring new patents, purchasing advanced equipment or machinery, and providing essential training for employees Additionally, the government should focus on improving access to capital markets for SMEs, especially when their internal capital is insufficient to finance innovation initiatives.

Third,thefindingsfromthisempiricalstudyhasconfirmedtheroleofhigh- qu al it y laborshareintotallaborforceinimprovingfirm’sproductivity.High- qualityl a b o r i n v o l v e s m a n y i n n o v a t i o n a c t i v i t i e s a n d theya r e t h e mainr e s o u r c e w h i c h createsa n d d r i v e s t h e n e w i n n o v a t i o n t o t h e firm.A s s u c h , f i r m ’ s m a n a g e r s a r e r e c o m m e n d e d toperiodicallyreviewandtohavetheschedulet oimprovetheirlaborquality.

Thiss t u d y p o i n t s o u t somel i m i t a t i o n s t h a t l e a d t o t h e n e c e s s a r y f u r t h e r r e s e a r c h e s i n t h e f u t u r e Firstly,t h i s studyo n l y t a k e i n t o a c c o u n t t h e impacto f innovationtofirm’sproductivityofVietnameseSMEsintwodimensions:innovationexpend iturea n d h i g h - q u a l i t y l a b o r b u t u n a b l e t o measurei n n o v a t i o n i n t e r m o f c o l l a b o r a t i o n withsuppliersand/orcustomers(spillovereffect)

(inputapproach)orr evenues h a r e fromi n n o v a t i v e p r o d u c t s ( o u t p u t a p p r o a c h ) Secondly,n o t m a n y VietnameseSMEsreportedtheirspendingoninnovationactivit ies,theproportionofa v a i l a b l e dataoninnovationexpenditureis nearlyat55%. Asaconsequence,thesamplemightnotsignificantlyrepresentforthepopulationofVietna meseSMEs.

Theseabovelimitationsareneededtoberesolvedbyfurtherresearchinthef u t ur e Thefutureresearchmightwanttodemonstratetheinnovation- productivityr e l a t i o n s h i p inwhichthemeasurementofinnovationincludetheeffe ctofspillovera n d / o r relativerevenueshareforminnovativeproducts.Thesecondlimitationcouldbesolvedby conductingsurveythatonlyfocusontheinnovationactivitiesorlargerd a t a s e t suchasVietna mEnterprisesSurveydataisrecommended.

Anothers u g g e s t i o n forf u t u r e r e s e a r c h i s i n analyzingf i r m ’ s p r o d u c t i v i t y a f f e c t e d byinput(laborandcapital)reallocation efficiencydriven byinnovation D i f f e r e n t levelofinnovationamongfirmscouldleadtothereallo cationprocessofi np u t factorsfromlessinnovativetoinnovativefirms.Thisreallocationprocessc ouldleadtodifferentinfirmlevelofproductivityandneedfurtheranalysis.

Inc o n c l u s i o n , a l t h o u g h t h e studycontains s e v e r a l l i m i t a t i o n s b u t i t mightcontributess o m e h o w t o t h e l i t e r a t u r e o f i n n o v a t i o n - p r o d u c t i v i t y o f VietnameseS M E s a n d o p e n u p n e w a s p e c t s o f i n n o v a t i o n – p r o d u c t i v i t y r e l a t i o n s h i p n e e d intensiveresearch.

Achen, C.H (2000).Whylaggeddependentvariablescan suppresstheexplanatoryp o wer ofotherindependentvariables.AnnArbor,1001(200 0),48106-1248.

(1991).Sometestsofspecificationforpaneldata:MonteCarloevidenceanda napplication toemploymentequations.Thereviewofeconomicstudies, 58(2),277-297.

( 2 0 0 7 ) E x p o r t m a r k e t p a r t i c i p a t i o n , i n ve s t m en ts i n R & D a n d w o r k e r t r a i n i n g , a n d t h e e v o l u t i o n o f f i r m productivity.Theworldec onomy,30(1),83-104.

(1999).Exceptionalexporterperformance:cause,ef f e ct , orboth?.Jou rnalofinternationaleconomics,47(1),1-25.

( 2 0 0 6 ) Strategicp a t h w a y s t o producti n n o v a t i o n capabilitiesinSMEs.JournalofBusinessVenturing,21(1),75-105.

(2013).ICTandproductivity:conclusionsf r o m theempiricalliterature.InformationEco nomicsandPolicy,25(3),109-1 2 5

(2015).Howdoesinformationtechnologyimproveaggregateproductivity? Anewchannelof productivity dispersionandr e a ll o c at i o n ResearchP olicy,44(5),999-1016.

Crespi,F.,& Pianta,M.(2009) Diversityininnovation and productivityin

Europe.I nSchumpeterianPerspectivesonInnovation,CompetitionandGro wth(pp.259-275).SpringerBerlinHeidelberg.

( 1 9 9 8 ) R e s e a r c h , I n n o v a t i o n A n d Productivity:A n E c o n o m e t r i c A n a l y s i s AtT h e F i r m L e v e l Economicso f InnovationandnewTechno logy,7(2),115-158.

Cucculelli,M.,Mannarino,L.,Pupo,V.,&Ricotta,F.(2014).Owner‐Management,

(2001).Firmsizeandproductivitydifferential:theoryandevidencefroma panelofUSfirm s.JournalofEconomicBehavior&Organization,44(3),2 6 9 - 2 9 3

( 2 0 1 0 ) Untesteda s s u m p t i o n s a n d d a t a s l i c i n g : A criticalreview o f fi rm- leve lp r o d u c t i o n function est im at ors.Dep ar tm en to f Economics,Univ ersityofOxford.

(1976).Theoryofthefirm:Managerialbehavior,a g e n c y costsandownerships tructure.Journaloffinancialeconomics,3(4),3 0 5 - 3 6 0

(2008).Employment, innovation,andproductivity:evidencefromItali anmicrodata.IndustrialandCorporateChange,17(4),813-839.

(1988).Estimatingvectorautoregressions withpaneldata.Econometrica:J ournaloftheEconometricSo ciet y,1371-1395.

(2004).Firms'age,processinnovationandproductivityg r o w t h InternationalJournalofIn dustrialOrganization,22(4),541-559.

(2006).Dynamicmodelsfordynamictheories:Theinsandou ts oflaggeddependentva riables.Politicalanalysis,14(2),186-205.

(2009).Multinationalenterprises,internationaltrade,andproductivity growth:firm- levelevidencefromtheUnitedStates.TheReviewo f EconomicsandStatistics,91(4),821-831.

( 2 0 0 6 ) T h e impacto f f a m i l y ownershipa n d c a p i t a l s t r u c t u r e s o n p r o d u c t i v i ty performanceofKoreanmanufacturingfirms:Corporateg o v e r n an c e a n d t h e “ c h a e b o l p r o b l e m ” Journalo f t h e J a p a n e s e a n d I n t e rn a t i o n a l Economies,20(2),209-233.

(2008).Theproductivityeffectsofinternala n d e x t e r n a l R & D : E v i d e n c e f roma dynamicpaneld a t a model.Oxfordb u l l e t i n ofEconomicsandStatistics,7

(2005).TheimportanceofR&Da n d i n n o v a t i o n f o r productivity:A r e e x a m i n a t i o n i n l i g h t o f t h e F r e n c h innovationsurvey.Annalesd'Econo mieetdeStatistique,487-527.

Mairesse,J.,&Robin,S.(2009).Innovationandproductivity:afirm- levelanalysisf o r FrenchManufacturingandServicesusingCIS3andCIS4data(1998- 2000an d 2002-2004).Paris:CREST-ENSAE.

(1944).Randomsimultaneousequationsandthet h e o r y ofproduction.Econome trica,JournaloftheEconometricSociety,143-2 0 5

(2010).Capitalstructure,equityownershipandfirmp e r f o r m a n c e Journal ofBanking&Finance,34(3),621-632.

(2013).Innovationandproductivity:Anupdate.EurasianB u sin e ss Review,3(1),47-65.

Nelson,R.R (1973).Recent exercisesingrowth accounting:new understandingordead end?TheAmericanEconomicReview,63(3),462-468.

(2007).InnovationandE x p o r t ofVietnam’sSMESector’,MPRAPaperNo.3256.De velopmentandPoliciesResearchCenter.

( 1 9 8 1 ) B i a s e s i n d y n a m i c modelsw i t h f i x e d e f f e c t s Economet rica:J o u rn a l oftheEconometricSociety,1417-1426.

(2006).Howtodoxtabond2:AnintroductiontodifferenceandsystemG M M inStata.Ce nterforGlobalDevelopmentworkingpaper,(103).

(2011).Isinnovationalwaysbeneficial?Ameta- analysisoftherelationshipbetweeninnovationandperformanceinSMEs.Jour nalofbusinessVenturing,26(4),441-457.

(1912).1934,TheTheoryofEconomicDevelopment:AnInquiryi n t o Profits,Cap ital,Credit,InterestandtheBusinessCycle.Trans.RedversOpie.Cambrid ge,MA:HarvardUniversityPress.

(1939).Businesscycles:atheoretical,historical,andstatisticala na lysi softhecapitalistprocess.McGraw-Hill.

(1992).Purchasedservices,outsourcing,computers,andp ro d u ct i vi t y i n m a n u f a c t u r i n g InOutputm e a s u r e m e n t i n t h e s e r v i c e sectors(pp.42

References Objectives Data Methodology Keyconclusions

- Pioneeronanalyzingt he relationshipbetween familyownershipstatus andTFPinItaliacontext

- Stage2:OLSestimation:regressingTPFobtainedfro mstage1withfirmage,family- managedstatusa n d vectoro f othercontrolvariables( f i r m size,humancapital,firmslistedinstockmarket, capitalintensity,andownershipconcentration.)

- OLSestimationwithd e p e n d e n t variableisprod uctivitygrowthandindependentvariablesarefirma g e a n d controlforsize,organizationalstructureandsecto rsinmanufacturingindustry.

- Atthefirstfewyearsofoperation,firmprodu ctivity is lower than average.

- Examine therelationship betweeninnovationintr oduction andproductivity growth.

- Firmsatearlystageenjoyhighproductivity growth(ataround(5%)a n d thisratedecrease s continuouslyfor8yearsuntilequaltheaverag eproductivity(about2%)

- Additionallycontrolf o r innovationresult sinhigherproductivitygrowthb u t thendecre asesafter3years.

Examinetheeffecto f fir msizeo n thefirmprodu ctivityinUS.

- Definedproductivitya s medianvalueo f capitala n d la bor ratio.

- OLSestimationo f Cobb- Douglasproductionfunctionisregressedseparatelyfor largefirmsandsmallfirmstoexaminewhethersmallfir msa n d largefirmsaredifferent incostofcapital.

Examinetheeffecto f fir msizeo n theperforman ce ofBrazilianElectricityI ndustry.

Paneldatafrom1 7 Brazil ianelectricitydistribution firmsfrom1998 to2005.

(i)puretechnicalefficiencyc h a n g e , (ii)scaleefficiencychange,(iii)technicalchange.

T h r o u g h Scaleefficiencyc h a n g e andTechnicalch ange, differentinfirmsizec a n explainproductivitydi fferential.

- Intheperiodof1998- 2005,TPFgrowthisa t 0.9%/ year,Technicalchangegrowthrateat4.9%/ year,Puretechnicalefficiencyc h a n g e growt hratea t -3.7%/ year,unchangedatScaleefficiencychange.

- FirmsizeispositivelycorrelatedwithTFPgr owth.Thereforemergerso f smallelectricityd istributionfirmscouldleadtogaininproductivi

- Testwhetherf i r m e fficiencyh a s a n y effec to n theirchoiceo f capit al structure.

- Determinetheeffecto f ownershipo n firmcap italstructurea n d effici ency.

FirmlevelpaneldataofFr ancefrom2002to2 0 0 5 in threeindustries:Chemica ls,Computersa n d Textile s.

- DynamicOLSestimationtoidentifytherelationship amongfirmefficiency,leveragea n d ownershipstatus, othercontrolvariables:profitability(profit/ totalassets),assetstructure(fixedtangibleassets/ totalassets),growthopportunities (intangibleassets/total assets),size.

- Atlowlevelofleverage,firm'slevelofeffici encyh a s positivea f f e c t o n firmleverage

- Firmefficiencyalsohasrelationtoassetsstru cture,growthopportunities,size,profitability, ownershipstatus.

-DefineChaebolsfirmsasfamily-managed,debt- dependent,diverse businessactivities.

-Familyownershipconcentrationhassignifica ntpositiveimpactonfirmproductivity,butatd ecreasingrate. statuses, capitalstructureo n firm productivity.

&D/ workertraining.Theexplanatoryvariables:firm age, capitalstock,wages,productivity(calculatedusingOP approach),interactionterms,etc.

- Usingmaximumlikelihoodestimatetodeterminethe marginalcontributiono f investmentinR&D/worker trainingonfutureproductivity.

- Firmswithhigherproductivityaremorelikel ytoinvolveinexport.Howeverthiseffectisnot significantwithchoicetoinvest inR&D/worker training.

- Keydeterminantso f firm'ssurvivalareentr ant statusandcapital stock.

- Currentproductivityleveldoesaffectfutur eproductivity.InvestmentinR&D/ workertrainingandexportexperiencehavesi gnificantpositiverelationshipwithfirmprodu ctivity,andtherelationshipbetweenthesetwof actorsarecomplement.

Examinetheeffecto f F DIa n d internationaltr adeonproductivitygro wthinUS

- FDIactivitieshavesignificantpositiveimpa cto n T P F growth( a c c o u n t for1 1 % TFP growth).T h e relationshipisthenrobust.

- Importd o affectTFPgrowthwiththesamed irection,b u t weakerthanFDI.Inaddition,the reisn o evidenceo n robustresultonimportan dTFPgrowth.

3 firmsfromCo mmunityInnov ationSurvey of Ireland in period of2004-2008.

- Innovationinput:inno vationexpenditure(rathert hanR&Dexpenditure) peremployee.

- Innovationoutput:Threety pesofinnovationdummies: product, process and organizationalinnovation;i nteractions;innovationsale s share.

(2)determineinnovationoutputusin ginnovationinputsa n d (3)innovati onoutputa n d otherproductioninput sintherelationshipwithfinaloutputp roduction.

(1) Foreignownedfirmsa n d domesticfirmsinvo lvedinexport activitiesaremorelikelytoinvestininnovationtha nfirmswithdomesticactivities only.

(2) Foreignownedfirmsa n d domesticfirmsinvo lvedinexport activitiesaremorelikelytohaveinnovationoutput Innovationexpenditurehaven o significanteffec to n innovationoutput.

Panel datafromCom munityInnovat ionSurvey inNetherlandsi n1 9 9 6 and199 8 for

Innovative sales (products thataren e w tothe market)productiv itygrowth.

- Dummyvariablesforfou rtypeso f R&Dcooperation :competitors,suppliers,cus tomers,universitieso r othe rresearchinstitutions.

IVregressionbetweenoutputvariabl eandinnovationvariables,controlfo rfirmsize,2- digitindustrydummies,ownershipst atus,demand-pullandcost- push.Productivityinthepreviousper iodalso isincluded.

Differenttypesof R&Dcollaborationa nd innova tionintensitysignificantlya n d positivelyaffectp roductivitygrowth(butinnovationintensityoninn ovativesalesshare).

Productandprocessinnovations;efforttobuildtec hnologicalcompetitiveadvantages, and servicesectors) in6E u r o p e co untriesfrom1 9

- Technologicalc ompetitiveness:percentage o f firmshavepatents; percentage offirms targeting onimproving productquality.

- Costcompetitiveness:sp endingonacquisitionofn e w machineryp e r employe e;percentageoffirmstarget ingonflexibletheproductio nprocess. model(reflectproductandprocessin novation); technologicalcompetitivenessmod elandcostcompetitivenessmodel. costadvantagessignificantlycontributetogrowthi nproductivity.

4 Parisi, 941 -Grossoutput -Process and product - Cobb-Douglas production -Positiveimpacto f processa n d product

Schiantarelli manufacturing growth innovationdummies functiontoestimatetheimpactof innovationo n productivity.Indetails,the and firmsinItaly - TFP growth -R&Dexpenditureas innovationactivitiesonoutput impacto f processinnovationisbiggerthan Sembenelli from two (TFP is percentageofoutput growth,instrumentedbylagof productinnovation.Theseresultsarerobustin

(2006) surveys in determined ln(output/labor), bothapproaches:TFPgrowtha n d Cobb-

1995 and usingLevinsohn ln(material/labor), Douglas productionfunctionestimation.

1998 and Petrin ln(capital/labor),R&Dintensity, -R&Dintensitydoesnothavesignificant

(2003) size) impactonproductivity. approach) -TornquistindexofTFPis regressed against innovation variables,instrumentedbythe samesetofvariables above.

5 Santos, Data of ROA -Humancapital -Descriptivea n d quantitative Innovationeffortsfrominnovativeinvestment Basso, Brazilianfirms ROS - Ratio of training approach:factoranalysis do notsignificantexplainfirm'sperformance. Kimura and in2000,2003, ROE expendituretosales -Structural equationmodelling Causalityrelationshipbetweeninnovationand

Kayo(2014) 2005inwhich: -Ratioo f internalR&D performance. expendituretosales.

- Innovationinputmea surements:internal(R&De xpenditure)a n d external (R&Dcooperation).

- Innovation outputmeasurements(inno vation sales,patents).

- Positiveeffecto f innovationo n firm'sperfor mancewheninnovationismeasuredinthreetypes, b u t theeffecto f innovationorientationislargert haninnovationoutcomes.

- Internalinnovationactivitieshavesignificantim pactonperformancewhileinnovativecollaborati onwithexternalinvolveshaven o significantimpa ctonperformance.

7 Lokshin, 304 Labor - Internal R&D GMMestimationforthedynamic -InternalandexternalR&Darecomplement Belderbos Netherlands productivity:n e t expenditure panelequationfromaugmented intherelationshipwithproductivitywith and Carree manufacturing valueaddedp e r - External R&D Cobb-Douglas production decreasingreturnstoscaleseffect.

(2008) firms from employee expenditure (contracted function Innovation variables -InternalR&Dhavepositiveimpactonfirm's

1996to2001 R&D) includedinthemodelare:internal productivity,thisrelationshipisrobustwith

R&Dexpenditure,externalR&Dexp enditure,quadraticformsa n d intera ctionform. differenttec hniques. dynamic panel econometric

Estimates efficient for homoskedasticity onlyStatistics consistent for homoskedasticity only

Number of obs= 1949 F(6,1942)= 50.27 Prob>F = 0.0000 Total (centered) SS 86439909.4 Centered R2 = -0.9527 Total (uncentered) SS e5444519.7 Uncentered R2= -0.1513

TFP| Coef Std Err z P>|z| [95% Conf Interval] -+ - invexpintensity | -1657.575 803.1596 -2.06 0.039 -3231.739 -83.4112 dummy

33.13309 capitalstructure | -372.9817 203.9315 -1.83 0.067 -772.6802 26.71677 firmage | -3.555249 2.472536 -1.44 0.150 -8.40133 1.290831 _cons | 598.6118 444.9574 1.35 0.179 -273.4886 1470.712 - Underidentification test (Anderson canon corr LM statistic): 7.005

Chi-sq(1) P-val= 0.0081 - Weak identification test (Cragg-Donald WaldFstatistic): 7.005 Stock-Yogo weak ID test critical values: 10% maximal IV size 16.38

Source: Stock-Yogo (2005).Reproduced by permission.

- Sargan statistic (overidentification test of all instruments): 0.000

(equation exactly identified) -endog- option:

Endogeneity test of endogenous regressors: 12.577

Chi-sq(1) P-val= 0.0004 Regressors tested: invexpintensity

Included instruments:dummy L.TFP lntotalassets capitalstructure firmageExcluded instruments: L.invexpintensity

Number of obs= 2907 F(7,2899)= 155.87 Prob>F = 0.0000 Total (centered) SS F7122455.9 Centered R2 = 0.2650 Total (uncentered) SS y9333085.9 Uncentered R2= 0.5705

TFP| Coef Std Err z P>|z| [95% Conf Interval] -+ - highqualitylabor | -395.2885 285.819 -1.38 0.167 -955.4834 164.9064 dummy

70.42706 lntotalassets | 42.31543 6.82258 6.20 0.000 28.94342 55.68744 capitalstructure | -35.67232 26.2863 -1.36 0.175 -87.19252 15.84788 firmage | -1.741898 9786339 -1.78 0.075 -3.659985 176189 _cons | -356.4369 84.88587 -4.20 0.000 -522.8101 -190.0636 - Underidentification test (Anderson canon corr LM statistic): 313.770

4.2 Innovation–Firm’sproductivityrelationship

Conclusionremarks

Thisstudya i m s t o examinet h e r e l a t i o n s h i p b e t w e e n i n n o v a t i o n a n d p r o d u c t i v i t y inthecontextoftheVietnameseSMEs.Thisrelationshipisdeterminedthrou ghthetwostagesprocess:

(i)estimatingtotalfactorproductivityforeachfirmi n thesampleand(ii)determining theinnovation-productivityrelationship inwhichp r o d u c t i v i t y isp r o x y byatotalfactor p ro du ct iv it y obtainedf ro m f irst stage.The innovation-productivityisexamined intwo measurementsofinnovation,including:

The relationship between innovation expenditure intensity and the share of high-quality labor in a firm's workforce is complex and not fully understood While some argue that innovation can boost a firm's productivity by introducing new products, improving production processes, and enhancing organizational structures, others caution that the inherent uncertainty of innovation may negatively impact productivity Firms may invest significant resources into innovative activities without a guarantee of generating added value, making the pursuit of innovation a potentially risky endeavor.

Thetwostagesapproachisimplementedtoexaminetherelationshipbetweeninnovati onandfirm’sp r oductivityi n t h i s s t u d y First,a simpleC o b b -

D o u g l a s p r o d u c t i o n functionisadoptedtoprovidetheestimatesoffirm’stota lfactorproductivity.LevinsohnandPetrinapproachhasbeenusedtodealwiththepotentialp r o b l e m ofendogeneitycausedbypossiblerelationship betweeninputdecisionandprod uctivi ty shocks(unobservedproductivityshockintheerrorter m).Second,firm’s totalfactorproductivity obtainedfrom firststageisregressedagainstthepastvalueo f i t s e l f , i n n o v a t i o n v a r i a b l e s a n d t h e s e t ofc o n t r o l v a r i a b l e s I n c l u d i n g l a g g e d dependent variableinth emodelandthepotentialendogeneityproblemcausedfromt h e simultaneousinnovation- productivityrelationshipleadtobiasedandinconsistentresultsfromtheOLSandFEestimati ons.Assuch,GMMisusedtoquantifyther e l a t i o n s h i p becauseitcansolvet heproblemofheteroscedasticity andautocorrelationinamoreefficientman nerwhiletheapproachdoesnotreducethesamplesize.

From theresultsgeneratedinthesecondstageinwhichinnovationvariablesincludedinnovatione xenditureintensityandshareofhigh- qualitylaborintotalfirm’sl a b o r force,threemainfindingsareobtainedfromthetwostagesofestimati onswhichc a n besummarizedasbelow:

 First,innovationexpenditureintensityprovidesasignificantlypositiver e l a t i o n s h i p o n firm’sproductivity.A n i n c r e a s e o f o n e p e r c e n t a g e i n innovationexpenditureintensitycouldleadtoanincreaseof0 7 9 infirm’s TFP,otherthingsremainunchanged.

 Second,high- qualitylabordoesprovideasignificantlypositiveimpacto n firm’sp r o d u c t i v i t y H i g h - qualityl a b o r s h a r e i n t o t a l firm’sl a b o r f o r c e i s a d d e d t o t h e m odela n d i n n o v a t i o n e x p e n d i t u r e i n t e n s i t y i s confirmedtoha vepositiverelationshipwithproductivity.

 Third,pas tv a l u e o f firm’sp r o d u c t i v i t y alsop r o v i d e s s i g n i f i c a n t r e l a t i o n s h i p withitscurrentlevelwhichimpliesthathigher(lower)levelo fcur rentproductivitycouldresultinhigher(lower)levelofproductivityinthefuture.

 Inisalsonotedthatothercontrolvariablesalsoprovidesignificanteffecto n firm’sprod uctivityexceptfirm’sage.Theresultsrevealthatfirm’ssizepositivelyim pactsproductivitywhichmeansthatlargerfirmsmightp e r f o r m moreefficient.I ncontrast,capitalstructurehasnegativeimpacto n firm’sproductivity.Inotherword s,firmswithlessdebttototalassetsr a t i o areexpectedtowell- performthanfirmswithhigher.

Policyimplications

Thisstudyisdesignedtodeterminetherelationshipbetweeninnovationandp r o d u c t i v i t y inVietnameseSMEs.O n thegroundoftheempiricalfindingsachievedf r o m thi sstudy,somepolicyimplicationsforfirm’smanagersandpolicymakersarep r o p o s e d asbel ow.

First,astheVietnameseeconomyisdominatedbysmallandmedium- sizedenterprisesa n d t h e s e S M E s playveryi m p o r t a n t r o l e i n r e l a t i o n toe m p l o y m e n t , c o n t r i b u t i n g totheoverallGDP,policieswhichcreatethefavora bleconditionstoenhancetheproductivityoftheVietnameseSMEsarenecessary. TheGovernments h o u l d designspecialprogramsaimingdirectlytoSMEstohelpthemi mprovetheirefficiency.SpecificpoliciesmayincludeprovidingtheSMEswithcapita lattachedr e d u c e d i n t e r e s t r a t e s a n d f l e x i b l e t e r m s a n d c o n d i t i o n s

The empirical results of this study indicate that higher intensity of innovation expenditure positively impacts a firm's productivity Therefore, managers should allocate a greater portion of their total investments to innovation activities, which may include research and development, acquiring new patents, purchasing new equipment or machinery, and providing essential training for employees Additionally, the government should focus on improving access to capital markets for SMEs, particularly when their internal capital is insufficient to fund these innovation initiatives.

Third,thefindingsfromthisempiricalstudyhasconfirmedtheroleofhigh- qu al it y laborshareintotallaborforceinimprovingfirm’sproductivity.High- qualityl a b o r i n v o l v e s m a n y i n n o v a t i o n a c t i v i t i e s a n d theya r e t h e mainr e s o u r c e w h i c h createsa n d d r i v e s t h e n e w i n n o v a t i o n t o t h e firm.A s s u c h , f i r m ’ s m a n a g e r s a r e r e c o m m e n d e d toperiodicallyreviewandtohavetheschedulet oimprovetheirlaborquality.

Limitationandpotentialfutureresearch