The effect of social capital on innovation of SMEs in vietnam

UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM ERASMUS UNVERSITY ROTTERDAM INSTITUTE OF SOCIAL STUDIES THE NETHERLANDS VIETNAM – THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS THE EFFECT OF SOCIAL CAPITAL ON INNOVATION OF SMALL AND MEDIUM-SIZED ENTERPRISES IN VIETNAM BY HOANG DUY KHOA MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, NOVEMBER 2016 UNIVERSITY OF ECONOMIC INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIET NAM THE NETHERLANDS VIETNAM – NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS THE EFFECT OF SOCIAL CAPITAL ON INNOVATION OF SMALL AND MEDIUM-SIZED ENTERPRISES IN VIETNAM A thesis submitted in partial fulfillment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By HOANG DUY KHOA Academic Supervisor: Dr LE VAN CHON HO CHI MINH CITY, NOVEMBER 2016 Table of contents DECLARATION ACKNOWLEDGEMENT ABSTRACT ABBREVIATIONS LIST OF FIGURES LIST OF TABLES CHAPTER 1: INTRODUCTION 1.1 Problem statement 1.2 Research objectives 1.3 Research questions 1.4 Scope of the study 1.5 structure of the study CHAPTER 2: LITERATURE REVIEW 11 2.1 Innovation 11 2.1.1 Definition of Innovation 11 2.1.2 Product innovation 11 2.1.3 Importance of innovation in entrepreneurship 13 2.1.4 Determinants of Innovation 15 2.1.5 SMEs and their contribution to economic growth 18 2.2 Social capital 21 2.3 Relationship between social capital and innovation 23 CHAPTER 3: METHODOLOGY AND DATA 27 3.1 Multinominal logit model 27 3.2 Data and variables 29 3.2.1 Data analysis 29 3.2.2 Variables 34 CHAPTER 4: EMPIRICAL RESULTS 37 4.1 Descriptive statistics 37 4.2 Regression Results 39 4.3 Marginal effects 42 CHAPTER 5: CONCLUSION AND RECOMMENDATIONS 45 5.1 Main finding 45 5.2 Recommendations 46 REFERENCES 48 APPENDIX 53 DECLARATION This declaration is to certify that this thesis entitled “The effect of social capital on innovation of small and medium-sized enterprises in Vietnam” which is conducted and submitted by me in partial fulfilment of the requirements for the degree of the Vietnam – The Netherlands Programme The thesis constitutes only my original works and due supervision and acknowledgement have been made in the text to all materials used.” Hoang Duy Khoa ACKNOWLEDGEMENT It is my pleasure to convey my heartfelt appreciation to those who greatly contributed to this thesis through supervision, support and encouragement I would like to express my utmost gratitude to my supervisor, Dr Le Van Chon, for his excellent guidance, advocate, caring, tolerance and patience It is my luck and honor to work under his supervision His wisdom, knowledge, skill and wholehearted devotion to this paper have always touched, inspired and motivated me Without his encouragement and persistent help, I would not have been able to complete this thesis I am very grateful to all the lectures of Vietnam – The Netherlands Programme (VNP), who not only delivered valuable knowledge to help me carry on this paper but also gave me inspirations to research I would like to send my special thanks to Prof Nguyen Trong Hoai, Dr Pham Khanh Nam and Dr Truong Dang Thuy who have always accompanied us during the two – year master programme I am very thankful to Dr Pham Khanh Nam and Dr Truong Dang Thuy who gave me encouragements and comments on my Concept Note and Thesis Research Design I would also like to thank all VNP staff for their conscientious assistance I am thankful to my friends from VNP who have shared bittersweet experiences of studying with me and always sent helps and encouragements whenever I need Besides, my sincere thankfulness also goes to my company’s managers and colleague who kindly and understandingly facilitated my master studying Finally, I am most grateful to Dad, Mom, Aunt, Sister and Brother for their unconditional love, endless support and limitless tolerance to me throughout my journeys ABSTRACT The contribution of SMEs in the economic growth is undeniable but difficult to measure, especially in Vietnam SMEs take a large percentage in the total number enterprises in Vietnam, thereby offering remarkable employment opportunities Moreover, they also play essential role in enhancing the stabilization and dynamic of the economy One of the most important element in improving the activities of the SMEs is innovation, which has long been mentioned as a consequential component for creating and keeping up the competition and development of cooperation in SMEs SMEs’ innovation activities are currently influenced by many components, but the SMEs usually faces the problem of lack of resources and capital In this context, social capital is used as a significant resources in most of SMEs activities in general and innovation process in particular The relationship between social capital and innovation has been examined by many authors in many countries However, there has been very little research about this issue in Vietnam This paper aims to ascertain the consequentiality effect of social capital on the innovation by utilizing the multinomial logit model while measuring innovation of Vietnamese SMEs According to the theories and empirical researches of many authors in all around the world, we expect the positive relations between the social networks of enterprises and the innovation activities Besides, we have also expected to figure out more related factors that effected on innovations activities, thus we might be able to recommend the policy makers ways to enhance the economics About the methodology, this paper use the multinomial logit model to test its hypothesis We measuring innovation of Vietnamese SMEs by “new products”, “improvement of existing products” “export” The positive relations between the social networks of enterprises and the innovation activities which is evidenced by previous literature again presented in this study In addition, we also find some factors which affect innovation, since the policy makers will be able to motivate the economy development by implementing the innovation support's policies Keywords: product innovation, social capital, SMEs, Vietnam, multinomial logit model ABBREVIATIONS GDP Gross domestic product SME Small and medium-sized enterprises CIEM Central Institute for Economic Management MPI Ministry of Planning and Investment of Vietnam ILSSA Institute of Labor Science and Social Affairs MoLISA Ministry of Labor, Invalids and Social Affairs of Vietnam BSPS Business Sector Programme Support R&D Research and development PPF Production–possibility frontier OECD Organization for Economic Cooperation and Development OLS Ordinary least squares MNL Multinomial logit model SOEs State-owned enterprises MIT Ministry of Industry and Trade FDI Foreign Direct Investment LIST OF FIGURES Figure 1: The movement of PPF curve to the right when have technological innovations 15 Figure 2: SMEs’ contribution to GDP and employment 19 Figure 3: Conceptual Framework 26 Figure 4: The 2013 SMEs’ survey sample by location 32 Figure 5: The 2013 SMEs’ survey sample by sector 33 LIST OF TABLES Table 1: The innovativeness indicators for SMEs in different dimensions 17 Table 2: Cataloged SMEs by financial assets 18 Table 3: SMEs’ Shares of Manufactured Exports in Developing and OECD Economies 19 Table 4: Firm ownership structure 30 Table 5: Firm size 31 Table 6: Different between Large enterprises and SMEs 33 Table 7: Number of observations with improve existing product and new process .37 Table 8: Interaction between improve existing product and new process 37 Table 9: Descriptive statistics 37 Table 10: The dummy variable descriptive statistics 38 Table 11: Multinomial logistic result 39 Table 12: Marginal effect results 43 Many papers proved that the social capital played an important role for the innovation process Firstly, the network participation have the positive effect to the product improvement The member in business association will receive more support than the non- members There are not only the financial support but also the relationship with other members The government control the majority of formal business networks in Vietnam for political reasons For example, when the new laws or regulation implements, the network members usually gains political benefits to the firm rather than the business advantages It is also obvious that the network participation would bring more progressive result through the network size much better than the network intensity In other words, for the network assistance, the quality; such as the high valuable interaction or timely action with daily operation of the company, is always more significant than the quantity; such as frequency low valuable contacts Secondly the network size also have the positive effect on the applying new process This mean the small firm with the limit resources need to take advantage of external sources of information and capital They use their relationship and social relation to reduce their cost They need to direct contact and maintain the connection with partners, suppliers, customers and even received the assists form business associations The number of firms applying the new process is small that can be explain by two main reasons Firstly, the customer just need the unique general product which useful with them, don’t need any innovative product is required Next, firms don’t have enough resources and suitable innovative one to applying new process 4.3MARGINAL EFFECTS After an estimation, a marginal effect of an independent variable show as a prediction function For dummy variables, marginal effect relates to discrete change in the probability of each option happens from zero to one in response to a unit increase of explanatory variable; all other variables being equal However, for continuous variables, marginal 42 effect relates to instantaneous rate of chance It measuring the absolute change of independent variable when one unit increase of dependent variables Table 12: Marginal effect results gender P (Improving P (Improving P (Improving P (Improving =1, New =1,New process =0, New =0, New process=0) =1) process =0) process =1) 0.034 age High school export -0.041 -0.0005 -0.027 -0.012 0.095 -0.0006 0.047 -0.114 Network size 0.00011 Labor force 0.00019 -0.00081 Network participation 0.147 0.038 -0.184 Competitive 0.075 0.023 -0.112 0.012 Source: Author’s calculation When no new process is applied and firms just apply product improvement, if the owner/manager is male, the product improvement will increase by 3.4% Age has a positive effect on the innovation through when owner/manager older than years, the probability of innovation activities reduce 0.05% The younger leader have more motive for innovation, and one more reason is they may lack of skills or experience in handling all the issues of operations The competitive have strong correlation with the innovation activities, thus the result have the significant When the competitive existing, the probability of apply innovation will increasing 7.5% in case improving product only and the probability of having both types of product innovation will increase 2.3% The probability even increasing 1.2% if just new process has applied This is the key point for policy makers, we can increasing the 43 innovation through by the increasing competitive in the market There are many way to solve this problem The government could reduce the monopoly, reduce the support The increasing number of employees has really increased the probability to improve its product When firms employ more person, the product improvement will increase by 0.02% This is similar with 100 employees is recruited, the product improvement will increase by 2% This only feasible with larger firms, because small firms with under 500 employees, it very difficult to increasing a large amount of workforce at one time When firms have the export activities, the rate will increase 9% in case just product improvement applied This is big probability which encourage firms to involve in export Throughout experience gain from exporting in the global market, the enterprises would acquire the comparative advance in foreign markets The joining into business association is also increasing the applying innovation by 14.8% when applying product improvement and nearly 4% when apply both types of innovation This represent through the “network participation” variable This mean the joining into business association is very necessary for firms who are looking for ways to innovate their product 44 CHAPTER 5: CONCLUSION AND RECOMMENDATIONS 5.1MAIN FINDING A few studies revealed the roles of social capital in SMEs’ innovation at transition economies This paper once again confirms the relationship between social capital and product innovation Besides social capital, gender, firm’s age, graduation from highschool, labor force, export and competition level have important impact on product improvement Finally, characteristic of company owners or managers is also proved to affect the innovation There are two variable among three variables represented social capital having significant effect on product innovation The entrepreneurs may gain more benefits from network participation Being a member of an association enhance the innovation Members of business association more likely business and assist each other Furthermore, firms can get updated information from business association on newlylaunched business-related regulations Although having more relationship and receiving assistance help enterprises to overcome many difficulties, the real impact in this research is not clear The effect of network size indicated by the number of regular contacts on innovation is positive This, again, emphasizes the importance of social network The larger relationship network of a company is, the more profitable it would be However, how much the assistance, measured by the frequency of help and support from networks, giving benefits SMEs' performance is not clarified This is the reason why business association is not popular in Vietnam Vietnamese government policies should invest more on establishing and developing business networks in order to directly support enterprises not only in their daily business but also in their long term strategies The empirical results state the positive effect of gender, age, export, firm size, competitive on innovation behavior of firms In reality, the characteristic of owner or manager is regarded as a potential elements for the development of SMEs The founders of SMEs need to accumulate knowledge and experience to lead the operation of enterprises 45 Additionally, recruitment activity is necessary for expanding and boosting their business The major element for innovation is export activities 5.2RECOMMENDATIONS With the point out the importance of innovation for the firm’s development, this study result suggest some policies that the policy makers can apply based on firm’s business network and some determinant of innovation below: First of all, Ministry of Industry and Trade (MIT) should support the establishment and operation of business associations in specific industry These associations can increase firm’s network through activities like connecting producers and suppliers, supporting and sharing information, organizing more settlements, fairs, workspaces All these advantages will be able to help enterprises have more experience and learn new technique to improve their products Secondly, Vietnam Trade Promotion Agency should motivate export activities to Vietnamese enterprises Besides, they should have trade policies which promote local producers to export their own products Finally, government should restrict the monopoly, create the competitive market where firms are given free access to Thus, firms will be encouraged to create better products to gain more market share 5.3LIMITATIONS There are some limitations of this research Due to lacking data, dependent variables could 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netsize Assit lf netpar competitive _cons gender age firmage asset highschool export netsize Assit lf netpar competitive _cons gender age Firm age asset High school export Network size Assistance lf Network participation Coef (base outcome) 0.2691743 -0.0024213 -0.0053309 7.15e-08 -.2251087 6317541 -0.0006331 6.92e-06 0.0005886 1.182139 0.9587196 -2.741624 -0.1840318 -0.0315283 0.0131797 1.45e-07 -0.1084574 -0.3252307 0.0036808 0.0000775 -0.0056054 0.8763552 0.8286079 -2.963688 0.5082891 -0.0088707 -0.0333368 7.58e-08 -0.8594402 0.8595474 0.0011058 -0.0002567 0.0023884 Std Err z P>z [95% Conf Interval] 0.132897 0.006226 0.0069296 3.89e-08 0.1599585 0.2240837 0.0015791 0.000131 0.0013976 0.1829381 0.2618316 0.3830996 2.03 -0.39 -0.77 1.84 -1.41 2.82 -0.4 0.05 0.42 6.46 3.66 -7.16 0.043 0.697 0.442 0.066 0.159 0.005 0.688 0.958 0.674 0 0.008701 -0.01463 -0.01891 -4.67E-09 -0.53862 0.192558 -0.00373 -0.00025 -0.00215 0.823587 0.445539 -3.49249 0.529648 0.009783 0.008251 1.48E-07 0.088404 1.07095 0.002462 0.000264 0.003328 1.540691 1.4719 -1.99076 0.2606479 0.0130479 0.0121837 5.00e-08 0.3177411 0.5951888 0.0013571 0.0001818 0.005159 0.3883419 0.5235992 0.7529523 -0.71 -2.42 1.08 2.89 -0.34 -0.55 2.71 0.43 -1.09 2.26 1.58 -3.94 0.48 0.016 0.279 0.004 0.733 0.585 0.007 0.67 0.277 0.024 0.114 -0.69489 -0.0571 -0.0107 4.66E-08 -0.73122 -1.49178 0.001021 -0.00028 -0.01572 0.115219 -0.19763 -4.43945 0.326829 -0.00595 0.037059 2.42E-07 0.514304 0.841318 0.006341 0.000434 0.004506 1.637491 1.854843 -1.48793 0.249329 0.0115919 0.0160725 5.59e-08 0.3834392 0.3425407 0.0019015 0.0003928 0.0012684 0.3243676 2.04 -0.77 -2.07 1.36 -2.24 2.51 0.58 -0.65 1.88 0.041 0.444 0.038 0.175 0.025 0.012 0.561 0.513 0.06 0.019613 -0.03159 -0.06484 -3.37E-08 -1.61097 0.18818 -0.00262 -0.00103 -9.8E-05 0.996965 0.013849 -0.00184 1.85E-07 -0.10791 1.530915 0.004833 0.000513 0.004874 2.75 0.006 0.256317 1.527815 0.8920662 54 competitive _cons 9803497 -3.5479 5209738 0.714446 1.88 -4.97 0.06 -0.04074 -4.94819 2.001439 -2.14761 MARGINAL EFFECTS IN CASE: FIRM HAS IMPROVED PRODUCT AND NO NEW PROCESS y= Pr(innova==1) (predict,p,outcome(1)) =0.13052326 variable gender age Firm age high school export Network size Assistance lf network participation competitive dy/dx 0274107 -0.0001946 -0.0005354 -0.0229019 0896283 -0.0000617 0.0001332 0.1722748 0.0807157 Std Err 0.01432 0.0007 0.00078 0.01657 0.03583 0.00017 0.00001 0.00016 0.03475 0.01673 z 1.91 -0.28 -0.68 -1.38 2.5 -0.36 0.11 0.85 4.96 4.83 P>z [ 95% 0.056 -0.00066 0.781 -0.00157 0.493 -0.00207 0.167 -0.05539 0.012 0.019405 0.72 -0.0004 0.912 -2.7E-05 0.395 -0.00017 0.10416 0.047935 C.I ] 0.055476 0.001178 0.000997 0.009582 0.159852 0.000275 0.00003 0.00044 0.24039 0.113496 X 0.606515 46.1629 15.5911 0.237891 0.061723 38.0527 199.976 15.5778 0.082726 0.884269 (*) dy/dx is for discrete change of dummy variable from to MARGINAL EFFECTS IN CASE: FIRM HAS NEW PROCESS AND NO IMPROVED PRODUCT y= Pr(innova==2) (predict,p,outcome(2)) =0.02640289 variable gender age Firm age high school export Network size Assistance lf network participation competitive dy/dx -0.0071119 -0.0008707 0.0004132 -0.0021848 -0.0081842 0.000091 -0.0000488 Std Err z 0.00698 -1.02 0.00032 -2.73 0.00031 1.35 0.00775 -0.28 0.01096 -0.75 0.00003 2.66 0.45 0.00011 -0.45 0.0190165 0.0145224 0.01538 0.00787 1.24 1.84 P>z 0.308 0.006 0.176 0.778 0.455 0.008 0.655 0.652 [ 95% -0.02079 -0.0015 -0.00019 -0.01738 -0.02967 0.000024 -7.00E-06 -0.00026 C.I ] 0.006561 -0.00025 0.001011 0.013006 0.013301 0.000158 0.000011 0.000164 X 0.606515 46.1629 15.5911 0.237891 0.061723 38.0527 199.976 15.5778 0.216 0.065 -0.01113 -0.00091 0.049164 0.029956 0.082726 0.884269 (*) dy/dx is for discrete change of dummy variable from to 55 MARGINAL EFFECTS IN CASE: FIRM HAS NEW PROCESS AND IMPROVED PRODUCT y= Pr(innova==3) (predict,p,outcome(3)) = 0.02932929 variable gender dy/dx 0.0126089 Std Err 0.00647 age Firm age high school export Network size Assistance lf network participation competitive -0.0002401 -0.0009429 -0.019975 0.0326638 0.0000335 0.000077 0.023317 0.018529 z 1.95 P>z 0.051 [ 95% -6.2E-05 C.I ] 0.02528 X 0.606515 0.00033 0.00044 0.00721 0.01819 0.00005 0.00001 0.00004 -0.73 -2.13 -2.77 1.8 0.65 -0.64 1.99 0.463 0.033 0.006 0.073 0.518 0.521 0.046 -0.00088 -0.00181 -0.03411 -0.00299 -6.8E-05 -2.8E-05 1.30E-06 0.000401 -7.7E-05 -0.00584 0.06832 0.000135 0.000014 0.000153 46.1629 15.5911 0.237891 0.061723 38.0527 199.976 15.5778 0.01463 0.00788 1.59 2.35 0.111 0.019 -0.00536 0.003091 0.051992 0.033967 0.082726 0.884269 (*) dy/dx is for discrete change of dummy variable from to MARGINAL EFFECTS IN CASE: FIRM HAS NEW PROCESS AND NO IMPROVED PRODUCT y = Pr(innova==0) (predict, p outcome(0)) = 0.81374456 variable gender age Firm age high school export Network size Assistance lf network participation competitive dy/dx Std Err -0.0329076 0.01667 0.0013054 0.00081 0.001065 0.00091 0.0450617 0.01893 -0.1141079 0.04027 -0.0000627 0.00018 0.00002 -0.0001614 0.0002 -0.2146082 -0.1137672 0.03752 0.01962 z -1.97 1.61 1.17 2.38 -2.83 -0.34 0.18 -0.8 P>z 0.048 0.107 0.241 0.017 0.005 0.732 0.856 0.426 [ 95% -0.06558 -0.00028 -0.00071 0.007963 -0.19304 -0.00042 -3.1E-05 -0.00056 C.I ] -0.00024 0.002895 0.002844 0.08216 -0.03518 0.000297 0.000038 0.000236 X 0.606515 46.1629 15.5911 0.237891 0.061723 38.0527 199.976 15.5778 -5.72 -5.8 0 -0.28814 -0.15223 -0.14108 -0.07531 0.082726 0.884269 (*) dy/dx is for discrete change of dummy variable from to 56 ... to ascertain the consequentiality effect of social capital on the innovation by utilizing the multinomial logit model while measuring innovation of Vietnamese SMEs According to the theories and... 2.1 .INNOVATION 2.1.1 Definition of Innovation The concept of innovation has evolved radically over the last forty years and one is known as the knowledge-based innovation There are a lot of concepts... application of social capital 2.3.RELATIONSHIP BETWEEN SOCIAL CAPITAL AND INNOVATION Nowadays, many firms decide to invest on the social capital because of the impact of it on their innovation Based on