The influence of institutional quality of firm size and number of non state firm at province level in vietnam

PROBLEMSTATEMENT

Afirmalwayshastodealwithissuessuchasthemobilizationofresourcesforinvestment,t h e a dministrationo f performance,t h e resolutiono f conflictsamongdifferentparties,andt h e s e oness h o u l d b e accomplishedinternally.However,t h e legalsystemcouldinfluenceonthoseproblems,a ndasaresult,theoptimalsizeoffirmsmightalsoreplyonthedevelopmentofinstitutionsineachcou ntry.

Invariousstudiesthatexploiteithercross– countryvariationorsinglecountryvariationhaveinvestigatedtheinfluencesofinstitutionalqualit yonfirmsize.Kumar,Rajan,andZingales( h e n c e f o r t h K R Z )

(2 00 1) concludedt h a t higherefficientlegalsystemsl e a d t o largerfirms i z e s acrossthirteenEuro peanc o u n t r i e s , t h e effectares t r o n g e r f o r industrieswherephysicalassetsarelessimport ant.InMexico,LaevenandWoodruff(2007)foundthatt h e p os i t i v e relationshipbetweena v e r a g e firms i z e andjudicialefficiency,t h i s l i n k i s more prevalentforproprietorshipsthanforco rporations.Becketal.(2006)hadsimilarresultwhent h e y usedfirm–leveldataon thelargestindustrialfirmsinforty-four countries.

Basedon those previousresearches,thispaperwillinvestigatetherelationshipbetweent h e localgovernancea n d en trepreneursi n V i e t n a m Interestingly,t h i s c o u n t r y hasa homogenouspoliticalsystemandgov ernmentstructure,b u t e c o n o m i c performancesi s s u b s t a n t i a l l y differentamongprovi nces(VNCI–VCCI,2005).

Vietnami s a nationw i t h m o r e t h a n n i n e t y m i l l i o n persons,a d e v e l o p i n g c o u n t r y organizedintosixty-threeprovinces.Bylaunching therenovationreforms(Doimoi)in1986,Vietnam’sGDPperc a p i t a increasesfroma r o u n d 1 0 0

$ t o over2 0 0 0 $ byt h e endo f 2 0 1 4 w i t h i n aquarterofacentury,andthepovertyratediminish esfrom50%intheearly1990sto3 % in2015(Worldbank,2015).Thestorymaycontinuetofollo wthepositivedirection,butunfortunately,itdoesnot.

Inrecentyears,Vietnameseeconomicshasrevealedmanytroubles:thepublicdebtist o o high,t h e p o p u l a t i o n aging,t h e p o l l u t e d environment,t h e e x h a u s t e d naturalreso urces, middlei n c o m e trap…

Aftera l o n g p e r i o d o f renovationr e f o r m s , Vietnamj u s t hasa p p r o x i m a t e l y ahalfofa millionenterprises,andremarkably,thesizeoffirmtendsmoreandm o r e small,cometo extremelysmall 1

ManyactionprogramsareaddressedbythecentralgovernmentofVietnamtoexpoundt h e ec onomicsrestructuringendeavors.Byimprovingthebusinessenvironment,increasingthee f f i c i e n c y ofgovernmentaloperationsandadministrations,eliminatingthebusinessconstraints… policymakersdesiretoachievethetargethavingamillionenterprisesin2020.Eventhoughthis targetisquitemodestincomparingwithpopulationscale,theresultofthisoneis stillhardpredictable.

TheProvincialCompetitiven ess Index(PCI)i s anannualranking ofeconomicgovern ancei n V i e t n a m ’ s sixty- threeprovincesproducedbyt h e V i e t n a m Chambero f CommerceandIndustry(VCCI).F u n d a m e n t a l l y , t h e V C C I gatherst h e o p i n i o n s o f about7 , 0 0 0 d o m e s t i c privatefirmsregarding economicgovernanceintheirprovinces.

ThePCIhastheintentiontoimprovetheefficiencyofadministrationoflocalgovernmen tsbyputtingthemintoacompetitionwitheachother,thoughatthebeginning,thisi n d e x lackso f t h e i r a t t e n t i o n W h e n t h e peopleandenterprises o c i e t y havem o r e a n d m o r e interestinthisin dex,theyarenolongerignoreit,thecompetitionbecomestherealoneamongsixty-three provincesandthePCIhasproved itsmeaning.

Byclarifyingtheinfluencesofinstitutionsoneconomicoutcomesthroughthelensoft h e PCIindexandfirmsize,thispaperpresentsstrongargumentstopolicymakerstoimprovet h e busi nessenvironmentthat is oneof primarygrowthrateconstrainsof Vietnam.

Thispaperinvestigatestheinfluencesofthequalityofmunicipalinstitutionson firms i z e andnumberofnon– statefirms.Inordertoacquirethat,thisoneusesauniquedatasetandrankingofprovincialgove rnanceinstitutionsfromVietnam–ThePCI-t o measurethe

1 http://tuoitre.vn/quy-mo-doanh-nghiep-vn-ngay-cang-nho-602008.htm. qualityofinstitutions.Thefinalfindingswillsupportdirectlycentralandlocalgovernmenttom a k e policiesandtocompletetheirstrategicobjectives.

Thedatasetusedinthispapercomesfromfifty– twoprovinceswiththeperiodfrom2 0 0 9 to2013.Witheveryprovince,therespectivePCIdataandt hedistancefromittothe17 thparallel arealsogathered.

Thethesiscomprisesf i v e chapters.Chaptert w o reviewst h e literatureabouti n s t i t u t i o n s , firmsize,number offirmsandtherelationshipamongthem.Thisonealsoillustratesthemethodtomeasurevariablesan dempiricalresults.Chapterthreediscussesthedataset:datasourcesandcharacteristics,theapproac hofestimationsemployedinthisstudy.Chapterfourunveilsthefindingfromthescopedataof5 2provinces/citiesinVietnam.Thel a s t o n e presentsconclusions,recommendationsandthelimitations of thispaper.

Thischapterpresentsempiricalresultso f p r i o r researcherswhent h e y investigatet h e influenceso f institutionalq u a l i t y onfirms i z e an d n u m b e r o ffirm.Ina d d i t i o n , t h i s chapterdiscussestechn iquestomeasurethe qualityof institutions andfirmsize.

AccordingtoRonaldCoase(1937):“peoplebegintoorganizetheirproductioninfirmswhent h e transactioncostofcoordinatingproductionthroughthemarketexchange,givenimperfectinformatio n,isgreaterthan within thefirm”.

A firm's interactions with the market may not be fully under its control, particularly due to factors like sales taxes, but it can manage its internal allocation of resources Alternative production methods, such as price mechanisms or economic planning, often fail to achieve complete production efficiency Consequently, firms either rely on internal pricing for all their production or a single large firm manages the entire economy The primary reason for establishing a firm is to minimize transaction costs associated with the price mechanism These costs include the effort to discover relevant prices, which can be reduced but not entirely eliminated through specialized information sources, as well as the expenses involved in negotiating and drafting enforceable contracts for each transaction, especially in uncertain environments.

Ifafirmoperatedinternallyunderthemarketsystem,manycontractswouldberequired(forinsta nce,evenfor producing a peno r delivering apresentation).Incontrast,a realfirmhasv e r y f e w (thoughm u c h m o r e c o m p l e x ) contracts,suchasd e f ininga manager’sp o w e r o f directio noveremployees,inexchangeforwhichtheemployeeis paid.

Henotedthatgovernmentmeasuresrelatingtothemarket(salestaxes,rationing,pricecontrols)tendt oincreasethesizeoffirms,sincefirmsinternallywouldnotbesubjecttosuchtransactioncosts.Thus, Coasedefinedthefirmas“thesystemofrelationshipswhichcomestoexistence whenthe direction ofresourcesisdependenton theentrepreneur”.

Thequestiont h e n ariseso f whatdeterminest h e s i z e o f firms,w h y d o e s t h e entrepreneursorga nizethetransactionstheydo,whyno moreorless?Sincethereasonforthefirm’sbeingis tohavelowercoststhanthemarket,theupperlimitonthefirm’ssizeissetbycostsrisingtot h e poin twhereinternalizinganadditionaltransactionequalsthecostofmakingthattransactioninthe market.Inpractice,diminishingreturnstomanagementcontributemosttoraisingt h e costso f o r g a n i z i n g a largefirm,p a r t i c u l a r l y i n largefirmsw i t h m a n y differentp l a n t s andd i f f e r i n g internaltransactions(suchasconglomerate),ori f t h e relevantpriceschangesfrequently.

RonaldCoasec o n c l u d e d t h a t t h e s i z e o f firmsi s dependento n t h e costso f u s i n g t h e p r i c e mechanism,andon the costs oforganizationofotherentrepreneurs.

Recent research highlights the critical role of "institutions" as key determinants of economic performance Douglass North notably underscored the significance of "contracting institutions," which facilitate private contracts among citizens, and "property rights institutions," which safeguard citizens' property rights from rulers Despite the importance of these factors for understanding long-term economic outcomes, there has been limited investigation into which types of institutions have the most impact on economic results This paper aims to contribute to that understanding.

Acemoglu and Johnson (2005) examined contracting institutions using the legal formalism measure from Djankov et al., focusing on the procedural complexity required to collect on non-paying commercial debts and the number of procedures involved For property rights institutions, they assessed various measures of constraints on government power and the protection of property rights Their identification strategy leveraged historical differences among former European colonies The study revealed strong first-stage relationships between legal origin and contracting institutions, as well as between colonization strategies and property rights Utilizing a multiple instrumental variables approach, they found that property rights institutions significantly influence long-term economic growth, investment, and financial development, while contracting institutions mainly affect the form of financial intermediation with a more limited impact on overall growth, investment, and total credit in the economy.

Theirconjectureisthatindividualscanstructurecontractstoreducetheadverseeffectsfromcontrac tingi n s t i t u t i o n s , f o r example,bychangingt h e f o r m o f i n t e r m e d i a t i o n t o reducet h e cost ofproviding outsidefinancetofirms.Becauseofthese adjustments,the usualeffectofrulesgov erningcontractsinvestmentandgrowthmayberelativelylimited.Incontrast,becauseenforceablec ontractsbetweent h e s t a t e andi n d i v i d u a l s a r e n o t p o s s i b l e , p r o p e r t y rightsinstitut ionsconstrainingarbitrarybehaviorandexpropriationbythestateandeliteshavem o r e importanteff ectsoneconomic outcomes.

Manyresearchersh a v e s tu di ed t h e impacto f th e q u a l i t y ofi ns ti tu ti on s o n firms i z e , andalmostfindingsindicatethattheexistenceof positiverelationshipbetweenthem.

Kumaretal(2001)concludedt h a t t h e q u a l i t y o f institutionsi s higher,firmsizeisgreater onaverage,whentheystudiedinthirteenWesternEuropeancountries.Moreover,theyalsoobservedth eeffectsofphysicalassetsandhumancapitalonfirmsize.Theoutcomesarephysicalassetsplayanim portantroleintheinfluencingmagnitudeofjudicialsystemsonfirms i z e , s i n c e theeffectof humancapitalis not obvious.

Gatheringthedataatfirmlevelofforty– foureconomics,Becketal(2006)hadthes i m i l a r conclusionswithKumaretal‘sfinding,notonl ywiththedevelopmentofinstitutions,b u t thedevelopmentoffinancialintermediaries.Bothofthe mhavepositiveeffectonaveragefirmsize.

InMexicocase,LaevenandWoodruff(2007)discoveredtheexistenceofpositivelinkbetwe enlegalenvironmentandaveragefirmsize,whentheydevelopedaframeworkinwhichi n s t i t u t i o n s influencese c c e n t r i c i t y r i s k s o f entrepreneuri n t e n d i n g t o increases h a r e o f hi sassetsi n a singlef i r m I n addition,t h e q u a l i t y oflegale n v i r o n m e n t hasstrongerimpacto n pro prietorshipst h a n t h a t o n corporations,andt h e y recommendedt h a t t h e decreasei n t h o s e r i s k s s h o u l d b e takenintoaccount.

Usingthedatain Spanish, Fabbri(2010)supposedthatfirmsizewill increaseandbankfinancingwillcheaper,whenthecourtsaremoreefficient.Inthispaper,Fabbriconsi deredthetrialjudgmentsasameasureoftheefficiencyofajudicialdistrict,moredetails,shecomputed t h e lengthofthoseonesonaverage,ortheratiobetweenthosetrialjudgmentsafterayearandt h e tot alnumberofproceedingjudgments.Inaddition,shearguedthattheendogeneityissueo f there searchwassolvedduetotheinfluencesoffirmleveldecisionsonmacroeconomicsort h e costof lawenforcementarelimited.

Byresearchingt h e influenceso f institutionale f f i c i e n c y o n firms i z e , thoseauthorsc l a r i f y variouschannels– investmentdecisions,theemploymentprotectionlegislation,transactioncost,creditenvironment

Firstly,firmsizeisaffectedbytheinefficienti n s t i t u t i o n s systemthroughinvestmentdeci sionsofentrepreneurs,whentheywillconsidercarefullyriskstheyhavetodealwithandt h e i r e xpected incomes.Thiscouldleadtodecreaseprobabilitiesofinvestmentandgrowth.

Secondly,theinstitutionscouldeffectonemploymentdecisionsoffirmsbyregulationso f l a b o r forceprotectionlaw,e v e n thought h i s r e l a t i o n s h i p i s n o t o b v i o u s conclusion.T h e lit eraturecouldarguethatfirm’sperformancecouldbereliedonitsactualimplementationtoadaptthisl aw.

Thirdly,thetransactioncostwillincreasesincethequality ofcontractenforcementisn o t good,firmsmayc h a n g e u p r i g h t l y i n t e g r a t i n g t h e i r p r o d u c t i o n p r o c e d u r e , andf i r m s i z e w i l l larger.

Next,t h e inefficiencyo f formalcontractenforcementi n s t i t u t i o n s increasest h e subordi nationofparties o n relationalcontracting,andmakesthe co ll ab or a ti on ofthemw i t h newpa rtnerb e c o m e s m o r e difficult.However,therei s anotherchannel,i n whichbarrierscreatedbyt h o s e relationalcontractionsh i n d e r t h e entranceo f n e w f i r m s , andt h i s channelcouldincreaset heaveragefirmsizeduetothefactthatnewfirmsareusuallysmallinsizeincomparewith operatingfirms.

Finally,LaevenandWoodruff (2007) orBecketal (2006)haveinvestigated theimpacto f creditmarketonfirmsize,whentheyuseprivatecreditasameasureoffinanciali n s t i t u t i o n s variable.The ideabehindthatis moreefficientfunctioning judicialsystems,creditorswillbesafer,theavailabilityofcreditandthecontractualtermsforpotent ialborrowerswillbe increasedandenriched,asaconsequence,financialconstraintstogrowthfore x i s t i n g firmswil lbemonitoredandeliminated.However,itishardtostatethatthislinkisacausationrelationship:mor eefficientcreditmarketleadstotheincreasingofnumberofnewfirms,andbecausenew firmsareusuallysmall in size,averagefirmsizewouldsmaller.

Insummary,t h e firstt w o channelsi n d i c a t e t h e n e g a t i v e r e l a t i o n s h i p betweeni n s t i t u t i o n s andaveragefirmsize,thethirdchannelproposesapositiveone,whilethetwolastchan nelsareambiguous.

Kumaretal(2001)suggestedt h r e e t e c h n i q u e s t o calculatefirms i z e : valuea d d e d , o u t p u t offirmsorthenumberofemployees.InMexico,LaevenandWoodruff(2007)addedt h e capitals t o c k asmeasuremento f firms i z e , a l o n g w i t h t h e n u m b e r ofemployees,w h i l e GiacomelliandMenon( 2 0 1 2 ) proposedt o u s e twom e t h o d s : t h e totalemploymentandt h e turn overoffirms.

Thedatao n d i s t r i b u t i o n o f firms i z e couldb e releasedn o t c o m p l e t e l y i t s p o t e n t i a l richnesswhentheaveragefirmsizeisproducedsimplybytheratiobetweentotalemploymenta ndtotalnumber offirmsinthecountryorsectorcombination.Inaddition,thesimpleaveragefirmsizeisnotabletomoni torinthecasethatagiantfirmhasdominatingshareinthesectori t belongsto.

UsingdatafromEnterprisesin Europe,Kumar,RajanandZingales(2001)computedt h eEmployeeWeightedAverageN u m b e r o f Employeesb a s e d o n DavisandHenrekson’ssuggesti on(1997).

DavisandHenrekson(1997)suggestedanotherapproachtocalculatefirmsize.Firstly,t h e y computedtheratiobetweenthenumberofemployeesandthenumberoffirmsingivenb i n The n,thisratiowillbecontrolledbyitsshareonthesector(theratiobetweenthenumbero f employeesin this binandthe total numberofemployeesin thesector).

LaevenandWoodruffuseddatafromMexicaneconomiccensusin1998,followedthe samemethodofKumaretal(2001)andDavisandHenrekson(1997)tocalculatefirmsize.Their dataweregatheredfromplant– l e v e l d a t a w h i l e manystudiesp r o d u c i n g firms i z e d i s t r i b u t i o n useenterprise– leveldata,however, th ey arguedthat almost100 %offirmsint h e i r datasetaresingle– establishment,thentheissueofplant–leveldataorenterprise–leveldatais nolongermatter.

InItaly,GiacomelliandMenon(2012)usedtwomethodstocomputeaveragefirmsizecomingf romtwodatasources:ASIAdatabaseandCERVEDdatabase.Thefirstoneincludest h e dataatpro vincelevel:thenumberoffirms,thenumber ofplants, thenumberofemployeesandt h e d i s t r i b u t i o n o f r i m s andp l a n t s bys i z e b i n s Basedo n t h i s dataset,t h e y computedaveragefirmsizefollowedthemethodofKumaretal(2001).Inadditio n,theyalsoobserved theinfluencesofinstitutionsontotalemploymentandthenumberofplants,theyarguedthats m a l l average firmsizemaybe comefrom thehighentrepreneurshiprate.

Theiranothermethodtomeasurefirmsizeistheturnoverbygatheringtheinformationo f bala ncesheetofmostcorporationsinItaly.Basedontheseconddataset,theycomputedtheturnoverofcorp orationonaverageatprovincelevelfor thetwoperiods2001–2002and2008

2009.Theaverageturnoverforthesecondperiodindicatesfirmsize,whilethegrowthratebetw eenthosetwo periodsindicatesfirms’growth.

GarciaPosadaandMoraSanguinetti(2013)usedtwoapproaches–employee weightedaverageandarithmeticaverage–tomeasurefirmsize.Whilet h e employee– weightedaveragefirmsizefollowedKumaretal(2001)andDavisandHenrekson(1997),anotheron ewastheindexaggregatedfromtheinformationofemployment,revenueandtotalassets.Thedataset usedinthispapercontainedfirm–leveldatafortheperiod2001–

2009.Oneoftheirconcernsistheimpactofinefficiencyjudicialsystemontheexistenceoflargefirms, andtheyarguedt h a t w h i l e t h e arithmeticaveragecouldn o t controlt h e situationi n whicha la rgeamounto f v e r y s m a l l firmt h a t accountf o r a v e r y s m a l l shareo f regionaleconomics,t h e employeeweightedaveragecoulddo.Inaddition,theemployee– weightedaveragefirmsizecouldminimizetheinfluencesofentryandexitsincenewsfirmsandexitin gfirmsareusuallym u c h smallerin sizethanoperatingones.

Thesecondmajorvariableofthisstudyistheinstitutionalquality.Witheverycircumstanc e,theauthorhasspecialapproachtomeasurethe qualityof institutions.

( v i ) t h e c o s t , easeo f use,andcompletenesso f p r o p e r t y registries,and( v i i ) t h e a d e q u a c y o f l o c a l legislationrelatedt o contractenforcement”,andtheinstitutionalqualityisthefin alindexcomputedbeaveraging thosesevenelement.Thissurveyobservedthecollectionofbankdebtfromthirty– twocourtsi n eachrespectivestatesof Mexico.

Kumaretal(2001)usedthedatabaseofBusinessInternationalCorpasameasureoft h e q ualityofinstitutions.Thisdatabaseisascalefrom0to10,inwhichlowermarksindicatelowerlevelofe fficiencyandintegrityoflegalenvironment.

Desai,Gompers,Lerner(2003)definedcorruptionas“themisuseofpublicpowerforprivat ebenefits,bribingofpublicofficials,kickbacksinpublicprocurement,orembezzlemento f publicfu nds”.Theyusedanindexcalculatedbyaveragingthecorruptionmarksfromgivensourcesas:“(1)Free domHouseNations in Transit, (2)GallupInternational,(3)theEconomistIntelligenceU n i t ,

( 5 ) t h e InternationalCrime Vi ct im Survey,

( 6 ) theP ol it ic a l andEconomicRi sk Consultancy,H o n g Kong,

(9)theWorldEconomic Forum”.F r o m “theGlobal CompetivenessReport2000ofWorldEc onomicForum”,theyusedanindexofpropertyrightprotectionast h e secondmeasuret o i n s t i t u t i o n s T o measuret h e e f f i c i e n c y oflegalsystem,theyusedani n d e x calledtheFormalismInd ex,andtheyexaminedhowwellthelegalsystemfunctionsbyu s i n g anindexfrom“theSurveyofW orldBusinessEnvironmentfromtheWorldBankGroupbetween1998– 2000”.

InItaly,GiacomelliandMenon(2016)suggestedamethodtomeasuretheefficiency o f contractenforcementatcourtlevelas“theaveragelengthoffirstinstancecivilproceedingsi n each court”.This proxyindicates that more requiringtimeto resolve a conflict ofacontract,t h e efficiencyofcontractenforcementwillreduce.ThedatabasewasgatheredfromtheI talianM i n i s t r y ofJustice.

In their 2006 paper, Becket et al identified the primary variable for assessing legal system efficiency as the time required for dispute resolution, specifically contract enforcement They also examined the impact of financial development on firm size, using private credit as a key indicator, defined as the claims of deposit money banks and other financial institutions on the private sector as a share of GDP Additionally, they incorporated a broad measure of institutional development known as property rights, which reflects the legal protection of private property and the likelihood of government expropriation.

Inrobustnesst e s t s , theyusedo t h e r dependentvariablessuchas:“ s t o c k o f marketdev elopment,asurvey- basedindicatoroftheefficiencyandintegrityofthelegalsystem,legalformalismcapturestheextent ofsubstantiveandproceduralstatutoryinterventionlegalsystems,andcontrolofcorruptionis ameasureoflackofcorruptioningovernment”.

Almostpapersc o n t r o l l e d f o r t h e effecto f m a r k e t s i z e o n firms i z e byu s i n g l o g o f municipalp o p u l a t i o n Int h e p a p e r o f LaevenandWoodruff,theyalsoincludedGDPp e r ca pitaandeducationlevelinstates,inwhicheducationvariableswasdefinedas“theshareofp o p u l a t i o n i n eachs t a t e agedfifteenyearsandoverw i t h atleastn i n e yearso f s c h o o l i n g educa tionin 1990”.

InthepaperofKumaretal(2001),theyused“logoftotalemploymentintheindustryi n t h a t country”ast h e i r measureo f marketsize,thoughtheyarguedt h a t maybee x i s t i n g causalityiss uebetweentwovariables– averagefirmsizeandmarketsize.Todealwiththisuse,theyappliedinstrumentvariablemetho d,inwhichtheirinstrumentswere:“logofGDP,t h e countrypopulationandtheratioofexportsto GDP”.Theyalsoaddedameasureofhumancapitalproducedby“theaverageyearsofschoolingin thepopulation overage 25”.

Followingt h e s a m e wa y, GiacomelliandMenon(2012)in cl ud ed “ t h e sha re ofhighsch oolinggraduatesonpopulationasameasureoflocalhumancapital”.Inaddition,theyusedmunicipalp opulation as ameasurefortheirmarket sizevariable.

Becketal (2006) explored various factors influencing firm size, including GDP, GDP per capita, inflation rate, and the trade share in GDP They identified the inflation rate as a key indicator of macroeconomic risks and defined the trade share in GDP as the ratio of total exports and imports to GDP Their findings suggested that the openness of economies significantly impacts firms' market power Additionally, they proposed that the "rate of gross enrollment in secondary education" serves as a measure of human capital accumulation within the economy.

InItalycase,GiacomelliandMenon(2012)notonlyobservedtherelationshipbetweeni n s t i t u t i o n s andfirmsize,b u t alsot h e effectso f i n s t i t u t i o n s o n totalemploymentandt h e n u m b e r offirms.W h i l e thepoorinstitutionshadnegativeeffectonfirmsize,their findingsalsoin dicatedthatthisonehadnegativeeffectontotalemployment,butdidnothavealinkw i t h t h e n u m b e r off i r m s Indetail,theyr u n t h e similarregressionsw i t h f o u r dependentvariables(in logs):“theaverageplantsize,theemployeeweightedaveragefirmsize,thetotaln u m b e r ofplant s,and thetotalemployment”.Theyillustratedthreemaindifferentscenarios:

Firstly,theinefficiencyofjudicialsystemhasanegativeandcomparableeffectonthegrowt hande n t r y off i r m s T h i s t h i n g resultsi n t h e coefficientsbetweent h e i n s t i t u t i o n s variableswiththetotalnumberofplantsandtotalemploymentshouldbenegative,whilethiso n e hasinsignificantforaverage firmsize.

Secondly,thejudicialinefficiency affectsonlyfirms’growthbutnotfirms’entry.Int h i s one,thecoefficientsbetweeninstitutionsvariablewiththetotalemploymentandaverages i z e s houldbenegative,whilethisoneofinstitutionsvariableandthenumberofplantsshouldb e insignific ant.

Lastly,theinstitutionsvariablehasanegativeeffectonfirms’entry,butnotonfirms’growth. Inthiscase,thecoefficientsofinstitutionsvariableandthenumberofplantsshouldb e negative, w h i l e t h i s o n e betweeni n s t i t u t i o n s variableandtotale m p l o y m e n t andaverages i z e shoul d beinsignificantand positive,respectively.

Afterall,theyfoundt h a t t h e p o o r institutionalqualityhada ne ga ti ve effecto n totalempl oymentbut with thenumberofplants,it did not.

Amongthelines,Klapper etal(2006)usedthe datasetofcorporationscoming fromdevel opedandtransitioneconomicsinEuropetoinvestigatetherelationshipbetweenmarket regulationswiththeestablishmentofnewlimited– liabilityfirms,theaveragesizesoffirms,andthegrowthofincumbentfirms.Inthiscase,theyconsi deredthecosttoadaptregulatoryrequirementsf o r t h e e s t a b l i s h m e n t a newl i m i t e d – l i a b i l i t y f i r m s ast h e i r p o t e n t i a l explanation.

Theirdependentvariabledefinedas“theratioofnewfirmstototalfirms”wascontrolledbyt h e i n d u s t r y share,t h e characteristicsatc o u n t r y levela n d i n d u s t r y l e v e l Inwhich,thecou ntrycharacteristicwas:“thecostoffulfillingthebureaucraticrequirementstoregisteracompany”,th eindustrycharacteristicwas:“theratioofnewfirmstototalfirmsint h e US”,andtheindustrysha rewas:“theratiooftheindustry’ssalestototalsalesoffirmsint h e country”.

Theirworkscomprised three actions.Firstly, theyinvestigated theinfluence ofe ntrycostsontheextentofincorporation.Theyexploredthatpoorperformanceofregulationsh asnegativeeffectontheestablishmentofnewfirms,thisoneisstrongerinnaturallyhigh– entryindustries.

Secondly,theyobservedt h e connectionbetweent h e bureaucratice n t r y regulationsw i t h the averagesizeof newfirms.As their outcomes,these regulationsobligatenewe n t r y firmsto bebigger,whiletheseonesmakeexistingfirmsinnaturallyhigh– entryindustriestogrowatlowerspeed.

Finally,theyconsideredo t h e r indicatorso f bus in es s environmentsucha s : “financialdev elopment,l a b o r regulation,protectiono f intellectualp r o p e r ty”s u p p o s e d t h a t t h e s e onesare likelyableto influenceonentry.Intheend,theirresultsdid not havedifference.

InthepaperofEdmund andMarkus(2009),theystudiedtheeffectofthequalityofVie tnameselocalgovernanceontheselectionofentrepreneurs- stayininformalsectorortos u b m i t t o formalgovernmentregulation.T h e i r researchanswer edt h e question:“howt h e q u a l i t y oflocalinstitutionsinVietnaminfluencesonthedecision totransitionfromavoidinggovernmentattentiontoacceptingit”.

TheirresearchfollowedthepaperofSimeonDjankov(2008),whenhestatedthattheselectio noffirms–stayintheinformaleconomyormovetoformaleconomy – isthemostsignificantdue tothe efficiency ofgovernanceandinstitutions hasimproved.Th eargumentbehindthis is:whenentrepreneursdecideto keepthe position in theinformaleconomy,thetaxrevenueswilldiminish,ineffectivehealthandenvironmentregulations willhamperthepublic,a v i c i o u s circleensuret h a t b r e a k s ruleso f l a w s T h i s o n e l e a d t o p o o r i n s t i t u t i o n s , greateri n f o r m a l i t y sincepolicymakersmissthenecessaryinforma tiontoadjustthebusinessenvironmentandguardthesocialwelfare.

AlthoughVietnamhasm o r e t h a n t w o decadeso f renovation( d o i m o i ) reformst o e stablishalegalenvironment forprivatefirms, thefactisthatinthis country,entrepreneurshav etofacemorebusinessconstraintsfromregulatorysystemthanthatofhouseholdbusiness( h o kinhd oanhcathe).ItisnotdifficulttopredictthatwhatsectorplaystheleadingproportioninGDP.A n d thet rueisthehouseholdsectorremainsthehighestpositioninnoto n l y agriculture,but alsoindustryandservices.

Ingeneral,regulatory responsibilitiesforhouseholdbusinessesandentrepreneursare separatedcrosst w o distinctadministrativelevels.T h e r eg ul at or y environmentt h a t monitorst h e activitieso f entrepreneursi s m o r e comprehensive,m o r e transparent,andm o r e s t r i c t l y implementsacrossprovincesthat theonethatinfluencesonhouseholdbusinesses.

UsingthePCIasameasureofinstitutionalqualityinVietnam,Edmund andMarkus(2009)foundthatthequalityoflocalgovernanceisassociatedwiththedecisiontooperateinformalsect oro f entrepreneurs.Inaddition,theya l s o discoveredthateventhoughentrepreneursinitiallychoos einto the informal sector, thetimetheseonesspendthereislessiflocalgovernancesarebetter.

Thischapterillustratesthetechniquetomeasurevariables:employee– weightedaveragefirms i z e , number offirms,institutionalqualityandothervariables.Thischapteralsodetailscharacteristicsandc o m p o n e n t s o f variables.Inaddition,causalityi s s u e andm o d e l specificationwill be discussed. 3.11DATASOURCESANDCHARACTERISTICS

2013wasgatheredfromt h e ProvincialStatisticalYearbook,w e b s i t e o f GeneralS t a t i s t i c s Officeo f Vietnam(GSO),websiteofVietnamChamberofCommerceandIndustry(VCCI),andGo ogleMaps.A fulllist of ourdatasourceswasshowedin Appendix2.

Thesimpleaveragefirmsizeproducedbytheratiobetweentotalemployeesandtotaln u m b e r offirmscanbebiasedincaseofalargenumberofsmallfirmsorasectordominatedbyasinglegi antfirm.Hence,analternativemeasureoffirmsizeistakenintoaccount.

Methodologically,thealternativemethodtomeasurefirmsizeofthispaperfollowstheapproa chofKRZ(2001)andDavidandHenrekson(1997)whoproducedemployee– weightedaveragefirmsizethatweightseachbinbythe number ofemployeesinthatbin.

InVietnam,thedatasetgatheredfromtheProvincialStatisticalYearbookandGeneral StatisticsOffice(GSO)doesnothavethedataofnumber ofemployeesinenterprisebysizeofemployeesandtypesofi n d u s t r i e s , i n additiontherei s n o t h e c onsistencya m o n g provinceswhentheycollectandgroupthedatafollowedtypeofindustries.Hence ,inthispaper,thebini s t h e typesofenterprise.

AccordingtothedefinitionofVietnameseLaws:“Enterprisesareeconomicunitsthati n d e p e n d e n t l y keepbusinessaccountandacquireitsownlegalstatus.TheymaybesetupbyS t a t e EnterpriseLaw,CooperativeLaw,EnterpriseLaw,ForeignInvestmentLaworbyAgreementbetw eentheGovernmentofVietnamandGovernmentofForeignCountries.Therearethreefollowingtypes ofenterprise:

(1)Enterpriseswith100%ofstatecapitalo p e r a t i n g a c c o r d i n g t o enterprisel a w a n d undercontrolofc e n t r a l o r l o c a l governmentalagencies;

Non– stateenterprisesareenterprisessetupbydomesticcapital.Thecapitalmaybeownedbycoop erative,privatew i t h 1 o r i n d i v i d u a l grouport h e governmentwhencapitalofgovernm entisequalorlessthan50%ofregisteredcapital.Therearef o l l o w i n g typesofnon– stateenterprises:(1)Cooperatives;(2)Privateenterprises;(3)Cooperative namecompanies; (4)Privatelimitedcompanies; (5)Joint stock companiesw i t h o u t capitalo f State;

Foreigndirectinvestedenterprisesa r eenterpriseswith capitaldirectly investedbyforei gners,n o t separatedbypercentofc a p i t a l shared.Therea r e f o l l o w i n g t y p e s o f foreig ndirectinvestedenterprise:Enterpriseswith100%ofcapitalinvestedbyforeignersandJoi ntventureenterprisebetweendomesticinvestorandforeigner”.

Inaddition,Employeesofenterpriseare:“totalofpersonswhotheenterpriseemploysandpay swageo r salary.Employeeso f enterprised o n o t include:

Weeliminates o m e provincest h a t h a v e n o d a t a o r t h e i r d a t a d o n o t meetgener alrequirements.A f t e r filtering,f i f t y – t w o provincesw i t h 2 6 0 observationsareusedt o r u n regression.

Thesecondmajor componentofthisstudyisi n s t i t u t i o n a l quality.InVietnam,manyre searchershaveusedthePCIasameasure ofinstitutionalquality.Forinstance,Tran,GraftonandKompas(2008)s t u d i e d whatdeterminesg r o w t h i n t h e n u m b e r o f privatefirms,firminvestment,Vu,Le,andVo(2009)investigateddeter minantsofforeigndirectinvestment,orM a l e s k y (2007)hadapaperdiscussedtheeconomicg rowth.

Fundamentally,thePCIisthecollectivevoice ofapproximately7,000 domesticprivatefirms.T h e re sp ons es ofprivateentrepreneursregardingeconomicgovernancei n t heirprovincesaregatheredinatwenty-pagessurvey.

Thefinali n d e x r a n k i n g Vietnam’ssixty-threeprovincesi s combinedf r o m t e n s u b - i n d e x ofgovernance 2 :

Entryc o s t s : i n c l u d i n gthrees m a l l e r c o m p o n e n t s : t h e timet o registero r re- registermeasuredindays,the number oflicenseshavetohavetostartoperatinga firm,an devaluationsof entrepreneurs to finalizethewholeprocess.

Transparencyandaccesstoinformation:accordingtoVCCI,thiscomponentis:“ame asureo f whetherf i r m s haveaccesst o t h e properp l a n n i n g andl e g a l documentsn e c e s s a r y t o r u n t h e i r b u s i n e s s e s , whethert h o s e d o c u m e n t s a r e e q u i t a b l y available,whethernewpoliciesandlawsarecommunicatedtofirmsandpredictablyimpleme nted,andthe business utilityof theprovincial Webpage”.

Timec o s t s o f regulatorycompliance:i sa c o m p o n e n t measuredbyt h e amounto f t i m e inwhichfirmshave tospendtodealwithlocalregulationsafter establish.

Informalcharges:t h eV C C I definest h e i n f o r m a l chargesare:“ a m e a s u r e ofh o w m u c h firmspayininformalcharges,howmuchofanobstaclethoseextrafeesposefort h e i r businesso p e r a t i o n s , whetherpaymentoft h o s e e x t r a feesr e s u l t s i n expected resultso r “services”a n d whetherofficialsu s e compliancew i t h localregulationst o extrac trents”.

PolicyBias:thiscomponentrelevanttotheperceivedprejudicelevelincludingsome elementssuchas:“thedominationofstate- ownedenterprises(SOEs)andcorporations,l a n d access,creditaccess,mineralexploitati onlicense,priorityto SOEs, FDI…”.

Proactivityo f provincialleadership:t h i scomponentmeasuresendeavorso f provincial leaderto supportprivatesectordevelopment, ort o executepolicieso f centralgovernment.

Businesssupportservices:accordingtoVCCI:“thisisameasureofprovincialservicesf o r p r i v a t e s e c t o r tradep r o m o t i o n , p r o v i s i o n o f r e g u l a t o r y information t o firms,businesspartnermatchmaking,provisionof industrialzonesorindustrialcluste rs,andtechnologicalservicesforfirms”.Thisoneincludessomeelementssuchas:“number oftradefairsheldbyprovinceinpreviousyearandregisteredforpresentyear,ratioofthetota lnumberofserviceproviderstothetotalnumberoffirms,firmhasusedbusinessi n f o r m a t i o n searchservices,firmusedp r i v a t e p r o v i d e r f o r a b o v e businessinformationsearchservices,firmusedprivateproviderfortechnologyrelatedservi ces,firmusedprivateproviderf o r b u s i n e s s matchm a k i n g services,firmusedprivatepr oviderforconsultingon regulatoryinformation…”.

Laborandtraining:includingsomeelementssuchas:“generaleducation,vocationaltraini ng,firmhasusedlaborexchange services,firmusedprivateproviderforabovel a b o r exchangeservices,percentageoftotalbusinesscostsspento n l a b o r t r a i n i n g , percentag eoftotalbusinesscostsspentonlaborrecruitment,overallsatisfactionwithlabor,s e c o n d a r y schoolgraduatesas

According to VCCI, the confidence of the private sector in provincial legal institutions is crucial for effective dispute resolution and addressing corruption Key elements include the legal system's ability to provide mechanisms for appealing against corrupt behavior, the assurance that property rights and contracts will be upheld, and the use of courts or other legal institutions to resolve disputes Additionally, factors such as the median time taken to resolve court cases, the formal and informal costs associated with legal proceedings, and the efficiency of provincial courts in handling economic cases contribute to this confidence Quick enforcement of court judgments and acceptable costs further enhance the perception of the legal system's effectiveness.

According to VCCI, a province that excels in the Provincial Competitiveness Index (PCI) is characterized by several key factors: low startup costs for businesses, easy access to land and secure business premises, a transparent business environment with equitable information, minimal informal charges, limited bureaucratic procedures and inspection times, reduced crowding out of private activities due to policy biases, proactive provincial leadership in problem-solving for enterprises, high-quality business support services, and effective labor training policies.

TheP C I i s producedi n a three– stepssequence:“1)collectbusinesss u r v e y d a t a andpublisheddatasources;2)calculateninesub– indicesandstandardizetoa10– pointscale;and3 ) calibratet h e compositeP C I astheweightedm e a n o f n i n e s u b – indiceswith am a x i m u m scoreof100points”.

Kumaretal(2001)usedtotalemploymentasaproxyforthemarketsize,andtheyhadt o applyt h e instrumentvariablemethodtodealwithendogenityi s s u e duetousetotalemployment.Theirin strumentwas:“thelogofGDP,thecountrypopulation,andtheratioofe x p o r t s t o GDP”.Howe ver,inmanyresearchesf o l l o w i n g thep a p e r of Kumaretal(2001),t h e y didnotusetotalemplo ymenttomeasuremarketsize,buttheyusedthepopulation,andt h e endogeneityissuewaseli minated.Hence,inthispaperthemunicipalpopulationwillbeameasureofmarketsize.

Thereare manyapproachesto measurehuman capital.LaevenandW o o d r u f f (2007)used

“theshareofpopulation in eachstate agedfifteenandover with atleastnine yearsofschooling educationin1990”,Kumaretal(2001)defined“theaverageyearsofschoolingint h e populatio noverage25”,whileGiacomelliandMenon(2012)included“theshareofhighschoolgraduateso n p o p u l a t i o n ” Int h i s p a p e r ,gatheredfromt h e G S O website,t h e h u m a n capitalcouldbeconsi deredas“thepercentageoftrainedemployedworkersat15yearsofageandabovebyprovince”,andna medasschoolingvariable.Finally,weinclude theGDPpercapitabyprovinceasaprovincelevelvari able.

Institutionsandfirmsizeshouldnotbetreatedasexogenous.Becketal(2006)s u p p o s e d t hatfinancialandlegalinstitutions couldinfluenceonfirmsizeinreversingways.O n theonehan d,thereisanexistenceofacontradictoryconnectionbetweenfirmsizeandthee f f i c i e n c y oflega landfinancialinstitutions.Theyarguedthatincountrywithinefficientlegal andfinancialsystems,largefirmst e n d t o s e l e c t internalcapitalmarketsinsteado f p u b l i c mark etsdue to theinternalcapitalmarketshavemoreeffectivethananotherone.

Ontheotherhand,becauseofagencyp r o b l e m s , largefirmswiththeirsizeandc o m p l e x i t y leadt o t h e challengeo f o u t s i d e i n v e s t o r s i n whicht h e firms’insiderscoulddominatetheexpr opriation.Thus,inlargefirms,outside investorsdesiretohavestrongandeffectivelegalandfin ancialsystemstosafeguardthemfromcorporateinsidersintheexpropriation.Thisargumentres ultsinthefirmsizeshouldbeassociatedwiththequalityoffinancialandlegal system.

LaevenandWoodruff(2007)supposedthatthereisanexistingofthecausalityissueb etweenjudicialefficiencyandfinancialmarketsuchasinvestmentandfirmsize.InMexicocase,th eysolvedthisissuebyusinginstruments:“theshareofindigenous– speakingpeoplei n a givens t a t e i n 1 9 9 0 andt h e n u m b e r o f c u l t i v a t e d cropsw i t h l a r g e economieso f s c a l e (sugar,coffee,riceandcotton) in1939”.

Toinvestigatetheinfluencesoffinancialandlegalinstitutions– measuredbyprivatecredit,contractenforcement,propertyrights– onfirmsize,Becketal(2006)used“thelegaloriginandgeographiclocation”asinstrumentalvariab lesforinstitutionsvariables.Inwhich,legalorigini s d u m m i e s w i t h valuesincludedCOMMO N,FRENCH,GERMAN,andSOCIALIST.T h e Geographiclocationi s t h e capital’sl a t i t u d e i n absolutetermsnamedadLATITUDE.Theirfirstregressionequation is:

Institutions= b0 + b 1 C O M M O N + b2FRENCH+ b 3GE RM AN + b4 SOC IAL IS T + b5LATITUDE.

InVietnam,E d m u n d andMarkus(2009)s t u d i e d t h e influencesofprovinciali n s t i t u t i o n s o n t h e businessformalization,andt h e y u s e d instrumentv a r i a b l e f o r t h e i r P C

EdmundandMarkus(2009)followedthesimilarmethodofEdwardMiguelandGerardRola nd(2006),MatthewKocher,Thomas Pepinsky andStathis Kalyya(2 00 8) , their instrument wasthedistancefromeachprovincetotheinfamousseventeenthparallel.The17 th parallelis:“quitearbitrarilychosenattheGenevaAccordin1954astheborderbetweenthet w o newcountriesusedtoknow:NorthVietnamandSouthVietnam”.Byusingthisinstrument,t h e y arguedt h a t t h e terribleconsequencesf r o m w a r w h e n t h e formerb o r d e r appearedto splitVietnamintotwodistinctregionsareprevalentevidencestoindicatethatthedistancetothe17 t hparallelisastronglysignificantforecastofbombingintensityduringthewar.

Thosewarconsequenceshaveremarkably influencedonprovincialgovernmentsandl e d t h e m t o b e m o r e relianceo n t h e assistancefromt h e centralgovernmentt o rebuildanddeveloppr ovinciale c o n o m i c s Therefore,theybecomem o r e p a s s i v e a n d amenablew h e n Vietn amislaunchingthemarketreformsor to build uplocalmarketinstitutions.

MiguelandRolanddiscoveredthattheconsequencesfrombombingcouldnotbeusedt o for ecastthelevelofpovertyinVietnam.TheyarguedthatendeavorsofVietnam’scentralgovernmentt o support thesepartsofthecountrywasthesignificantreason fortheirfinding.Inaddition,Kocheretal(2008)alsoconcludedthatprovinceslocatednearto17 thparall elwerel e s s l i k e l y to buildeffective localmarketgovernance.

Followingthesuggestionfromthesepriorresearches,inthispaper,thedistancefromt h e centralo f p r o v i n c e t o t h e 1 7 th parallelw i l l b e usedasinstrumentvariablef o r t h e P C I variab le.Thedataisgatheredfrom theGooglemaps.

Int h i s section,w e establisht h e m o d e l t o exploreinstitutionaldeterminantso f firms i z e Basedo n previousstudies,t h e q u a l i t y ofi ns ti tu ti on s should havea positive impactonav eragefirmsize,weinvestigatethisrelationshipbyrunningregressionsusingthelogoftheemplo yee-weightedaveragefirmsizeattheprovincelevelasdependentvariable.Theregressionmodel is:

EWAS it = β 0 +β 1 INST it +β 2 STATES it +ε it

STATESi s a vectoro f s t a t e – levelvariablesi n c l u d e d markets i z e , gdppercapitaandschooling.Marketsizeist hemunicipalpopulation,schoolingisthepercentageo f trainedemployedworkersa t15yearsofa g e andabovebyprovince.

Wealsoe x a m i n e t h e influencesofinstitutionalq u a l i t y o n n u m b e r ofn o n – s t a t e firmsatprovince levelfollowing theregressionmodel:

NON_STATEit=β 0 +β 1 INST it +β 2 STATES it +ε it

Non_stateis thelogofnumberofnon_stateenterprisesofprovincei,yeart.

INSTi s a vectoro f i ns ti tu ti on s variablesincluded thePCIindexo r theentr ycostindex–oneofelementsof thePCI.

Wedealwi th the endogeneity issuebyusinginstrumentalvariableapproach.As our instrumen t,thedistanceforeachprovincebetweenitscentralpointandtheinfamousseventeenthparallelwa sgatheredbyusingGoogleMaps.

LogPCIit = β 0 +β 1 Distance it + β 2 Log(marketsize) it

+β 3 Log(gdppercap) it +β 4 Schooling it +ε it

EWASit=β 0 +β 1 (predictedvalue)PCI it +β 2 Log(marketsize) it + β 3 Log(gdp percap) it +β 4 Schooling it +ε it

Distanceisthedistancefromthecentralofprovincetothe17 thparallel gatheredbyGoog le maps.

Obs Mean Std.Dev Min Max

Thedatabasehas52provinces/ citiesqualifiedtherequirementswith260observationsfrom2009to2013,andexiststhedivergen cesamongthemthatmaybecomefromgeographical,natural,historicalcharacteristics.

Intable1,wedescribeddescriptivestatisticofallvariablesfor52provinces/ citiesinVietnamforperiodfrom2009 to 2013.

Therei s a h u g e gapb e t w e e n t h e a v e r a g e firms i z e , producedbyt h e r a t i o o f tot alemploymentovertotalnumber offirms,andtheEWAS– theemployeeweightedaveragefirms i z e Especially,themeanandthemaximumvalue:35.850 and106.698ofaveragefirmsizecomparewith151.106and1,292.365ofEWAS.Inaddition,thesta ndarddeviationofaveragefirmsizeisjust14.748,whilethisvalueofEWASis147.528reflectsth attheEWASmethodisbettertoillustratethesizeoffirm.TheminimumvalueofEWASis25.729at KienGiangprovince,andthe maximum valueis 1292.365atTraVinhprovince.

Int h e p e r i o d from2 0 0 9 t o 2 0 1 3 , t h e leadingo f P C I r a n k i n g alwaysb e l o n g s t o D a N a n g province,eventhoughthisone locatedin centralofVietnam, too farfromt w o m a j o r c ities-

HaNoiandHoChiMinh.Besidethefactthatthisprovincehasreceivedverymuchfinancialsup portfromthecentralgovernment,theendeavorsofDaNanggovernmentisnott h e t h i n g that wecandisregard.

Intermofcorruptionorinformalchargesandmarketentryorentrycost,thestandarddeviati onofthemis0.967and1.008,respectively.Thischangeissmall,andthemeanvalueo f themis6 410and7.930,consideredasapositiveindicatorforthespurringenvironmentinVietnam.

The variance in the number of non-state firms across Vietnamese provinces is significant, with Bac Kan province having a minimum of just 364 firms, while Ho Chi Minh City boasts a maximum of 117,487 In 2013, Ho Chi Minh City and Hanoi accounted for approximately 59% of the total number of non-state firms in Vietnam, highlighting their strategic importance in the country's economic landscape This concentration also underscores the disparity in development levels among provinces From 2009 to 2013, the number of non-state firms increased by about 55%, with the proportion in these two cities rising from 56% to 59% This indicates a pressing need for other provinces to intensify their efforts to bridge the development gap with Ho Chi Minh City and Hanoi.

Detailinschoolingvariable– thepercentageoftrainedemployedworkersat15yearso f ageandabovebyprovince,fundamentall y,thisratioistoolowwiththemeanvalueisjust14.3%,andthereisnothardtounderstandwhenth eleadingofthisratiobelongstoprimarycentersofVietnam,HaNoi,DaNangandHoChiMinh.Th egapbetweentheminimumvalueandthe maximum valueis large.Ingeneral,this ratiocouldreflect thedisparity ofdevelopmentlevelamongVietnamprovinces.

Ino r d e r t o startanalyzingt h e relationshipbetweeni n s t i t u t i o n s variableando t h e r controlvariables,thissectionwillobservethecorrelationofvariables,andscatterplotfiguresamong them.

Distance(8) -0.068 -0.007 0.011 -0.116 * -0.0055 0.180 *** -0.377 *** 1 Note:*, **, *** denotesignificanceatthe10%,5%and1%ofstatisticalsignificancerespectively.

Table2reportsthecorrelationofvariablesusedinthispaper,almostthecorrelationofvariable shaspositivesign.Excludingtheaveragefirmsizeandgdppercap,therestvariableshasnegative correlationswith thedistance.

Indetail,t h e correlationo f P C I i nd ex w i t h d e p e n d e n t variablessuchasemployee– weighteda v e r a g e firms i z e , averagefirms i z e , n u m b e r o fn on – s t a t e fi rm s i s 0 2 2 9 , 0 1 9 3 , 0 1 6 5 , respectively,andall ofthemhavesignificant at 1 %level.

ThecorrelationofPCIindexwithmarketsizeis0.139andtheyhavesignificantat5%level,whil ethatoneofPCIandgdppercapitais0.267withsignificantat1%.Thecorrelationo f P C I andschooli ngh a s n o significant,andt h e samet h i n g occursbetweenP C I andt h e instrument–thedistance.

Figure1:ScatterplotoftheeffectofPCI,Marketsize,GDPpercapita,Schoolingo n Employee– weightedaveragefirmsize.

1indicateforthepositivecorrelationsofPCI,marketsize,gdppercapitaandschoolingon theemployee weightedaverage firmsize.

ThefigurebelowillustratesthelinkbetweenPCI,marketsize,gdppercapita,schoolinganda veragefirmsizecomputedbythetotalemploymentoverthetotalnumberoffirms:

Figure2:ScatterplotoftheeffectofPCI,Marketsize,GDPpercapita,Schoolingonaveragefirmsize.

Thesimilart hi ng fromfigure1 o c c u r s w i t h t h i s one.Fourtr en d linesf r o m figure2indic ateforthepositivecorrelationsofPCI,marketsize,gdppercapitaandschoolingontheaverage firmsize.

Infigure3 , w e o b s e r v e t h e trendl i n e betweenindependentvariabless u c h asPCI,mar ketsize,gdppercapita,schoolingandnumberofnon–statefirms:

Figure3:ScatterplotoftheeffectofPCI,Marketsize,GDPpercapita,Schoolingonnumbero f non– statefirms.

3indicateforthepositivecorrelationsofPCI,marketsize,gdpp e r capitaands c h o o l i n g o n n u m b e r o f n o n – s t a t e firms,especiallyt h e o n e betweenmarketsizeandnumber ofnon–statefirms.

Thela st figure,t h e l in k betweenvariablesi n t h e firsts t a g e regressiono f instrumentvaria bleapproachisdisplayed:

Figure4:ScatterplotoftheeffectofDistance,Marketsize,GDPpercapitaandSchoolingonP C I in dex.

Usingpanel– datamodels,thetablesbelowillustratetheeffectofdeterminantssuchasinstitutions,marketsize, gdppercapita,schooling(humancapital)onfirmsizeandnumbero f non– statefirmsatprovincelevelinVietnamfrom2009to2013.Thedetailsarereportedasbelow:

(1)OLS (2)FE (3)RE (4)OLS (5)FE (6)RE

Intable3,wepresentregressionrunningresultstoinvestigatetheinfluencesofdeterminantso nfirmsize.Weuseaveragefirms i z e capturedbythetotalemploymentovertotalnumber offirmsa n d employee– weightedaveragefirmsize asdependentvariable.Inwhich,m o d e l (1),( 2 ) ,

( 3 ) u s e a v e r a g e firms i z e , andm o d e l (4),(5),( 6 ) u s e e m p l o y e e - weightedaveragefirmsize.TheOLSmethod isappliedinmodel(1),

Remarkably,theoutcomesdonot meetour expectations.The main variable– log ofP C I index– hasnosignificantinmodelsusingfixedeffectsandrandomeffects,eventhoughi n OLSmodel, this onehassignificantand positivesign.

Thecoefficientoflogofmarketsizeinmodel(2),andthecoefficientofloggdppercapitai nmodel(3)havesignificantat1%levelwhenweuseaveragefirmsizeasdependentvariable,b u t , t h o s e onesbecomei n s i g n i f i c a n t i n m o d e l s u s i n g employee-weightedaveragefirmsize.

Thecoefficiento f schoolingo r h u m a n capitali n fixedeffectsm o d e l r u n n i n g w i t h averagefirmsizehasnosignificant,whilethatonerunningemployee– weightedaveragefirms i z e hassignificantat10%level.Inaddition,theR– squaredinmodelsusingaveragefirms i z e is verylow.

Ingeneral,wearenotabletoconcludeanythingfromtheoutcomesoftable3.Inthef o l l o w i n g table,w e c o n t i n u e t o investigatet h e influenceso f i n s t i t u t i o n s variableando t h e r co ntrolvariablesonfirmsizebyusingthe instrumentvariableapproach.

Table4: What determines firmsize?(usingIV)

Intable4,thedistancefromthe17 thparallel isusedastheinstrumentforinstitutionsvariable –logof PCI Thefirststage andsecond stageregressionisreportedrespectively.

Thereare noevidencestostateabouttheinfluencesofthemainvariable–log ofPCI– o n firmsizefrombothoftworegressions,whetherthedependentvariableisaveragefirmsizeo r em ployee– weightedaveragefirmsize.Theonlycoefficienthassignificantislogofgdppercapita,andthisone turnfromnegativesigninmodelusing averagefirmsizetopositivesigninmodelusingemployee– weightedaveragefirmsize.

(1)OLS (2)FE (3)RE 1 st Stage

Note:standarderrorsarereported inparentheses withIVmodel, robuststandarderrors arereportedin parentheseswithnonIVmodel.*,**,***denotesignificanceatthe10%,5%and1%ofstatisticalsignificancerespective ly.

Table5 presentst h e o u t c o m e o f regressionr u n n i n g t o investigatet h e i n f l u e n c e s o f i n s t i t u t i o n s variableandothercontrolvariablessuchasmarketsize,gdpp e r capitaandsc hooling.

( 3 ) usesOLS,FixedeffectsandRandomeffectsw i t h o u t instrumentvariable,respectively.Model(

4 ) reportst w o stageso f r e g r e s s i o n r u n n i n g w i t h t h e distancefromthe17 thparallel as theinstrumentforlogofPCI.

Interestingly,thecoefficiento f i n s t i t u t i o n s hasn o significantatallm o d e l s w i t h o r w i t h o u t instrumentvariable.G d p percaptia hassignificantandpositive signinallmodels, thought h e significantl e v e l i n m o d e l u s i n g i n s t r u m e n t variablesi s lowert h a n t h a t i n o t h e r m o d e l s Marketsizehassignificantat1%levelandpositivesigninmodelsrunningwithouti nstrument,butininstrumentvariablemodelthisonehasnosignificant.TheR– squaredinm o d e l (4)is muchlowerthanthatinrestmodels.

Tosumup,wedonotfindtheimpactofmainvariable–PCIindex–onthenumberofnon– s t a t e firms,eventhoughweh a v e usedpanel– datam o d e l s andinstrumentvariableapproach.

Byu s i n g t h e ProvincialCompetitiveIndex– theP C I i n d e x asam e a s u r e o f t h e administrationsqualityo f 5 2 l o c a l governments,co mbiningwith theemployeeweightedaveragefirmsize,suggestedbyDavisandHenrekson(1997),asameasur eofthedependentvariables,t h i s paperp r e s e n t s t h e m a i n purposeinvestigatingt h e influen ceso f institutionalq u a l i t y onfirmsizeandthe numberofnon–statefirm.

Inaddition,wesetothervariablestocontrolfirmsizeandnumberofnon– statefirms.T h e firstoneismarketsizemeasuredbythemunicipalpopulation,thesecondoneis gdppercapita,andt h e l a s t o n e w e u s e t h e percentageo f trainedemployedat15yearso f a g e anda bovebyprovincenamedschoolingvariable.

Wedealwiththe endogeneity issuebyusingtheinstrumentforinstitutionsvariable.T h e distancefromthecentralprovincetothe17 thparallel isusedtoinstrumentforPCIindexvariable.T heargumentbehindtheinstrumentisthatthesmallergaptothatlineindicatesthehigherdamagefr omthewar,asa consequence,t h i s thing influencesont h e quality ofl o c a l government.

Summingu p , t h i s paperf i n d s n o evidencest o c l a r i f y t h e relationshipbetweent h e provincialinstitutionsquality,firmsizeandnumber ofnon–statefirms.

Businessenvironmentplaysanimportantr o l e t o s p u r economicperformance,improvingt heinstitutionalqualityatlocalgovernment,policymakersareabletosolveoneofgrowthconstraints atVietnam.Althoughthefindingsfromthispaperarenotstrongenoughtoconvincepolicymakerst oeliminateconstraintsofbusinessenvironment, thestrategicobjectivesofVietnamgovernment will notachieveif theydo notperform

Thissectionlistssomelimitationsofthisstudy.Firstly,thedatabaseofthisonelacksofthepres enceofsomeprovinces(11provincesdonotbeobservedinthisresearch).Moreover,t h e sourceof provincedatawasonlygatheredfromtheProvincialStatisticYearbookofeachprovince.Hence,ther eisstill not anassessmentagencyresponsibleforthequalityof thisdata.

Secondly,theinstrumentofthisone–thedistancefromthecentralofprovincetothe17 thparallel – isnotgoodone,whenusingit,thecoefficientofthemajorvariabledoesnotappearastheexpectations. 5.3SUGGESTIONFORFUTURERESEARCHES

Inaddition,thePCIdatasetcontainsmanyvaluableelementssuchas:“informalcharges,legali n s t i t u t i o n s , e n t r y costs…”,byb r e a k d o w n t h i s one,t h e s e f o l l o w i n g researchescouldinv estigatedeeper theinfluencesof institutions onfirmsizedistribution.

Finally,t h e f u t u r e researchess h o u l d gathert h e datao f V i e t n a m provincesasm u c h as p o s s i b l e

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NinhBì nh SơnLa VĩnhLo ng

BắcGia ng CầnThơ HàNam Kon

Tum Phú Thọ TháiBình YênBái

BạcLiêu CaoBằ ng HàNội LaiChâu PhúYên TháiNgu yên

BắcNi nh ĐàNẵng HàTĩnh LâmĐồ ng

HảiPh òng LàoCai QuảngN gãi

HậuGia ng LongAn QuảngNi nh TràVinh

Distance Thedistancefrom thecentralofprovinceto the17 th parallel GoogleMaps

EWAS Employee–weightedaveragefirmsize Provincialstatisticyearb ook GDPper capita GDPpercapita Provincialstatisticyearb ook

Non-state Numberofnon–statefirm Provincialstatisticyearb ook

PCI ThePCI VietNamChamberofCo mmerce andIndustry(VCCI) Schooling thepercentageoftrainedemployedworkersat15yearsof age andabovebyprovince

PCIindexisbasedontheexperiencesofnearly8.093domesticenterprises(2013)aboutaq u a l i t y e xecutionandbusinessenvironmentthroughat6 3 provinces/ citieso f VietNamandt h e estimationofnearly1.609foreignfirms.ThissurveywasdonebyCham berofCommerceandIndustryofVietnam(VCCI),withsupportfromUnitedStatesAgencyInternatio nalDevelopment(USAID).

PCIindex indicatesf o r t h e q u a l i t y ofp r o v i n c i a l p u b l i c governance.Infact,P C I is a seto f i ndicatorsoftheperceptionsofdomesticprivateinvestorsaboutgovernanceandpublicadministratio nattheprovinciallevel.

The index is created by surveying a randomly selected group of firms across each province, focusing on nine key aspects of the investment climate: entry costs, land access and tenure security, transparency, time costs of regulatory compliance, informal charges, provincial government proactivity, business support services, labor training, and legal institutions Each aspect is evaluated through sub-indices that combine perception-based and concrete indicators, providing an overall assessment of economic governance quality The questionnaire includes the name and position of respondents, typically reflecting their own business experience, enhancing the survey's credibility One critical aspect examined is informal charges, specifically regarding bribery in business registration and licensing processes For more details on the construction of the PCI, visit www.pcivietnam.org.

RESEARCHHYPOTHESES

THESISSTRUCTURE

Thethesiscomprisesf i v e chapters.Chaptert w o reviewst h e literatureabouti n s t i t u t i o n s , firmsize,number offirmsandtherelationshipamongthem.Thisonealsoillustratesthemethodtomeasurevariablesan dempiricalresults.Chapterthreediscussesthedataset:datasourcesandcharacteristics,theapproac hofestimationsemployedinthisstudy.Chapterfourunveilsthefindingfromthescopedataof5 2provinces/citiesinVietnam.Thel a s t o n e presentsconclusions,recommendationsandthelimitations of thispaper.

Thischapterpresentsempiricalresultso f p r i o r researcherswhent h e y investigatet h e influenceso f institutionalq u a l i t y onfirms i z e an d n u m b e r o ffirm.Ina d d i t i o n , t h i s chapterdiscussestechn iquestomeasurethe qualityof institutions andfirmsize.

AccordingtoRonaldCoase(1937):“peoplebegintoorganizetheirproductioninfirmswhent h e transactioncostofcoordinatingproductionthroughthemarketexchange,givenimperfectinformatio n,isgreaterthan within thefirm”.

A firm's interactions with the market may be influenced by external factors, such as sales taxes, but it retains control over its internal resource allocation Alternative production methods, like price mechanisms or economic planning, often fail to achieve full production efficiency Consequently, firms either rely on internal pricing for all their production or a single large firm manages the entire economy The primary reason for establishing a firm is to minimize transaction costs associated with using the price mechanism These costs include identifying relevant prices—an expense that can be mitigated but not entirely eliminated by consulting specialists—and the costs of negotiating and drafting enforceable contracts for each transaction, which can be significant in uncertain conditions.

Ifafirmoperatedinternallyunderthemarketsystem,manycontractswouldberequired(forinsta nce,evenfor producing a peno r delivering apresentation).Incontrast,a realfirmhasv e r y f e w (thoughm u c h m o r e c o m p l e x ) contracts,suchasd e f ininga manager’sp o w e r o f directio noveremployees,inexchangeforwhichtheemployeeis paid.

Henotedthatgovernmentmeasuresrelatingtothemarket(salestaxes,rationing,pricecontrols)tendt oincreasethesizeoffirms,sincefirmsinternallywouldnotbesubjecttosuchtransactioncosts.Thus, Coasedefinedthefirmas“thesystemofrelationshipswhichcomestoexistence whenthe direction ofresourcesisdependenton theentrepreneur”.

Thequestiont h e n ariseso f whatdeterminest h e s i z e o f firms,w h y d o e s t h e entrepreneursorga nizethetransactionstheydo,whyno moreorless?Sincethereasonforthefirm’sbeingis tohavelowercoststhanthemarket,theupperlimitonthefirm’ssizeissetbycostsrisingtot h e poin twhereinternalizinganadditionaltransactionequalsthecostofmakingthattransactioninthe market.Inpractice,diminishingreturnstomanagementcontributemosttoraisingt h e costso f o r g a n i z i n g a largefirm,p a r t i c u l a r l y i n largefirmsw i t h m a n y differentp l a n t s andd i f f e r i n g internaltransactions(suchasconglomerate),ori f t h e relevantpriceschangesfrequently.

RonaldCoasec o n c l u d e d t h a t t h e s i z e o f firmsi s dependento n t h e costso f u s i n g t h e p r i c e mechanism,andon the costs oforganizationofotherentrepreneurs.

There is significant evidence that institutions play a crucial role in economic outcomes Douglass North highlighted the importance of "contracting institutions" that facilitate private contracts among citizens and "property rights institutions" that safeguard citizens' property rights from rulers Despite the relevance of these factors to long-term economic performance, there has been limited research on which types of institutions are most impactful on economic outcomes This paper aims to address this gap in understanding.

Acemoglu and Johnson (2005) examined contracting institutions using the legal formalism measure from Djankov et al., focusing on the procedural complexity required to collect on non-paying commercial debts They also assessed property rights institutions by analyzing constraints on government power and the protection of property rights Their identification strategy leveraged historical differences among former European colonies, revealing strong first-stage relationships between legal origins and various measures of contracting institutions, as well as between colonization strategies and property rights institutions Utilizing a multiple instrumental variables approach, they found robust evidence that property rights institutions significantly influence long-term economic growth, investment, and financial development, while contracting institutions primarily affect the nature of financial intermediation with a more limited impact on overall growth, investment, and credit availability in the economy.