INTRODUCTION
Problem Statement
The remarkable merger and acquisition (M&A) stories of well-known Vietnamese brands often perplex financial researchers As reported by Kinhtedautu magazine in April 2014, foreign companies negotiated these acquisitions at surprising prices that exceeded the total tangible assets of the companies involved, exemplified by Phở 24.
Businesses raising significant capital, such as $20 million or even over $60 million, often spark questions regarding the original source of a firm’s intrinsic value Many firms struggle to accurately assess the benefits of intangible assets or misunderstand the importance of investing in these invisible resources This can lead to distorted calculations of operational efficiency and project payback periods For instance, a strong brand, as an intangible asset, can enable a firm to sell products at higher volumes and prices If analysts fail to evaluate the strength of a brand, they may encounter challenges in accurately forecasting future revenue.
Proper evaluation of intangible assets is crucial due to the volatile nature of the economy, which significantly impacts both management decisions and investor choices Companies must continually adapt their operations and expansion strategies to maintain market share and revenue However, traditional financial statements often fail to capture the full extent of a company's efforts to innovate and grow, as highlighted by Baruch Lev and Paul Zarowin's research in 1999, which indicates that balance sheets, income statements, and cash flow statements have lost relevance over time Investments in research and development or advertising are typically recorded as expenses, rather than reflecting their true value as intangible assets Additionally, as economic conditions evolve, businesses must engage customers with innovative offerings to sustain sales Therefore, accurately assessing the value of intangible assets is essential to comply with accounting standards, ensuring that revenue aligns with the expenses incurred to generate it.
Valuing intangible assets is crucial for key sectors such as financial reporting, commercial strategy, and development planning A clear presentation of these assets enhances the company's financial position and meets shareholder expectations When shareholders understand the value of intangible assets, their loyalty to the company increases, potentially lowering the cost of equity.
In addition to financial objectives, intangible assets like brand equity and intellectual capital significantly enhance a firm's ability to achieve differential returns by boosting customer loyalty and increasing profit margins on sales (Fernandez, 2013) A well-known brand can command higher prices for its products while also lowering costs through effective negotiations with suppliers This strategic advantage underscores the importance of brand strength in overall business development (Rocha).
(2014), manager of company could plan their investment strategy, how much for factory constructing and what proportion for marketing…
After all, demand for measuring value of intangible assets is very clear
Finding an appropriate method is crucial in the research of intangible assets According to Parble Fernandez (2013), we are only at the beginning of evaluating these assets Currently, there are three established methods for calculating the total value of intangible assets This research aims to introduce a new method for this evaluation.
Research Objective
This research evaluates the impact of intangible assets on company performance across various industries, providing valuable insights for firms to optimize resource allocation Utilizing a novel indirect approach with panel data analysis, the study aims to determine the total value of intangible assets for selected companies in Vietnam.
This thesis also solves another objective related to development policies It rises a problem about supporting policies between small and medium enterprise (SME) and larger companies.
Research Questions
Base one research objectives above, this research will solve two questions:
Why should companies allocate their resources in both tangible and intangible assets?
What policies control market power of both SME and large companies?
Structure of Thesis
This study comprises four key components: a literature review, a conceptual framework, an econometric model, and an empirical study The initial section will focus on a review of prior research conducted by various authors regarding intangible assets.
This article explores various methods for evaluating intangible assets, analyzing the strengths and weaknesses of each approach while emphasizing the advantages of T Yamaguchi's 2014 model It discusses improvements made to Yamaguchi's valuation method and visualizes the evaluation process through a diagram The econometric model section highlights qualitative methods used in the study and interprets the applied calculation methods Finally, it details the application of the intangible asset evaluation method within Vietnam's stock market, providing specific calculations to demonstrate the value of intangible assets across different businesses and industries, while also examining how these assets impact overall business performance.
LITERATURE REVIEW
What Are Intangible Assets
Intangible assets are defined differently due to varying perceptions, with accounting perspectives adhering to a more rigorous definition influenced by prudence In contrast, investors and managers tend to adopt a broader assessment and definition of intangible assets.
International Accounting Standard 38 (IAS 38) defines an intangible asset as an identifiable non-monetary asset that lacks physical substance Additionally, it emphasizes that a key characteristic of intangible assets is the expectation of future economic benefits.
According to OECD project (2011), with a different perspective, OECD defines
Intangible assets refer to non-physical and non-financial resources that hold value, as defined by the OECD Furthermore, the OECD distinguishes between intangible assets and intellectual assets, noting that intellectual assets are a subset of intangible assets.
Besides that, intangible asset include three different: “computerized information”;
“innovative property”; “and economic competencies"
In this research, we will follow OECD’s definition to estimate aggregate value of intangible asset It means that we will use the word “intangible asset” instead of
“intellectual property” or “intellectual asset” This definition allows us not to have problem with matching concept and undervaluation of current financial reporting system.
Types Of Intangible Assets
Intangible assets can be categorized in various ways, with researchers often focusing on specific types such as brand names, customer lists, and company culture Among these categories, one notable example is the work of Petros A., which highlights a unique perspective on intangible assets.
Kostagiolas and Stefanos Asonitis (2009) They listed types of intangible assets as below:
Table 1: Category of Intangible Asset
This research focuses on the impact of total intangible assets on a company's income, despite the various types of intangible assets available Understanding the categorization of intangible assets is essential for selecting appropriate valuation methods and will aid in interpreting the underlying factors contributing to industrial growth rates in subsequent sections.
Intangible Asset Valuation Approaches
According to the book Valuing Intangible Assets of Reilly, R F., and Schweis, R P
In 1999, three primary approaches were established for evaluating intangible assets: the cost approach, the market approach, and the income approach Each method utilizes distinct data sources and involves various procedures, leading to a range of reasonable valuations for intangible assets Typically, researchers tend to apply only one of these approaches due to constraints related to data collection and associated costs.
Lev and Sougiannis (1996) propose that the cost approach for evaluating intangible assets is based on the total expenditure required to recreate or build a similar asset with equivalent functionality They analyze the value of R&D activities in relation to a company's earnings by calculating the value of intangible assets derived from past R&D expenditures While this method can effectively quantify certain intangible assets like R&D and advertising expenses, it poses challenges in accurately valuing other intangible assets, including brand names, employee experience, and customer lists.
Assessing the useful life of intangible assets poses a significant challenge, as it requires ongoing evaluation to identify the appropriate lag time for research and development (R&D) expenses that impact operating earnings.
The market approach evaluates the value of intangible assets by referencing the market price of similar assets within the same market Kossovsky (2002) utilized this approach to indirectly assess the value of intellectual assets by analyzing the difference between a firm's book value and its market equity value This method offers an objective measurement of intangible asset value through market comparisons However, a company's stock price reflects not only its intrinsic value but also shareholder perceptions of future prospects, which can be influenced by temporary speculation Moreover, if an appraiser relies solely on comparable assets to estimate the value of intangible assets, challenges arise when suitable comparables are unavailable, as identifying two similar intangible assets is often quite difficult.
The income approach assesses the value of intangible assets by comparing the significant benefits derived from possessing these assets against the scenario of their absence Specifically, the value of an intangible asset is determined by subtracting the net present values of cash flows in both situations.
Interbrand employs an income-based valuation method to assess a brand's worth, incorporating a variable known as brand strength to evaluate associated earnings However, Paulo Fernandez highlighted several issues with Interbrand's approach in his paper on valuing intangible assets and intellectual property.
In 2013, Interbrand highlighted the significant advantages of intangible assets by comparing the EBITs of well-known brands to those of private label companies However, identifying private label companies poses a challenge, as these firms lack market power associated with brand recognition, making them difficult to pinpoint Additionally, as noted by Paulo Fernandez, the methods used to assess a brand's strength are inherently subjective, raising concerns about potential manipulation by appraisers.
The panel data approach utilizes panel data analysis to assess unobservable firm effects, which Motohashi (2005) interprets as management ability, employee motivation, and R&D expenditures While R&D expenses can be precisely identified, Motohashi incorporates it as an independent variable in his model His methodology analyzes the impact of labor, capital, and internet networks on a firm's value added through components of the production function However, in this model, Motohashi only interprets the effects of internet networks, treating other intangible assets as part of the error term He also suggests using cross-sectional data, fixed effects, and random effects for estimation.
Ramirez and Hachiya (2006) introduced a fixed effect method to evaluate the value of intangible assets, utilizing sales growth rate as the explained variable and production factors like R&D expenses and sales and administrative costs as explanatory variables While this approach is linked to the market value of firms, it may exhibit biases similar to market-based methods, despite its foundation in production functions and the incorporation of production factors.
Sadowski and Ludewig (2003) utilized panel data to analyze added value as the dependent variable, incorporating explanatory variables such as capital, labor, human capital, and social capital In contrast, Tomohiro Yamaguchi (2014) also employed panel data but focused on measuring intangible assets through firm-specific fixed effects Yamaguchi's approach distinguishes itself by valuing a company's assets using both production and cost functions to assess the firm's added value, considering the impact of intangible assets.
Conceptual Framework
Through the studies, we found that each study was caught in specific matters
T Yamaguchi's 2014 study presents a practical approach to evaluating a company's intangible assets by utilizing panel data and indirect methods, addressing the limitations of previous research His methodology involves several intermediate calculations, starting with the production and cost functions to determine the firm's equity, excluding the influence of intangible assets The value of intangible assets is then derived by subtracting the total value of the firm's tangible assets from its overall enterprise value This method relies on realizable data, eliminating speculative assumptions about future economic values Finally, a regression analysis examines the relationship between enterprise value—measured through revenue or stock price—and various asset types, allowing for a comprehensive assessment of the significance of intangible assets in businesses.
Equity of firm Equity of firm withour Intangible Asset
Book Value of Equity Tangible Asset
Calculate α and β in production function
ECONOMETRIC MODEL
This research utilizes Tomohiro Yamaguchi's methodology for assessing the value of intangible assets, followed by an analysis of their impact on a firm's added value and equity in relation to tangible assets.
The formula of growth of company is based on Cobb and Douglas production function (1928):
𝑄 𝑖𝑡 = 𝑎 𝑖 𝐾 𝑖𝑡 𝛼 𝐿 𝛽 𝑖𝑡 𝑒 𝜀 𝑖𝑡 𝑄 (1) Where: 𝑄 𝑖𝑡 is added value of firm i in year t,
𝐾 𝑖𝑡 stands for capital of firm i in year t,
𝐿 𝑖𝑡 is labor of firm i in year t
The parameter 𝑎 𝑖 in equation 1 indicates effects of total factor productivity (TFP)
The growth rate of a company's value is influenced by various intangible assets, such as the advantages of internet usage, buyer and seller power, intellectual capital, and employee motivation These factors contribute significantly to a firm's overall growth, highlighting that a company's value is not solely dependent on its total assets but also on the dynamic changes in its value over time (Hulten, 2000) Consequently, the effects of intangible assets can be categorized into firm-specific impacts and the growth rate of the industry at a given time.
𝑄 𝑖𝑡 = 𝐴 𝑖 𝑒 ∑ λ 𝑀 ℎ ℎ 𝐷 ℎ (𝑖)𝑡 𝐾 𝑖𝑡 𝛼 𝐿 𝛽 𝑖𝑡 𝑒 𝜀 𝑖𝑡 𝑄 , ℎ = 1, … , 𝑀 (2) Where: λ ℎ presents growth rate λ of industry h
𝐷 ℎ (𝑖) is dummy variable of firm i in industry h
To estimate the function, we will take the logarithmic form of equation 2 T Yamaguchi (2014) simplified the equation by substituting β with 1-α, under the assumption of constant economies of scale for the companies studied In contrast, this paper will estimate α and β separately to analyze the aggregate market, allowing us to identify different types of economies of scale.
The added value of the i-th firm is derived from its financial statements, beginning with operating profit This value encompasses depreciation, personnel expenses, and operating profit itself Furthermore, to accurately assess the firm's added value, it is essential to adjust for inflation, as this value will be utilized in deflator form.
𝑝 𝑡 𝑄 𝑖𝑡 = 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑃𝑟𝑜𝑓𝑖𝑡 + 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝐶𝑜𝑠𝑡 + 𝑃𝑒𝑟𝑠𝑜𝑛𝑛𝑒𝑙 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠 (4) With p t is deflator in year t
The value of intangible assets is a key outcome of this research; however, we cannot regress equation 3 without the value of \( A_i \) The initial step involves estimating equation 3 to obtain the parameters α and β We will utilize the difference form of the variables in this equation, with the expectation that \( \ln A_i \) will equal zero, allowing us to extract fixed effects.
Where d(…) is difference form of variables
Because firm’s added value includes cost of production factors, we couldn’t compute value of company by discount just firm’s added value flow Instead, we will use company’s profit
= Operating Profit – Interest Rate – Tax (6) = 𝑝 𝑡 𝑄 𝑖𝑡 – (Depreciation Cost + Personnel Expense + Interest + Tax) (7)
We also have the firm’s total cost C excluding cost of goods sold:
So that, firm’s profit is available to compute via formula:
The cost of a company can be analyzed through the duality approach, a key concept in microeconomics that examines the relationship between production and cost functions This approach, discussed by economists such as Samuelson (1947), Shephard (1953, 1970), and Uzawa (196), focuses on how manufacturers can optimize costs by effectively combining production factors By estimating the cost function based on the production function, companies can ensure that their production processes are both efficient and cost-effective.
Where 𝑅 𝑖𝑡 is nominal cost of capital of firm i in year t
𝑊 𝑖𝑡 is nominal wage of firm i in year t
We will calculate cost function through equation 10 After that, firm’s added value
𝑄 𝑖𝑡 and α, β will be obtained from estimating equation 5
The equity nominal value, denoted as E it, will be calculated by considering the impact of intangible assets through the net present value of two key financial flows: the firm's added value flow and the total cost flow.
𝑟 𝑖 is cost of equity of firm i in year t
To determine the value of intangible assets, we subtract the value of tangible assets from the total equity, denoted as 𝐸 𝑖𝑡 The nominal value of equity excluding intangible assets, represented as 𝐸 𝑖𝑡 𝑛𝑜𝑛𝐼, can be calculated using a specific formula.
Where: 𝑅 𝑖𝑡 𝑛𝑜𝑛𝐼 is nominal cost of capital without intangible assets
𝑊 𝑖𝑡 𝑛𝑜𝑛𝐼 is nominal wage of labor without intangible assets
𝑅 𝑖𝑡 𝑛𝑜𝑛𝐼 and 𝑊 𝑖𝑡 𝑛𝑜𝑛𝐼 are able to be identified by:
𝑝 𝑡 𝑄 𝑖𝑡 𝑒 λ ℎ (15) From equations 12 and 13, we could calculate value of intangible assets 𝐼 𝑖𝑡 by the difference between 𝐸 𝑖𝑡 and 𝐸 𝑖𝑡 𝑛𝑜𝑛𝐼
Equation 16 allows us to analyze the proportion of intangible assets within a firm's total assets Based on this analysis, we will compare the impact of intangible assets and tangible assets on the firm's market value and overall performance.
Where: 𝑇 𝑖𝑡 is value of firm’s tangible assets,
𝑌 𝑖𝑡 is firm’s stock price or firm’s added value.
EMPIRICAL RESEARCH
Data Sources
This research will be conducted for Vietnam listed companies in different industries These are 214 chosen companies and data are collected from 2008 to 2012
We chose this time range to lower effect of economic recession from previous period
Firstly, firm’s operating profit multiplying deflator stands for firm’s added value
This data could be calculated through equation 4 There are some researches estimating Cobb-Douglas model which use different proxies for firm’s added value
Hsing and Yu (1996) used value added to represent for output On the other hand, B
Lev and S Radhakrishnan (2003) define revenue as a proxy for output, while T Yamaguchi (2014) utilized earnings before tax, depreciation, and amortization to represent output in his study on intangible assets This research will adopt EBIT as the output measure, as it reflects the added value after accounting for the cost of raw inputs The necessary components for calculating this will be sourced from the VEC database, including account TS131, TS132, TS161, TS162 (depreciation), TN11 (personal expenses), and KQKD8, KQKD12.
Capital (K) and labor (L) data will be sourced from the VEC database, following the methodologies established by B Lev and S Radhakrishnan (2003), where net plant, property, and equipment (PP&E) represent capital K, excluding construction in process as it cannot currently generate profit Labor is quantified by the number of employees in the firm, consistent with T Yamaguchi's (2014) approach This research will further calculate total labor expenses as L, as it more accurately reflects the labor factor's impact on the firm's added value when applying the Cobb-Douglas function in its logarithmic form This method effectively interprets the relationship between labor and capital factors concerning EBIT Additionally, K and L will be utilized to assess equity values, making total labor expenses a more fitting representation than merely the number of employees Data for K and L will be gathered from specific accounts in the VEC database, including TS11 and TS12 for capital K.
LD11, LD13, TN11, TN12 (labor L)
The nominal cost of capital (R) is determined using the Capital Asset Pricing Model (CAPM), with the firm's rate of return (r) calculated as the first step This rate, also known as the cost of equity, represents the return that common shareholders expect from the firm's operations Unlike R, which is the weighted average of capital flows including equity, debt, and liabilities, calculating r poses challenges due to the uncertainty of future cash flows, which can fluctuate in amount and timing To address this issue, we can utilize common approaches such as CAPM, the dividend discount model, or the bond yield plus risk premium method, with this research focusing on the Capital Asset Pricing Model.
Base on CAPM approach, William Sharpe (1964) find out expected firm’s rate of return from relationship between risk-free rate and premium from bearing the stock’s market risk (beta*(r m -r f ))
𝑟 = 𝑟 𝑓 + 𝑏𝑒𝑡𝑎 ∗ (𝑟 𝑚 − 𝑟 𝑓 ) With: 𝑟 is firm’s cost of capital,
The risk-free rate is typically derived from risk-free assets, such as Treasury bonds or government debt instruments, which carry minimal default risk When calculating a firm's rate of return, it is essential to select a bond that matches the duration of the firm's stock Since a firm's stock is assumed to have infinite duration based on the going-concern principle, a long-term Treasury bond, specifically a ten-year bond, is used as the appropriate proxy for the risk-free asset.
When considering risk premium, it is essential to account for various risks, including inflation, business cycles, and credit risk The three-factor Fama-French model, developed by Fama and French in 1992, aims to capture these multiple risks effectively.
The historical equity risk premium approach is a reliable method for estimating risk premiums by analyzing long-term data This technique calculates the risk premium based on the average market return and the risk-free rate of a country, requiring a data collection period that spans nearly an entire economic cycle, including both expansion and recession phases In their 2003 paper, Dimson, Marsh, and Staunton employed this method to determine the risk premium for 16 countries, including the United States, over the period from 1900 to 2002 Their findings provide clear insights into the equity risk premium in relation to Treasury Bonds, enhancing readers' understanding of the concept of risk premium.
This research utilizes the historical equity risk premium approach to calculate equity’s risk premium, while acknowledging its limitations Firstly, stock indices are subject to change, leading to fluctuating market returns over time Secondly, the risk aversion of investors is often unstable Additionally, the historical period covered by the data poses another limitation Despite these challenges, this method has demonstrated its appropriateness over time and has been widely adopted by researchers The IFS database will be employed to obtain deflator data for the study's time frame.
First estimation: Calculate α and β
To determine the parameters α and β, we will utilize equation 5, starting with the derivation of the data The complexity of this regression arises from the large number of companies across three industry categories, making it challenging to sort and process time series data by tax ID number To address this issue, I employed both SPSS and Excel for analysis Initially, necessary data will be collected and categorized into various industries Subsequently, each firm’s data will be derived separately, and dummy variables will be created for each industry, resulting in 49 dummy variables for the 50 industries analyzed Once the derivative forms of K, L, Q, and the dummy variable D are established, we can proceed with equation 5.
In this research, we will apply a panel data fixed-effect model to regress equation 5, following T Yamaguchi's (2014) methodology To assess the efficiency between fixed-effect and random-effect models, we will conduct Hausman’s test The results indicate that the fixed-effect model is more suitable for our analysis.
In this study, we focus on firm-level cross-sections due to the inability to match industry IDs across the same time period We will incorporate an industry dummy variable to assess the impact of industry growth rates on firm performance Utilizing the Panel Least Squares Method with a Fixed Effects Model, as employed by T Yamaguchi, we will examine the relationships between added value and various inputs, including capital, labor, and industry growth rates The Hausman test will guide us in selecting the most suitable model, while we will also conduct heteroskedasticity and multicollinearity tests to identify and address any heteroskedasticity issues Serial correlation analysis will be excluded from this study, given the limited duration of the micro panels, which span only five years.
This article compares the fixed effects model and the random-effects model using Equation 5, with regression results presented in Table 3 The coefficients for labor and capital are nearly identical across both models To determine the most suitable model, we apply the Hausman test, the results of which are displayed in Table 4, indicating that the random-effects model better explains the relationship between labor, capital, and firm performance It is crucial to ensure that the results in Table 3 are free from heteroskedasticity and multicollinearity We utilize the Wald test to assess heteroskedasticity, with findings shown in Table 5, which reveal the presence of heteroskedasticity in our regression model Appendix 4 presents the regression results after addressing the heteroskedasticity issue Additionally, we investigate multicollinearity using the VIF index, with results in Table 6 confirming that our regression does not exhibit multicollinearity problems.
The regression using random-effects model (Appendix 4) presents an interesting result that is sum of α and β less than 1 (estimation of α equal 0.63 and of β equal 0.24)
Vietnamese listed companies are experiencing decreasing returns to scale, meaning that as these firms increase their workforce and invest more capital to grow their operations, their operating profit turnover diminishes.
Table 3: Result of equation 5 using fixed-effects and random-effects model α β R 2
(1) Fixed effect model without industrial dummy variables
(2) Random effect model without industrial dummy variables
(3) Random effect model with industrial dummy variables
Table 5: Testing for heteroskedasticity using Wald test
Modified Wald test for groupwise heteroskedasticity in fixed effect regression model
H0: sigma(i)^2 = sigma^2 for all i chi2 (214) = 3.4e+37
Table 6: Testing for multicollinearity using VIF index
Variable | VIF 1/VIF -+ - dlnK | 1.60 0.63 dlnL | 1.60 0.63 -+ - Mean VIF | 1.60
Table 7: Effect of Industry on Firm’s Output
Despite the combined values of α and β being less than one, the dummy variables for various industries indicate that many sectors are experiencing positive growth rates This trend is a promising indicator for the Vietnamese economy, suggesting that the advancement of listed companies is driven not only by tangible assets but also by intellectual contributions According to T Yamaguchi (2014), the primary source of sustained long-term growth is expected to stem from intangible assets Table 9 illustrates the growth rates of different Vietnamese industries, and we will analyze several sectors that have demonstrated notable growth in recent periods to uncover the underlying factors contributing to their success.
The five high-growth industries—consumption, industrial machinery, chemicals, banking, and steel—experienced significant development between 2008 and 2012 due to various factors Understanding these factors is crucial for grasping the business environment of firms within these sectors By recognizing the driving forces behind industrial growth, we can better interpret the scope of intangible assets associated with a company's activities.
Vietnam consumption market is one of the most developing markets in comparing with other neighbor countries and maintains high growth rate in previous period
According to the Global Retail Development Index (GRDI), Vietnam's retail market ranked 23rd in 2011, dropped to 32nd in 2012, and improved to 28th in 2014, indicating significant potential for future growth in this industry Several factors have influenced the past progression of the consumption sector.
Vietnam's population growth is a key driver of the retail market's expansion As the population increases annually, so does the demand for retail products According to the Vietnam General Statistics Office (GSO), the population reached approximately 87.84 million in 2011, marking a 1.04% increase from the previous year, with about 26.88 million citizens, or 30.6% of the total population By 2012, the population was estimated to be around 90 million, highlighting the market's growth potential and opportunities for retail development.
- Spending on consumption: Average income per capita in 2002-2007 periods was about 7.3% per year and lead to 10.3% per year in the next period from
Between 2008 and 2012, increased earnings enhanced consumer purchasing power, positively impacting the revenue of the consumption industry During this period, the proportion of consumption relative to total personal income remained stable at approximately 14.8%, contributing to a significant total of $89.7 billion by the end of 2012.
Vietnam's economic development plays a crucial role in the growth of its retail market, with an annual GDP growth rate of approximately 6-7% From 2000 to 2011, Vietnam's GDP surged from $31 billion to $140 billion Despite global economic recessions, Vietnam's growth forecast remains resilient at around 5%.
- Urbanization: One of reasons of high-growth economic is high speed of urbanization This factor will create more demand and higher level of demand
The retail model in Vietnam predominantly targets urban areas due to their larger market size and the propensity of city dwellers to adopt new products more readily than those in rural areas This trend highlights significant growth opportunities within the Vietnamese retail market According to a World Bank report, Vietnam is experiencing an urbanization rate of approximately 3.4% per year, further emphasizing the potential for retail expansion in urban settings.
Vietnam's young population structure significantly contributes to its labor force, driving economic growth and creating sustained demand As reported by the GSO, the labor force in Vietnam reached approximately 46.48 million in 2013, with projections indicating continued growth in the coming years.
Travel significantly boosts the retail market in Vietnam, particularly in the food, beverage, and clothing sectors Despite a low-growth economic environment, the country welcomes approximately 6 million international visitors annually, alongside catering to around 30 million domestic tourists In 2010, the travel industry generated a total profit of about 130 trillion Vietnamese dong.
Vietnam's retail market is becoming increasingly open, particularly following its engagement with the WTO As of January 1, 2009, foreign investors are allowed to establish wholly-owned companies in the retail sector Furthermore, since November 1, 2010, foreign companies in the service industry can introduce new brands and franchises in Vietnam This heightened competition is prompting domestic retailers to enhance their technology, boost productivity, improve management systems, and adopt new business strategies that emphasize advertising and after-sales services.
- Development of Banking System: Having more payment facilities helps
Estimate Cost Function
According to Samuelson (1947), firms prioritize achieving maximum profit, which is influenced by production and costs To optimize profit, companies can either increase revenue or reduce total costs Utilizing the Cobb-Douglas formula, a company can determine the optimal output based on the combination of labor and capital This combination is crucial for maximizing profit, as it represents the firm's primary objective The profit function of a firm can be articulated as follows:
We take first derivative to find out maximizing profit point
Firm will come to maximum profit when (19) and (20) equal zero We will change these two equation a little bit and have two equations as below:
We multiplied K in both side of equation 21 and L in both side of equation 22, then
𝛽𝐴 𝑖𝑡 𝐾 𝛼 𝐿 𝛽 = 𝑊𝐿 (24) From equation 23 and equation 24, factor labor L could be expressed via factor capital K:
The marginal products of capital and labor are determined using equations 21 and 22, leading to the cost minimization condition where the ratio of marginal product of capital to marginal product of labor equals the ratio of labor cost to capital cost This relationship can be expressed as: MPK/MPL = Cost of Labor / Cost of Capital.
𝑊 (26) Base on equation 2 and substitute L for K as equation 25, formula of target output will become:
𝑊] −𝛽 𝑒 𝜀 𝑖𝑡 𝑄 (28) Take power 1/(𝛼 + 𝛽) for both side of equation 28, we have:
It comes to number of labor (number two input), we will replace equation 29 to equation 25:
Up to now, we could measure cost of company base on cost function as below:
𝐶(𝑅 𝑖𝑡 , 𝑊 𝑖𝑡 , 𝑄 𝑖𝑡 ) = 𝑅 𝑖𝑡 𝐾 𝑖𝑡 + 𝑊 𝑖𝑡 𝐿 𝑖𝑡 = 𝐵 ℎ 𝑅 𝑖𝑡 𝛼/(𝛼+𝛽) 𝑊 𝑖𝑡 𝛽/(𝛼+𝛽) 𝑄 𝑖𝑡 1/(𝛼+𝛽) (30) With B in equation 30 is expressed as:
Equation 30 is similar to equation 10 Data for calculating cost function includes𝛼, 𝛽, 𝑅 𝑖𝑡 , 𝑊 𝑖𝑡 , 𝑄 𝑖𝑡 and 𝐵 ℎ 𝛼, 𝛽 and 𝑄 𝑖𝑡 are regression results of equation 5 𝑊 𝑖𝑡 could be collected from VEC database and 𝑅 𝑖𝑡 will be computed using CAPM model
It is another input we need to compute for equation 30, 𝐵 ℎ 𝐵 ℎ is presented in equation
31 and data we need to finish this computation is [𝐴 𝑖 𝑒 ∑ λ 𝑀 ℎ ℎ 𝐷 ℎ (𝑖)𝑡 ] −1/(𝛼+𝛽) We can use formula of equation 2 to do this calculation
Equation 30 show total cost of company with effect of both intangible asset and tangible asset To determine value of intangible asset, value of intangible asset need to be subtracted from total firm’s equity We will calculate equity with and without intangible asset to compute intangible asset value in the next steps.
Compute Firm’s Equity Value
The equity value of a firm represents the total value it can generate over its lifetime, calculated as the discounted sum of its future operating profit flow While the calculation method is straightforward, challenges arise in accurately forecasting operating profits and selecting an appropriate discount rate.
In 2014, T Yamaguchi's research on discounted cash flow proposed the assumption of an infinitely maintained growth rate, simplifying calculations and addressing issues arising from fluctuating economic conditions However, when applied to listed companies in Vietnam, this method encounters challenges due to the unrealistically high growth rates of certain firms In reality, sustaining long-term growth proves to be an almost impossible task for most companies.
While companies may experience strong sales currently, this positive trend is unlikely to persist due to external factors such as competition, substitute products, and changing macro policies that influence business cycles Each product has its own life cycle, and some companies can extend this period through effective control systems and mergers and acquisitions A company's financial position is crucial for maintaining a leading market position, although only a few exceptions exist, as extending the development period is often an intangible asset linked to management systems Currently, certain industries are in an expansionary phase, but this upward trend is not sustainable long-term Therefore, I project that companies will maintain their current growth rate over the next five years, aligning with the Vietnamese government's five-year economic plan Following this period, firms are expected to transition into a stable phase, securing market share and achieving consistent annual operating profits, which will necessitate slight adjustments to our formula for calculating firm equity value.
𝑟 𝑖 (1 + 𝑟 𝑖 ) −𝑛 (33) With n is the number of year that company still remains it growth speed
In this study, we utilize the weighted average cost of capital (WACC) as the discount rate for evaluating a company's cash flow, aligning with common practices in research We assume that any changes in the cost of equity and cost of liability are minimal and do not significantly affect the WACC, which is a crucial assumption that helps maintain the simplicity of our model.
Compute Firm’s Equity Value with Non Intangible Asset
The total value of a firm's equity reflects its future profit potential, derived not only from physical assets like PP&E and labor force size but also from intellectual properties and intangible assets In the early stages of a business, growth typically stems from company expansion, with management challenges remaining manageable due to the smaller scale However, as a company grows, it must explore new markets, develop additional brands, and hire more staff, leading to increased management complexities that encompass financial and marketing strategies Each decision can significantly impact profitability, necessitating careful allocation of limited budgets towards projects and marketing efforts Therefore, alongside cultivating a strong brand and corporate culture, hiring exceptional leadership, such as a CEO or CFO, becomes crucial as they represent valuable intangible assets Furthermore, the growth percentage of a small company differs from that of a larger one, prompting a need to evaluate firm equity value without considering intangible assets This assessment essentially answers the question of a company's value based solely on labor and capital inputs.
13 In the left-hand side of equation 13, added value of firm’s equity is computed using Cobb-Douglas model with just two components, L and K We also use WACC as discount rate to discount future added value flow In formula of added value of firm’s equity with non-intangible asset, company’s growth rate will not exist Cobb-Douglas function indicates optimal output with each combination of K and L In the rest of equation 13, total firm’s expense with non-intangible asset will be calculated by the same formula as total firm’s expense These two expenses are just different from nominal cost of capital and nominal cost of labor Cost of capital and cost of labor in non-intangible asset condition will be adjusted from cost of capital and cost of labor in normal condition
Evaluating Firm’s Intangible Asset
To determine the value of a firm's intangible assets, we can use the formula from Equation 16, which states that the value of intangible assets is derived from the total asset equity value minus the equity value without intangible assets After calculating this, we obtain the firm's intangible asset value Figure 5 illustrates the proportion of intangible assets relative to total assets across various industries.
Examine Relationships among Firm’s Revenue, Intangible Asset and
In the final analysis, we explore the significance of intangible assets in relation to a firm's value Yamaguchi (2014) establishes a connection between a firm's revenue and its intangible assets through a regression analysis that initially focused on the relationship between revenue and the book value of equity By incorporating additional variables such as industry growth rate and intangible assets, his findings reveal that intangible assets have a greater impact on a firm's value than the book value of equity.
Industrial growth rates influence a firm's value, but this impact is less significant than that of its asset structure Japanese firms are more reliant on their asset composition than on industry trends Companies with strong brand recognition, effective management systems, and diversified distribution networks, or those that invest more in intangible assets, tend to achieve greater growth compared to their industry counterparts.
Figure 4: Change of total factor of production (TFP)
Figure 5: Ratio of Intangible asset on Total asset
This study investigates the impact of intangible assets on the added value of listed companies in Vietnam, highlighting the distinct effects of tangible versus intangible assets We will utilize the value of tangible assets instead of the book value of equity for a clearer analysis A non-linear model is theoretically proposed for estimation, reflecting firms' simultaneous decisions to maximize revenue and minimize costs However, as noted by Samuelson (1947), practical application of non-linear estimation is complex, leading to the recommendation of a linear approach with logarithmic transformations of the variables The estimation process will begin with all variables included, followed by a reduction in the number of variables to assess the individual effects on the firm's added value.
This analysis utilizes data from 214 companies across various industries to assess the factors influencing earnings before interest and taxes (EBIT) in 2012 A notable limitation of this dataset is that it only reflects observations from that single year, which may not account for the effects of the business cycle or seasonal variations Expanding the data range could address these limitations and provide a more comprehensive understanding of the variables at play.
Table 8: Estimation with all variables
REVENUE Coefficient Std Error t-Statistic Prob
Table 9: Effect of intangible asset and industry development on firm’s added value
REVENUE Coefficient Std Error t-Statistic Prob
Table 10: Effect of intangible asset on firm’s added value
REVENUE Coefficient Std Error t-Statistic Prob
Intangible assets significantly enhance a firm's added value, with a positive correlation between their investment and profitability For every 1% increase in intangible asset investment, companies can expect a 0.04% rise in profits, though the long-term benefits are likely greater than this short-term figure suggests Limitations in data restrict our view to a one-year impact For instance, when a consumption firm expands its distribution network into new markets, it primarily attracts younger consumers who are more adaptable to new products, while older consumers tend to be more cautious This initial group, known as innovators, represents about 2.5% of customers (Rogers, 1983), and their experiences with the product help build brand recognition over time As more young consumers engage with the product, curiosity among older consumers increases, leading to greater financial returns for the firm in the future This principle applies similarly to other forms of intangible asset investments.
The growth rate of industries significantly influences a firm's EBIT, differing from findings in Yamaguchi’s research The development resources for Vietnam's listed companies are affected by unstable factors, particularly industry profitability Each industry's attractiveness fluctuates with the economic cycle; during recovery, sectors like financials and transportation thrive early on, while technology and capital goods excel mid-cycle, and basic industries and energy peak later Conversely, some sectors, such as utilities, perform better during recession phases, particularly in the middle or at the trough Consequently, the growth rate of Vietnam's listed companies remains inconsistent and unpredictable.
When analyzing a company's market value, we explore the relationship between independent variables and stock price, as illustrated in Table 11 The findings reveal an inverse relationship, indicating that tangible assets hold a significant coefficient, whereas intangible assets and industry growth rates do not play a substantial role.
Table 11: Association among intangible asset, tangible asset, industrial growth rate and stock price
Stock Price Coefficient Std Error t-Statistic Prob
Table 12: Association between tangible asset and stock price
Stock Price Coefficient Std Error t-Statistic Prob
Stock prices are influenced by various factors, including a company's performance, financial position, cash flow, and policies Each country's stock market has unique characteristics, and in Vietnam, the market is relatively small, allowing large financial entities to easily control price trends A significant number of investors in the Vietnamese stock market prioritize short-term profits, which can lead to trading behaviors that disregard a company's future profitability based on its core values Consequently, certain critical information, such as administrative expenses and brand value, may be overlooked in investment analysis, despite their importance.
Tables 8 and 11 illustrate the varying impacts of intangible assets on both a firm's performance and its stock price The analysis indicates that intangible assets represent potential future profits for companies Therefore, in addition to expanding manufacturing capabilities, firms should prioritize the accumulation of intangible assets to foster long-term growth and development.
4.8 Firm’s Intangible Asset and Policy Implications
Intangible assets hold significant value in a company's operations and are closely linked to its potential for future growth Understanding the strong impact of these assets on business performance requires in-depth analysis and long-term study of each specific case.
Market power refers to the ability of a firm or group of firms to influence or control the price of goods and services in a market This concept is often associated with monopoly markets, where a single entity dominates In contrast, perfectly competitive markets feature numerous businesses with minimal market share, rendering them unable to impact market prices significantly However, when firms emerge that can set prices, the notion of market power becomes relevant, highlighting the dynamics of competition and pricing strategies.
According to Lawrence (May 2012), market power is the ability to generate excess profits of the company from the difference between the price and marginal cost
Market power arises from product differentiation, as highlighted by Bain's 1956 research, which identifies barriers to entry and the ability to distinguish products as key factors Without differentiation, products compete solely on price, leading to market equilibrium and the elimination of excess profits, thereby negating market power Product differentiation is influenced by three main elements and resembles the creation of intangible assets Lawrence notes that various factors contribute to the formation of product differences.
A resources-owned monopoly refers to a situation where a company holds exclusive rights to certain inputs, such as government-granted licenses for services like taxi operations or exclusive patents These monopolistic resources can include unique raw materials or mineral ingredients, which require companies to have substantial social capital and financial stability Additionally, a strong brand presence is essential for ensuring that suppliers engage exclusively with these monopolistic firms, highlighting the importance of proprietary trade as a vital component of social capital.
Intangible assets, such as patents, stem from strong relationships between businesses and government, highlighting the importance of research and development (R&D) activities or acquisitions A firm with a robust portfolio of patents demonstrates its commitment to long-term growth and innovation, showcasing its structural capital.
- Economic of scale: This is the origin of "natural monopoly" To participate in the industry, enterprises have accumulated an amount of capital needed and thereby create barriers to entry
Entering the beverage industry requires significant investment, often leading to substantial sunk costs that cannot be recovered if businesses decide to exit This high financial barrier includes expenses related to research and development, market analysis, advertising, and brand establishment, making it a cost-intensive sector Companies like Coca-Cola and Pepsi exemplify the challenges of market entry; while creating a similar product may seem feasible, their strong branding and extensive advertising make it difficult for substitutes to compete Therefore, potential entrants must be prepared to allocate considerable financial resources for marketing and brand development to survive in this competitive landscape.
This financial requirement is an actually barrier to entry, barrie of brand name
Fixed effect estimation without industrial dummy variables
Appendix 1: Fixed effect estimation without industrial dummy variables dlnQ Coef Std Err t P>t [95% Conf Interval] dlnK 0.62 0.05 11.63 0 0.51 0.72 dlnL 0.24 0.06 3.93 0 0.12 0.37
Appendix 2: Random effect estimation without industrial dummy variables dlnQ Coef Std.Err z P>z [95% Conf Interval] dlnK 0.63 0.04 14.3 0 0.54 0.72 dlnL 0.24 0.05 4.78 0 0.14 0.34
Appendix 3: Random effect estimation with industrial dummy variables dlnQ Coef Std.Err z P>z [95%Conf Interval] dlnK 0.63 0.04 14.03 0 0.54 0.72 dlnL 0.24 0.05 4.64 0 0.14 0.34
Appendix 4: Random effect estimation with industrial dummy variables after adjusted heteroskedasticity dlnQ Coef Robust
Std.Err z P>z [95%Conf Interval] dlnK 0.63 0.11 5.6 0 0.41 0.85 dlnL 0.24 0.1 2.29 0.02 0.03 0.44
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