(Luận văn) financial development and firms’ financing constraints, a study of manufacturing firms in vietnam

t to UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM ng INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS hi ep w n lo VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS ad ju y th yi pl n ua al n va FINANCIAL DEVELOPMENT AND FIRMS’ FINANCING CONSTRAINTS: ll fu A STUDY OF MANUFACTURING FIRMS IN VIETNAM oi m at nh BY z z VU THI KHANH k jm ht vb om l.c gm MASTER OF ARTS IN DEVELOPMENT ECONOMICS n a Lu n va y te re th HO CHI MINH CITY, MAY 2015 t to ng hi ep UNIVERSITY OF ECONOMICS HO CHIMINH CITY VIETNAM INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS w n lo ad VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS ju y th yi pl n ua al n va FINANCIAL DEVELOPMENT AND FIRMS’ FINANCING CONSTRAINTS: ll fu A STUDY OF MANUFACTURING FIRMS IN VIETNAM oi m nh A thesis submitted in partial fulfilment of the requirements for the degree of at MASTER OF ARTS IN DEVELOPMENT ECONOMICS z z k jm ht vb om l.c VU THI KHANH gm By n a Lu y te re DR.LE VAN CHON n va Academic Supervisor: th HO CHI MINH CITY, MAY 2015 t to ng Declaration hi ep w “This is to certify that this thesis entitled “Financial development and firms’ financing n constraints: A study of manufacturing firms in Vietnam”, which is submitted by me in lo ad fulfillment of the requirements for the degree of Master of Art in Development y th Economics to the Vietnam – The Netherlands Programme (VNP) ju yi The thesis constitutes only my original work and due supervision and pl ua al acknowledgement have been made in the text to all materials used.” n Vu Thi Khanh n va ll fu oi m at nh z z k jm ht vb om l.c gm n a Lu n va y te re th t to ng Acknowledgments hi ep This thesis would not have been possible without the support and the w n encouragement from many people I would like to make a sincere effort in portraying lo ad my deep sense of gratitude in the form of words y th I owe a debt of gratitude to my supervisor, Dr Le Van Chon for his great ju yi generosity and dedication in sharing his wisdom, stimulating my critical thinking skills pl and guiding me to rethink and to deconstruct my thesis topic He was also not afraid of al n ua time-consuming to explain econometric methods as well as data processing techniques va to me Moreover, he took time to diligently review my final thesis draft and help me n correct errors and inappropriate words usages Furthermore, I am grateful to Ass.Prof fu ll Nguyen Trong Hoai and Dr Tran Tien Khai for their valuable comments and m oi suggestions for my concept note and thesis research design Thank to Dr Pham Khanh nh at Nam for his enthusiasm of helping me collecting data I must show my gratitude z toward all lecturers VNP who have broadened my perspectives and encouraged me to z ht vb think harder and deeper about the complexity of the world’s realities k jm Next, I wish to express my thank you to all my friends here at VNP Together gm we have walked and struggled through this whole treasured journey of learning and shared memorable and priceless moments Then, I want to say thanks to VNP officers l.c om as well as VNP librarian for their support of comfort lab room and study materials n besides me and never stop supporting me a Lu Finally, I dedicate my thesis to my parents and my brother who are always n va y te re th t to ng Abbreviations hi ep w n lo ad : The Asian Development Bank BTA : The U.S.-Vietnam Bilateral Trade Agreement DM : Demirguc-Kunt and Maksimovic GDP : Gross domestic production GSO : General statistics office of Vietnam HNX : Hanoi Stock Exchange ju y th ADB yi : Ho Chi Minh Stock Exchange IMF : The International Monetary Fund pl HOSE ua al : Liquid liabilities ratio n LLY va : Private credit to GDP ratio SMEs : Small and medium enterprises SOEs : State-owned enterprises SVG : Stock market total valued traded to GDP UK : The United Kingdom UN : The United Nations UPCoM : Unlisted public company market US : The United States of America VAR : Vector Autoregression VES : The Vietnam Enterprise Survey WB : The World Bank n PCG ll fu oi m at nh z z k jm ht vb om l.c gm n a Lu n va y te re th t to ng Abstract hi ep Using panel data from the Vietnamese Enterprise Survey (VES) from 2006- 2012, this thesis aims to analyze the relationship between financial development and w n financing constraints of firms in Vietnam The Euler equation approach is applied to lo ad model firms' investment Investment sensitivity to cash-flow is employed as the ju y th variable to test for the existence of financing constraints To control for endogeneity and firm heterogeneity, I utilize the first difference GMM estimation proposed by yi pl Arellano and Bond (1991) There is robust evidence that Vietnamese manufacturing al ua firms face financing constraints and that financial development significantly relaxes n firms' dependence on internal funds for investment In addition, although smaller firms va n suffer more severe financing constraints, their constraints are alleviated more than fu ll those of larger firms in the presence of financial development oi m nh Keywords: Financial development, Financing constraints, Corporate Investment at z z k jm ht vb om l.c gm n a Lu n va y te re th t to ng hi ep Table of contents w Chapter 1: Introduction n lo 1.1 Problem statement ad 1.2 Research questions y th ju 1.3 The scope of the study yi 1.4 The structure of the study pl ua al Chapter 2: Literature review 2.1 Sources of investment financing n n va 2.1.1 External financing ll fu 2.1.2 Internal financing oi m 2.2 Financing constraints on firms nh 2.2.1 Definition at 2.2.2 Measurement of financing constraints on firm z z 2.3 Financial development and financing constraints on firms vb 2.4 Conclusion 14 ht k jm Chapter 3: Model specification 16 gm 3.1 Investment modeling 16 3.1.1 Euler investment equation approach 16 l.c om 3.1.2 Detecting the presence of firm’s financing constraints using Euler equation 24 n 3.3 Empirical model to evaluate the impact of financial development on firm a Lu 3.2 Financial development measurement 25 n va investment 28 th 5.1 Data 37 y Chapter 5: Empirical results 37 te re Chapter 4: Financial development in Vietnam 30 t to 5.1.1 Sample and variable construction 37 ng hi 5.1.2 Descriptive (Initial relationship) 40 ep 5.2 Estimation technique: GMM dynamic panel estimation 44 w 5.3 Regression results 46 n lo Chapter 6: Conclusion 51 ad 6.1 Main findings 51 y th ju 6.2 Policy implications 52 yi 6.3 Limitations and further research 52 pl ua al References 53 Appendix 60 n n va ll fu oi m at nh z z k jm ht vb om l.c gm n a Lu n va y te re th t to ng List of tables hi ep Table 2.1: Share of financing sources in two industries in the United Kingdom Table 2.2 The proportion of financing sources according to different firm sizes w n lo Table 5.1: Firm level variable definitions 38 ad y th Table 5.2: Panel data structure 39 ju Table 5.3 The descriptive statistics of the key variables for the whole data sample 41 yi pl Table 5.4 Median value of the key variables by different firm types 41 al n ua Table 5.5 Correlation matrix 42 va Table 5.6 Mean values of the key variables by manufacturing industries 42 n fu ll Table 5.7 Mean values of the key variables by years 43 m oi Table 5.8 Regression results using first difference GMM estimation 47 nh at Table 5.9 Scenario analysis of firm’s size on investment –cash flow 50 z z k jm ht vb om l.c gm n a Lu n va y te re th t to ng List of figures hi ep Figure 4.1 The mono-tier banking system in Vietnam before banking reforms 31 Figure 4.2 Structure of the two-tier banking system in Vietnam (after May 1990) 31 w n lo Figure 4.3 Brief on the Vietnamese banking system 32 ad y th Figure 4.4 Liquid liabilities (M3) as % of GDP of some countries 33 ju Figure 4.5 Credit to the economy 34 yi pl Figure 4.6 Private credit to GDP of some countries 34 al n ua Figure 4.7 Stock Market Capitalization as % of GDP 35 n va ll fu oi m List of appendix nh at Appendix Banking system development progress from 1990’s 61 z z Appendix Stock market development process from 1990’s 63 ht vb k jm Appendix Boxplot chart for each variable (IK,SK,CFK) by industries 66 om l.c gm Appendix Scatter chart for each variable (IK, SK, CFK) by industries 66 n a Lu n va y te re th t to ng Chapter 6: Conclusion hi 6.1 Main findings ep It is no doubt that one of the major mechanisms through which economies could w gain from financial development is to stimulate firm’s investment financing (Levine, n lo 2005) Financial reforms, whose main purpose is reducing capital markets ad y th imperfections, would exert a powerful effect on output by providing larger and more ju efficient sources of finance to firms yi pl This paper inherits the ideas from Love (2003), Laeven (2003) and O’Toole and al ua Newman (2012) Although the idea of using Vietnamese manufacturing data taken n from VES rooted from O’Toole and Newman (2012), this study has applied a different va n approach of testing the presence of financing constraints Firms are tested whether they fu ll face financially constrained by using Euler equation approach obtained by addressing m oi firm’s maximizing its value problem after taking first order condition for investment at nh (Love, 2003 and Laeven, 2003) Three main indicators of financial development z measurement employed in this paper are liquid liabilities ratio, private credit to GDP z vb ratio, and stock market total value traded to GDP which widely employed in previous k 2011b; Čihák et al., 2013) jm ht studies (Dermirguc-Kunt& Levine, 1996; Levine et al., 2000; Love, 2003;Huang, gm As the result, Vietnamese manufacturing firms face financing constraints, and om l.c small firms suffer more severe financing constraints than large firms Fortunately, financial development has a significant effect in relaxing firms’ financing constraints a Lu Moreover, the effect varies from firm to firm Smaller firms with higher level of n y te re of financial development n va financing constraints experience a better reduction in their constraints in the presence th 50 t to 6.2 Policy implications ng hi ep Based on the above results, there are some policy recommendations Firstly, financial development process both in banking and stock market sector should be w encouraged in the future due to the positive effects on firm’s investment Financial n lo reforms not only focus on the quantity aspect but also the quality of the financial ad y th reforms The second is about large firms In the presence of the financial development, ju large firms gradually lose their privilege and endure some difficulties in banking credit yi access External financing sources only come to healthy and prospective firms Thus, pl ua al large firms, probably consisting of many SOEs, need to improve their efficiency, n competiveness and transparency of their activities va n 6.3 Limitations and further research fu ll This research still remains some limitations The first concern belongs to the m oi quality of data Firms taking part in the survey are not forced to provide accurate and nh at sufficient financial information It is really a matter because key variables in the z empirical model are derived from firm’s financial statement The second problem is z ht vb mall number of consecutive years of firm observations It seems not to be long enough jm to show a clear trend The third issue roots from the selection of financial development k proxies Due to the absence of the official index of financial development, there are gm many choices for financial development indicators according to the purpose of each om l.c study In this thesis, three proxies of financial development indicator are calculated in country level They not take into account the variety of financial development a Lu across provinces One suggestion is that provincial level of financial development n n va indicators in Guariglia & Poncet (2008) might be applied in further research y te re th 51 t to ng References hi 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banks began to be established - In this period, four Joint-Venture banks of state owned banks and foreign ju y th - yi banks were set up Normalizing relations with international financial institutions (IMF, WB, ADB) n - The Parliament passed a resolution to remove the sales tax on banking n va 1995 ua al - pl 1993 The 10th convocation of National Assembly passed the Law on the State Bank m - ll 1997 fu operations and banks established to serve the poor oi of Vietnam and the Law on Credit Institutions (launched on 12/02/1997) and at The Mekong Delta Development Bank was established (Decision No.769/TTg z - nh effective from 10.01.1998; z vb launched on 09/18/1997) This was also the year when the financial crisis in jm ht East Asia Thus, this has a negative impact on the banking system in Vietnam After this period, some banks with weak performance were rearranged From k remained 37 banks l.c gm more than 50 joint-stock commercial banks, by the end of 2004, there - The Deposit Insurance of Vietnam was established (launched on 9/11/1999) 2000 - Restructure the financial status and operation of state-owned commercial om 1999 n - The asset management companies were set up in the commercial banks - The U.S.-Vietnam Bilateral Trade Agreement (BTA) was signed In this n va agreement, Vietnam has committed to follow a given opening-up process y te re 2001 a Lu banks and the joint-stock commercial banks - Liberalize the VND interest rates of credit institutions - the final step of full 59 th 2002 t to liberalization of interest rate market in both input and output ng hi 2003 - Conduct in-depth restructuring activities of commercial banks in accordance ep with international standards - The Bank for Social Policies on the basis of the Bank for the Poor was w n established on the purpose of separating policy credit from commercial credit; lo ad - Carry out the first step of the amendment of Law of the State Bank of - On 16/6/2010, in order to meet the new requirements of the development pl 2010 Amend the Law on Credit Institutions Vietnam yi - ju y th 2004 Vietnam ua al process of economic and financial system, the Law on State Bank of Vietnam n and the new Law on Credit Institutions were passed by the 12th convocation of va National Assembly and took effect from 01/01/2011 n In comparison with the 1997 Law of the State Bank, the 2010 Law of the State ll fu - oi m Bank has several important changes, including clarifying the legal status of the state bank, and defining the functions and tasks of the State bank as a central at nh bank as follows: z  Perform the functions of state management in the fields of monetary and z ht vb banking activities, confirming tight relationship between two important jm functions of a central bank, consisting of implementing monetary policies and k monitoring the operation safety of the credit institutions system gm - Meanwhile, in comparison with the old Law, there is a significant change in l.c the new Law on Credit Institutions That is credit institutions are not allowed om to take part in any business activities other than banking It means that capital a Lu raising activities like banking of non-banking institutions in the field of n securities, financial investment services will be terminated from the beginning n va of 2011 y te re Source: Collected from website of the State Bank of Vietnam (http://sbv.gov.vn/) th 60 t to ng Appendix 2: Stock market development process from 1990’s hi ep Event 1993 Establishment of Capital Market Research and Development Department Year w n One of the first meaningful steps to set up the Vietnamese stock market was the establishment lo ad of Capital Market Research and Development Department (Decision No.207 / QD-TCCB launched on 11/06/1993 by Governor of the State Bank) It was under the supervisor of the y th State Bank with the main tasks of researching, developing projects and preparing conditions ju yi for the establishment stock market pl 1996 Establishment of the State Securities Commission ua al State Securities Commission, established on November 28th 1996 under Decree No.75/CP of n va the Government, is a government agency performing functions of organization and state n management of securities and the Stock Market Exchange The establishment is crucial for fu ll the openness of the stock market three years later Opening the stock exchange center oi m 2000 nh at Although established in 1998 under Decision No 127/1998/QD-TTg launched on 11/07/1998, z but after years, on July 28, 2000, Ho Chi Minh City Stock Exchange Center was officially z State Securities Commission is placed under the supervision of Ministry of Finance Over the jm 2004 ht vb put into operation with two first listed companies, REE and SACOM k five years operation, the State Securities Commission had implemented functions and tasks to gm achieve many obvious results, expressing its role as an organizer and an operator of Vietnam's stock market However, to facilitate better coordination among ministries in promoting the l.c om development of the securities market, on February 19th, 2004 the Government issued Decree No.66/2004/ND-CP with the main content of transferring the State Securities Committee to n a Lu be under the supervision of the Ministry of Finance On August 3rd, 2005, the Hanoi Securities Trading Center, which later was transformed and restructured into Hanoi Stock Exchange (HNX) in 2009, officially opened 61 th the centralized procurement of government bonds at the Hanoi Securities Trading Center y On 20/06/2006, the Ministry of Finance issued Decision No 2276 / QD-BTC that regulates te re 2006 n va 2005 t to According to the decision, Hanoi Securities Trading Center is the only organization tasked to ng hi conduct bidding for government bond in Vietnam Up to now, the HNX is responsible for ep organizing securities transactions with two primary activities, including the share auctions and Government Bond biddings to mobilize capital for the State budget Simultaneously, the w n HNX has operated three secondary trading markets on a modern technological structure, lo including listed stock market, government bond market, and unlisted public company market ad (UPCoM) y th After years of growing and integrating into the global securities market, the government ju 2007 yi signed Decision No 599/QD-TTg on May 11th 2007 to transfer the Ho Chi Minh City pl Securities Trading Center to Ho Chi Minh Stock Exchange (HOSE) On August 8th 2007, Ho al n ua Chi Minh Stock Exchange was officially opened n va Sources: Collected from official websites of HNX and HSX (http://hnx.vn/ and http://www.hsx.vn/) ll fu oi m at nh z z k jm ht vb om l.c gm n a Lu n va y te re th 62 t to ng hi Appendix 3: Boxplot chart for each variable (IK,SK,CFK) by industries ep w n lo ad ju y th yi pl n ua al n va ll fu oi m at nh z z k jm ht vb om l.c gm n a Lu n va y te re th 63 t to ng hi ep w n lo ad ju y th yi pl n ua al n va ll fu oi m Appendix 4: Scatter chart for each variable (IK, SK, CFK) by industries at nh z z k jm ht vb om l.c gm n a Lu n va y te re th 64