(Tiểu luận) determinants of the business perfromance of enterprises in vietnam in 2019

The research results also show that the profit of the enterprises is influenced by different factors: business size, age, leverage ratio, profitability, debt to equity ratio and structur

FOREIGN TRADE UNIVERSITY

FACULTY OF INTERNATIONAL ECONOMICS

-*** -

MIDTERM ASSIGNMENT DETERMINANTS OF THE BUSINESS PERFROMANCE

OF ENTERPRISES IN VIETNAM IN 2019

Class: KTEE309.2 Group: 18

Instructor: Dr Đinh Thị Thanh Bình

No Full Name Student ID % of Contribution

Hanoi, December 2022

CONTENT

INTRODUCTION 5

CHAPTER 1 THEORETICAL FRAMEWORK AND LITERATURE REVIEW 7

1.1 Theoretical Framework 7

1.1.1 Overview of business performance of enterprises 7

1.2 Literature Review 8

1.2.1 Research into factors affecting business performance of enterprises 8

1.2.2 Justification of research gap 11

1.3 Factors affecting the business performance of enterprises and research hypothesis 11

1.3.1 Age of business 11

1.3.2 Firm size: 11

1.3.3 Leverage ratio: 12

1.3.4 Liquidity ratio 12

1.3.5 Asset structure 13

1.3.6 Debt ratio 13

CHAPTER 2 RESEARCH METHODS AND RESEARCH MODEL 14

2.1 Research Design 14

2.1.1 Model building methods 14

2.1.2 Data collecting methods 14

2.1.3 Data analysis methods 14

2.2 Research model building 15

2.2.1 Research data 15

2.2.2 Theoretical model specification 15

2.3 Interpretation of variables in model 16

2.4 Data Description 18

2.4.1 Data Sources 18

2.4.2 Descriptive Analysis of Data 18

2.4.3 Correlation analysis 19

INFERENCE 22

3.1 Estimates results and Model testing 22

3.2 Model testing 23

3.2.1 Ramsey RESET test 23

3.2.2 Multicollinearity test 24

3.2.3 Variance error change test (heteroskedasticity test) 24

3.2.4 Standard Normal Distribution 25

3.2.5 Variable variance defects resolution 25

3.3 Statistical hypothesis test 26

3.3.1 Testing the statistical hypothesis test of coefficient terms 26

3.3.2 Testing the statistical significance of coefficient terms 26

3.3.3 Testing and Statistical Inference 29

CHAPTER 4 CONCLUSIONS AND RECOMMENDATIONS FOR VIETNAMESE ENTERPRISES 30

4.1 Recommendations 30

4.2 Conclusions 31

REFERENCES

TABLE OF FIGURES

TABLE 1: Expected signs of variables and explanation of variables table 15

TABLE 2: Variables’ description 18

TABLE 3:The descriptive statistics table 19

TABLE 4: Correlation table 20

TABLE 5: Relationships among the independent variables 20

TABLE 6: Former estimate of model 22

TABLE 7: Results of former regression parameters 22

TABLE 8: VIF result 24

TABLE 9: Skewess result 25

TABLE 10: Variable variance defect results 25

TABLE 11: Significance of coefficient terms 27

In general, business performance is the company’s ability to profit from resources and achieve its objectives This definition is, however, very broad In practice, the term business performance usually refers to the ability of a business to implement a strategy to achieve organizational objectives or key performance indicators (KPIs) and

is considered a crucial tool for enterprises to analyze how effective management is at achieving business goals

A high financial performance draws the attention of every manager because it plays a vital position within the structure and development of a firm Nonetheless, that aim is often challenged by many factors, leading to a low level of firm performance Understanding the determinants of financial performance is gradually getting necessary for companies in Vietnam to raise their performance level Realizing the importance of business performance, our group has chosen the topic: “Factors affecting the business performance of enterprises in Vietnam in 2019.”

This study contains two objectives:

(1) Identify the factors that affect the performance of enterprises in Vietnam in

2019

(2) Propose solutions to raise Vietnamese enterprises’ business performance

To estimate the factors affecting Vietnam’s business performance in 2019, we use secondary data using convenient sampling techniques from the 2019 Financial Statements of 236 enterprises The database is chosen based on the top 500 best profitable enterprises listed in Vietnam, with the selected analysis criteria in the model The study uses Stata-64.exe software to support data analysis Quantitative statistical methods with criteria such as average, rate, frequency, and standard deviation are applied to analyze the current situation of Vietnamese enterprises’ production and business activities with an adaptation of the regression technique The research results also show that the profit of the enterprises is influenced by different factors: business size, age, leverage ratio, profitability, debt to equity ratio and structure of assets of

enterprises On that basis, the article proposes some solutions to improve business

performance in Vietnam in the current period

The research consists of the following contents:

• Introduction

• Chapter 1: Theoretical framework and Literature review

• Chapter 2: Research design and Regression Model

• Chapter 3: Estimation results, Diagnostic tests, and Statistical hypotheses tests

• Chapter 4: Suggestions to improve enterprises’ performance

• Conclusion

assistance during our research and study We are bound to make mistakes in our final product due to a lack of time and advanced knowledge, but we are eager to receive feedback from the Ph.D.Dinh Thi Thanh Binh to improve our report.

We send you our faithful wishes for future success!

CHAPTER 1 THEORETICAL FRAMEWORK AND LITERATURE REVIEW

Vietnam corporations ‘s business performance in 2019

According to the Statistics industry survey at 31/12/2019, Vietnam has 668,505 operating businesses with business production results, an increase of 9.5% compared to the time of 12/31/2018 In particular, in 2019 the proportion of profitable businesses accounted for 43.0%; the proportion of breakeven businesses accounted for 8.2%; The percentage of business enterprises with losses accounted for 48.8%

The total capital used for SXKD of the entire operating enterprise with the results

of business production at 12/31/2019 reached VND 43.3 million, increased by 11.4% compared to the same time in 2018

The total net revenue of the entire operating business sector with business production results in 2019 reached more than VND 26.3 million, an increase of 11.4% compared to 2018 with industrial and construction businesses with the largest contribution

In 2019, the total pre-tax profit of the business sector reached VND 889.9 trillion, down 0.5% compared to 2018 The percentage of profitable businesses in 2019 reached 43.0%, down from 2018 (44.1%) The percentage of business enterprises losing in 2019 reached 48.8%, an increase compared to 2018 (48.4%).TOP 50 in 2019 is still a familiar

Vinhomes, Novaland, Khang Dien, Nam Long with revenue and profit indicators, Impressive capitalization value

Return on Asset

ROA - net profit to asset ratio (Return on total assets), is the company's profitability measurement indicator of how profitable a company is relative to its assets

or the resources it owns or controls

Return on Assets (ROA) = Net Income/Total Assets

The ROA provides investors with information about the interest generated from the amount of investment ( or the amount of assets ) A company's assets are made up

of loans and equity Both of these are used to fund company operations The effect of converting investment capital into profit is shown by ROA The higher the ROA, the better because the company is making more money on less investment

To assess the business performance of an enterprise, profit rate indicators (ROA, ROE) are often used, because it represents the relationship between profit and actual production costs, showcasing the business ability of people in using those factors According to Kaguri (2013), the appropriate scale is chosen to evaluate the business performance of an enterprise depending on the type of business For for-profit businesses, business performance is measured by financial indicators (Skandalis, 2005) Due to the aforementioned elements, our group will use ROA (Return to asset)

as a suitable tool of evaluation of 243 Vietnam's corporation business performance in

2019 Therefore ROA will be presented as a dependent variable later in our model

1.2 Literature Review

1.2.1 Research into factors affecting business performance of enterprises

For enterprises, business performance evaluation is indispensable as it helps them align their employees, resources, and systems to meet their strategic objectives As such, researchers have conducted various studies into factors affecting business performance of enterprises from both theoretical and empirical perspectives However,

as those studies vary from different industries and contexts within different periods of time, the results can not be applied into Vietnam’s outlook and characteristics of Vietnamese enterprises – the scope of this thesis

Following are the explanation and analysis of previous studies into the subject a) Prior research in foreign countries

Firstly, “The Determinants of Small and Medium-sized Enterprises Performance

in Nigeria” by Idris Isyaku Abdullahi, Sulaiman Chindo (2015) from which data was

database investigated five main factors that could be determinants of small and sized enterprises, which are interest rate, government spending, net export, level of education and instability on SMEs performance in Nigeria SMEs performance was quantified based on share of SMEs contribution to GDP With ADRL approach, the research has identified that only two factors: interest rate and net export had significant and negative impact on SMEs performance Overall, the study pointed out some policies which are for regulators to improve the business performance in Nigeria Moreover, as the economic context of Nigeria is extremely different from that of Vietnam, the findings might not be applicable only in the Nigerian setting

medium-Secondly, to identify factors that are affecting business success of small and medium enterprises in Thailand, Chittithaworn, Islam and Keawchana et al conducted

a research in 2011 with regression analysis Eight factors were examined during the research and these factors are SMEs characteristic, management and know-how, products and services, customer and market, the way of doing business and cooperation, resources and finance, strategy, and external environment Based on correlation analysis from 143 companies in Thailand, the results of the survey indicated that SMEs characteristics, customer and markets, the way of doing business, resources and finance, and external environment have significant positive effect on the business success of SMEs Whilst, management know-how, product and services and strategy have no significant effect on performance of business

Several years later, another research also conducted in Thailand is the reflective study of Nimlaor, Trimetsoontorn and Fongsuwan in 2014 “Factors Affecting Business Performance: An Empirical Study in Thailand” which evaluated “the empirical relationships and influencing factors of firm strategy, firm environment and firm characteristics that influence the performance of the Thai garment industry” (Nimlaor, Trimetsoon and Fongsuwan, 2014) With PLS model and data collected from 178 chief executives in garment companies in Thailand, the research revealed that all firm characteristics including leaders and teamwork and firm strategy factor consisting of R&D, product differentiation and brand has direct influence on firm performance Firm environment also have indirect impact on performance of enterprises through sub-factors such as government policy, alliance and international trading system Overall, the researchers in this study has showed that the internal factors of companies, espcially human-related factors also have statistical impact on business performance However, this research is limited in the Thai garment industry For that reason, the conclusion can

be varying in other industries due to the unique characteristics of garment industry and therefore, unable to generalize those findings in other countries

In comparison with the research of Chittithaworn, Islam and Keawchana et al., Nimlaor (2011), that of Trimetsoontorn and Fongsuwan (2014)also have similar

However, even if the study is conducted in the same country, it can be also seen from these two researchers that not every factor can have impact on the firm performance, it depends greatly on the scale or the scope of the research

b) Previous studies in Vietnam

In Vietnam, factors affecting business performance of enterprises also triggred interests of scholars and practitioners to find out more, especially when the Vietnamese economy is in the international economic integration era Prior researchers in Vietnam focus mainly into the business performance of SMEs in Vietnam for the reason that the number of small and medium-sized enterprises accounts for 93.5% of the total number

of enterprises operating in Vietnam according to the 2021 Vietnamese White paper about enterprises However, according to Muriithi (2017) and Tuan(2020) there is no universally accepted definition for small and medium businesses In Vietnam, according

to the Government's Decree 39/2018/ND-CP dated March 11, 2018, the classification

of Vietnamese enterprises has been announced

First, the research article “Factors affecting performance of small and sized enterprises in Vietnam” by Nguyen Thi Ngoc Oanh, Nguyen Kim Quoc Trung and Nguyen Thi Kim Chi et al (2021), from which data was collected from the Ho Chi Minh Stock Exchange (HOSE), determined the factors affecting the performance of Vietnam’s SMEs in the Ho Chi Minh City area from 2009 to 2019 These factors are firm age, firm size, leverage ratio, revenue growth, gross domestic product (GDP) growth, inflation rate, and quality of local governance ROE is used in this study as the dependent variable to represent the performance of firms With panel data and four methods: OLS, FEM, REM and FGLS, the researchers reach the conclusion that firm age, size and revenue growth positively affect SMEs' performance Among macroeconomic variables, GDP, growth, inflation rate and local governance have “ a notable impact on the performance of enterprises” Overall, the study identified seven factors in four internal factors (from the companies perspectives) and three external factors that have impact on business performance However, the study has ignored the effect of Covid-19 on SME businesses, therefore, with different time range, different dataset, the results can be varying

medium-With the same topic, Vu Ngoc Xuan, Nguyen Thi Phuong Thu and Ngo Tuan Anh (2020) in the research paper “Factors affecting the business performance of enterprises: Evidence at Vietnam small and medium-sized enterprise” have the same variable with the previous research: revenue growth and the number of years of operation but in this study, conductor put great emphasis on internal factors, which are the number of state support, education level of the owner, social relationship of companies The performance of enterprises is measured by ROA (return on assets) With 456 SMEs collected from the Vietnam stock market, the study revealed that only

and positive influence on firm performance However, age (the number of years operating) did not affect the performance of the firm, which is a contrast conclusion with the study of Nguyen Thi Ngoc Oanh, Nguyen Kim Quoc Trung and Nguyen Thi Kim Chi et al

Last but not least, the research article “ Factors affecting business performance

of firms in food industry in Vietnam” by Lai Cao Mai Phuong & Nguyen Thi Loi (2022) also used six various variables to measure the business performance of firms, which are age, size of the firms, leverage ratio, liquidity, the structure of fixed assets Similar with two previous research, revenue growth is also included in those independent variables The results shows that only size, liquidity has statiscally affected the performance of business while the structure of fixed assets, revenue growth has no statistical effect on business performance Overall, the article added various breakthrough findings on the literature However, the study only addressed companies in food industry, so the generalizability of findings also limit only in this industry itself

1.2.2 Justification of research gap

In sum, we find that the existing literature has contrast outcomes which triggers

us to find our own answers with Vietnamese economic outlook and context Moreover, although many models in these aforementioned research are used such as FGLS or PLS-SEM, we want to use OLS model to re-test prior research Therefore, this hole in the literature motivates us to conduct the research

1.3 Factors affecting the business performance of enterprises and research hypothesis

1.3.1 Age of business

Some studies suggest that the longer the companies have been working on this specific field, the better their financial results and operation effieciency given the more intensive and broad experience (Coad et al., 2013; Osunsan et al., 2015)

However, research by Loderer et al (2011), Ouimet and Zarutkskie (2014) expressed the concern that the age of enterprises can negatively affect their operation activities, making financial indicators such as ROA and ROE worse Because long-term enterprises often face difficulty in accessing modern production and business technologies and more reluctant to alter their labour structure, their competitive advantage is also lower than that of young enterprises

Age of business = the year chosen to evaluate (2019) - the year of firm’s establishment+1

1.3.2 Firm size:

more financial potential can easily build up reputation and also have many competitive advantages in trade negotiations and diversified products and services, thereby holding many opportunities to further enhance business performance

However, according to the research results of Kartikasari and Merianti (2016), Shehata et al (2017), firm size measured by total assets has a negative impact on business performance of the enterprise

1.3.3 Leverage ratio:

Leverage ratio is a group of financial measurement that indicate the level and way in which a business uses borrowed capital for business activities, thereby assessing the financial risk (risk of default) of the company

These indicators are often used for the purpose of assessing the ability of an enterprise to fulfill its financial obligations by considering factors such as loan amount, equity, EBIT,

The results of the study by Iqbal et al (2018) and those of Egbunike and Okerekeoti (2018), Zeitun and Tian (2007), Kartiningsih et al (2020) ) has shown that the financial leverage ratio has a significant impact on business performance However, some other studies show that, the more financial leverage is used, the worsen the company business result is (Simerly and Li, 2000; Thuy et al., 2015)

In this essay, we will apply Debt to Asset ratio - one of the key measurement of leverage ratio

Debt- -toAsset= Total Debt/Total Asset

1.3.4 Liquidity ratio

Liquidity ratios are an important class of financial metrics used to determine a debtor's ability to pay off current debt obligations without raising external capital.Liquidity ratios determine a company's ability to cover short-term obligations and cash flows

Common liquidity ratios include the quick ratio, current ratio, and days sales outstanding

Research results of Akenga (2017), Khidmat et al (2014) confirm that liquidity has a positive impact on enterprises's performance Accordingly, liquidity has a positive impact on corporate performance measured through ROA and ROE However, research

by Khalifa and Zurina (2013), Thuy et al (2015) shows that, if the enterprise maintains

assets , with the increase in operating costs, the profit of the business will decrease Current ratio= Current Asset /Current Liabilities

1.3.5 Asset structure

According to research by Memon et al (2012), asset structure measured through the ratio of long-term assets( fixed asset) to total assets has a negative impact on ROA This means that it has a negative impact on the performance of the business This result

is also in line with the study of Zeitun et al (2007)

Asset structure = Fixed asset/ Total Asset

1.3.6 Debt ratio

The debt ratio reflects the ability of a business to use its own capital to cover its debts The smaller this index is, the better it reflects the financial viability of the business, presenting its business performance The standard expected value of this indicator is not to exceed 1 So it is consider to have a reverse impact on business performance

Debt ratio= Total Liabilities/Total Shareholder’s Equity

CHAPTER 2 RESEARCH METHODS AND RE SEARCH MODEL

2.1 Research Design

2.1.1 Model building methods

In the essay, our team used Ordinary least square (OLS) regression analysis to build the model as learnt in Econometrics 1 course OLS is a statistical method of analysis that estimates the relationship between one or more independent variables and

a dependent variable; the method estimates the relationship by minimizing the sum of the squares in the difference between the observed and predicted values of the dependent variable configured as a straight line Accordingly, our team analyzed the relationship between dependent variables (ROA), a financial measure that displays the firm's business performance, with six independent variables: the firm's age, size, liquidity ratio, leverage ratio, assets structure and finallly debt to equity ratio 2.1.2 Data collecting methods

The selection of firm is completed randomly to ensure the variety, applicability and generalization of the factors chosen By looking for enterprise's audit financial reports through company pages and official stock websites namely Cafef, Vietstockfinance, we have chosen 6 independent variables in 2019: the firm's age, size, liquidity ratio, leverage ratio, assets structure and debt to equity ratio and continuosly rechecking the numerical statistic, the credibility of the data source is ensured

2.1.3 Data analysis methods

After the data collection phase, the team processes data using the usual Ordinary least square (OLS), based on data found to test statistical significance and model suitability based on observations as well as similar prior studies From there, we find the best results will be harnessed to serve the analysis phase During the course of the study, the group implemented the knowledge of econometrics 1, macroeconomics, finance–currency, quantitative methods and software that support STATA, Microsoft Excel Microsoft Word to synthesize, process data and finally complete this essay Our group used the Stata software to scale the Ordinary Least Squared method (OLS) to estimate the parameters of multivariate regression models :

• Use the Ramsey Reset Test check to see if the model has missed any variable

• Use Correlation test in Stata software to find the correlation matrix between variables

• Use variance inflation factor (VIF) which measures the correlation and strength of correlation between the explanatory variables in a regression model to detect multicollinearity

• Use Breusch – Pagan test for verification of variance error change of the model and Robust Standard Errors to obtain unbiased standard errors of OLS coefficients under heteroscedasticity

2.2 Research model building

2.2.1 Research data

Our group collected data of 243 firm’s sample in accordance to the top 500 Vietnam companies of many different fields in 2019 through website Profit500 The selection of firm is completed randomly to ensure the variety, applicability and generalization of the factors chosen.The data is cross-sectional and secondary data concerning a myriad of Vietnam’s firms so we opt to search mainly on the Internet By looking for enterprise's audit financial reports through company pages and official stock websites namely Cafef, Vietstockfinance, for 6 independent variables in 2019: the firm's age, size, liquidity ratio, leverage ratio, assets structure and debt to equity ratio and continuosly rechecking the numerical statistic, the credibility of the data source is ensured

Information about the variables used in the model is described below:

Ordinal

number

sign

1 ROA Return on Assets %

4 AST Structure of fixed

assets

TABLE 1: Expected signs of variables and explanation of variables table

(Source: Collected by team with STATA)

2.2.2 Theoretical model specification

We created the model below based on the secondary data from the firm’s financial report to investigate the impact of various factors on the business performance

of enterprises in Vietnam:

ROA = f (Lev, Size, AST, Age, DE, Liq)

In which:

• Lev: Leverage ratio

• Size: Firm size

• DE: Debt to equity

• Liq: Liquidity ratio

In order to investigate the association between above factors on the business performance of enterprises in Vietnam in 2019, our group used the theoretical basis It proposes a theoretical mathematical model as follows:

• Population Regression Function (PRF)

ROA= 𝛽𝑂+𝛽1+𝛽2𝐿𝑒𝑣 𝛽+ 3𝐴𝑆𝑇 + 𝛽4𝐴𝑔𝑒 + 𝛽5𝐷𝐸 + 𝛽6𝐿𝑖𝑑 + 𝑢𝑖

• Sample Regression Function (SRF)

ROA = B0^ + B1^Lev + B2^Size + B3^AST + B4^Age + B5^DE + B6Liq + ui^

2.3 Interpretation of variables in model

2 Lev Leverage ratio Total debts/Total assets

3 Size Firm size The log of the ratio of the firm's assets

4 AST Structure of fixed

assets

Fixed assets/Total assets

5 Age Firm age Age is calculated as one plus the

difference between the investigation year and the firm's birth year

6 DE Debt to equity Total debt/ Total stockholders’ equity

7 Liq Liquidity ratio Measured by the current ratio (current

assets/ current liabilities)