Effect of rd on the productivity of construction enterprises in vietnam

UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE ~~ETHERLANDS VIETNAM -NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS EFFECT OF R&D ON THE PRODUCTIVITY OF CONSTRUCTION ENTERPRISES IN VIETNAM IN PARTIAL FULFILMENT OF THE REQUIREMENT FOR THE DEGREE OF MASTER OF ARTS IN DEVELOPMENT ECONOMICS BY DO KHAC THANH • SUPERVISOR Dr NGUYEN HUU DUNG Ho Chi Minh City, December 2011 - CERTIFICATION I certify that the substance of this thesis has not already been submitted for any degree and is not being currently submitted for any other degrees I also certify that, to the best of my knowledge, any help received in preparing this thesis, and all sources used, have been acknowledged in the thesis Signature Do Khac Thanh • • - - ACKNOWLEDGMENT I am indebted to numerous individuals but I cannot name them here all First of all, I would like to thank all the teachers and staff of the Project for their valuable suggestion, good learning facilities and warm attitudes during my school time My deepest gratitude goes to my supervisors, Dr Nguyen Hu Dung, and Dr Nguyen Trong Hoai for their valuable comments and instructions concerning my thesis Finally, I would like to thank my friends, my family who have been always behind me, given me moral support, encouragement, and sympathy that have helped me gain more strength to complete this work • ABSTRACT The study aims to examine the link and relationship between productivity of construction enterprises in Vietnam and R&D expenditure R&D capital is measured in a simple way by using available R&D expenditure in the survey and ignoring the accumulation of R&D expenditure in the past, its deflation and obsolescence A sample of 264 construction firms was drawn from the data set of Vietnam Enterprise Survey conducted by the General Statistics Office in 2005 for analysis A regression model is estimated based on the CobbDouglas production function and the R&D capital model with three main independent variables: physical capital, dummy and R&D capital, and labor variables reflecting type of ownership and size of labor Research findings show that a positive and significant impact of R&D expenditure on productivity is found with the elasticity of productivity with respect to R&D expenditure per labor is about 0.1 Moreover, the effects of physical capital and labor on productivity are also positively and statistically significant The elasticity of productivity with respect to physical capital per labor and total labor are around 0.35 and 0.15, respectively ACRONYMS EU European Union CBO Congressional Budget Office GDP Gross Domestic Product MFP Multifactor Productivity MOST Ministry of Science and Technology NACE Classification of Economic Activities in the European Community NISTPASS National Institute for Science and Technology Policy & Strategy Studies OECD Organization for Economic Cooperation and Development OSTP Office of Science and Technology Policy R&D Research & Development SME Small and Medium Enterprise YES Vietnam Enterprise Survey VND Vietnamese Dong n.d No Date VIF Variance Inflation Factors - - - CHAPTER INTRODUCTION 1.1 RATIONALE OF THE RESEARCH Research and Development (R&D) is widely regarded as the core of technological advance, and innovative capacity of firms are reliably indicated by levels and rates of R&D expenditures growth Countries belonging to the Organization for Economic Cooperation and Development (OECD) spend significant amounts on R&D activities Progress of technology has a quite central role in the modem economy today It contributes importantly to growth of economy and is a key factor to determine the competitiveness of firms in both national and international marketplace On average, OECD countries have spent more than percent of GDP on annual public and private R&D investments during the last two decades (OSTP 1, 1997) Those stocks of knowledge can be increased by formal investment in R&D activities In the public and private sectors, the allocation of resources toward the investment to generate new knowledge must be decided carefully There are many sources for productivity improvements, but one strategy for enhancing productivity growth which is widely acknowledged is increasing the stock of knowledge Following the assessment of the Ministry of Industry is that the labor currently lack of necessary skills to support technological upgrading and there are very little R&D activities appropriate for such upgrading Indeed, only a small fraction of the country's R&D scientists and engineers are working in industrial enterprises The rest are working in national centers for R&D, ministries and government agencies, universities or other institutions that perform research Another reason is the most important reason for a little investment in R&D activities of Vietnamese enterprises may be their limitations in financial resources Moreover, that there is little market-oriented relationship between firms, R&D institutions and universities (Bezanson et al., 2000) If R&D has any relationship with productivity of construction finns, the case of Vietnam will increase a doubt Specially, Role of knowledge or technological capital for productivity growth is emphasized by some empirical research at enterprise level Those studies only focused on investment of R&D and appeared that in many countries It proved that R&D has a contribution to productivity growth significantly, pm1icularly in the cross sectional dimension However, the conclusion is not suitable for Vietnam Those R&D activities have not been taken into consideration for much investment in Vietnam, especially in business sector While most OECD countries and China devoted around 2% of their GDP to R&D activities, Vietnam spent only 0.5% of its GDP for this purpose Neve11heless, the technology level across the SME sector in Vietnam is generally assessed as being two, three or even more times lower than both world and regional levels (Bezanson et al., 2000) R&D expenditure of Vietnamese enterprises accounted for only about 20% of the total R&D expenditure of the country in 2002 Whereas, according to OSTP (1997), companies in OECD countries finance more than 50% of all R&D expenditure and they conduct two-thirds of all R&D activities SMEs make up the vast majority of registered companies in Vietnam, namely 96.5% 1.2 OBJECTIVE OF THE RESEARCH (R&D) investment has been regarded as an important factor in the improvement of productivity levels of firms For exainple, the average annual rates ofR&D expenditure relative to gross domestic product in the US and Japan are around 2.64 per cent and 3.04 per cent, respectively (National Science Council, 2001: 195) This has been proved true by many empirical studies for many countries but neglected for Vietnainese case From 1960s, investment of R&D has played an important role in improvement of productivity levels Creation and accumulation of that knowledge is rationale factors via the R&D efforts of a firm or industry , this will be available to the production process or product innovation (Mansfield, 1965; 1969) Those investments will lead to promotion of nationwide economic development Therefore, many the advanced countries based on this rationale to invest expenditure on R&D activities This study sets out to estimate the relationship between R&D activities and productivity growth of construction firms in Vietnam to answer the following questions: Is there a positive relationship between R&D and productivity m Vietnamese construction firms? What should those finns to increase their productivities? and What policies should be recommended to support them in improving productivity by increasing R&D expenditure? 1.3 RESEARCH METHODOLOGY The thesis used such methods as descriptive statistics, quantitative analysis and OLS regression to deal with the research questions The thesis studied the impacts of R&D expenditure to productivity growth of Vietnamese construction firms by using data from the Vietnam Enterprise Survey 2005 1.4 Thesis organization There are five chapters in this thesis Introduction is the first chapter is which presents the rationale of the research, the objective of the research, research hypothesis as well as methodology, and the thesis structure Literature Review is the next one is This chapter examines theories and empirical studies relating to the impact of R&D expenditure on productivity growth of construction firms R&D activities of tirms are discussed in the chapter 3: Overview of R&D and firm performance in Vietnam • Chapter 4: Research Jvfethodology focuses on model specification and variables choices justification Chapter is the practical results are analyzed via descriptive statistics and regression analysis: Result Analysis Finally, conclusions and policy recommendations are provided in Conclusions and Recommendations chapter CHATPER2 LITERATURE REVIEW This chapter will make sure that the research is conducted based on a scientific background Through this chapter, impact of R&D expenditure on productivity growth is generally figured out on the basis of economic theories and empirical studies The chapter will be presented in four main parts In the part one, key concepts related to the topic such as R&D, productivity as well as construction will be discussed Economic theories supporting for the study are found out and stated in the next part At the end of this part, a research model which represents factors affecting productivity is suggested Finally, there will have empirical studies regarding effect of R&D on productivity growth of construction firms in some countries are discussed in the last part 2.1 CONCEPTS 2.1.1 Research and experimental development (R&D) R&D has been divided into three categories: basic research, applied research and experimental development OECD (1994) defined that "Research and experimental development (R&D) comprise creative work undertaken on a systematic basis in order to increase the stock of knowledge, including knowledge of man, culture and society, and the use of this stock of knowledge to devise new applications" >- Experimental development is defined as systematic work that usmg current knowledge That current knowledge gained from practical and research experience These research and experience is directed producing new products and devices, materials; installing new processes, systems or services; or substantially improving at the future in which they has been produced or installed in the past o Basic research is an experimental or theoretical jobs which ensured not to gain benefits in long-term However, they must be advance the state of knowledge (CBO, 2005) In those researches, characteristics, structures and relationships are analyzed with a view to test and formulate theories and laws Moreover, outcome of basic research are not for buy or sale, however usually for publishing in usage of interested people scientific journals Sometimes, it may be kept secret for security reasons o Applied research is also original work that is unde1iaken to acquire new knowledge with a specific application in view Its' aims are determining possible uses for results of basic research or determining new ways to achieve specific objectives Results of applied research are mainly valid for a limited number of products, operations, methods or systems The knowledge or information resulting from applied research is often applied for patent or may be kept secret Applied research is the investigation that is performed for the development of government policy Basic research is the theoretical investigation of factors which have influence on regional variations in economic growth Experimental development is the development of operational models based on laws with the purpose of modifying regional variations The measurement of such two kinds of R&D expenditures is so complicated with many costs should be included or excluded "Expenditure on R&D may be made within the statistical unit or outside it" (OECD, 1994, page 20) However, in this thesis, R&D expenditure used to examine its effects on productivity growth of Vietnamese construction firms is available in the Vietnam Enterprise Survey There are different meanings in different contexts for the word "innovation" depending on certain objectives of measurement or analysis Scientific and technological innovation is known as the transformation of an idea into a new or improved product, a new or improved operational process or a new approach toward a social service New products or processes and significant technological changes in products or processes are considered as technological innovations An innovation is performed if it is brought out to the market or used in a production process Thus, innovations include dozens of activities relating to science, technology, organization, finance and commerce R&D is one of such activities and it may be done at different stages of the innovation process 2• R&D can act as the origin of See Appendix for explanation of innovation process 10 Table 5.3: Correlation matrix from the variables in the function ~ ~ >-