The imfact of transaction cost on competitiveness level, case study in vietnam at the provincial level

UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS THE VIETNAM- THE NETHERLANDS PROJECT FOR M.A PROGRAM IN DEVELOPMENT ECONOMICS THE IMPACT OF TRANSACTION COST ON COMPETITIVENESS LEVEL, CASE STUDY IN VIETNAM AT THE PROVINCIAL LEVEL "CJ so GIAO DVC fJAO T,;O TRVONG 8~1 HQC KINH TE TP.HCM By BUI QUANG HUY THUVIEN \ ) ·7 6t c:: A thesis submitted in partial fulfillment of the requirements for the degree of MASTER OF ARTS IN ECONOMICS OF DEVELOPMENT ACAMEDIC SUPERVISOR: DR NGUYEN TRQNG HOAI HO CHI MINH CITY, APRIL 2008 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 degree I certify that to the best of my knowledge and help received in preparing this thesis and all sources used, have been acknowledged in this thesis" Signature • BUI QUANG HUY • Date: April 2008 • I ACKNOWLEDGMENTS This thesis is a very significant in my life And this thesis would not have been finished without the best helps and supports from many people So, I wish to express my acknowledgments to them Firstly, I would like to express my acknowledgment and thank to my academic supervisor, Dr Nguyen Trong Hoai, for his guidance and comments through # my thesis writing period His scientific instructions make my thesis become more clearly and concise I sincerely thank Mr Nguyen Duy Khanh, who has provided me to have the data set of GDP of The General Statistics Office; and Mr Nguyen Anh Tuan i - the expert of the VCCI & VNCI for giving me help in the statistical and calculation issues of the PCI data for my thesis I am very grateful to my teachers and staff in Vietnam -Netherlands Project, Mr Dao Xuan Due - my leader and friends of mine for their help and friendship And finally, as for my family, specially my wife, I can not thank them enough for their unconditional support and love They has encouraged and supported me in during this program Ho Chi Minh City, April2008 II - - - - - - - - - - - - - ABSTRACT The Transaction cost & Competitiveness include multidimensional feature of an economic entity operating in a market economy In this thesis, therefore, different aspects of them can be explored The meaning of Transaction cost & Competitiveness for different economic entities will be determined and their I relationship will be shown on the provincial level The major determinants of Transaction cost are presented And, the main objectives of the thesis are \ firstly, to build a measurement regression model of the Competitiveness level basing on data which is collected from some resources (The VNCI & VCCI (2005-2006); General Statistics Office); and then to use that model to evaluate i t the impact of transaction cost on the Competitiveness level From which, some important policies can be given so that the transaction cost can be reduced and the provincial competitiveness in Vietnam can be increased remarkably ·- • III LIST OF ABBREVIATION Co Competitiveness GDP/head or capita • • Gross Domestic Product per head or capita TC Transaction cost HK Human Capital QI Quality of Infrastructure PM Proximity to Market EC Entry cost IC Informal charges Tc Time cost of regulatory compliance TAl Transparency and access to Information PSD Pro-activity of Provincial Leadership X Time of researching The VNCI & VCCI The Vietnam Competitiveness Initiative & Vietnam Chamber of Commerce and Industry MICI Microeconomic Competitiveness Index PIB Produit Interieur Brut (meaning GDP/head) SWF social welfare function OLS Ordinary Last Square • VND Vietnamese dong % Percent IV - TABLE OF CONTENTS CHAPTER 1: INTRODUCTION ! 1.1 Problem statement 1.2 Research objectives 1.3 Research questions: 1.4 Research hypotheses: • 1.5 Research methodology: 1.6 Research limitation: CHAPTER 2: LITERATURE REVIEW 2.1 Definitions 2.1.1 Competitiveness 2.1 Transaction costs 2.2 Theoretical backgrounds 2.2.1 The competitiveness model 10 2.2.2 Transaction cost model 14 2.2.3 Human capital, Quality of Infrastructure and Proximity to market: 17 2.3 Empirical studies 19 2.3.1 Dale B Thompson (1998) 19 2.3.2 Ning Wang (2003) 25 • 2.3.3 J Luis Guasch & Alvaro Escribano (2005) 26 2.3.4 World Bank (2006) 28 v 2.3.5 Empirical study of the USAID-funded Vietnam Competitiveness Initiative (VNCI) and the Vietnam Chamber of Commerce and Industry (VCCI) (2005-2006) 31 2.4 Chapter Remarks 31 CHAPTER 3: DATA AND ECONOMETRIC MODEL FINDINGS 34 3.1 The Econometric Design 34 3.2 The Definition of variables 35 3.2.1 Dependent Variable (Competitiveness) 35 3.2.2 Independent variable 35 3.2.3 Model specification 38 f 3.3 Data collection method 39 3.3.1 Competitiveness 40 3.3.2 The determinants of Transaction costs on the Provincial Competitiveness 40 3.3.3 Variable analysis 40 3.4 Main hypothesis: 46 3.5 Estimation of result by regression equation 46 3.6 Explanation of coefficient 48 3.7 Chapter remarks 54 CHAPTER 4: CONCLUSIONS AND POLICY IMPLICATIONS 56 4.1 Conclusions 56 4.2 Policy implications 57 REFERENCES 60 VI APPEND IX .66 APPEND IX • ••••.•• ••.•• • •• ••.•• • •• •• • ••.• 70 APPEND IX 73 APPENDIX 74 f VII LIST OF TABLES Table 2.1: Checklist for the Institutional Transaction Costs Framework 22 Table 2.2: Some Important Types of Transaction Costs 28 Table 2.3: Transactions Cost Related to the Legal and Regulatory Environment 29 Table 3.1: Variable summary 39 Table 3.2: Descriptive statistics of ratio difference of the variable between 2005-2006 41 Table 3.3: The detail result of Provincial Competitiveness Sub-Indices in 2005 43 Table 3.4: The detail result of Provincial Competitiveness Sub-Indices in 2006 44 Table 3.5: The results of regression 47 Table 3.6: The results of restricted regression SO • VIII CHAPTER 1: INTRODUCTION 1.1 Problem statement In recent years, globalization has brought new opportunity as well as challenges to both policy makers and enterprises of Vietnam In the context of globalization, regional and international organizations have been established, growing and setting new standards to influence business activities and various sectors It means that the competitiveness improvement becomes one of most important issue in the economy So, what is competitiveness? And, why does competitiveness have important role in economy? According to the Reports of the National Council for Competitiveness and Development (2006); Competitiveness, as the ability to maintain and improve the standards of living in a country, advance the business environment, strengthen employment, cohesion, environmental protection, and to constantly upgrade productivity and increase market shares in a globalize context Thus, when Vietnam becomes a member of WTO, competitiveness is the key to the further economic success Recently, Vietnam's Government focuses on • efficiency to enhance the national competitiveness of Vietnam as well as provinces That is why more and more Vietnam has become an attractive destination for foreign investors However, investors still complain about complicated procedures (vietnamnet.vn (2006)) It is because they have to spend a lot of times and costs for overlapping law, regulation, and bureaucratic official staff And, they have to lose a lot of transaction cost before they get anything So, what is • transaction cost? How is its role in modern social? And whether a reduction in transaction cost and an increase in competitiveness is a really urgent demand? Collins, Bruce M., and Frank J Fabozzi (1991) "A methodology for measuring transaction costs." Financial Analysts Journal47 (2):pp 27-36 Demsetz, Harold (1968) "The cost of transacting." Quarterly Journal of Economics 82:pp 33-53 Gardiner, B (2003), "Competitiveness Indicators for Europe - Audit, Database Construction and Analysis" Paper presented at Regional Studies Association International Conference, Pisa, April 2003 Garelli, S (1997) World The Four Fundamental Forces of Competitiveness, Competitiveness Yearbook Gujarati, D.N (1995)"Basis Econometrics" Singapore: McGraw-Hill, Inc Hall, Robert and Charles Jones (1999) "Why some countries produce so much more output per worker than others?" Quarterly Journal of 114(1):pp Economics 83-116 http://www imd.ch/wcy/approach/fondamentals.html 26.09.1997 Hoang Ngoc Nham (2007) "Exercise in Econometrics with Eviews" University of Economic Ho Chi Minh City: Part I, pp 41-44 Knack, Stephen and Philip Keefer (1995) "Institutions and economic performance: cross country tests usmg alternative institutional measures." Economics and Politics 7(3):pp 207-228 Lin, Justin and Jeffrey Nugent (1995) "Institutions and economic development." In Handbook of Development Economics, Vol 3A New York: Elsevier Science Luis, Guasch J & Escribano, A (2005) "Assessing the Impact of the Investment Climate on Productivity" http://papers.ssrn.com/so13/papers.cfm?abstract_id=755070 61 Matthews, R C (1986) "The economics of institutions and the source of growth." Economic Journal 96:pp 903-918 Nguyen Hiep & Hiroshi (2007) "The role of entry costs and heterogeneous characteristics of firms m the decision to export" http://www research.kobe-u.ac.jp/gsics-publication/gwps/2007-17 pdf Nguyen Trong Hoai (2007) "Review - Heteroskedasticity" The Fulbright Economics Teaching Program, Autumn term 4/9/2007-23112/2007 Porter, M (1990) "The Competitive Advantage of Nations" (The Free Press, New York, A Division of Macmillan 1990), pp 885 Porter, M (1998) "The mtcroeconomtc foundations of economic development" in Global Competitiveness Report, Geneva: World Economic Forum, 1998 Ramu Ramanathan (2002) "Introductory econometrics with application" 5thed, Fort Worth: Harcourt College Publishers: Chapter 8, pp 344-367 Rodrik, Dani (2000) "Institutions for high-quality growth: what they are and how to acquire them." NBER Working Paper 7540 Stoll, Hans and Robert Whaley (1983) "Transaction costs and the small firm effect." Journal of Financial Economics 12:pp 57-79 The Competitiveness Institute (2007) "The cluster practitioners network" http://www.competitiveness.org/article/articleview/774, 15 - Nov - 2007 The Competitiveness of nations (2004) "Economic Growth in the ECE Region" http://www.unece.org/ead/sernlsem2004/papers/Fagerberg.pdf The Free Dictionary (2007) "Financial dictionary - Transaction cost" http://encyclopedia thefreedictionary com/transaction +cost 62 I I global 1!he I I I development finance (2006) report http://pgpblog.worldbank.org/node?page=25 I I the International Institute for Management Development (IMD), The World I I I Competitiveness Yearbook http://www.imd.ch/research/centers/wcc/research_methodology.cfm I I ifhe National Competitiveness Council (2007), "Annual Competitiveness Report 2001 " http://www forfas ie/ncc/reports/ncc _annual_01 I a pproach.htm#2 :The Reports of the National Council for Competitiveness and Development.(2006) "The 2005 competitiveness report, executive summary" http://www google.com vn/search ?hl=vi&q=% 22ability+to+maintain+an d+improve+the+standards+of+living+in+a+country%22&meta= :The Role of Intellectual Property System in the use of ICTs by SMEs (2001) I I http://www wipo.int/sme/en/documents/pdf/codi_2 pdf The socio-economic & enviromental research institute (2002) "Economic briefing to the Penang State Government" http://www.seri.com.my/oldsite/EconBrief/EconBrief2002-08.PDF The Vietnamnet.vn (2006) "Prices m 2007: up or down?" http://english vietnamnet vn/biz/2007 /01/651517/ The Vietnamnet.vn (2006) "Thu tt,lc phi~n ha, hanh h 10% leading to Maintain H0 It means that there is no heteroscedasticity in restricted model (Nguyen Trong Hoai (2007)) Table Appendix 2.3: The results of multicollinearity Test of restricted regression Restriced model QI PM TC PSD Rii 0.054845 0.025265 0.451585 0.043284 VIF=l/(1- Rii 2) 1.058028 1.02592 1.823437 1.045242 1NIF 0.945155 0.974735 0.548415 0.956716 Source: Author's calculation Table Appendix 2.3 show that Rij • < Ru (0.604688) and, thus Variance - Inflation Factor (VIF) is used to test the problem of multicollinearity VIF = - (1 - ru2) All calculated VIF is smaller than 10, and it means that there 1s no multicollinearity arising in the restricted model (Gujarati, 1995) 72 APPENDIX3 Use Wald test to choice model the restricted model or the unrestricted model Table Appendix 3: The results of Wald test Wald Test: Equation: LOG(CO) Test Statistic F-statistic Chi-square Value df Probability 0.669570 2.678279 (4, 74) 0.6151 0.6130 Value Std Err 0.133387 -0.161014 0.087189 -0.043971 0.090620 0.314218 0.235856 0.266694 Null Hypothesis Summary: Normalized Restriction(= 0) C(2) • C(5) C(6) C(8) Restrictions are linear in coefficients Source: AuJhor's calculation Hypothesis H0 : a 2= a = a = a = (Use restricted model) Hypothesis H 1: At least a ora ora or as=/= (Use unrestricted model) because P (F > 0.669570) = 0.6151> 0.05 leading to maintain Ho It means that restricted model can be used (Hoang Ngoc Nham, 2007, Part I, pp 41-44) 73 APPENDIX4 Chart Appendix 4.1: The Provincial Competitiveness Index ranking in 2005 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 76.82 70 65.65.029468.56 C::::::::::;::::::::::::;:::::::::::::::::::::::::::::::::::::::::::::::::::J 64.14 c:===============:::::::J 61.62.3993 C::================:::~ 61.29 c===============~ 61.13 C::::=~=============::=~ 61.09 C::::::::::::::::::::::::::::::::::::::::::::====::::l 60.60 c===============:::J 60.44 c===============:=J C::=========:::::;:::::::::::::::::=J 59.60.7023 r==============:::::J 59.59.6516 c==============:=:J t::=~=============:::~ 59.40 r=============:=:J 59.6155 c==============::J 58 ~==============:::! 58.49 58.06 t::::::::::;::::::::::::::::::::::::::::::::::::::::::::::=J 57.44 ~=============:::J 56.77 c============~ 56.25 c============:=:J 55.89 c============::::J 55 63 ~============:::~ 54.08 53.97 r===========:=:J 53.53.0376 r========:::::::::::::::::J51.67 c=========:J47.49.9950.2990 t:::=======:::::J47.06 P:='3· lE,•i:· ·•·:I·=: : :==:: J 45.45.7997 t: •·: Z•· Z·•: : ;: : : : : : : !41 : : : 2:J144.45 38.81 ~ Binh Duong Da Nang Vinh Long Ben Tre Vinh Phuc Dong Nai Quang Ninh Thai Binh Can Tho Kien Giang Quang Tri Binh Dinh Phu Yen HaNoi Hung Yen Quang Nam HCM C NgheAn HaiPhong BRVT Dong Thap LongAn Bac Ninh Tay Ninh TT-Hue Tra Vinh Tien Giang Soc Trang Khanh Hoa Binh Thuan Ha Nam Quang B inh HaTinh An Giang Thanh Hoa Quang Ngai BinhPhuoc Nam Dinh Hai Duong Ninh Thuan ·- _ ·-~ -· ~ ~================::=~ ~=~============:::::::J60.32 ~=============:=:J ~===========::::J ~=========::::;::::::J ~==========:=~ ~========:::::J t:::=~=====:::J NinhBinh} Ha Tay Source: The VNCI & VCCI 2005 74 - ~ Chart Appendix 4.2: The Provincial Competitiveness Index ranking in 2006 ·- 30 40 50 60 70 75.39 66.49 Vinh Long 64.67 Dong Nai 64.64 Lao cai HCMC 64.11 63.39 Vinh Phuc An Giang Can Tho Dong Thap 61.27 60.45 58.30 58.13 Yen Bai 56.85 Tra Vinh Quang Nam Bac Giang Hung Yen BRVT Ninh Sinh Soc Trang 56.83 56.42 55.99 55.97 55.95 55.82 55.34 Khanh Hoa Phu Yen Bac Ninh Nghe An Phu Tho 55.33 54.93 54.79 54.43 54.42 Quang Ninh Ben Tre Gia Lai Thai Nguyen Hai ~ong 52.70 Binh Thuan 52.66 53.25 53.11 53.06 52.71 Hau Giang Lam Dong 52.25 Tten Giang 52.18 52.61 Quang Tri 52 18 Oak Lak 51 65 Kien Giang 51 27 Thai Sinh TT-Hue Long An HaNoi 50.54 50.53 50.40 50.34 Hoa Sinh HaiPhong Lang Son Nam Dinh Bac Kan Ha Giang Tay Ninh Quang Sinh Ha Nam 50.17 49.98 49.64 48.89 48.73 48.49 48.35 47.90 47.27 Tuyen Quang 90 B~h~ong ~~76.~23-Da Nang Binh Dinh • 80 47.21 46.63 Cao Bang Sinh Phuoc 46.29 Ninh Thuan 45.82 Thanh Hoa Son La Quang Ngai Ca l\llau Ha Tinh Sac Lieu Dien Bien Kon Tum Ha Tay 45.30 45.22 44.20 43.99 €~~~ 42.35 42.89 42.28 41.38 40.73 Dak Nong Lai Chau Weighted PCI Source: The VNCI & VCCI 2006 • 75 ... definition of transaction cost by Arrow (1969 p.48) "transaction costs are the costs of running the economic system" Both definitions imply that transaction costs are costs that it includes the. .. the basic concept of transaction cost that are those costs of buying and selling in markets which are not passed on in the transaction According to Ronald Coase (1937.p.388), the definition of. .. of transaction cost introduced as "cost of using the price mechanism" is based on the notion of the costliness of exchange and the recognition of information as scarce and valuable asset Another