Labor Productivity of Vietnamese Manufacturing SMEs

TRIEU DOAN XUAN HOA International University, Vietnam National University HCMC - tdxuanhoa@gmail.com PHAN THUY KIEU International University, Vietnam National University HCMC - phanthuyk

Labor Productivity

of Vietnamese Manufacturing SMEs

NGUYEN VAN PHUONG International University, Vietnam National University HCMC - nvphuong@hcm.edu.vn

TRIEU DOAN XUAN HOA International University, Vietnam National University HCMC - tdxuanhoa@gmail.com

PHAN THUY KIEU International University, Vietnam National University HCMC - phanthuykieu2006@gmail.com

Abstract

This study evaluates the impact of technology innovation, employee characteristics, and managerial and trading strategies on labor productivity of Vietnamese small medium enterprises (SMEs) by examining longitudinal data of over 12,500 samples during the period from 2005 to 2013 The results show that application technology has a positive impact on labor productivity Additionally, the study illustrates the analysis of some labor characteristics, as well as the critical role of high-educated employees in overall firm productivity The effectiveness of some human resource policies relating to compensation and motivation has been confirmed The exporting firms are more likely to gain higher productivity than non-exporting ones

Keywords: labor productivity; technology; human resource management; foreign trading

1 Introduction

In the literature on the determining factors in productivity growth at the firm level has investigated in many countries For example, Hall et al (2012) find that research & development (R&D) and information and communication technology (ICT) investment have a strong impact on innovation and productivity in Italian manufacturing firms In terms of firm size, Hall et al (2009) show that under the pressure of international competition, Italian SMEs with enhancing R&D investment and processing innovation activities have a higher productivity growth Besides, Love and Roper (2015) summarised and synthesised the evidence from the interaction of SME innovation and exporting having a significant impact on productivity growth Additionally, Mohnen and Hall (2013) reviewed previous studies to distinguish the effects of technological and non-technological innovations on the productivity at the firm level

In the past decade, the studies on productivity of SMEs in Vietnam have attracted many authors Specifically, many papers have explored the relationship between the trade liberalization and firm performance after Vietnam pursued the economic integration policies and achieved many bilateral trade agreements and multinational trade agreements such as ASEAN Free Trade Area (AFTA), World Trade Organization (WTO) and others Ha and Kiyota (2014) illustrated that there was a significant relationship between trade liberalization and aggregate productivity growth in manufacturing firms in Vietnam Besides, Rand and Torm (2012) utilized the unique panel data of SMEs in Vietnam and found that firms having a business license gained the better gross profit They were more likely to be compliant with regulations and to consider the investment in human capital Doing so enabled firms to improve the productivity and achieve stable development

The number of SMEs raised rapidly in the past few years in Vietnam, which accounted for 97% the total number of enterprises in the country in 2015 SMEs play a vital role in the national economy, including vacancy creation, social resources for investment and development encouragement, poverty reduction in regions and provinces, and the growth of large enterprises by participating into

a value chain and supporting industries In the new economic circumstances, SMEs are able to respond and adapt to changes and growth in needs of consumers and create more opportunities for women, minor ethnics, as well as facilitate operation in under-developed areas with high rate of unemployment According to General Statistics Office of Vietnam, every year, SMEs take account for more than 90% of the number of Vietnamese enterprises, contributing about 40% GDP of the country and using over 50% Vietnamese labor force

The size of these firms enables SMEs to adapt the economic changes and absorb the development

of technologies rapidly However, this feature also makes SMEs more vulnerable with economic fluctuation and prevents firms to access many resources to upgrade their technologies Despite accounting for large proportion of the number of companies in the Vietnamese economy, SMEs have certain weaknesses in capital, technology, management capability, research, and development (R&D) and experiences in approaching new markets and widen their current market

Realizing the significance of the enhancement productivity and contribution of SMEs and combining advantages of previous studies, this paper extends determining factors affecting the productivity By utilizing a unique panel data of Vietnamese SMEs during the period from 2005 to

2013, we investigate the impacts of capital investment, technology and innovation, workplace practices, human resource management practices, and foreign trading activities on the firm labor productivity Specifically, the paper addresses four key points for SMEs in Vietnam: (1) how to gain more benefits from implementing ICT, facilitating technology innovation, investing in R&D; (2) how

to highlight the role of the interplay between labor characteristics and labor productivity; (3) how to implement human resource management policies effectively; and (4) whether exporting firms perform better than non-exporting ones

2 Factors underlying labor productivity

A change in productivity can come from either the internal resources or external factors that affect the market interactions Syverson (2010) describes the theory behind these factors and divides them into two categories: internal and external factors The internal factors regard the firm choices while the external factors regard the market environment interactions, such as competition The external factors are mostly relevant to market and policy perspective Politicians can introduce new laws that change the dynamics of the labor market or facilitate more competitive environment Internal factors, on the other hand, are interesting to a managerial perspective since they can be influenced

by the managers’ decisions and interest Firm level productivity is a complex term, which is decided

by both internal and external factors and the interactions among these factors Existing studies have concentrated on these factors to find a better solution for improving the firm productivity in both terms of labor and capital (Syverson (2010), Bartel and Lichternber (1987), Lentz and Mortensen (2008), Fernandes (2008)) In this paper, we will highlight the range of different factors and relationships that affect labor productivity Thus, the theoretical framework and productivity drivers will be described in more details

2.1 Technology and innovation

Product innovation can raise a firm’s revenue if it results in a higher quality product with the same level of inputs, or produces the equivalent product with a lower amount of inputs Bartel and Lichternber (1987) suggested that one of the main reasons behind the information technology (IT)

to enhance productivity growth was through more customized products, which added more value to the product Similarly, Lentz and Mortensen (2008) found a strong evidence that there was a reallocation of labor in the most innovative firms However, the impact of using IT on productivity has been analysed but still remained controversial issues For instance, Bailey and Gordon (1988) found an insignificant impact of computers on the trend of aggregate productivity growth Furthermore, Oliner and Sichel (1994) argued that the investment in IT could be expected to contribute a small percentage of the capital stock Due to the ability to bridge gaps of information,

which allows companies to access information related to markets and business strategies Therefore,

we are expecting that applying ICT has a positive impact on labor productivity:

H1: The technology and innovation factors that indicated by the penetration of the Internet has positive relationship to the labor productivity

H2: The technology and innovation factors that indicated by the share of workers using computers has positive relationship to the level of labor productivity

Examining on Italian SMEs, Hall et al (2009) concluded that investment on equipment and R&D impact positively on firm productivity, especially process innovation Research on the development

of advanced technology in developing countries also revealed that the most effective way of acquiring technological approach takes the form of continuous and incremental modification to adapt technologies to fit specific situations or production conditions (Bell & Pavitt, 1995; Dosi, 1988) Ability

to gain advantage of new technologies fundamentally depends on the level of investment in R&D and the workforce improvement and skills enhancement via on-job-training programs Supporting by Cohen and Levinthal (1989), Lucas (1993), Mody (1995), and Audretsch (1995), the productivity may depend on investment in R&D activities and using imported machineries in production

H3: The investing activities on R&D increases labor productivity

H4: The using imported machine in production have a positive impact on labor productivity

2.2 Organizational practices

In the theory of human resource management, managers are able to increase the level of firm productivity either through their managerial talent or through the quality of their practices (Syverson, 2010) However, the research within this field has previously been subject to data limitations because it is challenging to find a quantifiable measure of the somewhat abstract term of managerial talent Some previous studies have found a positive connection between productivity and

a variety of different variables such as: the proportion of managers and the number of years of experiences (Fernandes, 2008), the age of the executive (Bertrand et al., 2003), and “best practice” management (Bloom & van Reenen, 2006) Taking advantage of these previous studies, we develop the following hypothesis:

H5: The proportion of managers increases level of labor productivity

In reality, employers tend to prefer male workers due to the labor policies for women such as maternal compensations and healthcare policies In terms of natural, unqualified female workers often work less effectively than male ones as attributed to psychological and health factors According

to the inspection of Vietnam General Confederation of Labor in 2012, there were more female labors worked at unskilled positions, whereas there were more male labors taking managing positions The Vice President of Vietnam General Confederation of Labor pointed out that female labors had fewer opportunities for being trained than male labor did so the productivity of female labor was lower

compared to that of male labors Due to the maternity period, high rate of female workers has also led companies to have more backup workers, which reduces the overall productivity of firms (Arvanitis, 2007) Moreover, Prpic (2002) confirms the average productivity of female is less than their counterparts’ male in five years Based on the studies, we propose hypothesis 6:

H6: The proportion of female workers lowers a level of labor productivity

The results of previous studies show a positive relationship between high-skilled workers and firm productivity (Audretsch, 1995; Cohen & Levinthal, 1989) In addition, Black and Lynch (2001) found a practical relationship between the educational levels of workers and productivity Therefore, this paper investigates whether high-educated employees work more productivity than less-educated ones or not Hypothesis 7 was proposed:

H7: The proportion of high-educated employees increases a level of labor productivity

Beside of the role in the management board and skilled employees, unskilled workers are supposed to correlate with the firm performance (Westhead & Storey, 1996; Rand & Torm, 2012) Although unskilled labors are associated directly to producing activities, in a competitive market, SMEs have to deal with how to recruit skilled labors without paying high wages Indeed, a firm with many unskilled workers is very difficult to improve the labor productivity Therefore, we develop the following hypothesis:

H8: The proportion of unskilled labor lowers a level of labor productivity

2.3 Human resource management practices

In some studies, the presence of unions can have a positive impact on labor productivity Malcomson (1983) has emphasized the importance to the union in workplace practices The labor union contributes to labor productivity by reducing operation cost of introducing new workplace practices, providing efficient collective voice for workers in negotiation with management boards Alternatively, the negative effect of labor union on the use of merit-based compensation could reduce the labor productivity (Clark, 1984) In fact, the role of the labor union in Vietnam is not like many developed countries The union has not really been on behalf of labors to negotiate the compensations, working environment and social benefits Within this context, we want to examine whether the unionization contributes to improve the labor firm productivity or not Hypothesis was proposed:

H9: Unionization increases labor productivity

Under the review of Black (2001), the amount of labor compensations have a significant effect on productivity Particularly, the companies, which have adopted self-evaluate and incentive-based compensation policies, have substantially higher productivity than similar establishments with more traditional labor-management (Arvanitis, 2005) Some approaches for increasing firm productivity, included establishing internal regulations, establishing quality requirement for goods produced,

applying policies for increasing loyalty of employees, and monitoring the quality control system, will

be used to test the validity of these policies, thus we expect positive relationship between these factors and labor productivity

H10: Self-evaluate and incentive-based compensation policies, and motivation policies increase labor productivity

2.4 Trading policies

Bernard and Jensen (2007) discovered a causal relationship from productivity to exporting but not the other way around Investigating the role of exporting on productivity for Danish companies, Christiansen et al (2004) found a positive relationship between these two factors Moreover, Smeets and Warzynski (2013) further investigated the role of imports/exports on firm productivity using Danish data They found the positive relationship between trading activity and productivity Fernandes (2008) analysing Bangladesh enterprises proved that exporting firms achieved significantly higher productivity than firms sold only in the domestic market Martin Andersson et

al (2008) advocated the effect of trading on firm productivity by showing that firms that both export and import activities were more productive than firms only did business in either exporting or importing José Farinas et al (2010) come into the same conclusion like Antras and Helpman (2003), which has supported that high-productivity companies source intermediate inputs from international markets, whereas low-productivity companies acquire them domestically Take advantages of previous studies, we developed the following hypothesis:

H11: Firms participating in international trade gain higher labor productivity

3 Methodology

3.1 Data sample

The paper uses data from the quantitative survey conducted by Central Institute for Economic Management (CIEM), the Institute of Labor Science and Social Affairs (ILSSA) of the Ministry of Labor, Invalid and Social Affair (MOLISA) and the Department of Economics (DOE) of University of Copenhagen together with the Royal Embassy of Denmark in Viet Nam The survey was constructed based upon the interview more than 4,500 small and medium sized of non-state manufacturing enterprises in Vietnam during the period from 2005 to 2013 in ten representative provinces, including Ho Chi Minh City, Ha Noi, Hai Phong, Ha Tay, Quang Nam, Phu Tho, Nghe An, Khanh Hoa, Lam Dong, and Long An The sample size in this source was divided respectively by ownership categories to ensure that all form of non-state enterprises had been carried out including, officially registered households, private firms, cooperatives, limited liability companies and joint stock enterprises This study focuses on a large number of small and medium manufacturing enterprises

in Vietnam to provide the overall view of both formal and informal SME dynamics in the Vietnamese economy According to the definition of a micro, small, medium and a large scale enterprise adapted

from the current Vietnamese Government definitions (Decree No 56/2009/ND-CP of The Government of Socialist Republic of Vietnam), the data excluded all firms having more than 300 workers in this study

3.2 Measuring and descriptive statistical views

Labor productivity: The dependent variable is measured by taking the logarithms of the ratio of firm value-added and the total number of full-time workers at the end of the year, which is the similar measure of labor productivity reported by Black and Lynch (2001)

Control variables: Capital factor was measured by taking the logarithms of the ratio of total physical assets of end-year in accounting value (value added) over the total number of full-time workers in a firm end-year, which is the similar measure of labor productivity reported by most of the previous published such as Black and Lynch (2001), Fernandes (2008) Material factor was measured by taking the logarithms of the ratio of difference of Inventories of raw materials and unfinished products ending-year to beginning-year in accounting value over the total number of full-time workers in a firm end-year, which is the similar measure of labor productivity reported by Black and Lynch (2001) On real equivalent values, mean of value-added per worker of Vietnamese SMEs during the period of time from 2005 to 2013 was VND 33,806,893 The average value of capital investment per worker of Vietnamese SMEs during the studied period was VND 112,947,682 The value of materials per worker had the average of VND 60,616,354

In terms of ICT innovation, we examine the effect of ICT on labor productivity via the penetration and diffusion of the Internet in the workplace environment and the ratio of employees using computers in the firm Extending from the investigation of Black and Lynch (2001) and Arvanitis (2007), Internet dummy variable is assigned a score of 1 if a firm had the Internet connection and a 0-score for otherwise Due to the unavailability of information in 2005, we assumed that firms using email as using the Internet in the workplace In data surveyed from 2005 to 2013, there was an increase in ICT penetration and diffusion In 2005, there was only 5.23% of Vietnamese SMEs having Internet connection However, the number of SMEs using the Internet in their workplaces increased

to 26.23% in 2009 and reached around 33% in the next two years and maintained the same level in

2013 The sharing of workers using Computers over total labors in the firm was estimated by dividing the number of computers in the firm by the total number of full-time workers in this firm The percentage of SMEs labors using computer in work fluctuated from 7.9% to 10.7% during the period from 2007 to 2013 Inspired by Fernandes (2008), we created R&D_dummy variable by assigning a score of 1 if a firm invested in R&D activities, and 0-score for otherwise Using imported machines variable was created by assigning a score of 1 if a firm used imported machine in production and a score of 0 for otherwise The amount of SMEs participated in R&D activities played a small ratio over the number of Vietnamese SMEs The percentage of firms invested in R&D activities was only around 1%-2% percent, after which percentage levelled off and remained relatively static over the next eight years, but the percentage of firms using imported machinery changed swiftly During the period

2005 – 2007, the percentage of SMEs using imported tools for production was 21.2%, then it surged

to 57.3% in 2009 and 84.8% in 2013

Following Black and Lynch (2001), we conducted four variables to examine the labor characteristics of the firm; they are the sharing of managers (% Managers), female employees (% Female employees), undergraduate and higher (% high-educated employees), and unskilled workers (% unskilled workers) The labor sector within SMEs did not change much in the ratio of female employees and high-educated labor sector One of the considerably positive signs for SMEs was that the percentage of unskilled labor reduced from 48.5% in 2005 to 24.9% in 2013 Conversely, there was a tremendous rise in the percentage of managers over the number of full-time employees over the observed period The share of managers in SMEs increased sharply from 10% in 2005 to 26% in

2007, and continued rising gradually to 32% in 2013

For the term of Human resource management practices, similar to the analyses of Chadwick et

al (2013), and Datta et al (2005), Unionization variable was created by assigning a score of 1 if a firm had any employees being covered under a collective bargaining agreement and 0-score for otherwise Labor union organizations in Vietnamese SMEs was considerably weak, which was only about 9.2% SMEs having labor unions Negotiate a salary level to individuals variable was assigned

a score of 1 if a firm applies policy of setting salary level based on perceive of employees about their capability, given 0-score for otherwise Raise productivity by a compensation variable was created by assigning a score of 1 if a firm applying incentive-based compensation policy, and assigned 0-score for otherwise If a firm raised labor productivity though establishing internal regulations, or establishing quality requirement for goods produced, or applying policies for increasing loyalty of employees, or have supervisor’s checking, then raise productivity variable by setting rules, requirements to ensure products’ quality, raise workers’ loyalty, and supervisor controlling variables would be assigned a score of 1, respectively, otherwise assigned 0-score There were 69% of labors working in SMEs negotiated with employers to set the appropriate wages upon to their capability Firms also focused on enhancing their labor productivity by applying rewarding policies, setting internal regulations and requirement of products’ quality, and raise the loyalty of employees Firm participating in foreign trading activities were measured via two variables importing value/worker and Exporting value/worker, which are the proportion of corresponding total value of importing and exporting in VND 1,000,000,000 over the total number of full-time workers in a firm end-year On average, in 2005, the value of importing and exporting activities per worker in SMEs was VND 5,734,300 and VND 8,510,800, respectively From 2007 to 2009, the means of importing value of SMEs were larger than these of exporting value, these figures declined remarkably to VND 4,152,000 and VND 1,611,000 in 2007, respectively, then soared to VND 9,281,500 and VND 6,625,900 in 2009, respectively In the beginning of 2013, foreign trading values reached VND 8,073,300 in importing and VND 9,858,600 in exporting

3.3 Procedure

This study was conducted in two sections In the first one, the panel data during the period from

2005 to 2013 will be examined for the effect of technology innovation, labor characteristics, unionization, human resource policies, and trading activities on firm productivity by analysing the results of the fixed effect model (FEM) We also implemented a Hausman test to confirm that FEM is the more appropriate method than random effects model in our panel data Furthermore, because the unavailability of information, the first section will not examine raise productivity by compensation variable, Raise productivity by setting rules variable, Set requirement of products’ quality variable, Raise workers’ loyalty variable, and Supervisor controlling variable in terms of Human resource management practices The second section examines the impact of all terms in Human resource management practices and other exploratory variables to firm labor productivity

by applying OLS method analysing data in 2011 and 2013 with a dummy variable for year 2011 (as the base) All variables and models are tested and applied econometrical techniques to control biases

if occur

Table 10

Panel analysis result

2005-2013 2011-2013

(1.451) (0.0067) (0.0063)

(1.323) (0.0093) (0.0105) Technology

(0.422) (0.0211) (0.0197)

(0.104) (0.0626) (0.0853)

(0.498) (0.0129) (0.0177) Labor characteristics

(0.217) (0.0394) (0.0442)

(0.267) (0.0399) (0.0277)

Variable Obs Mean/SD FEM OLS

(0.074) (0.1168) (0.1291)

(0.293) (0.0196) (0.0345) Human resource policies

(0.290) (0.0439) (0.0302)

(0.462) (0.0161) (0.0174)

Foreign trading activities

(0.084) (0.1306) (0.1352)

(0.095) (0.1294) (0.1306)

(.)

0.0192)

(0.1042) (0.1298)

Notes: Standard errors in parentheses * p<.10, ** p<.05, *** p<.01

4 Results and discussion

4.1 Technology and innovation

As measure for technology applications, Using Internet and Firm labor productivity are positively related (β = 0.2722; p < 0.01); this means using Internet in operations, firms could increase their labor productivity by 27.22% Development of information technology systems significantly supports operation management and internal controls so that business activities become smoother, easier,