The effect of trade openness on the profitability of vietnam’s food processing companies

The Effect of Trade Openness on The Profitability of Vietnam’s Food Processing Companies Le Hai Ha University of Economic and Technical Industries, Vietnam Le Thanh Huyen Thuong Mai University, Vietnam Abstract In the increasing trend of globalization, the trade openness is considered as one of important external factors impacting on the firm’s performance In a context where international business is strongly boosted, the level of openness of market can create opportunities for companies to improve their profit Knowledge of the relationship between ability of international expansion and firm performance has been a significant concern for theory development in the strategy and international business literature Based on this theory, in order to evaluate its influence, the research examined the effect of trade openness on the profitability of Vietnamese food processing companies over five - year period from 2013 to 2017 With the data collected from companies in this industry in Vietnam, we used regression analysis method to show the effect of the level of trade openness on firm profitability However, according to our research, there is no relationship between dependent variable (ROA, ROE) and the independent variable (openness index) In fact, there is no statistically significant correlation between these variables Keywords: Food processing companies, Trade openness, Profitability Introduction Always managers spend a lot of attention on firm profitability, because it plays an important role in the structure and growth of companies As a result, it can lead to the high performance and success of an organization Based on enhancing the profitability, a company can also increase its reputation Consequently, maximizing the profits of firm becomes one in all the most goals of leaders There are many ways to achieve that aim, but no manager can ignore the impact of an external factor named trade openness In the trend of globalization, it is able to create numerous opportunities to grow for companies through import and export activities which can easily grow their profit Therefore, improving the trade-toGross Domestic Product (GDP) ratio can be a manner to develop the domestic economy Vietnam is an agricultural country, as a consequence, the food processing industry is one of top prioritized sectors Therefore, food processing companies have a solid ground to develop In order to reach success and become the backbone of Vietnamese economy, their main objective is the maximization of profit which is able to cause the maximization of shareholders wealth With this purpose, that Government pays attention to trade openness is necessary Our study focuses on the impact of openness index on their gain Examining many relationships can provide an overview about their capacity to create profit Reasonable trade-to-GDP ratio becomes especially helpful to companies considering a growth based on boosting sales, when they realize that the production can be increased by expanding market The goal of our research is to ascertain the relationship between openness index and profitability in Vietnamese food processing industry 221 The hypothesis that the openness index does significantly impact on the level of profit of food processing sector in Vietnam The H2 there is no significant relationship between openness index and profitability Literature review 2.1 Concept of the relationship between international business and economic growth Gianni De, Honohan & Ize (2003) defined international business as business activities across the frontiers that is with the rest of the world Therefore, it can play an important role in enhancing the economic growth at large, and productivity in particular Historical validation has showed that countries having internationally actives are prone to be more productive than countries which rely only on the domestic market However, its benefits for economic growth and development are difficult to estimate These authors found out that international business deals with the economic and financial interdependences in economic and financial activities among countries In addition, international business is integral for shaping economic and social performance and prospects of nations around the world, particularly those of developing countries Nevertheless, there are also a lot of risks in business activities across the frontiers, including economic risk, political risk, country buyer and seller risk, commercial risk, culture difference, lack of knowledge, overseas markets, language barriers corruption in business and natural risks, which create the problems for the foreigner investors and firms’ leaders Consequently, the influence of international on growth has been being debatable Economic globalization is the integration process of numerous economies of the world where any hindrances in the free flow of goods and services, technology, capital and even labor or human capital is eliminated (Sonia and Rajeev, 2009) With the international business, individual firms and corporate organizations can transact businesses worldwide without restrictions 2.2 Concept of the relationship between economic growth, profitability of firm and openness index (Pitelis, 2003) Growth is not a purpose itself, but rather an endogenous outcome of intra-firm knowledge generation and a means of achieving maximal possible long-run profits Edith Penrose (1959), in her book named “The Theory of the Growth of the Firm”, does not indicate the discrepancy between growth and profitability into account Her point of view is similar to a lot of previous researches, it is that profit and growth in the long term could be seen as equivalent, and companies pursue the growth for long-run development However, according to Pensore, growth is not the ultimate aim of a firm She did not count the opportunity cost of growth, and did not consider the differences between profit and growth According to Montgomery and Wernerfelt (1988), in order to reach goal of growth, comparing to expanding product, a company should spend attention on foreign markets based on its existing product that has success in its own country and is facing to the saturation in the current market, because new activities have a close relation to its current activities, thus, they require only a simple replication or relatively easy extension of the current knowledge In other words, they can take use of existing background in acquiring new markets The traditional Ricardian-Hecksher-Ohlin trade theory shows that openness to international trade leads only a one-time rise in output, but it does not suggest the long-run growth The neoclassical growth model points out that the long-run growth rate of per capita output is determined by the exogenous technological progress The newer endogenous growth theories spend attention on implications of trade openness on growth in the long run, because openness improves the transmission of technology through providing communication with foreign counterparts, boosting domestic resources towards more intensive research sectors and grows market size (see Rivera-Batiz and Romer (1991) and Grossman and Helpman (1991, 222 Chapters and 9)) However, these models not necessarily predict that openness results to economic growth in all circumstances and for all countries Edwards (1993) and Rodrik and Rodr´ıguez (2000) The strong results in favour of openness may arise from model misspecification and/or openness measures may be acting as a proxy for other macroeconomic policies or other important factors such as institutions and geography In conclusion, the cross-country studies can suffer from lack of robust and convincing evidence on the openness-growth connection and this issue is still highly controversial In a citation count of the most cited papers dealing with openness and growth published after 1992, the four most cited papers were concerned with cross-national statistical evidence connecting trade and growth, and all stated finding a positive association between economic integration and growth In 2001, Dani Rodrik and Rodríguez carried out a systematic critique of this evidence In their point of view, the results in these papers either derived from the fact that the openness indicators used were not appropriately measuring openness (while more appropriate indicators in fact failed to deliver a significant association) or that the papers in question had made questionable methodological choices Using the same data than the authors of these papers, they showed that correcting for these shortcomings in measurement and methods made the significance of the results go away Using broader databases and cross-section or panel-data estimations, Freund and Bolaky (2008) and Chang et al (2009) also point out that trade openness has a positive influence on income and that this positive relationship is enhanced by complementary policies Many different measures of trade openness have been proposed and used in empirical analyses of the relationship between openness and growth As argued by Lee et al (2004), all measures of openness are generally closely linked to the growth rate Hence, it is likely that all measures of openness are jointly endogenous with economic growth, which may cause biases in estimation resulting from simultaneous or reverse causation Various methods have been used to remedy this problem and there is still a debate among scientists about which method is the most appropriate (see, e.g., Dollar and Kraay, 2004; and Lee et al., 2004) Hausmann et al (2007) proposed an analytical framework linking the type of goods (as defined in terms of productivity level) a country specializes in to its rate of economic growth In order to test empirically for this relationship, they defined an index aiming at capturing the productivity level (or the quality) of the basket of goods exported by each country Using various panel data estimators during the period 1962 – 2000, their growth regression showed that countries exporting goods with higher productivity levels (or higher quality goods) have higher growth performances These results suggest that what countries export matters as regards the growth effect of trade Hence, our measurement of trade openness should consider this quality dimension as a complement to the trade ratio (or the dependency) dimension On the other hand, monopolistic competition trade models with heterogeneous firms and endogenous productivity provide theoretical support for a positive impact of trade openness on growth Indeed, the theory predicts a productivity improvement in the country due to the exit of less efficient firms after trade liberalization -or a reduction in transport costs for example- (e.g., Melitz, 2003) Furthermore, a higher share of the most productive firms will start exporting, which translates into an increase in the variety of exports As exporters are more productive on average than domestic firms, an increase in exports variety can be associated to rising country productivity Based on this literature, Feenstra and Kee (2008) developed a model allowing to link, across countries and over time, relative export variety to total factor productivity using a GDP function They tested this relationship on the basis of exports to the US for a panel of 48 countries over the period 1980-2000 using three stages least squares regressions Their empirical results indicated that there is a positive and significant relationship between export variety and average productivity Furthermore, computing the gains from trade in the monopolistic competition model of Melitz (2003), Feenstra (2010) shows that countries with a greater export over GDP ratio will experience higher gains in terms of GDP per capita growth, from export variety 223 Once again, these results suggest that, in addition to the trade dependency ratio, the structure of countries’ exports matters regarding the growth effect Andersen and Babula (2008) studied the openness-growth relationship based on looking at the channels through which international trade affects economic growth They consider capital accumulation and productivity growth as two sources of growth in GDP per capita They use studies proving that the main factor of growth is not capital accumulation, and according to their conclusion, the influences of trade on development mainly rely on productivity growth In a framework where growth is conducted by innovation, they give three factors creating the impact of international business on growth First, trade facilitates the access to foreign intermediate inputs and technologies Second, trade also rises the size of market for companies, encouraging to continually research and development to manufacture new products Thirdly, trade allows for sharing general knowledge across geographical boundaries, which allowing trading partners to have information, leading to facilitating the R&D process and subsequent innovation Drawing from the Penrosian perspective that emphasizes the role of resources in firm growth, in 2010, Liu Anran, with research named Organizational Slack, International Expansion, and Firm Profitability, investigates whether and how firm slack resources influence the tradeoff between international expansion and profitability Particularly, author argues that there is an inverted-U shaped curvilinear link between international expansion and firm profitability, and uses resource-based view and agency theories to hypothesize how human and financial slacks impact the relationship In this research, the international expansion of Korean firms is examined Based on the data consisting of Korean firms that were listed on the Korea Stock Exchange (KSE) between 1995 and 2007, this study indicates an inverted-U shaped nonlinear relationship between international expansion and firm profitability exist In the research “The Effect of International Business on SMEs Growth in Nigeria”, Oladimeji Moruff Sanjo, Muhammed Olaniyi Ibrahim (2017) examined the influence of international business on SMEs growth in Nigeria They collected secondary from the Nigerian Bureau of Statistics and the Central Bank of Nigeria (CBN) annual report The study shows that trade openness and FDI have no significant effect on SMEs growth in Nigeria It was also revealed that the exchange rate has a significant influence on SMEs growth in Nigeria, and the effect of exchange rate on SMEs growth is relatively strong According to this study, the exchange rate has a negative coefficient, in other words, the exchange rate reduces SMEs growth increases Moruff Sanjo Oladimeiji, Augusta Thereza, Ebodaghe, Peter Babatunde Shobayo (2017) carried out a research named “Effect of globalization on small and medium enterprises (SMEs) performance in Nigeria” This paper investigates the influence of globalization on small and medium enterprises (SMEs) performance in Nigeria In this study, authors used the secondary statistics data from CBN bulletin on relevant information In order to examine the effect of globalization on SMEs performance in Nigeria, a co-integration model was used In addition, three proxies were used to capture the activities of globalization; consisting of interest rate, bank credit and trade openness Output of SMEs to GDP was considered as a tool to measure SMEs performance from 1992 to 2014 This study shows that the variables are not significant Research Methodology The research study is analytical in nature and involved testing of hypotheses quantitatively The main content of this research approach is to find out a concise answer to the research questions through the collection and analysis of information of firms The study is mainly based on secondary financial data including income statements, balance sheets, and cash flow statements of listed sampled food processing firm, the data about import and export activities, GDP collected from statistical yearbook of Vietnam, yearly report of Ministry of Industry and Trade od Socialist Republic of Vietnam for period of 2013 to 2017 This offered an 224 improved understanding of the links existing among the variables This section of the article discusses the corporations and variables enclosed within the study 3.1 Sample selection: The study uses financial data of 20 food processing listed corporations in Vietnam between 2013 and 2017, the data about import and export activities, GDP as the sample, for instance, figures for Profit before tax, Sales, import and export activities, GDP and others Companies with missing data are excluded from the study 3.2 Measurement of Variables This study identifies key variables including dependent and independent variables that influence profitability of Vietnamese food processing sector Openness index is an independent variable, and we take Earning price per share ratio, Return on equity ratio and Return on assets as measures of profitability to represent dependent variables Independent Variable: We take one variable as independent variable: The ratio of trade to GDP (openness index) - an indicator of trade 'openness' is a result of globalization, and trade liberalization The indicator is defined as follows Openness = Import+Export GDP Dependent Variables: We take three variables as dependent variables: - Return on assets (ROA)is the value of the firm’s annual net income divided by the firm’s total assets in book value This ratio measure for the operating efficiency for the company based on the firm’s generated profits from its total assets ROA = Net profit after taxes Total assets - Return on equity (ROE) or return on capital is the ratio of net income of a business during a year to its stockholders' equity during that year It is a measure of gain of stockholders' investments It shows net income as percentage of shareholder equity The formula to calculate return on equity is: Net profit after taxes ROE = Total shareholders' equity The portion of a company's profit allocated to each outstanding share of common stock Earnings per share serve as an indicator of a company's profitability Calculated as: - Earnings per share are generally considered to be the single most important variable in determining a share's price It is also a major component used to calculate the price-to-earnings valuation ratio EPS = Net Income - Dividends on Preferred Stock Average Outstanding Shares Research question What is the impact of openness index on firm profitability? What is the nature of impact whether positive or negative? Research objectives: The main objective of this research was to examine the influence of trade openness on firm profitability The specific objectives of the study are: (a) To examine the impact of trade openness in food processing sector 225 (b) To test how fast the sample firms have been able to enhance their respective level of efficiency if policies about trade openness are improved It is expected that this study may contribute to better understand the efficiency of trade openness for food processing companies in an emerging market like Vietnam Hypothesis development: In the light of the above discussion, the present study expects relationship between fixed assets and profitability The main hypotheses to be tested in this study are as follows: H1: Openness index has an association with Return on Equity H2: Openness index has an association with Return on Assets H3: Openness index has an association with Earning Per Share 3.3 Research model: Trade openness Profitability Return On Equity Openness index Return On Asset ROA = β0 + β1Openness+ ε ROE = β0 + β1Openness+ ε Earning Per Share EPS = β0 + β1Openness+ ε ROE = Return on Equity ROA = Return on Assets Openness = Openness index α = Constant Term β = Coefficient Term ε = Error term Data analysis and Discussion 4.1 Descriptive statistics The table shows the mean value of the variable return on asset is around percent and return on equity is around 7.2 percent with standard deviation of 0.098 and 0.356 respectively; the mean value for openness index in that period is about 170% 226 Table 1: Descriptive Statistics Openness ROA ROE EPS Valid N (listwise) N 100 100 100 100 100 Minimum 1.54 -.19 -1.29 -9581.00 Maximum 1.98 79 65 11497.00 Mean 1.7096 0508 0726 1999.8400 Std Deviation 15245 09850 21417 2796.43898 4.2 Correlation between cash conversion cycle and profitability ratios The Sig.(2-tailed) value tells if there is a statistically significant correlation between two variables In comparing trade openness from firm’s profitability, research compares openness index as the trade openness, earning per share (EPS), returns on assets (ROA), returns on equity (ROE) as firm’s profitability As can be seen from the table 2, the sig.(2-tailed) value between Openness index and ROA is 335, the value between Openness index and ROE is 853, and the value between Openness index and EPS is 343 That result means that there is no statistically significant correlation between Openness index and ROA, ROE or EPS In other words, there is no statistically significant correlation between Trade openness and Profitability of Vietnamese food processing companies from 2013 to 2017 Tabe 2: Correlations Openness Pearson Correlation Sig (2-tailed) N 100 Pearson Correlation -.093 ROA Sig (2-tailed) 355 N 100 Pearson Correlation -.019 ROE Sig (2-tailed) 853 N 100 Pearson Correlation -.096 EPS Sig (2-tailed) 343 N 100 ** Correlation is significant at the 0.01 level (2-tailed) Openness ROA -.093 355 100 100 485** 000 100 590** 000 100 ROE -.019 853 100 485** 000 100 100 709** 000 100 EPS -.096 343 100 590** 000 100 709** 000 100 100 Conclusion This paper studied the impact of trade openness on profitability in twenty Vietnam’s food processing companies in the period of 2013 to 2017 Results showed that, there is no significant correlation between Trade openness and Profitability of Vietnamese food processing companies from 2013 to 2017 In other words, the theory about the effect of trade openness on firm’s profitability is not suitable for Vietnamese food processing companies in that period References Andersen, L & Babula, R (2008) The link between openness and long-run economic growth Journal of International Commerce and Economics, pp 1–20 Chang R., Kaltani L and Loayza, N.V (2009) Openness can be good for growth: the role of policy complementarities Journal of Development Economics, 90, p 33-49 Dollar, D and Kraay, A (2004) Trade, Growth, and Poverty The Economic Journal, 114, February, p 22-49 Edwards, S (1993) Openness, trade liberalization, and growth in developing countries, Journal of Economic Literature 31(3): 1358–1393 227 Edwards, S (1998) Openness, productivity and growth: What we really know?, Economic Journal 108(447): 383–398 Feenstra, R C (2010) Measuring the gains from trade under monopolistic competition Canadian Journal of Economics, 43 (1), p 1-28 Freund, C and Bolaky, B (2008) Trade, regulations, and income Journal of development economics, 87, p 309-321 Gianni De, N., Honohan, P., and Ize, A (2003) Dollarization of the banking system: good or bad? 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