Technical efficiency and its determinants , the case of manufacturing firms in vietnam

UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM VIETNAM- NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS TECHNICAL EFFICIENCY AND ITS DETERMINANTS: THE CASE OF MANUFACTURING FIRMS IN VIETNAM A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS I~ By TRAN VAN KHUE Academic Supervisor: DR NGUYEN TRONG HOAI DR PHAM LE THONG HO CHI MINH CITY, DECEMBER 2011 I I :-~ ~ ABBREVIATIONS AEC Allocative Efficiency Change DEA Data Envelopment Analysis E&E Electrical and Electronics FDI Foreign Direct Investment FEM Fixed Effects Model GDP Gross Domestic Product GSO General Statistic Office ICT Information and Communication Technology MDE Master of Development Economics POLS Pooled Ordinary Least Squares R&D Research and Develop REM Random Effects Model SEC Scale Economies SEC Scale Efficiency Change SFPF Stochastic Frontier Production Function SMEs Small and Medium Enterprises SOEs State-Owned Enterprises TE Technical Efficiency TEC Technical Efficiency Change TFP Total Factor Productivity TP Technical Progress TT Time Trend III TABLE OF CONTENTS CHAPTER 1: INTRODUCTION 1.1 The problem statement 1.2 Objectives of the research S 1.3 Research questions 1.4 Research methodology 1.5 Thesis structure CHAPTER 2: LITERATURE REVIEW 2.1 Introduction 2.2 Basic Concepts and Theoretical Review 2.2.1 The Production Function 2.2.2 Cobb-Douglas production function 2.2.3 Technical Efficiency 11 2.2.4 Technical efficiency measurement 12 2.2.5 The stochastic frontier production function (SFPF) 13 2.3 Empirical Studies 16 2.3.1 Studies in advanced countries 16 Studies in developing countries 19 2.3.3 Studies in Vietnam 22 2.4 Analytical framework for the research 29 CHAPTER 3: RESEARCH METHODOLOGY AND DATA COLLECTION 3.1 Introduction 31 3.2 Research methodology 31 3.2.1 The stochastic frontier model 31 3.2.2 The technical efficiency model 34 3.3 Testing Hypothesis 37 3.3.1 The stochastic frontier model 37 IV 3.3.2 The technical efficiency model 37 3.4 Data Collection 38 CHAPTER 4: ANALYSIS RESULTS 4.1 Sample profile 39 4.2 Technical efficiency 41 4.3 Comparison of technical efficiency 44 4.4 Technical efficiency model 46 4.4.1 Testing for the most appropriate model 46 4.4.2 Testing for heteroskedasticity .47 4.4.3 Determinants of technical efficiency .4 4.5 Chapter Summary 50 CHAPTER 5: CONCLUSIONS, RECOMMENDATION AND LIMITATIONS 5.1 The conclusions 51 5.2 The recommendations 54 5.3 Limitations 55 REFERENCES 56 APPENDICES 60 v LIST OF TABLES & GRAPHS Table 2.1: Summary of Empirical Studies Table 3.1: Summary ofvariables in the frontier production function Table 3.2: Summary of variables in the technical efficiency model Table 4.1: Descriptive statistics of output, capital and labour of manufacturing firms in the period 2000-2004 Table 4.2: Estimates ofti model and tvd model Table 4.3: The statistical tests of some hypothesis Table 4.4: Summary of technical efficiency between ti model and tvd model Table 4.5: Determinants oftechnical efficiency Graph 4.1: The structure of 1,645 manufacturing firms from other sectors VI LIST OF FIGURES Figure 1.1: The share of manufacturing enterprises in all industries ofVietnam Figure 2.1: Illustration of Technical Efficiency Figure 2.2: Analytical Framework VII CHAPTER 1: INTRODUCTION 1.1 The problem statement Since the launch of renovation in 1986, Vietnam has successfully transformed the centrally-planned economy into a market economy and made great achievements in social and economic aspects In the period of 2000- 2010, the country's economic growth was relatively high and stable at an annual average rate of 2% In 2010, the real GDP was recorded 3.4 times as much as that in 2000; the state budget collection was times; and the GDP per capita stood at US$1,168 (GSO, 2011) By achieving these, Vietnam has moved from the group of poorest countries to the group of middle-income countries In addition, Vietnam has been successful in poverty reduction, close to achieving universal primary education, improving maternal health, reducing child mortality, obtaining much progress in gender equality and empowering women, and etc In contribution to economic and social development, Vietnamese enterprises play a crucial role Business activities of enterprises have made significant progress In 1995, enterprises contributed about 45.3% of GDP; in 2001 this share increased to • 53.2% and in 2007 was over 60% (GSO, 2008) The development of enterprises in many different sectors and localities lead to the change of economy's structure which reduces the share of agriculture and increases those rates of industry and services With regards to manufacturing enterprises, they made important contribution to dealing with social matters such as creating more new jobs, increasing income for employees, contributing more to the state budget, and etc In more details, manufacturing enterprises create 2.203 million jobs, accounting for 47.3% of total jobs in all enterprises (GSO, 2007) However, many weaknesses are found in the process of the development of the economy in general and the manufacturing sector in particular The infrastructure has not been completed and needs to be improved comprehensively The shortage of electricity and water which are common may reduce the productivity (Klause et al., 2005) So, the efficiency and competitiveness of the economy still is lower than its potential Moreover, the performance of enterprises has different results because of their resource, types of ownership, type and scale of business, location and some other reasons Although the business environment has been more transparent and flexible for business operation, the business results of each enterprise might not grow steadily In general, Vietnam enterprises expose their own features Firstly, the number of new enterprises especially private companies has grown sharply since 2000 when the Enterprise Law carne into effect In three years after the issue of the Law, more than 72,600 new private enterprises were established, creating around 1.6 - million new jobs (ClEM, 2004) These figures are very impressive when compared with just 26,000 private enterprises operating by the end of 1998 Secondly, enterprises located in big cities such as Hanoi; Hochirninh city may enjoy many favorable conditions such as ideal geographical location; advantage of telecommunication, transportation; abundant labor supply with high skill to apply new technology in production Consequently, the number of enterprises in these cities increases very fast and accounts for about 7% of total number of enterprises and 45% of total revenue of the whole country (GSO, 2007) On the other hand, these enterprises are still facing with a lot of problems such as non-synchronous infrastructure, un-skilled labor Especially, each enterprise in big cities has to compete fiercely with many other local and domestic companies located at the same city These problems in association with improper policies might cause the companies to slowly increase their effectiveness Thirdly, as a multi-sector market model operating according to the market mechanism and the state regulations, Vietnam's enterprises include state, private and foreign-invested sectors where the former plays a leading role in the economy The government uses the state enterprises as an important tool to stabilize the microeconomic environment and market prices of essential commodities such as electricity, coal, transport, rice and rubber So, state enterprises have received a lot of support, priorities, and subsidies from government Therefore, the performance of state enterprises is questioned about the efficiency relative to other sectors in the economy For above reasons, some issues need to be clarified such as the performance of firms in Vietnam; the production efficiency level of firms located in former Hanoi, Hochiminh cities and other places; firms of the state, foreign and other sectors; and the factors influencing the technical efficiency of firms The purpose of this thesis is to identify the above issues And, the manufacturing sector is selected to research because of following reasons: The share of manufacturing enterprises in all industries accounts more than 20 percent of all kind of activity (GSO, 2006) However, manufacturing enterprises contribute important shares of revenue (more than 30 percent), number of employees (about 50 percent) and export value (22 percent) The thesis applies a stochastic frontier production model and technical efficiency model to analyze the technical efficiency of manufacturing firms and try to find the determinants that affect firms' technical efficiency Figure 1.1: The share of manufacturing enterprises in all industries of Vietnam 60 50 tn -Q) ·c 40 ,= 30 C'G 20 ';te 10 2000 2001 2002 2003 2004 2005 2006 Source: GSO 1.2 Objectives of the research Basically, this thesis aims at four objectives as follows: (1) To measure the level of technical efficiency of manufacturing firms in the period 2000 to 2004 (2) To compare the difference in technical efficiency between manufacturing firms located in former Hanoi and Hochiminh City and those located in other provinces; between firms of state-owned, foreign firms and other firms (3) To identify factors influencing the technical efficiency of manufacturing firms (4) To suggest appropriate policies for improving technical efficiency of manufacturing firms *Note: Former Hanoi: Because the data applied in the thesis from 2000 to 2004 Since August 1, 2008 Hanoi has merged with Hatay province and parts of neighboring of Vinhphuc and Hoabinh provinces ... impact on technical efficiency of the firms In summarizing the technical efficiency of manufacturing firms and its determinants, according to the theoretical and empirical evidence, the analytical... performance of firms in Vietnam; the production efficiency level of firms located in former Hanoi, Hochiminh cities and other places; firms of the state, foreign and other sectors; and the factors influencing... on technical efficiency The study reveals some limitations: the sample is cross-sectional data in periods of 200 2, 926 firms; of 200 5, 2,2 28 firms and of 200 7, 2,0 50 firms So, the technical efficiency