Technical efficiency of small and medium enterprises in manufacturing sector in viet nam

UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIET NAM THE NETHERLANDS VIET NAM – NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS - TECHNICAL EFFICIENCY OF SMALL AND MEDIUM ENTERPRISES IN MANUFACTURING SECTOR IN VIET NAM By NGUYEN THI THU HUONG MASTER OF ARTS IN DEVELOPMENT ECONOMICS Ho Chi Minh City, December 2013 UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIET NAM THE NETHERLANDS VIET NAM – NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS TECHNICAL EFFICIENCY OF SMALL AND MEDIUM ENTERPRISES IN MANUFACTURING SECTOR IN VIET NAM A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By NGUYEN THI THU HUONG Academic supervisor Dr PHAM KHANH NAM Ho Chi Minh City, December 2013 ACKNOWLEDGEMENTS This paper has could not be started and completed without the help of several individuals who supported me directly and indirectly First of all, I appreciate my supervisor Dr Pham Khanh Nam so much for his enthusiastic assistance He has not only given me genuine intellectual guidance in academy but also encouraged me a lot through the analysis process It is so hard for me to complete this research without his profound advice Thus, I am very grateful to him I am also thankful to Dr Nguyen Trong Hoai for sharing his knowledge and practice experiences in researching which are very useful for this study I am very grateful thank Dr Truong Dang Thuy for his comment and advice about thesis research design I also thank my friend Le Minh Tri for sharing his advantage discussions on econometric techniques Last but not least, I would like to thank my parents, and all my other family members for their concern and invaluable moral support ABSTRACT Most enterprises in Viet Nam is Small and medium enterprises (SMEs) In 2009 SMEs account for 98,54 percent in total enterprises in economy So, this paper examines the technical efficiency of small and medium enterprises in manufacturing sector in Viet Nam The paper concentrated on evaluating the technical efficiency of the firms Then it identifies the determinant of technical efficiency in these small and medium enterprises The data set collected from survey of Central Institute for Economic Management (CIEM), Department of education (DoE), and Institute of Labor Science and Social Affairs (ILSSA) in 2009 with 1.968 observations This paper resulted in a high technical efficiency in 2009 Levels of technical efficiency ranged from 0.94 percent to 0.98 percent Regarding factors influencing technical efficiency, the paper shows that only firm age and area have a positive relationship with technical efficiency Others factor such as firm size, sub-contractor, competitor, enterprise launched new product and improve product have a negative relationship Keywords: small and medium enterprise in manufacturing sector, technical efficiency, stochastic frontier production function, determinant, Viet Nam TABLE OF CONTENTS CHAPTER 1: INTRODUCTION…………………………………………………….1 1.1 Problem statement…………………………………………………… 1.2 Research objective………………………………………………………3 1.3 Scope of study………………………………………………………… CHAPTER 2: LITERATURE REVIEW…………………………………………….5 2.1 Theoretical framework for technical efficiency……………………….5 2.2 Empirical literature on technical efficiency………………………… 2.3 Conceptual framework……………………………………………… 19 CHAPTER 3: OVERVIEW VIET NAM SMEs AND DOMESTIC MANUFACTURING SECTOR…………………………………………………… 21 3.1 Overview of Vietnam SMEs………………………………………… 22 3.2 Domestic manufacturing sector………………………………………26 CHAPTER 4: RESEARCH METHODOLOGY………………………………… 28 4.1 Empirical model……………………………………………………….28 4.2 Data and variables…………………………………………………… 31 CHAPTER 5: RESEARCH RESULT………………………………………………34 5.1 Descriptive statistic……………………………………………………34 5.2 Regression results…………………………………………………… 36 CHAPTER 6: CONCLUSION AND POLICY RECOMEMDATON…………….45 REPERENCE APPENDIX List of Tables Table 1: Definition for Small and Medium Enterprises in Viet Nam……… 21 Table 2: Enterprises by labor scale and type in 2009…………………………23 Table 3: Enterprise by capital size and economic sector and type in 2009 23 Table 4: Contributions to State budget of SME in the 2007-2009 periods………………………………………………………………….25 Table 5: Variables and their descriptive……… ……………………………32 Table 6: Deterministic statistic of main variables…………………………… 34 Table 7: Correlation coefficient of variables………………………………… 37 Table 8: Generalized Likelihood Ratio Test………………………………… 38 Table 9: Distribution of Efficiency Level of Sample Firms…………… ……38 Table 10: Average Efficiency Level by Firm Size………………………………39 Table 11: Estimate frontier production function using Cob-Douglas production function………………………………… …………………………….40 Table 12: Determinant of technical efficiency……………………… …………42 Table 13: Number of enterprises by labor scale in 2000 to 2009…………… 52 Table 14: Laborers by sector.……………………………………… ………….52 Table 15: Gross output of industry at constant 1994 prices……………………53 Table 16: Manufacturing SMEs in Operation (2006-2009)…………………….54 List of Figures Figure 1: Technical, allocative, and overall efficiency…………………………………5 Figure 2: Production frontier and technical efficiency………………………………….6 CHAPTER 1: 1.1 INTRODUCTION Problem statement Since Innovation 1986, private ownership has been encouraged in industries, commerce and agriculture Thanks largely to these reforms, Vietnam achieved around 8% annual GDP growth from 1990 to 1997, and the economy continued to grow at an annual rate of around percent from 2000 to 2005, making Vietnam become one of the world's fastest growing economies Growth still remained strong during the late 2000s global recession, holding at 6.8 percent in 2010 The development is still stable until now, especially in small and medium enterprises (SMEs) SMEs are the most important part of Viet Nam economy They play a vital role in promoting economic growth, increasing national income, creating jobs for workers and contributing to the economic restructuring towards industrialization According to the Vietnam Chamber of Commerce and Industry (VCCI), until the date of 31/12/2011, Viet Nam has 543,963 enterprises In that, there are nearly 97 percent of small and medium enterprises, mainly private businesses SMEs use 51 percent of the workforce and contribute more than 40 percent of the national GDP If we take 133,000 cooperatives, farms and about million individual businesses, this region contributes up to 60 percent of GDP SMEs not only contribute significantly to the economic development of the country, but also create more than one million new jobs per year for the most untrained labor, contribute to poverty reduction, enhance security society Manufacturing is one of the main fields of SMEs Output of manufacturing accounted for 51.3 percent in total gross output of industry (2009) It has also made significant contributions to the Gross domestic product (GDP) However this figure has gone down through several years: 21.13 percent in 2007; 20.22 percent in 2008 and reduced to 19.96 percent in 2009 The question is: why did this figure reduce? Because productivity growth is contributed by many factors such as scale efficiency change, technical efficiency change and technical progress So, the reduction bases on this factor? Many papers in previous time showed that technical efficiency is the important factor effecting to productivity growth: Viet Le (2011), Viet Le and Charles Harvies (2010), Hung T Pham, Thanh L Dao and Barry Reilly (2010); Nguyen Khac Minh and Giang Thanh Long (2007); Nguyen Thang (2005); Tran Thị Bich (2008); Pham (2009); Nguyen Khac Minh (2007) Most of these studies used firm level data from surveys in 1997, 2002, 2005, 2007 Their technical efficiency reached more than 30 percent to nearly 90 percent It means that the firm can increase their current level of output with the same level of input to reach maximum efficiency Furthermore, the determinant of technical efficiency is also an import matter to concern Nunes (2011) shows that age and size as well as cash flow is restrictive factors of the growth in SMEs In Viet Nam, number of labor in manufacturing sector of the SMEs is 5,665 thousand people in 2007 and increase up to 6,449 people in 2009 The number of enterprise also increases from 155,771 enterprises to 248,842 enterprises in 2009 (nearly 63 percent increasing) Other factor contributing to productivity is material Material is the most important to industry, especially in manufacturing That is essential input in production process By using inputs effectively the enterprises can raise output Besides, there are many factors related to technical efficiency include internal factors and external factors So, it is necessary to continue researching technical efficiency in firm, especially in manufacturing SMEs in Viet Nam The question is which level of technical efficiency in manufacturing SMEs is and what factors affect technical efficiency? Which policy we can use to improve technical efficiency? So, this paper will estimate the technical efficiency of Vietnamese manufacturing SMEs to evaluate firm performance and answer above question 1.2 Research objective General research objective of this thesis is to investigate technical efficiency of small and medium enterprise in manufacturing sector in Viet Nam Specific of objectives are: a To measure technical efficiency of manufacturing SMEs in Vietnam b To examine determinants of technical efficiency of manufacturing SMEs in Vietnam 1.3 Scope of study The analytical unit in this thesis is small and medium enterprises in manufacturing sector in Viet Nam The reason for choosing manufacturing industry is this industry uses the same production function So, there will be an overview of the effectiveness of this sector without bias Thereby overall assessment of the effectiveness of the sector and make appropriate policy The year was selected for this study is 2009 The previous years there have been a lot of studies evaluating the effectiveness of TE in SMEs: 2002, 2005, and 2007 In 2009 SMEs are more variable, increasing both the number of employees and the size of the enterprises So assessing the increasing or decreasing of TE is necessary Thereby the Government will have the appropriate policies in order to maintain and increase the TE next years The methodology chosen is stochastic frontier approach This paper used stochastic frontier model to investigate technical efficiency in manufacturing sector by using Cobb-Douglas production function and Transcendental-logarithm (Translog) production function And the technique is running software Frontier 4.1 developed by Collie (2005) In general, the assessment of the technical efficiency when manufacturing SMEs enterprises only uses the main inputs and when uses other factors did not differ significantly Efficiency levels are relatively high, due to the efficient use of inputs, not the error term Results are shown in Table 11 and Table 12 In table 11, the value of σ2 is 0.0685 It means that the firm mentioned is not fully efficient Test for 1,968 observations give the result γ equal 0,000013 respectively in table 11 and is statically significant at percent TE of enterprise is nearly full efficiency Compare to the previous result from other researcher, there are some differences Gamma is estimated at 0,977 (2002); 0.934 (2005) and 0.943 (2007) in Viet Le’s paper (2010) or at 0,617 as reported by Giang Thanh Long and Nguyen Khac Minh (2007) Determinant of Technical efficiency o To investigate the relationship between technical efficiency and its main effect, the paper classifies the firm size by annual employee and firm age by the years stabled Beside, some dummy variables are chosen to consider it impact Variables are detail in Table The effect of variables as follow: Table 12: Determinant of technical efficiency Variables Parameter Coefficient Standard-error Constant δ0 0.0387 0.0320 Age δ1 0.0036* 0.0009 Size δ2 -0.0001 0.0001 Area δ3 0.0125 0.1116 41 Sub δ4 -0.0180 0.0257 Competitor δ5 -0.0448 0.0307 New P δ6 -0.0556* 0.0814 Improve δ7 -0.0352*** 0.0225 sigma squared σ2 0.0659* 0.0022 gamma γ 0.0011*** 0.0021 Log likelihood LK -117.5526 Note: *, **, *** denote statistical significance at 0.01, 0.05 and 0.1 level respectively Table 12 provides the summary the technical effect The surprise that firm size is found to have a negative relationship with TE Thus, there are some evidences of learning by doing for Viet Nam manufacturing SME sectors Some are suggested on methodology Contrary to expectations that firm size will affect to TE, the results did not bring as expected Firm size is negative with TE There will be some explanations for these results In the paper "Relationship between firm size and Technical efficiency in East African manufacturing firm” after run model Agrey, Aliab, Joseph did not bring results as the authors expect that firm size affects to TE The authors had used both the DEA and SPF method but the result was still negative Nguyen Khac Minh and Giang Thanh Long (2008) gave similar results when using two methods DEA and SPF There are some ideas and perspectives to discuss this issue Today information technology is growing, businesses inherited good technical achievements so they should support the production efficiency a lot The policy also freer, more open to business lead to the large, medium or small enterprises are equally affected Scientific and technical 42 progress is also enhanced, enterprise system especially manufacturing sector have been accessed The location has a positive affects to TE Other variables are negative Location affects TE is explained as follows: The fact that the enterprises their business in the area such as the downtown area; the industrial park will be more cost They must rent or buy ground more expensive Whereas, the conditions in rural areas and coastal towns may be better Business man can build factories, workshops with reasonable costs, not to mention the benefits of hiring low labor cost So, depending on the type of activity and company size, companies can choose the most convenient location to minimize costs and increase production efficiency Many small and medium enterprises in Vietnam have the cooperation and association with foreign partners The way of corporation may be contribute capital, joint ventures with the purpose of mutual benefit Despite of receiving working capital due to rapid and significant sources of capital from foreign investors, this partnership also brings many limitations Domestic enterprises will not be fully active in the strategic business objectives The flexibility of all manufacturing operations as well as the elements of law, innovation will be limited So, the result of Subcontractor is negative Vietnam joined the WTO in 2007 This opened many opportunities and challenges for VN economy in general, and particular in SMEs In the study mentioned that Vietnam will face more competition since joining the World Trade Organization However, the competition results bring that TE variables is negative What is reason? WTO accession biggest challenge is increased competition, including in the domestic market due to our country should take steps to open their markets to foreign firms At the same time, when connected with the international market the volatility of world 43 impacts on Vietnam is faster and stronger The Viet Nam SMEs would surprise loopholes and losers In 2009, after two years of joining the WTO Vietnam has made significant changes Besides the competition of foreign partners, the funds were brought into Vietnam was also significant Thus SMEs have the opportunity to develop and bring to market new products to meet the needs of the whole society However, the results given in Table 12 show a negative relationship between new product for manufacturing SMEs and TE Perhaps in 2009 after joined WTO SMEs in Viet Nam face many changes in capital, operating, and law So making the new product is not suitable When the actions are not established, the developing of new products may not bring the technical efficiency of operations Just like the introduction of new products, the product improvements also bring similar results Improve product variables is negative with TE Perhaps the strong influence of the innovations was against TE at an early stage The stability is needed then continue to grow After that the enterprises concentrate on improving TE 44 CHAPTER 6: CONCLUSION AND POLICY RECOMEMDATON Technical efficiency in the manufacturing sector is a major factor in increasing the economic efficiency of enterprises In 2002, 2005, 2007 there are a lot of studies on this issue Some famous authors mentioned on this study such as: Viet Le (2011), Viet Le and Charles Harvies (2010), Hung T Pham, Thanh L Dao and Barry Reilly (2010); Nguyen Khac Minh and Giang Thanh Long (2007); Nguyen Thang (2005); Tran Thị Bich (2008); Pham (2009); Nguyen Khac Minh (2007)…In addition, many papers research technical efficiency in others countries by: Aigner, Lovell and Schmidt (ALS) (1977), Meeusen and Van den Broeck (MB) (1977), and Battese and Corra (1977), (Murillo-ZAmorano, 2004), Koopmans and Debreu-Farrell (1951), Nunes (2005)… Continuing to study and evaluate the changes of technical efficiency in SMEs over the years this paper focused on the assessment of technical efficiency in the manufacturing SMEs in Vietnam The paper concentrates on main points The first point is the evaluation of technical efficiency of SMEs in manufacturing sector in Viet Nam The second point is the determinant of technical efficiency The data set is collected from survey of Central Institute for Economic Management (CIEM), Department of education (DoE), and Institute of Labor Science and Social Affairs (ILSSA) in 2009 These data mentioned on output (Y), total capital (K), and labor (L) to evaluate the technical efficiency The purpose is to consider the level of output when using K, L There are many similarities in the methods of research and evaluation on technical efficiency Most of manufacturing SMEs have brought relative efficiency to meet expectations in expanding manufacturing, generating revenue and increasing profit Collie et (2005) developed the software Frontier 4.1 to evaluate the performance of enterprises The paper uses this software to assess TE in manufacturing SMEs Results 45 in 2009 brought quite satisfactory Average TE in manufacturing SMEs is 95.40 percent; the highest is 99.9 percent respectively Comparison with previous studies on 2002 at an average of 85 percent and in 2005 and 2007 at an average 92 percent, the average growth rate in 2009 increased of percent TE increased positively, promises to deliver high revenue and profits Then the determinant of technical efficiency gave the result some variables effect to TE and some not The main determinants mentioned are firm age and firm size Other determinants are firm’s location (Area), sub-contractor or non subcontractor (Sub), competition when joining the WTO (openness), enterprise with new launched product (new P) and enterprise with improved product (improve) In general, that is the important factors which can affect the technical efficiency of enterprise However, depending on the situation and the particular time, these factors have the different effect Follow result in chapter 4, both firm age and the area where enterprise are located positively impact on technical efficiency Other variables including firm size, openness, new product, improving product have a negative impact This result gave a little surprise because of the expectation that these factors are positive effect to technical efficiency in SMEs in manufacturing sector That may explain by the time research In 2009, SMEs still faced many difficulties The economy still developed slowly, unstably, the capital was limited, weak technology So, there were many internal and external factors affected uncomely Stability development is more suitable at that time From the result above, to increase technical efficiency in SMEs manufacturing sector in Viet Nam is the most important task But, how to that is more difficulty Improving technology is the first task to help all enterprise to access high technology, which helps enterprise in reaching the model way to upgrade business activity As a result, the enterprise can increase technical efficiency and economic efficiency Enterprises which have been set up should be maintained and active stably Then, the 46 enterprises have groundwork to expand business activity and to apply the way to increase economic efficiency Furthermore, appropriate incentives should be offered depending on strengths of each location It is believed that Government should encourage the establishment of industrial parks and SMEs The support policies such as reducing corporate income tax, excise tax exemption for the first year of operation, the VAT deferment should be established The benefit of operation area, will promote enterprise development fastly, increase technical efficiency 47 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sewerage, management waste and remediation activities Foreign invested sector Source: GSO Table 16: Manufacturing SMEs in Operation (2006-2009) 2006 2007 2008 2009 Number of SMEs 121,252 143,483 184,674 226,624 Number of manufacturing SMEs 24,553 31,057 37,304 49,857 Distribution of Manufacturing SMEs by sub-sectors (%) Manufacture of food products 21.57 21.20 22.14 21.34 Manufacture of beverages 2.51 2.17 2.71 2.43 53 Manufacture of tobacco products 1.59 1.49 1.21 1.25 Manufacture of textiles 5.74 5.20 4.58 4.61 Manufacture of wearing apparel 4.88 5.01 5.09 4.84 4.78 4.44 4.29 3.76 wood and cork (except furniture) 2.09 2.10 2.02 1.94 Manufacture of paper and paper products 2.22 2.25 2.37 2.14 1.14 0.97 0.96 0.94 0.31 0.19 0.28 1.81 5.96 5.64 5.94 6.46 1.13 1.05 1.08 1.20 4.87 4.82 5.21 4.99 mineral products 6.99 6.27 6.24 7.47 Manufacture of basic metals 4.51 5.10 5.30 4.49 Manufacture of leather and related products Manufacture of wood and of products of Printing and reproduction of recorded media Manufacture of coke and refined petroleum products Manufacture of chemicals and chemical products Manufacture medicinal, of pharmaceuticals, chemical and botanical products Manufacture of rubber and plastics products Manufacture of other non-metallic 54 Manufacture of fabricated metal products 5.88 6.10 6.25 6.33 optical products 4.08 4.66 4.23 4.38 Manufacture of electrical equipment 4.35 4.85 4.30 4.10 1.25 1.31 1.31 1.42 and semi-trailers 3.00 3.23 3.39 3.11 Manufacture of other transport equipment 5.22 5.93 5.13 5.15 Manufacture of furniture 4.40 4.32 4.02 3.78 Other manufacturing 1.13 1.14 1.21 1.15 0.39 0.56 0.76 0.89 (except machinery and equipment) Manufacture of computer, electronic and Manufacture of machinery and equipment n.e.c Manufacture of motor vehicles; trailers Repair and installation of machinery and equipment Source: Author calculated based on Enterprises Census 2006-2009, GSO 55 ... determinants of technical efficiency of manufacturing SMEs in Vietnam 1.3 Scope of study The analytical unit in this thesis is small and medium enterprises in manufacturing sector in Viet Nam The... technical efficiency of small and medium enterprise in manufacturing sector in Viet Nam Specific of objectives are: a To measure technical efficiency of manufacturing SMEs in Vietnam b To examine determinants... in total enterprises in economy So, this paper examines the technical efficiency of small and medium enterprises in manufacturing sector in Viet Nam The paper concentrated on evaluating the technical