Innovation and productivity in small and medium enterprises, a case study of vietnam

UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM – THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS INNOVATION AND PRODUCTIVITY IN SMALL AND MEDIUM ENTERPRISES: A CASE STUDY OF VIETNAM By PHAM DO TUONG VY MASTER OF ART IN DEVELOPMENT ECONOMICS HCMC, NOVEMBER 2016 University of Economics International Institute of Social Study Ho Chi Minh City The Hague Vietnam The Netherlands VIETNAM – THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS INNOVATION AND PRODUCTIVITY IN SMALL AND MEDIUM ENTERPRISES: A CASE STUDY OF VIETNAM by Pham Do Tuong Vy A Thesis Submitted in Partial Fulfilment of the Requirements for the Degree of Master of Art in Development Economics Academic Supervisor: Dr Vo Hong Duc HCMC, NOVEMBER 2016 DECLARATION I hereby declare that this thesis entitled “Innovation and Productivity in Small and Medium sized Enterprises: A case study of Vietnam”, which is written and submitted by me in accordance with the requirement for the degree of Master of Art in Development Economics to the Vietnam – The Netherlands Programme This is my original work and all sources of knowledge carried in this thesis have been duly acknowledged HCMC, November 2016 PHẠM ĐỖ TƯỜNG VY ACKNOWLEDGEMENT I would like to take this opportunity to express my deepest gratitude for the help, support and encouragement of the following people, who have contributed to the completion of this thesis in their very own ways Above all, I would like to express my immeasurable appreciation to my supervisor – Dr Võ Hồng Đức for his precious time, support and advices to make this thesis completed Furthermore, I would like to send my great thanks to all the lecturers and staffs at the Vietnam – The Netherlands Programme for their knowledge and supports during my time joining in the program In specific, I am extremely grateful to Dr Phạm Khánh Nam and Dr Trương Đăng Thụy for their valuable guidance and support in the courses and thesis writing process To all of my friends in Class 21 and my colleagues at TPF, I could never thankful enough for your encouragement and support until the very end of this thesis Last but not least, my deepest thanks and love to my parents, who have always been beside me Without their unconditional love, none of this would have been possible ABBREVIATION 2SLS Two Stage Least Squares CDM Crépon, Duguet and Mairesse FE Fixed Effect GMM Generalized Method of Moments GSO General Statistic Office IV Instrument Variables LP Levinsohn and Petrin OLS Ordinary Least Squares OP Olley and Parker R&D Research and Development SMEs Small and Medium-sized Enterprises TFP Total Factor Productivity ABSTRACT The majority of enterprises in Vietnam is categorized as small and medium sized (SMEs) firms which play an important role to the sustainable growth of the Vietnamese economy As such, improving the productivity of the SMEs is essentially needed and this request becomes a crucial mission for the governments It is generally accepted that innovation and technology improvement are key drivers of productivity (Bartelsman & Doms, 2000) However, they have not been well-acknowledged by the SMEs in Vietnam even though their huge contribution to firm’s productivity is unarguable This study aims to examine the relationship between innovation and productivity in the Small and Medium-sized Enterprises (SMEs) in Vietnam To establish and quantify this relationship, this study employs the two-stage process: (i) the estimation of total factor productivity for each firm; and (ii) a determination of an innovation – productivity relationship In the first stage, total factor productivity is estimated based on production function using the input and output approach However, firms might adjust their input level according to expected productivity shock As such, a potential endogeneity caused by possible relationship between input decision and productivity shocks (unobserved productivity shock) might exist To deal with this problem of endogeneity, an approach developed by Levinsohn and Petrin is applied to estimate firm’s total productivity In the second stage, the systemGMM approach is adopted to examine the relationship between innovation and productivity An unbalanced panel dataset from five Small and Medium-sized Enterprises surveys from 2005 to 2013 is used in this study Findings from this study indicate that, in the context of Vietnam, when innovation is measured as innovation expenditure intensity and high-quality labor share in total firm’s labor force, innovation activities provide positive and significant impact on firm’s productivity In addition, past value of firm’s productivity also has significant relationship with its current level This finding implies that higher (lower) level of current productivity could lead to higher (lower) level of productivity in the future The study also provides empirical evidence to confirm that larger firms might perform better than the relatively smaller firms In contrast, capital structure provides negative impact on firm’s productivity However, this study fails to provide any evidence to support the view that longevity of firm does provide significant impact on productivity of firms Key words: Vietnam SMEs; Total factor productivity; Productivity Shock; Innovation, GMM TABLE OF CONTENTS CHAPTER INTRODUCTION .1 1.1 Problem statement 1.2 Research objectives .2 1.3 Research questions 1.4 Research motivations .2 1.5 Research scope and data 1.6 The structure of this study .3 CHAPTER LITERATURE REVIEW 2.1 Schumpeter Theory of Innovation – How does Innovation play its role in economic development? 2.2 Productivity: concept and measurements 2.1.1 Concept 2.1.2 Measurements 2.1.3 General productivity determinants .12 2.3 Innovation: concept and measurements .16 2.1.4 Concept 16 2.1.5 Measurements .17 2.4 How has the relationship between innovation and firms’ performance been analysed in the literature? 18 CHAPTER 23 RESEARCH METHODOLOGY 23 3.1 An overview of Vietnamese Small and Medium-sized Enterprises 23 3.1.1 Statistic overview 23 3.1.2 Difficulties 26 3.2 Methodology 27 3.1.3 Conceptual framework 27 3.1.4 Model identification 29 3.3 Research hypotheses and concept measurements 34 3.1.5 Research hypotheses .34 3.1.6 Concept and variable measurements 34 3.4 Data sources 36 CHAPTER 39 EMPIRICAL RESULTS 39 4.1 Total Factor Productivity of Vietnamese SMEs 39 4.1.1 Data descriptions 39 4.1.2 Total factor productivity from production function estimation of Vietnamese SMEs 42 4.2 Innovation – Firm’s productivity relationship .45 4.1.3 Data descriptions 45 4.1.4 The relationship between innovation expenditure intensity and firm’s productivity 46 4.1.5 The relationship between high-quality labor share in total firm’s labor force and their productivity 49 CHAPTER 52 CONCLUSION AND POLICY IMPLICATION 52 5.1 Conclusion remarks .52 5.2 Policy implications 54 5.3 Limitation and potential future research 54 REFERENCES 56 APPENDIX 1: Empirical studies on general productivity determinants 62 APPENDIX 2: Empirical studies on relationship between innovation and firm’s performance 65 APPENDIX 3: Durbin – Wu Hausman test for endogeneity 69 APPENDIX 4: Durbin – Wu Hausman test for endogeneity 71 LIST OF TABLES AND FIGURES Table 3.1: Classification of SMEs in Vietnam Table 3.2: Concepts and measurements of variables used in the study Table 3.3: Number of observation in selected industries in dataset Table 3.4: Number of observation after filtering Table 3.5: Number of observation after filtering in stage Table 4.1: Descriptive statistics of production function variables Table 4.2: Comparison of OLS, Fixed Effect and LP estimators in Foods, Woods and Rubber and Plastics Table 4.3: Comparison of OLS, Fixed Effect and LP estimators in Non-metallic mineral, Fabricated metal and Furniture Table 4.4: Descriptive statistics of TFP and its determinants Table 4.5: Regression results of innovation expenditure intensity and firm’s productivity Table 4.6: Regression results of high-quality labor shareity of Vietnamese SMEs and open up new aspects of innovation – productivity relationship need intensive research 55 ... between innovation and performance 6 Rosenbusch, Brinckmann and Bausch (2011) Lokshin, Belderbos and Carree (2008) - Innovation information from PINTEC of Brazilian Institute of Geography and Statistics... - Innovation output: Three types of innovation dummies: product, process and organizational innovation; interactions; innovation sales share - Innovation expenditure per sales - Dummy variables... regressed against innovation variables, instrumented by the same set of variables above - Descriptive and quantitative approach: factor analysis - Structural equation modelling - Positive impact of