Determinants of firm exit in vietnam

VIETNAM – THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS DETERMINANTS OF FIRM EXIT IN VIETNAM BY TRAN THI LAM MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, MAY 2017 Non-VIB VIETNAM – THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS DETERMINANTS OF FIRM EXIT IN VIETNAM A thesis submitted in partial fulfilment of requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By TRAN THI LAM Academic Supervisor: DR TRUONG DANG THUY HO CHI MINH CITY, MAY 2017 Non-VIB TABLE OF CONTENTS ACKNOWLEDGEMENT ABSTRACT .2 LIST OF FIGURE AND TABLES CHAPTER 1: INTRODUCTION .4 1.1 Problem Statement 1.2 Research objectives 1.3 Research questions 1.4 Scope of research CHAPTER 2: LITERATURE REVIEW 2.1 Literature Review .8 2.1.1 Firm exit behavior 2.1.2 Determinants of the decision to exit 2.2 Review of empirical studies on firm survival/exit 17 2.2.1 Approaches of analyzing firm exit and survival .17 2.2.2 Emprical analyses of firm survival 18 2.2.3 Emprical analyses of firm Exit 20 CHAPTER 3: RESEARCH METHODOLOGY .23 3.1 Conceptual framework and the econometric model .23 3.1.1 Conceptual framework 23 3.1.2 Theoretical reviews 24 3.1.3 The econometric model 25 3.2 Data and variables 27 CHAPTER 4: RESEARCH RESULT 29 4.1 Descriptive Statistic 31 4.2 Regression results 34 4.2.1 Bivariate analysis 34 4.2.2 Multivariate analysis .36 4.2.3 Multicollinearty analysis 37 4.2.4 Results of random-effect logistic regressions……………………………………… …38 4.2.5 Marginal effects .41 Non-VIB CHAPTER 5: CONCLUSION…………………………………………………………………… 43 5.1 Conclusion 43 5.2 Policy Implications 44 5.3 Thesis limitations and suggestion for further researches 44 REPERENCE 46 APPENDICES 56 Non-VIB ACKNOWLEDGEMENT Firstly, I would like to express my sincere gratitude to my advisor Dr TRUONG DANG THUY for his enthusiastic assistance He has not only several insightful comments based on his immense knowledge helps me to solve all my problems, but also encourages me to finish my thesis I would like to express my thanks to my friends in MDE class 19, and 20, especially Duy Chinh (class 19), Do Luat (class 20), Duy Lap (class 20), Nguyen Thai Duong (class 20) and one special friend who have given their limited time to help me solved the difficulties in the process I also would like to send love to my family and my close friends for always being beside me, spiritually encouraging me and letting me know that I am not alone in all difficult situations Finally, my special thanks also to my husband and my baby who help me to have a strong motivation to finish my thesis Non-VIB 1|Page ABSTRACT This paper examines the determinants of firm exit in Vietnam using SME data from 2005 to 2011 Using panel data from 10 provinces and cities in Vietnam and applying the logistic regression method, this study finds that total asset and leverage have positive impacts on firm exit while the size, age, investment and total gross profit negatively affect firm exit Keywords: Small and medium enterprise, total asset, firm exit, firm size, firm age, debt leverage, investment, total gross profit, random effects logistic regression Non-VIB 2|Page LIST OF FIGURE AND TABLES Figure 1.1: Number of registered enterprises and stop business over period 2007-2015 Figure 3.1: Conceptual framework Table 3.1: List of surveyed province/city Table 3.2: Descriptive variables Table 4.1: Descriptive Statistic Table 4.2: The number of survey exit firms in each city/province Table 4.3: Overview of firm exit in Viet Nam Table 4.4: Firm exit in province/city Table 4.5 A comparison between Firm non-exit and Firm exit in term of variables Table 4.6: Covariance matrix Table 4.7: VIF index Table 4.8 Results of three Random – effect logistic regressions Table 4.9 Marginal effect results Non-VIB 3|Page CHAPTER 1: INTRODUCTION 1.1 Problem Statement The stable development and growth of firms are key factors what influence directly the socioeconomic development On the other hand, firm’s activities affect almost all respects of economy and society such as rate of unemployment, national budget, activity of trade, and other macroeconomic indicators The role of small and medium enterprises (SMEs) in economic growth has been recognized through many studies in the world recently An article by Joshua and Quartey (2010) describes that SMEs play important roles to an economic development as creating efficient and productive jobs, the seeds of large corporations and the fuel maintaining the national machine In advanced economies, the number of firms in the SME sector, which has substantial labors, is larger than the multinational one (Mullineux, 1997) In addition, Feeney and Riding (1997) reveal that governments in most countries have conducted several policies to encourage the development of SMEs Whereas, the growth of SMEs promotes the process of redistribution of both inter and intraregional division of the firm and they also become a countervailing force again the influence of large-scale corporations There is approximately 91% of the enterprises is Small, Medium and Micro Enterprises (SMMEs) in South Africa (Hassbroeck 1996, Berry et al 2002) They create about 61% jobs for labor source and also represent for 52%- 57% of GDP (CSS 1998, Ntsika 1999, Gumede 2000, Berry et al 2002) In additional, Small and medium enterprises also account over 90% of the private business sector and play a crucial role in contributing GDP in most African countries (UNIDO 1999) Viet Nam has changed from a centralized planned economy to a socialist-oriented market economy after “Đổi Mới” reform period since mid-1980 Undergoing a period of formation and development, the Vietnam economy continues to grow and get many substantial achievements A private ownership sector contributes a vital role for Vietnam economic growth According to Vietnam General Statistics Office, Vietnam attains around 7% GDP growth over the period 2000 to 2005 and continues to grow at 7.01 percent from 2005 to 2010 The process of developing keeps in stable until now, especially SMEs sector Small and medium enterprises (SMEs) have an essential role to play in motivating growth, generating jobs and contributing to poverty reduction The Non-VIB 4|Page contribution of SMEs is a major tax resource for Vietnam budget annually Furthermore, according to the report of the Vietnam Chamber of Commerce and Industry (VCCI), we have 543,963 enterprises in 2011, about nearly 513,000 enterprises in 2015, but there is nearly 97 percent of small and medium firm, mainly private businesses The important role of SME is increasing thanks to not only contributing significantly to the Gross domestic product (GDP), reducing poverty, enhancing security society, but also creating more than one million new jobs per year According to Ministry of Science and Technology, there are 692 thousand enterprises registered business in the period 2007 – 2015 However, there are too many enterprises not enough power to survive in globalized market and international integration and move out of market every year According to General Statistics Office of Vietnam, more and more firms exit and stop activity in annual reports (2015: 80,900 firms; 2014: 67,800 firms; 2013: 70,500 firms and 2012: 63,500 firms) Figure 1.1 shows that the number of firms that ceased operations is increasing in the recent years 100.000,00 90.000,00 80.000,00 70.000,00 60.000,00 50.000,00 40.000,00 30.000,00 20.000,00 10.000,00 - Figure 1.1: Number of registered enterprises and stop business over period 2007-2015 (Source: Administrative Department of Business Registration - Ministry of Science and Technology) Therefore, this is a crucial problem requires a reaction from government official and policy makers to decrease the number of firm stopping business every year Non-VIB 5|Page Bernard, Andrew, and J Bradford Jensen 2002 “The Deaths of Manufacturing Plants.” National Bureau of Economic Research Working Paper no 9026, NBER, Cambridge, MA Blanchard, P., Huiban, J.P and Mathieu, C., 2012 The determinants of firm exit in the French food industries Revue d'Etudes en Agriculture et Environnement-Review of agricultural and environmental studies, 93(2), pp.193-212 Bloom, N., M Draca and J Van Reenen (2011), ‘Trade induced technical change? The impact of Chinese imports on innovation, IT and productivity,’ NBER Working Paper 16717 Bruderl, J and R Schussler, 1990, Organizational Mortality: The Liabilities of Newness and Adolescence, Administrative Science Quarterly 35, 530–547 Boone, J., J C van Ours and H van der Weil (2007), ‘How (not) to measure competition,’ CEPR Discussion Paper 6275 Camacho, A., & Rodriguez, C (2013) Firm exit and armed conflict in Colombia Journal of Conflict Resolution, 57(1), 89-116 Caves, R E 1981 Intra-industry trade and market structure in the industrial countries Oxford Economic Papers, 33(2): 203-223 Caves, R E 1998 Industrial organization and new findings on the turnover and mobility of firms, Journal of Economic Literature, 36(4): 1947-1982 Caves R.E (1998) Industrial organization and new findings on the turnover and the mobility of firms, Journal of Economic Literature 36 (4), 1947-1982 Cefis, E., & Marsili, O (2005) A matter of life and death: innovation and firm survival Industrial and Corporate change, 14(6), 1167-1192 CSS, 1998 “Employment and Unemployment in South Africa 1994-1997”, South Africa Coucke, K., & Sleuwaegen, L 2008 Offshoring as a survival strategy: Evidence from manufacturing firms in Belgium Journal of International Business Studies, 39(8): 1261-1277 Non-VIB 48 | P a g e Coad, A and M Teruel (2013), ‘Inter-firm rivalry and firm growth: is there any evidence of direct competition between firms?’ Industrial and Corporate Change, 22, 397–425 Colantone, I and Sleuwaegen, L., 2010 International trade, exit, and entry: A cross-country and industry analysis Journal of International Business Studies, 41(7), pp.1240-1257 Cohen, W.M., Klepper, S., 1996 A reprise of size and R & D Economic Journal 106, 925–951 Das, S., & Das, S P (1996) Dynamics of entry and exit of firms in the presence of entry adjustment costs International journal of industrial organization, 15(2), 217-241 Das, Sanghamitra, and Krishna Srinivasan 1997 “Duration of Firms in an Infant Industry: The Case of Indian Computer Hardware.” Journal of Development Economics 53:157–67 Davis, S J., Haltiwanger, J C, & Schuh, S 996 Job creation and destruction Cambridge, MA: MIT Press Dimara, E., Skuras, D., Tsekouras, K., & Tzelepis, D (2008) Productive efficiency and firm exit in the food sector Food Policy, 33(2), 185-196 Disney, R., Haskel, J., & Heden, Y (2003) Entry, exit and establishment survival in UK manufacturing The Journal of Industrial Economics, 51(1), 91-112 Dunne P, Hughes A (1994) Age, size, growth and survival: UK companies in the 1980s J Ind Econ 42:115–140 Dunne T, RobertsMJ (1991) Variation in producer turnover across U.S manufacturing industries, in Geroski PA, Schwalbach J (eds) Entry and market contestability: an international comparison Blackwell, London 187–203 Dunne, Timothy, Mark Roberts, and Larry Samuelson 1988 “Patterns of Firm Entry and Exit in U.S Manufacturing Industries.” RAND Journal of Economics 19, no.4:495–515 Doi N 1999 The determinants of firm exit in Japanese manufacturing industries Small Business Economics 13: 331–337 Non-VIB 49 | P a g e Dixit, A and Chintagunta, P.K., 2007 Learning and exit behavior of new entrant discount airlines from city-pair markets Journal of Marketing, 71(2), pp.150-168 Esteve-Pérez, S., & Mañez-Castillejo, J A (2008) The resource-based theory of the firm and firm survival Small Business Economics, 30(3), 231-249 Ericson R., Pakes A (1995) Markov-perfect industry dynamics: A framework for empirical work, Review of Economic Studies, 62 (1), 53-82 Fariñas, J.C., Moreno, L., 2000 Firms' growth, size and age: a nonparametric approach Review of Industrial Organization 17, 249–265 Feeney, L S., and A L Riding, 1997 Business Owners’ Fundamental Tradeoff: Finance and the Vicious Circle of Growth and Control, Canadian Business Owner, November Ferragina, A., Pittiglio, R., & Reganati, F (2012) Multinational status and firm exit in the Italian manufacturing and service sectors Structural Change and Economic Dynamics, 23(4), 363-372 Fichman, M and D Levinthal, 1991, Honeymoons and the Liability of Adolescence: A New Perspective on Duration Dependence in Social and Organizational Relationships, Academy of Management Review 16, 442–468 Flynn JE (1991) The determinants of exit in an open economy Small Bus Econ 3:225–232 Hall BH (1987) The relationship between firm size and firm growth in the U.S manufacturing sector J Ind Econ 35:583–605 Fotopoulos G, Louri H (2000) Location and survival of new entry Small Bus Econ 14:311–321 Frank M Z (1988) An Intertemporal Model of Industrial Exit Quarterly Journal of Economics 103:333–344 Frazer, G., 2005 Which firms die? A look at manufacturing firm exit in Ghana Economic Development and cultural change, 53(3), pp.585-617 Fudenberg, D and J Tirole (1986), "A Theory of Exit in Duopoly," Econometrica, (July), 943-60 Non-VIB 50 | P a g e Geroski, P A 995 What we know about the entry? International Journal of Industrial Organization 13(4): 421-440 Ghemawat P., Nalebuff B (1985) Exit Rand Journal of Economics 16:184–194 Gopinath M., Pick D and Li Y (2004) An empirical analysis of productivity growth and industrial concentration in US manufacturing, Applied Economics 36 (1), 1-7 Görg, H., & Strobl, E (2000) Multinational companies, technology spillovers and firm survival: Evidence from Irish manufacturing (No 2000, 12) Research paper/Centre for Research on Globalisation and Labour Markets Greenaway, D., Gullstrand, J., & Kneller, R 2008 Surviving globalization Journal of International Economics, 74(2): 264-277 Grossman, G M 1984 International trade, foreign investment, and the formation of the entrepreneurial class American Economic Review, 74(4): 605-614 Grubel, H G., & Lloyd, P J 1975 Intra-industry trade: The theory and measurement of international trade in differentiated products New York: John Wiley & Sons Gumede, V 2000 “Growth and Exporting of Small and Medium Enterprises in South Africa, Some Thoughts on Policy and Scope for Further Research”, Trade and Industrial Policy Strategies, South Africa Hall BH (1987) The relationship between firm size and firm growth in the U.S manufacturing sector J Ind Econ 35:583–605 Huyghebaert, Nancy, and Linda Van de Gucht (2004) ‘Incumbent strategic behavior in financial markets and the exit of entrepreneurial start-ups,’ Strategic Management Journal 25, 669–88 Heiss, Florian, and Jens Koke (2004) ‘Dynamics in ownership and firm survival: evidence from corporate Germany,’ European Financial Management 10, 167–95 Hasbrouck, D 1996 “Entrepreneurship Training for the Informal Sector in South Africa, in Educating Entrepreneurs in Modernising Economies”, Aldershot, Hants: Avebury 51 | P a g e Non-VIB Hopenhayan, H.A (1992), "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, 60 (5), 1127-50 Ilmakunnas, P., & Topi, J (1999) Microeconomic and macroeconomic influences on entry and exit of firms Review of Industrial Organization, 15(3), 283-301 Jovanovic, B (1982) Selection and the Evolution of Industry Econometrica: Journal of the Econometric Society, 649-670 Khandelwal, A (2010), ‘The long and short (of) quality ladders,’ The Review of Economic Studies, 77(4), 1450–1476 Kimura, F., & Kiyota, K (2006) Exports, FDI, and productivity: Dynamic evidence from Japanese firms Review of World Economics, 142(4), 695-719 Kovenock D, Phillips G 1997 Capital structure and product market rivalry: how we reconcile theory and evidence? Review of Financial Studies 85: 403–408 Kovenock D, Phillips G 1997 Capital structure and product market behavior: An examination of plant exit and investment decisions The Review of Financial Studies, 10(3), 767-803 Klepper, S (1996), "Entry, Exit, Growth, and Innovation over the Product Life Cycle," American Economic Review, 86 (3), 562-83 and K Simmons (2000), "Dominance by Birthright: Entry of Prior Radio Producers and Competitive Ramifications in the U.S Television Receiver Industry," Strategic Information Journal, 21 (10), 997-1016 Klein, M W., Schuh, S., & Triest, R K 2003 Job creation, job destruction, and the real exchange rate Journal of International Economics, 59(2): 239-265 Kneller, R and D McGowan (2012) Tax policy and firm entry and exit dynamics: Evidence from OECD countries Discussion Papers in Economics 12/01, The University of Nottingham Lang, Larry, Eli Ofek, and RenC Stub, paper (New York University, New York, Non-VIB 1994, Leverage, investment, and firm growth, Working NY; Ohio State University, Columbus, OH) 52 | P a g e Lieberman, M.B., 1990 Exit from declining industries: “shakeout” or “stakeout”? Rand Journal of Economics 21, 538–554 Liedholm, Carl, and Donald Mead 1999 Small Enterprises and Economic Development: The Dynamics of Micro and Small Enterprises London: Routledge MacDonald JM (1986) Entry and exit on the competitive fringe South Econ J 52:640–652 Mahmood T (1992) Does the hazard rate of new plants vary between high- and low-tech industries? Small Bus Econ 4:201–210 Malerba, F (2007), ‘Innovation and the dynamics and evolution of industries: Progress and challenges,’ International Journal of Industrial Organization, 25(4), 675–699 Mahmood (1995), "New Firm Survival: New Results Using a Hazard Function," Review of Economics and Statistics, 77 (1), 97-103 Mahmood T (2000) Survival of newly founded businesses: a log-logistic model approach Small Bus Econ 14:223–237 Mata, J., Machado, J.F., 1996 Firm start-up size: a conditional quantile approach European Economic Review 40, 1305–1323 Mata J, Portugal P (1994) Life duration of new firms J Ind Econ 27:227–246 Mata, J., Portugal, P., & Guimaraes, P (1995) The survival of new plants: Start-up conditions and post-entry evolution International Journal of Industrial Organization, 13(4), 459-481 Mata, J., & Portugal, P (2002) The survival of new domestic and foreign‐owned firms Strategic Management Journal, 23(4), 323-343 McCann, B T., & Vroom, G (2010) Pricing response to entry and agglomeration effects Strategic Management Journal, 31(3), 284-305 McPherson, Michael A 1995 “The Hazards of Small Firms in Southern Africa.” Journal of Development Studies 32 (October): 31–54 Non-VIB 53 | P a g e Melitz, Mark (2003) ‘The impact of trade on intra-industry reallocations and aggregate industry productivity,’ Harvard University Working Paper Millinuex, A W 1997 “The Funding of Non-Financial Corporations (NFCs) in the EU (19711993): Evidence of Convergence”, Mimeo, Department of Economics, University of Birmingham Musso, P., & Schiavo, S (2008) The impact of financial constraints on firm survival and growth Journal of Evolutionary Economics, 18(2), 135-149 Ntsika, 1999 “State of Small Business in South Africa”, SARB Quarterly Bulletins; and Stats SA Releases, South Africa OECD 2006 OECD_APEC keynote paper on removing barriers to SME access to international markets OECD_APEC Global Conference, Athens, November Paris: OECD Olley, G S., & Pakes, A (1992) The dynamics of productivity in the telecommunications equipment industry (No w3977) National Bureau of Economic Research Olley, Steve, and Ariel Pakes 1996 “The Dynamics of Productivity in the Telecommunications Equipment Industry.” Econometrica 64, no 6:1263–97 Ofek, E., 1993 Capital structure and firm response to poor performance: An empirical analysis Journal of financial economics, 34(1), pp.3-30 Roberts, Mark J., and James R Tybout 1996a “Industrial Evolution in Developing Countries: A Preview.” In Roberts and Tybout 1996b Segarra A, Callejón M (2002) New firms’ survival and market turbulence: new evidence from Spain Rev Ind Organ 20:1–14 Sheppard, J.P (1994), “Strategy and Bankruptcy: An Exploration into Organizational Death,” Journal of Management, 20 (4), 795–833 Siegfried, J J., & Evans, L B (1994) Empirical studies of entry and exit: a survey of the evidence Review of Industrial Organization, 9(2), 121-155 Non-VIB 54 | P a g e Tsionas, E G., & Papadogonas, T A (2006) Firm exit and technical inefficiency Empirical Economics, 31(2), 535-548 Tybout, 2003 Plant- and firm-level evidence on the "new" trade theories In E K Choi & Harrigan (Eds), Handbook of international trade: 388-415 Maiden, MA: Blackwell Publishing UNIDO, 1999 SMEs in Africa Survive against all Odds, http://www.unido.org/doc/view? document_id=3927&language_code=en Utar, H and L B Torres Ruiz (2013), ‘International Competition and Industrial Evolution: Evidence from the Impact of Chinese Competition on Mexican Maquiladoras,’ Journal of Development Economics, 105, 267–287 Van Stel, A., Carree, M., & Thurik, R (2005) The effect of entrepreneurial activity on national economic growth Small business economics, 24(3), 311-321 Van Kranenburg, H.L., F.C Palm, and G.A Pfann (2002), "Survival in a Concentrating Industry: The Case of Daily Newspapers in the Netherlands," Review of Industrial Organization, 21(3), 283303 Wagner J 1994 The post-entry performance of new small firms in German manufacturing industries Journal of Industrial Economics 42: 141–154 Witteloostuijn, A.V (1998), “Bridging Behavioral and Economic Theories of Decline: Organizational Inertia, Strategic Competition, and Chronic Failure,” Management Science, 44 (4),501–519 Yang, Q.G., and Temple, P., 2012 Reform and competitive selection in China: An analysis of firm exits Structural Change and Economic Dynamics, 23(3), pp.286-299 Zingales, Luigi (1998) ‘Survival of the fittest of fattest? Exit and financing in the trucking industry,’ Journal of Finance 53, 905–38 Non-VIB 55 | P a g e APPENDICES Appendix 1: VIF test Appendix 2: Logistic regression with Random effects Random-effects logistic regression Group variable: id Random effects u_i ~ Gaussian avg = max = Integration method: mvaghermite Wald chi2(6) Log likelihood Likelihood-ratio test of rho=0: chibar2(01) = Non-VIB 56 | P a g e Appendix 3: The marginal effects for Model Average marginal effects Model VCE Expression dy/dx w.r.t asset size old tgp i lvr Appendix 4: Logistic regression with Random effects of sub-provinces Random-effects logistic regression Group variable: id Random effects u_i ~ Gaussian avg = max = Integration method: mvaghermite Wald chi2(15) Log likelihood prv Likelihood-ratio Non-VIB 57 | P a g e Appendix 5: The marginal effects for Model Average marginal effects Model VCE Expression dy/dx w.r.t asset size old tgp i lvr Appendix 6: Logistic regression with Random effects of sub-provinces and time Random-effects logistic Group variable: id Random avg = max = effects Integration u_i method: ~ regression Gaussian mvaghermite Wald chi2(18) Log likelihood prv year 2007 2009 2011 Likelihood-ratio Non-VIB 58 | P a g e Appendix 7: The marginal effects for Model Average marginal effects Model VCE Expression dy/dx w.r.t asset size old tgp i lvr Appendix 8: SCATTER THE PREDICTED PROBABILITY OF EXIT ON CONTINUOUS VARIABLES Label variable exit "Predicted probability of exit" Asset Size Non-VIB 59 | P a g e .5 0 AGE TGP Non-VIB 60 | P a g e .5 0 INVESTMENT Non-VIB 61 | P a g e .1 Lvr Non-VIB 62 | P a g e .. .VIETNAM – THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS DETERMINANTS OF FIRM EXIT IN VIETNAM A thesis submitted in partial fulfilment of requirements for the degree of MASTER OF. .. 2.1.1 Firm exit behavior 2.1.2 Determinants of the decision to exit 2.2 Review of empirical studies on firm survival /exit 17 2.2.1 Approaches of analyzing firm exit. .. fixed assets in the service of production and business Differences in the use of financial leverage of businesses replace the difference in the level of risk between firms in the same industry Non-VIB