Outsoursing and total factor productivity evidence from vietnamese small and medium sized enterprises

UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM ERASMUS UNIVERSITY ROTTERDAM INSTITUTE OF SOCIAL STUDIES THE NETHERLANDS VIETNAM – THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS OUTSOURCING AND TOTAL FACTOR PRODUCTIVITY: EVIDENCE FROM VIETNAMESE SMALL AND MEDIUM-SIZED ENTERPRISES BY PHAM THI HOA TIEN MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, December 2017 UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS OUTSOURCING AND TOTAL FACTOR PRODUCTIVITY: EVIDENCE FROM VIETNAMESE SMALL AND MEDIUM-SIZED ENTERPRISES A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By PHAM THI HOA TIEN Academic Supervisor: PHAM THI BICH NGOC HO CHI MINH CITY, December 2017 DECLARATION This is to certify that this thesis titled “Outsourcing and total factor productivity: evidence from Vietnamese Small and Medium-sized Enterprises”, which is submitted in fulfillment of the requirements for the degree of Master of Arts in Development Economics to the Vietnam Netherlands Program (VNP) The thesis constitutes only my original work and due supervision and acknowledgement have been made in the text to all material used Page i ACKNOWLEDGEMENT First, I would like to thank my supervisor - Dr Pham Thi Bich Ngoc for her support, advice, and valuable guidance during the thesis process Secondly, I would like to thank Dr Truong Dang Thuy who also gave me useful advice for my thesis I also would like to extend my thanks to the Vietnam – Netherlands program, professors, staffs, and classmates, for their help, encouragement and incredible knowledge Finally, I would like to thank my family and friends, who always unconditionally supported me in not only the thesis writing but also my whole life Pham Thi Hoa Tien Ho Chi Minh City, December 2017 Page ii ABBREVIATIONS SMEs : Small and Medium-sized Enterprises R&D : Research and Development GDP : Gross Domestic Product ROE : Return on equity OECD : Organization for Economic Co-operation and Development ILSSA : Labor Studies and Social Affairs MOLISA : Ministry of Labor, Invalids and Social Affairs SSE : Stockholm School of Economics GSO : General Statistic Office TFP : Total Factor Productivity TCT : Transaction Cost Theory RBV : Resource-Based View RDT : Resource Dependency Theory GMM : Generalized Method of Moment 2SLS : Two Stages Least Square CDM : Crépon, Duguet and Mairesse IV : Instrument Variables OP : Olley and Parker LP : Levinsohn Petrin OLS : Ordinary Least Square FE : Fixed Effects RE : Random Effects FEM : Fixed Effects Model REM : Random Effects Model Page iii ABSTRACT This study aims to examine the impacts of outsourcing activities on firms total factor productivity of 4,549 Vietnamese enterprises by using a panel dataset of Small and Mediumsized Enterprises during the period from 2005 to 2013 It is supposed to contribute to existing empirical, literature by employing the complementarity and substitutability test to investigate the effect of outsourcing on firms’ total factor productivity The total factor productivity in this study is calculated based on Levinsohn Petrin method Furthermore, the Fixed Effects with Driscoll Kraay standard error model, which has the advantage of correcting the problem of autocorrelation and heteroskedasticity is applying to get the better result of outsourcing and firms’ total factor productivity relationship estimation The finding proves a significant positive nexus between outsourcing and firms’ total factor productivity and confirms that firms spend more on outsourcing will get higher total factor productivity index These results are supported by a majority of empirical papers about relationship of outsourcing and total factor productivity and outsourcing’s theories From the findings, this study will give some discussion as well as some policy recommendations for firms to enhance their productivity Key words: Vietnamese SMEs, Total factor productivity, Driscoll Kraay Page iv ACKNOWLEDGEMENT ABSTRACT TABLE OF CONTENT LIST OF TABLES LIST OF FIGURES CHAPTER 1.1 Research problems 1.2 Research objectives and questions 1.2.1 Research 1.2.2 Research 1.3 Data and methodology 1.4 Thesis structure CHAPTER 2.1 Outsourcing 2.1.1 Definitio 2.1.2 Theoreti 2.1.2.1 2.1.2.2 2.1.2.3 2.2 Total factor productivity 2.2.1 Definitio 2.2.2 Measure Page v 2.3 Empirical studies- outsourcing and TFP 2.4 Conceptual framework CHAPTER 3.1 Data source 3.2 Research model 3.2.1 Dependen 3.2.2 Independe 3.2.2.1 3.2.2.2 3.3 Methodological approach 3.4 Econometric approach 3.4.1 Method fo 3.4.2 Method fo 3.4.1.1 3.4.2.1 3.4.2.2 3.4.2.3Fixed effects model with Driscoll Kraay standard erro CHAPTER 4.1 Summary statistics and analysis 4.1.1 Data summ 4.1.2 Summary 4.1.3 Model spe 4.2 Empirical results Page vi 4.2.1 Step 1: C 4.2.2 Step 2: T 4.2.3 Step 3: T CHAPTER 5CONCL 5.1Main findings 5.2Discussion and suggested policies 5.3Limitation and potential future research REFERENCE APPENDIX Page vii LIST OF TABLES Table 3.1 Number observations in dataset 2005-2013 16 Table 3.2 Variables description 23 Table 4.1 Observations by type of firms Error! Bookmark not defined Table 4.2 Observations by type of firms in the period 2005-2013 31 Table 4.3 Firms types with and without outsourcing .31 Table 4.4 Firms sizes in the period 2005-2013 32 Table 4.5 Descriptive statistics of TFP and other variables .33 Table 4.6: Firms sizes with and without outsourcing 34 Table 4.7 Correlation between variables 35 Table 4.8: Comparision of OLS, Fixed Effect and LP estimation 36 Table 4.9 : Regression results of different TFP between outsourcing firms and none outsourcing firms .38 Table 4.10: Regression results of TFP within outsourcing firms 39 v Page viii demonstrated though the increasing number of using outsourcing services in Vietnam In addition, the finding of this study confirm again that the effect of outsourcing is also important for Vietnamese SMEs in the integration process with international markets since it benefits can enhance firms’ performance and contribute to develop economy of Vietnam, especially increase the competitiveness of Vietnamese enterprises Based on the empirical findings, this study would prove some recommendations to improve outsourcing practices in Vietnam for both the Government and enterprises For the Government Adopt policies to encourage and support the implementation of outsourcing in business, educate the outsourcing advantage awareness for Small Medium sized enterprises The majority participants of Vietnamese economy are small and medium-sized enterprises and these SMEs play a vital role in nexus to employment, contributing to overall GDP Hence, it is necessary to have policies, which create the favorable conditions to enhance the productivity of Vietnamese SMEs Besides that, being aware of outsourcing advantages is necessary since may help enterprise improve their productivity However, the development of outsourcing activities in business actor has to be come from cooperation between the Government and enterprises Therefore, Government should adopt policies to enhance outsourcing knowledge for enterprises by organizing seminars to present benefits of outsourcing, open more economic forums across country to provide enterprise the chance to access opportunities for employ outsourcing activities In addition, Government should design special programs to support and encourage enterprises develop their outsourcing activities such as reduced interest rates with flexible terms and conditions since the capability of enterprises alone may be insufficient to employ outsourcing activities For the enterprises: Enhance the knowledge about benefits of outsourcing activities on productivity within enterprises: The increasing of outsourcing advantages knowledge should begin from the heads of companies, managers or those who have vital role in orienting the development of firm Their decisions have huge impacts on both business strategies and performance of Page 43 enterprises, especially for small and medium-sized enterprises (SMEs) In this sense, firm’s managers are expected to acknowledge and understand the important role outsourcing activities in improving their efficiency first, and after that they may lead firms to employ outsourcing activities This study proposes some evidences for positive relationship between outsourcing activities and firm total factor productivity in for specific case of Vietnamese SMEs Therefore, enterprises are encouraged to imply more outsourcing activities to be more productive Propose long-term strategies for implying outsourcing activities with appropriate steps in different periods: The implementation of outsourcing activities with immediately improving their productivity would be not a simple matter that firm can achieve in the short term This practice is due to the limitations of firm’s resources, especially the financial capability Furthermore, this research argues that when implying outsourcing activities, larger firms intend to have higher productivity since their financial resources are able to cover the initial cost of outsourcing implementation Hence, smaller enterprises should have carefully plans and strategies to imply outsourcing step-by-step in order to improve their productivity In addition, the result of this study reveals that older firms will get higher total factor productivity index than younger firms when applying outsourcing This is easy to understand since older firms with more experiences will get higher number of total factor productivity For firms, those have outsourcing activities already, results from this study suggest that firm should spend more expenditure on outsourcing activities by contracting out more low value added internal activities to enhance their total factor productivity 5.3 Limitation and potential future research Despite the fact that this study is carried out strictly with theoretical background, literature review and standard econometric method However, the study still faces some limitations that need to overcome in future researches to gain better results Firstly, this study only considers the effect of outsourcing to Vietnamese SMEs’ total factor productivity in two dimensions: dummy outsourcing variable, outsourcing expenditure intensity but unable to measure outsourcing in term of different types of Page 44 outsourcing such as onshore outsourcing versus offshore outsourcing, labor outsourcing versus services outsourcing and so on Therefore, we suggest that further research should compare the different outsourcing’s effect on TFP due to different type of outsourcing Secondly, the rationale of firm to making outsourcing decision is not studied in this research There are many reasons for employing outsourcing such as the problem of constraints capacity due to equipment, capacity constraints due to technology, constraints of labor, and so on Hence, understanding the motivation of enterprises for outsourcing, we can define which constrain matters that business actor can solve better by applying outsourcing The expansion of this topic for future research could be which rationale deciding the better practices of outsourcing Finally, this research utilizes innovation as dummy variable in control variable group to strengthen the result of regression; therefore, it is lack of many other effects of innovation on TFP under outsourcing’s effect circumstances As a result, investigating the interaction of innovation and outsourcing impact on TFP will be a new problem for further research In sum up, despite some limitation existed in this study, it may contribute somehow to the literature of outsourcing-total factor productivity of Vietnamese SMEs and open up some new aspects of outsourcing-total factor productivity relationship require more indepth research Page 45 REFERENCE Amiti, M., & Wei, S.-J (2006) Service offshoring and productivity: evidence from the United States Retrieved from Antonietti, R., Ferrante, M R., & Leoncini, R (2016) Local market size, social capital and outsourcing: evidence from Emilia Romagna Small 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HAGUE THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS OUTSOURCING AND TOTAL FACTOR PRODUCTIVITY: EVIDENCE FROM VIETNAMESE SMALL AND MEDIUM- SIZED ENTERPRISES A thesis... This is to certify that this thesis titled “Outsourcing and total factor productivity: evidence from Vietnamese Small and Medium- sized Enterprises? ??, which is submitted in fulfillment of the requirements... Therefore, this study employs total factor productivity to measure firms’ productivity 2.2.2 Measurement of total factor productivity Multifactor productivity or total factor productivity was regularly