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 wellacknowledged 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 system-GMM 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.Problem statement 1.2.Research objectives 1.3.Research questions 1.4.Research motivations 1.5.Research scope and data 1.6.The structure of this study CHAPTER LITERATURE REVIEW 2.1 Schumpeter Theory of Innovation – How economic development? 2.2.Productivity: concept and measurements 2.1.1 Concept 2.1.2 Measureme 2.1.3 General pro 2.3.Innovation: concept and measurements 2.1.4 Concept 2.1.5 Measureme 2.4 How has the relationship between innov analysed in the literature? CHAPTER RESEARCH METHODOLOGY 3.1.An overview of Vietnamese Small and M 3.1.1 Statistic ov 3.1.2 Difficulties 3.2.Methodology 3.1.3 Conceptual 3.1.4 Model iden 3.3.Research hypotheses and concept measur 3.1.5 Research h 3.1.6 Concept an 3.4.Data sources CHAPTER EMPIRICAL RESULTS 4.1.Total Factor Productivity of Vietnamese S 4.1.1 Data descri 4.1.2 Total fact Vietnamese SMEs 4.2.Innovation – Firm’s productivity relation 4.1.3 Data descri 4.1.4 The relatio productivity 4.1.5 The relati force and their productivity CHAPTER CONCLUSION AND POLICY IMPLICATION 5.1.Conclusion remarks 5.2.Policy implications 5.3.Limitation and potential future research REFERENCES APPENDIX 1: Empirical studies on general productivity determinants APPENDIX 2: Empirical studies on relationship between innovation and firm’s performance APPENDIX 3: Durbin – Wu Hausman test for endogeneity APPENDIX 4: Durbin – Wu Hausman test for endogeneity 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 share in total labor force and firm’s productivity Figure 3.1: Number of enterprises at 31/12 (by size of employees) Figure 3.2: Conceptual framework Jensen, M C (1986) Agency cost of free cash flow, corporate finance, and takeovers Corporate Finance, and Takeovers American Economic Review, 76(2) Jensen, M C., & Meckling, W H (1976) Theory of the firm: Managerial behavior, agency costs and ownership structure Journal of financial economics, 3(4), 305-360 Ha, D T T., & Kiyota, K (2014) Firm‐Level Evidence on Productivity Differentials and Turnover in Vietnamese Manufacturing Japanese Economic Review, 65(2), 193-217 Hall, B H., Lotti, F., & Mairesse, J (2008) Employment, innovation, and productivity: evidence from Italian microdata Industrial and Corporate Change, 17(4), 813-839 Hansen, L P (1982) Large sample properties of generalized method of moments estimators Econometrica: Journal of the Econometric Society, 1029-1054 Holtz-Eakin, D., Newey, W., & Rosen, H S (1988) Estimating vector autoregressions with panel data Econometrica: Journal of the Econometric Society, 1371-1395 Huergo, E., & Jaumandreu, J (2004) Firms' age, process innovation and productivity growth International Journal of Industrial Organization, 22(4), 541-559 Keele, L., & Kelly, N J (2006) Dynamic models for dynamic theories: The ins and outs of lagged dependent variables Political analysis, 14(2), 186-205 Keller, W., & Yeaple, S R (2009) Multinational enterprises, international trade, and productivity growth: firm-level evidence from the United States The Review of Economics and Statistics, 91(4), 821-831 Kim, E (2006) The impact of family ownership and capital structures on productivity performance of Korean manufacturing firms: Corporate governance and the “chaebol problem” Journal of the Japanese and International Economies, 20(2), 209-233 58 Li, H., & Atuahene-Gima, K (2001) Product innovation strategy and the performance of new technology ventures in China Academy of Management Journal, 44(6), 1123-1134 Lokshin, B., Belderbos, R., & Carree, M (2008) The productivity effects of internal and external R&D: Evidence from a dynamic panel data model Oxford bulletin of Economics and Statistics, 70(3), 399-413 Mairesse, J., Mohnen, P., Kremp, E., & KREMP, E (2005) The importance of R&D and innovation for productivity: A reexamination in light of the French innovation survey Annales d'Economie et de Statistique, 487-527 Mairesse, J., & Robin, S (2009) Innovation and productivity: a firm-level analysis for French Manufacturing and Services using CIS3 and CIS4 data (19982000 and 2002-2004) Paris: CREST-ENSAE Marschak, J., & Andrews, W H (1944) Random simultaneous equations and the theory of production Econometrica, Journal of the Econometric Society, 143-205 Margaritis, D., & Psillaki, M (2010) Capital structure, equity ownership and firm performance.Journal of Banking & Finance, 34(3), 621-632 Miguel Benavente, J (2006) The role of research and innovation in promoting productivity in Chile.Economics of Innovation and New Technology, 15(4-5), 301-315 Mohnen, P., & Hall, B H (2013) Innovation and productivity: An update Eurasian Business Review, 3(1), 47-65 Mortensen, P S., & Bloch, C W (2005) Oslo Manual-Guidelines for collecting and interpreting innovation data Organisation for Economic Cooporation and Development, OECD Myers, S C (1977) Determinants of corporate borrowing Journal of financial economics, 5(2), 147-175 59 Nelson, R R (1973) Recent exercises in growth accounting: new understanding or dead end? The American Economic Review, 63(3), 462-468 Nguyen, N A., Pham, Q E., Nguyen, D C., & Nguyen, D N (2007) Innovation and Export of Vietnam’s SME Sector’, MPRA Paper No 3256 Development and Policies Research Center Nickell, S (1981) Biases in dynamic models with fixed effects Econometrica: Journal of the Econometric Society, 1417-1426 Olley, G S., & Pakes, A (1992) The dynamics of productivity in the telecommunications equipment industry (No w3977) National Bureau of Economic Research Parisi, M L., Schiantarelli, F., & Sembenelli, A (2006) Productivity, innovation and R&D: Micro evidence for Italy European Economic Review,50(8), 2037-2061 Petrin, A., Poi, B P., & Levinsohn, J (2004) Production function estimation in Stata using inputs to control for unobservables Stata journal, 4, 113-123 Polder, M., Leeuwen, G V., Mohnen, P., & Raymond, W (2009) Productivity effects of innovation modes Santos, D F L., Basso, L F C., Kimura, H., & Kayo, E K (2014) Innovation efforts and performances of Brazilian firms Journal of Business Research, 67(4), 527-535 Roodman, D (2006) How to xtabond2: An introduction to difference and system GMM in Stata Center for Global Development working paper, (103) Rosenbusch, N., Brinckmann, J., & Bausch, A (2011) Is innovation always beneficial? A meta-analysis of the relationship between innovation and performance in SMEs Journal of business Venturing, 26(4), 441-457 Schreyer, P., & Pilat, D (2001) Measuring productivity OECD Economic studies, 33(2), 127-170 60 Schumpeter, J A (1912) 1934, The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest and the Business Cycle.Trans Redvers Opie Cambridge, MA: Harvard University Press Schumpeter, J A (1942) Socialism, capitalism and democracy Harper and Brothers Schumpeter, J A (1939) Business cycles: a theoretical, historical, and statistical analysis of the capitalist process McGraw-Hill Siedschlag, I., Zhang, X., & Cahill, B (2010) The effects of the internationalisation of firms on innovation and productivity Economic and Social Research Institute Working Paper, (363) Siegel, D., & Griliches, Z (1992) Purchased services, outsourcing, computers, and productivity in manufacturing In Output measurement in the service sectors (pp 429-460) University of Chicago Press Solow, R M (1957) Technical change and the aggregate production function The review of Economics and Statistics, 312-320 Tovar, B., Ramos-Real, F J., & De Almeida, E F (2011) Firm size and productivity Evidence from the electricity distribution industry in Brazil Energy Policy, 39(2), 826-833 Van Beveren, I (2012) Total factor productivity estimation: A practical review Journal of economic surveys, 26(1), 98-128 Vu, H N., & Doan, Q H (2015) Innovation and Performance of Enterprises: The Case of SMEs in Vietnam White,H (1982) Regularity conditions for Cox's test of non-nested hypotheses Journal of Econometrics, 19(2), 301-318 61 APPENDIX 1: Empirical studies on general productivity determinants References Cucculelli et al (2014) Objectives - Pioneer on analyzing the between ownership TFP in Italia context - Determine the impact of firm age on TFP in family owned firm in Italia relationship firm productivity growth De Kok et al (2006) Huergo and Jaumandreu (2004) Dhawan (2001) relationship innovation introduction productivity - If exist, whether firm life span matter? Examine the effect of firm size on the firm productivity in US 62 Estimate age Examine Tovar et al (2011) Examine the effect of firm performance Brazilian Industry Margaritis and Psillaki (2010) relationship firm leverage and their performance efficiency effect of capital structure - Determine the effect of capital efficiency relationship family Kim (2006) 63 size on Examine Test whether has ownership on structure Assess statuses, structure productivity Aw, Roberts and Winston (2007) behavior export investing in R&D and investing in improving labor force quality - Assess the impact of these on firm productivity Keller and Yeaple (2009) Examine the effect of FDI and international trade growth in US 64 on Analyze in above on APPENDIX 2: Empirical studies on relationship between innovation and firm’s performance Reference Siedschlag, Zhang Cahill (2010) Belderbos, Carree Lokshin (2004) Crespi Pianta (2009) Data and and and 65 Outp meas Panel 723 firms from Community Innovation Survey Ireland period 2004-2008 data of Labo produ Panel from Community Innovation Survey Netherlands in 1996 and 1998 for manufacturing firms 32 industries (including manufacturing data Labo produ grow ve in (prod are n mark 2056 produ grow of in of Labo produ grow and sectors) Europe countries from 1996 to 2001 Parisi, Schiantarelli and Sembenelli (2006) 941 manufacturing firms from surveys 1995 1998 Santos, Basso, Kimura and Kayo (2014) Data Brazilian firms in 2000, 2003, 2005 in which: 66 service in in Italy two in and grow (TFP deter using and (2003 appro of ROA ROS ROE Rosenbusch, Brinckmann and (2011) Lokshin, Belderbos and (2008) - Innovation information from PINTEC of Institute Geography and Statistics information from and Mercantil 42 studies Bausch 21,270 SMEs 304 Netherlands Carree manufacturing firms 1996 to 2001 67 Brazilian of Financial Serasa Gazeta empirical Categ on three return - grow - sto perfo Labor produ value from empl 68 APPENDIX 3: Durbin – Wu Hausman test for endogeneity IV (2SLS) estimation Estimates efficient for homoskedasticity only Statistics consistent for homoskedasticity only Total (centered) SS Total (uncentered) SS Residual SS -Underidentification test (Anderson canon corr LM statistic): Chi-sq(1) P-val = -Weak identification test (Cragg-Donald Wald F statistic): Stock-Yogo weak ID test critical values: 10% 15% 20% 25% Source: Stock-Yogo (2005) Reproduced by permission 69 -Sargan statistic (overidentification test of all instruments): -endog- option: Endogeneity test of endogenous regressors: Regressors tested: -Instrumented: invexpintensity Included instruments: dummy L.TFP lntotalassets capitalstructure firmage Excluded instruments: L.invexpintensity 70 APPENDIX 4: Durbin – Wu Hausman test for endogeneity IV (2SLS) estimation Estimates efficient for homoskedasticity only Statistics consistent for homoskedasticity only Total (centered) SS Total (uncentered) SS Residual SS -Underidentification test (Anderson canon corr LM statistic): Chi-sq(1) P-val = -Weak identification test (Cragg-Donald Wald F statistic): Stock-Yogo weak ID test critical values: 10% 15% 20% 25% 71 Source: Stock-Yogo (2005) Reproduced by permission -Sargan statistic (overidentification test of all instruments): -endog- option: Endogeneity test of endogenous regressors: Regressors tested: -Instrumented: highqualitylabor Included instruments: dummy L.TFP invexpintensity lntotalassets capitalstructure firmage Excluded instruments: L.highqualitylabor 72 ... non-linear in variable intermediate inputs and capital As developed by Robinson (1988), partially linear equation can be estimated using semiparametric estimation approach In this approach, and. .. determined using Levinsohn and Petrin (2003) approach applied in production function Input variables is labor, capital and intermediate inputs Output variables is value added (ii) Innovation and productivity. .. and 1998 for 2056 manufacturing firms to analyse the impact of innovation and firm performance in Netherlands Not only internal innovation 19 activities but also external innovative collaboration