The relationship between business networking and SMEs production efficiency

UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDY ERASMUS HO UNIVERSITY OF CHI ROTTERDAM MINH CITY VIETNA THE M NETHERLAN DS VIETNAM – THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONMICS THE RELATIONSH IP BETWEEN BUSINESS NETWORKIN G AND SMES PRODUCTIO N EFFICIENC Y By LE HOANG LONG MASTER OF ART IN DEVELOPMENT ECONOMICS HCMC, NOVEMB ER 2013 University of Economics Ho Chi Minh City, Vietnam International Institute of Social Study Erasmus University of Rotterdam, The Netherlands VIETNAM – THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONMICS THE RELATIONSHIP BETWEEN BUSINESS NETWORKING AND SMEs PRODUCTION EFFICIENCY by L H gL g A Thesis Submitted in Partial Fulfillment of the Requirements for the Degree of Master of Art in Development Economics Academic Supervisor Dr V H g Vietnam – Netherlands Programme, November 2013 DECLARATION This is to certify that this thesis e titled “The relationship between business networking and SMEs production efficiency”, whi h is submitted by me in fulfillment of the requirements for the degree of Master of Art in Development Economic to the Vietnam – The Netherlands Programme The thesis constitutes only my original work and due supervision and acknowledgement have been made in the text to all materials used L H gL g ACKNOWLEDGEMENT I would not be possible to write this master thesis without the help and support of people surrounding me Ki Above all, I w uld li e t th Hi , wh lw ys l ves, t es yf e f ily, es e i lly d su ts e y the – H g Th the w y I have chosen I would like to express special appreciation to my supervisor, Dr V H g who I have learned a lot from his guidance, useful recommendations and valuable comments I would like to acknowledge all the lecturers at the Vietnam – Netherlands Programme for their knowledge of all the courses, during the time I studied at the program I ti ul , I g teful t ss f Nguy T g H i, h Kh h N , T g g Th y, M h g Th h h d LV Ch , who support me significantly in the courses as well as in the thesis writing process Last, but not least, I would like to thank my friends and colleagues at Banking University of HCMC for their helps HCMC, November 2013 L H iii gL g , ABBREVIATIONS AE Allocative efficiency CIEM Central Institute for economic mangement CRS Constant returns to scale DEA Data envelopment analysis DMU Decision making unit GSO General Statistics Office Of Vietnam SE Scale efficiency SFA Stochastic frontier analysis SMEs Small and medium sized enterprises TE Technical efficiency TFP Total-factor productivity VRS Variable returns to scale iv ABSTRACT This study aims to examine the relationship between business networking and the technical efficiency of small and medium sized enterprises (SMEs) in Vietnam To achieve this objective, this study proposes a framework to measure the production efficiency of the SMEs; then, the study identifies the relationship between business networking and their performance efficiency Data Envelopment Analysis method is employed in the first stage to measure the efficiency In the second stage, the study uses both Tobit and least squared regressions to examine the relationship between the firm networking and its performance efficiency The unbalanced data from the four SMEs surveys, which cover the period of years, from 2004 to 2010, will be employed in this study The research finds that the average technical efficiency scores of SMEs in this period are moderately low, ranging from 48 percent to 70 percent depending on the industries Additionally, the relationship between business networking and firm’s production efficiency appears to be different in different indutries For example, in food products and beverages, the network quantity is found to have positive impact on the technical efficiency However, network quality as well as the network diversity might hinder the firms in this industry The wood and wood products and fabricated metal product experience a contradictory tendency when the total network size and cluster size appear to have no impact, or even negative impact on the technical efficiency In these industries, the network quality appears to hold a significantly crucial role than other dimensions of networking when it has positive correlation with firm efficiency Finally, the role of official business association appears to be vague to firm efficiency v TAB LIST OF TABLES LIST OF FIGURES Chapter 1: INTRODUCTION 1.1 Problem statement 1.2 Research objectives 1.3 Research questions 1.4 Research scope and data 1.5 The structure of this study Chapter 2: LITERATURE REVIEW 2.1 Production efficiency: Concepts, measurements an 2.1.1 Conc 2.1.2 Mea 2.1.3 Effic 2.1.4 Sour 2.1.4.1 Exog 2.1.4.2 Inter 2.2 Business networking 2.2.1 Busi 2.2.2 Com 2.2.3 Rela Chapter 3: RESEARCH METHODOLOGY 3.1 An overview of Vietnamese Small and Medium s 3.1.1 Grow 3.1.2 An o vi 3.2 3.2.1 Conceptual framework and model specification The first s 3.2.2 The secon 3.3 Research hypotheses and concept measurements 3.3.1 Research h 3.3.2 Concept a 3.4 Data source and filter process Chapter EMPIRICAL RESULTS 4.1 Production efficiency of SMEs 4.1.1 Data desc 4.1.2 Production 4.2 The relationship between business networking an 4.2.1 Data desc 4.2.2 Regressio 4.2.2.1 Network q 4.2.2.2 Network q 4.2.2.3 Network d 4.2.2.4 Cluster siz 4.2.2.5 Participati Chapter 5: CONCLUSION AND POLICY IMPLICATION 5.1 Conclusion remarks 5.2 Policy implications 5.3 Limitations and recommendations for future rese REFERENCES Appendix 1: Empirical vii Granovetter, M (1983) The strength of weak ties: A network theory revisited.Sociological theory, 1(1), 201-233 Gujarati, D N (2011) Econometrics by example Hampshire, UK: Palgrave Macmillan Gulati, R (1999) Network location and learning: The influence of network resources and firm capabilities on alliance formation Strategic management journal, 20(5), 397-420 Hallberg, K (1999) Small and medium scale enterprises: A framework for intervention The World Bank Hsu, C C., Kannan, V R., 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Vinh, T T (2007) A Non-parametric Analysis of Efficiency for Industrial Firms in Vietnam Nguyen Khac Minh and Giang Thanh Long (eds.), 1-30 Molina‐M les, F X , & M tí ez‐Fe of social capital on firm Management, 48(2), 258-279 dez, M T (2010) Social networks: effects innovation Journal of Small Business 62 Morishima, M (1991) Information sharing and firm performance in Japan.Industrial Relations: A Journal of Economy and Society, 30(1), 37-61 Müller, J (1974) On sources of measured technical efficiency: the impact of information American Journal of Agricultural Economics, 56(4), 730-738 Nickell,S., & Nicolitsas, D (1999) How does financial pressure affect firms?.European Economic Review, 43(8), 1435-1456 Nikaido, Y (2004) Technical efficiency of small-scale industry: application of stochastic production frontier model Economic and Political Weekly, 592597 Parker, S C (2008) The economics of formal business networks Journal of Business Venturing, 23(6), 627-640 Pham, H T., Dao, T L., & 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(1995) Developing relationships in business networks Londres: Routledge Timmer, C P (1971) Using a probabilistic frontier production function to measure technical efficiency The Journal of Political Economy, 776-794 Vu, Q N (2003) Technical Efficiency of Industrial State‐Owned Enterprises in Vietnam Asian economic journal, 17(1), 87-101 Watson,J (2007) Modeling the relationship between networking and firm performance Journal of Business Venturing, 22(6), 852-874 Zhao, L., & Aram, J D (1995) Networking and growth of young technologyintensive ventures in China Journal of business venturing, 10(5), 349-370 64 Appendix 1: Empirical studies on the sources of technical efficiency No References Objectives (1) Introduce technique to measure efficiency Timmer (2) Apply the technique to (1971) the empirical of agriculture (3) Compare to the results to traditional estimations Estimate function Pitt and sources and of Lee (1981) efficiency in Indonesian industry Admassie & Matambaly a (2002) Examine efficiency Tanzania sources efficiency Measurement: - Output: yearly sales income - Input set: Capital stock; Labor cost (labor bill); Material (real value of raw materials, fuel, electricity and water) - Attributed variables: Age; Size (number of employees); Skill intensity of labor (average period to train labor); Skill intensity of management staff (average period to train management staff); Dummy for regional control Method: using maximum likelihood estimates to identify the parameters of Cobb-Douglas - Mean technical efficiency level is production function around more than 50% - Technical efficiency has link to age (negative impact), size (positive impact), human capital development 65 Measure efficiency industry Nikaido investigate the relationship (2004) between of small (SSI) firm size geographical agglomeration efficiency index Applying method to Rios & efficiency of Shively coffee farm (2004) relationship between score and farm size and (instrumental variable from probit model) Muller (1974) Re-evaluate the concept of technical efficiency and the relationship information and efficiency Measurement: using proxies for information concept: DH (level of fees paid to a trade organization which provide information to members); FY (an index performing exposed information type variable); LP (an management index that seemed to be related with the relative production costs) Methodology: Using augmented Cobb-Douglas production function where information proxies are added Least square estimations are employed in log-linear form; then, the marginal impact of information variables is calculated from the regression results 66 Both regression results from data set of 1964 and enlarged data set of 1960-1963 suggest the significant role of information for the production efficiency Adding information variables facilitates the production function when it can reduce the productivity differences Binam, Sylla, Diarra & Nyambi (2003) Examine the technical efficiency in farmers and key identify determinants Binam , Tonye , Nyambi & Akoa (2004 ) Examine efficiency household Cameroon and identify the key technical efficiency small coffee Vavoua the income of technical efficiency 81 Côte 1998 in farmers determinants the technical small in of 450farm Camero agricultu in season were groundn monocro monocro maize-g farming 67 Appendix 2: Empirical studies on the relationship between business network and firm performance No References Objectiv Examine the importance of Gulati firm (1999) the alliance and determin alliance forming decision Review definitions capital, classify the sources of social Portes the or of cap examine both (2000) impact and impact of social capital on individuals communities 68 Conceptualize capital as the level Establish multidimensional model of social capital and examine Koka & the social Prescott, (2002) source of information (in dimensions of information: capital volume, diversity richness) Develop the social capital theory impacts of this information on the firm performance represent the productivity Using fix-effect model 69 focusing on Different types of net more crucial to firm de In (1) Reputational netwo role Lechner, Dowling & Welpe (2006) 60 venture capitalfinanced Germany, and Switzerland in 2003 Examine the impact of the different networks on firm development only proxy for network quantity rather than network quality Examine between SME performance Watson (2007) (survival, ROE) and networking This paper showed the positive relationship between networking (particularly with formal network such as external accountants) and both firm survival and growth, but not ROE Network can have impact on both new venture firms and established firms Both informal network and formal Identify the impac Schoonjans formal et al networking on (2011) growth business networking causes growth or growth helps to promote networking? 70 71 Appendix 3: Empirical studies on the technical efficiency measurements of manufacturing firms in Vietnam No References Data/Data level 1312 observations of manufacturing firms fr Chu & Kalirajan 2000-2003 (2011) Data is extracted from Enterprise Data se (GSO) 5204 observations of manufacturing SMEs in Le (2010) three surveys carried out in 2002-2007 Pham, Dao & Reilly 10.759 manufacturing firms in the Enterpr (2010) Data survey conducted in 2003 1000 manufacturing firms in 23 industries in Minh & Vinh (2007) the period of 2000-03 164 State Owned Enterprises in the period of Vu (2003) 1997 - 1998 72 ... Rotterdam, The Netherlands VIETNAM – THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONMICS THE RELATIONSHIP BETWEEN BUSINESS NETWORKING AND SMEs PRODUCTION EFFICIENCY by L H gL g A Thesis Submitted... relationship between the business networking and the production efficiency of SMEs in Vietnam? If yes, then how can business networking can influence the production efficiency of SMEs? 1.4 Research... on the relationship between business networking and firm production efficiency It begins with the definitions and determinants of the production efficiency This chapter then discusses the networking