The role of family involvement in a firm’s performance

UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS VIETNAM –NETHERLAND PROGRAMME FOR MA IN DEVELOPMENT ECONOMICS THE ROLE OF FAMILY INVOLVEMENT IN A FIRM’S PERFORMANCE Academic Supervisor: DR LE VAN CHON Student: NGUYEN QUOC KHANH HO CHI MINH CITY, OCTOBER 2013 ACKNOWLEGDEMENTS During doing research, I have received the supports, helps and guidance from my supervisor, committee members, friends and family First of all, I really appreciate and thank to the enthusiastic help of my supervisor - Dr Le Van Chon I always get clearly instructions, heartfelt encouragements and enthusiastic assistances from him during my thesis I also would like to thank Dr Pham Khanh Nam to suggest me the ideas for my thesis and supply the data source for the analysis in my research I would like to express my great appreciation to Associate Prof Dr Nguyen Trong Hoai – Vice Principal of the University of Economics & Director of Vietnam – Netherlands Programme for MA in Development Economic who oriented and facilitated me during two years learning this master course Finally, I would like to express my heartfelt gratitude to my family, my friends and my colleagues who supports, and encourage me to finish this research Ho Chi Minh City, October 2013 ii ABSTRACT This paper investigates the difference in performance between family businesses and non family businesses of small and medium enterprises (SMEs) in Vietnam It focuses on the differences in how the use of capital and labor and in total factor productivity (TFP) between the two types of firms The study used statistics on small and medium enterprises in Vietnam over the years 2005, 2007 and 2009.This paper also gives a number of policy implications for small and medium businesses to improve their performance and for the policy-maker to support the Vietnam small and medium enterprises Based on the Cobb-Douglas production function, we apply the methods OLS, GLS and panel model to estimate It finds that there are significant differences in the contribution of the two inputs that are labor and capital to output – the value added- between family businesses and non family businesses in Vietnam On labor, its contribution to output in the family businesses was significantly higher than non-family businesses In terms of capital, the contribution of this factor in the family business is low compared to their counterparts Moreover, there are no bases to conclude which kind of firm is more productivity iii TABLE OF CONTENTS ACKNOWLEDGEMENTS………………………………………………………………………ii ABSTRACT…………………………………………………………………………………… iii TABLE OF CONTENTS……………………………………………………………………… iv LIST OF TABLES……………………………………………………………………………….vi LIST OF FIGURES…………………………………………………………………………… vii CHAPTER I INTRODUCTION 1.1 Problem statement…………………………………………………………………………….1 1.2 Research objectives……………………………………………………………………… .2 1.4 Scope of study and data………………………………………………………………………2 1.5 Thesis structure……………………………………………………………………………….2 CHAPTER II LITERATURE REVIEW 2.1 What is family business? …………………………………………………………3 2.2 Differences between family and non-family businesses ……………………… 2.3 The performance of family and non-family firms……………………………………………7 2.4 The importance of the family firm………………………………………………………… 13 2.5 The other determinants of firm's performance………………………………………………14 2.6 Conceptual framework………………………………………………………………………15 CHAPTER III RESEARCH METHODOLOGY 3.1 The development of Domestic Private sector and Small and Medium Enterprises in Vietnam………………………………………………… 16 3.2 The recent performance of Small and Medium Enterprises in Vietnam………… ………19 3.3 Sources of data………………………………………………………………… …………20 3.4 Research methodology…………………………………………………………………… 21 3.5 Variable treatment……………………………………………………………………… 22 iv CHAPTER IV EMPIRICAL RESULTS 4.1 Descriptive statistics……………………………………………………………………….22 4.2 Empirical Results ………………………………………………………………………….34 CHAPTER V CONCLUSION…………………………………………………………… 41 REFERENCES APPENDIX v LIST OF TABLES Table 2.1: Summary of Empirical Review on the performance difference between family firms and their counterparts……………………………………………………………… Table 3.1: Number and ownership structure of Vietnamese enterprises 2000-2008…………….16 Table 3.2: Vietnamese SMEs’ share in different ownership type ………………… ………… 17 Table 3.3: The number and ownership structure of Vietnamese Small and Medium Enterprises period 2000-2008……………………………………………………………………………… 18 Table 3.4: Variables used in the Production Function……………………………………… 25 Table 4.1: Summary Statistic for SMEs sample (2005-2009)………………………………… 32 Table 4.2: Correlation Table…………………………………………………………………… 33 Table 4.3: The firm production function by OLS and GLS method with homogenous input 34 Table 4.4: The firm production function by OLS and GLS method with heterogeneous input…………………………………………………………35 Table 4.5: The firm production function estimation in pool data……………………………….37 Table 4.6: The firm production function estimation in panel fixed-effects…………………… 37 Table 4.7: The firm production function estimation in panel random-effects………………… 38 Table 4.8: Hausman Test for Fixed or Random Effects……………………………………… 39 vi LIST OF FIGURES Figure 2.1: The long-term view of family-business performance……………………………… Figure 2.2: Empirical framework……………………………………………………………… 15 Figure 4.1: The probability density function histogram of variables through years Log Value Add………………………………………………………………………………….27 Figure 4.2: The scatter-plot of log value add on variables of family and non-family firms through years…………………………………………………………………28 vii CHAPTER I INTRODUCTION 1.1 Problem statement The impact of the family involvement on the firm performance has been debated in many researches for a long time Many scholars have concerned the difference between family and non-family business performance However, the results of researches are not congruent due to the difference of the family firm definition, performance measurement or the samples So the issues about the “family effect” or “family involvement” impact on the productivity and firm performance are continued The role of the small and medium-sized enterprises (SMEs) is crucial in the developing economy for the goal of economic growth and integration like Vietnam The issues concerning to SMEs have received increased attention of several economists For example, CIEM (2010) investigates the characteristics of the SMEs, the government policies and the business environment in Vietnam The significance of innovation for exporting of SMEs has been studied by Nguyen Ngoc Anh et al (2008) In addition, Le Van Khoa (2006) considers the environment pollution problems caused by the SMEs in the Ho Chi Minh city In 2009, the firm recognized as family firm in the total number of the SMEs in Vietnam is large that more than 60 percent (CIEM, 2010) However, there is lack of studies investigating the differences of family and non-family firms More specifically, no research on the impact of the family ownership on the firm productivity for the case of Vietnam has been established In this paper, we consider how the family ownership impacts to the firm productivity in Vietnam, making it different to the non-family ones The Cobb Douglas is usually utilized to evaluate the firm output between family and nonfamily counterpart such as work by Bosworth and Londes (2002), Barth et al (2005), Martikainen (2009) that indicate ambiguous relationship To interpret to the difference, F Barbera, K Moores (2011) argued that assuming the homogeneity of factor elasticity lead to different result, then two main factors in the production function-labor and capital- contribute to the output differently 1.2 Research objectives The objective of this study aims to find out how the difference, between family and nonfamily firms, in using labor and capital affects the SMEs’ output and the difference in the total factor productivity (TFP) between two types of firms In addition to this, the paper also examines the other determinants that influence to the SMEs’ output and suggests some recommendations for firms to improve their performance 1.3 Research question This study tries to answer whether the family involvement has any impacts on the performance of the small and medium sized enterprises for the case of Vietnam 1.4 Scope of study and data Based on the production function Cobb-Douglas, this study applies the OLS and panel data to examine the factors affecting the firms’ output The panel data is utilized to solve the heterogeneity problem and to control the omitted variables of each individual It uses the data of small and medium enterprise surveys for the year 2005, 2007 and 2009 by the World Institute for Development Economics Research, the University of Copenhagen and some government agencies and bodies of Vietnam It contains the information of more than 2000 SMEs concerning the characteristic of the Vietnam business environment and of the firms 1.5 Thesis structure Following the introduction chapter, the paper is organized as followed Chapter Two gives some literature reviews and empirical studies that provide the rational for the firm performance difference between family and non-family firms Chapter Three presents the research methodology Chapter Four provides the descriptive statistics and the result The last discuss the conclusion and some recommendations CHAPTER II LITERATURE REVIEW This chapter by reviewing previous studies firstly provides the most frequently used definition of the family business Then it indicates the difference between family and non-family firm in using resources Next it points out the differences in performance between the two types of firms and the importance of family businesses in the economy In addition to using the resources and family involvement that impact to the firm performance, a number of other factors are also considered to build the conceptual framework for the next chapter 2.1 What is family business? Recent researchers have paid much attention on the difference in performance between family and non-family firm such as Gallo, (1995); McConaughy et al., (1999); Westhead et al., (1998) and Anderson et al., (2003) However, what is the family business? It has been the controversy issue for many authors to find out the clarity definition, although they have agreed on the view that the family business involvement is the factor make the firm different from others (Miller & Rice, 1967) Westhead et al., (1998), reviewing and investigating previous researches on the family firms, found that there are differences in the family definition used in studies According to Chrisman et al., (2003b), the work for family definition is continued Diversified definitions are given basing on different methods Shanker et al., (1996) gave two definitions for family-firm, the narrow one concerning to the daily business and the broad one regarding to strategic decision Astrachan et al., (2002) used factors regarding to experience, power and culture to measure the influence level of family on the firm Some authors based on the essence of the a family firm such as Davis et al , (1989); Shanker et al., (1996) to investigate the impact of family on making decision The concept “familiness” was first introduced by Habbershon et al., (1997) concerning to the resources of a family firm that originated in the systems of business, of family or individuals in family Habbershon et al., (2003) state that “familiness” can bring competitive advantage to the family firm  Nguyen, Anh Ngoc; Quang Pham, Ngoc; Nguyen, Chuc Dinh; Nguyen, Nhat Duc (2008) Innovation and exports in Vietnam's SME sector The European Journal of Development Research, Volume 20, Number 2, June 2008 , pp 262-280(19)  A Palia, D., & Lichtenberg, F (1999) Managerial ownership and firm performance: reexamination using productivity measurement Journal of Corporate Finance, 5: 323339  PwC (2012), Family Firm: A resilient model for the 21st century” Family Business Survey 2012, available for downloading at http://www.pwc.com/gx/en/pwc-familybusiness-survey/index.jhtml  Raspe, O.; Oort, F.G van (2011) Growth of new firms and spatially bounded knowledge externalities The annals of regional science, Volume: 46 (2011), pp 495-518  Sato, K (1976) The meaning and measurement of the real value added index The Review of Economics and Statistics, 58(4), 434–442  Singh, V (2007) Ethnic diversity on top corporate boards: A resource dependency perspective International Journal of Human Resource Management, 18: 2128-2146  Steers, R M (1982).When is an organization effective? In E F McDonough (Ed.), Designing effective organizations (rev ed., pp 196–206) Lexington, MA: Ginn  Tagiuri, R., & Davis, J (1996) Bivalent attributes of the family firm Family Business Review, 9(2), 199–208  Tanewski, G A., Prajogo, D I, and Sohal, A S (2003), "Strategic Orientation and Innovation Performance Between Family and Non-Family Firms", proceedings of the 48th World Conference of the International Council on Small Business, Belfast, Northern Ireland, 15-18 June  Villalonga, B., & Amit, R (2006) How family ownership, control and management affect firm value? Journal of Financial Economics, 80(2), 385–417  Wall, R A (1998) An empirical investigation of the production function of the family firm Journal of Small Business Management, 36(2), 24–32  Ward, J L (1988) The special role of strategic planning for family businesses Family Business Review, 1(2), 105–117  Zahra, S A (2005) Entrepreneurial risk taking in family firms Family Business Review, 18(1), 23–40 47  Yasar, M & Rejesus, R M (2005) Exporting status and _rm performance: Evidence from a matched sample Economics Letters 88(3), 397-402  Yong Yang (2008) The Impact of Exporting on Firm Performance: Evidence from Chinese Queen Mary, University of London  Westphal, J D., & Stern, I (2007) Flattery will get you everywhere (especially if you are a male Caucasian): How ingratiation, boardroom behavior, and demographic minority status affect additional board appointments at U.S companies Academy of Management Journal, 50: 267-288 48 APPENDIX Appendix 1: Criteria to for a small and medium enterprise according to the decree No 56/2009/NĐ-CP dated 30 June 2009 of the Government Criteria to for a small and medium enterprise according to the decree No 56/2009/NĐ-CP dated 30 June 2009 of the Government: Scope Sector I Agriculture, forestry and fishery (A) II Industry and construction (B-F) III Trade and services (G-U) Source: GSO 2010, The Enterprise in Vietnam years at the beginning of century 21 49 Appendix 2: Number of enterprises by size of capital resources (Large, medium and small) In unit Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source GSO 2010, calculated by author 50 Appendix 3: Number of enterprises by size of employees (Large, Medium and Small) In unit Total number of enterprise Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 In percentage (%) Total number of enterprise Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source GSO 2010, calculated by author Appendix 4: Estimation the equation (2) for the year 2005 by OLS method Source Model Residual Total Log Value Add Log Labor Log Capital F_Labor F_Capital Family involvement Ha_Noi Phu_Tho Ha_Tay Hai_Phong Nghe_An Khanh_Hoa Quang_Nam Lam_Dong Long_An Number of year Export Apparel Fabricated Textile Furniture _cons 52 Appendix 5: Estimation the equation (2) for the year 2005 by GLS method Linear regression Log Value Add Log Labor Log Capital F_Labor F_Capital Family involvement Ha_Noi Phu_Tho Ha_Tay Hai_Phong Nghe_An Khanh_Hoa Quang_Nam Lam_Dong Long_An Apparel Fabricated textile Furniture Export Number of year _cons 53 Appendix 6: Estimation the equation (2) for the year 2007 by OLS method Source Model Residual Total Log Value Add Log Labor Log Capital F_Labor F_Capital Family involvement Ha_Noi Phu_Tho Ha_Tay Hai_Phong Nghe_An Khanh_Hoa Quang_Nam Lam_Dong Long_An Number of year Export Apparel Fabricated Textile Furniture _cons Appendix 7: Estimation the equation (2) for the year 2007 by GLS method Linear regression Log Value Add Log Labor Log Capital F_Labor F_Capital Family involvement Ha_Noi Phu_Tho Ha_Tay Hai_Phong Nghe_An Khanh_Hoa Quang_Nam Lam_Dong Long_An Apparel Fabricated textile Furniture Export Number of year _cons Appendix 8: Estimation the equation (2) for the year 2009 by OLS method Source SS Model Residual Total Log Value Add Log Labor Log Capital F_Labor F_Capital Family involvement Ha_Noi Phu_Tho Ha_Tay Hai_Phong Nghe_An Khanh_Hoa Quang_Nam Lam_Dong Long_An Number of year Export Apparel Fabricated textile Furniture _cons 56 Appendix 9: Estimation the equation (2) for the year 2009 by GLS method Linear regression Log Value Add Log Labor Log Capital Family involvement F_Labor F_Capital Ha_Noi Phu_Tho Ha_Tay Hai_Phong Nghe_An Khanh_Hoa Quang_Nam Lam_Dong Long_An Apparel Fabricated Textile Furniture Export Number of year _cons 57 Appendix 10: The firm production function estimation in pool data Source Model Residual Total Log Value Add Log Labor Log Capital F_Labor F_Capital Family involvement Ha_Noi Phu_Tho Ha_Tay Hai_Phong Nghe_An Khanh_Hoa Quang_Nam Lam_Dong Long_An Number of year Export Apparel Fabricated Textile Furniture _cons 58 Appendix 11: The firm production function estimation in panel fixed-effects Fixed-effects (within) regression Group variable: Code2 R-sq: within = 0.3742 between = 0.6903 overall = 0.6339 corr(u_i, Xb) = -0.6811 Log Value Add Log Labor Log Capital F_Labor F_Capital Number of year Export _cons sigma_u sigma_e Rho 59 Appendix 12: The firm production function estimation in panel random-effects Random-effects GLS regression Group variable: Code2 R-sq: within = 0.3359 between = 0.9148 overall = 0.8264 corr(u_i, X) = (assumed) Log Value Add Log Labor Log Capital F_Labor F_Capital Family involvement Ha_Noi Phu_Tho Ha_Tay Hai_Phong Nghe_An Khanh_Hoa Quang_Nam Lam_Dong Long_An Apparel Fabricated Textile Furniture Number of year Export _cons sigma_u sigma_e rho 60 ... Non -family capital 2005 Family Labor year 2007 Non -family Labor year 2007 28 Family capital year 2007 Non -family capital 2007 Family Labor year 2009 Non -family Labor year 2009 Family capital year... The family involvement in the family- businesses brings them some competitive advantage that the others cannot have easily The advantages in resource acquisitions come from the combination of family. .. 80%, indicating that the high suitability of the model and that the variability of the independent variables explain more than 80% of the variability of dependent variable The following apply the