Determining factors influencing firm erformance in midland and mountainous provinces of vietnam

TABLE OF CONTENT ACKNOWLEDGEMENTS ABSTRACT LIST OF TABLES LIST OF FIGURES CHAPTER 1: INTRODUCTION 1.1 Research Background 1.2 Problem statement 1.3 Research Objective and Research Questions 10 1.4 Research Scope 10 1.5 Research Structure 11 CHAPTER 2: ANALYTICAL FRAMEWORK AND LITERATURE REVIEW 12 2.1 Review analytical framework 12 2.2 Firm performance 13 2.3 Literature review on factors influencing firm performance 15 2.3.1 External factors influencing firm performance 15 2.3.2 Internal factors influencing firm performance 17 2.3.3 Research on firm performance and economic development in mountainous region of Vietnam 20 2.4 Research Gap 23 CHAPTER 3: RESEARCH METHODOLOGY AND DESIGN 23 3.1 Research methodology 23 3.2 Research design 24 3.2.1 Models and Hypotheses 24 3.2.1.1 Model of return on assets (ROA) 24 3.2.1.2 Model of return on equity (ROE) 26 3.2.2 Data collection 27 3.2.3 Data presentation 28 3.2.4 Methods 30 CHAPTER 4: FINDINGS 31 4.1 Correlation matrix 31 4.2 Regression analysis 33 CHAPTER 5: DISCUSSIONS AND CONCLUSION 36 5.1 Policy Implication 36 5.2 Limitation 39 5.3 Future research 40 5.4.Conclusion……………………………………………………………….40 REFERENCES 41 ACKNOWLEDGEMENTS I would like to thank Prof Vu Anh Dung and Prof Vu Hoang Linh for their expert advice and extraordinary support in this thesis process, as well as Prof Kawashima, Prof Anh Duong and Prof Baladur in University of Tsukuba during my internship in Japan I am particularly grateful for the assistance given by Dr Thuy Anh, Prof Taro and Ms Thu Ha from the office of public policy program The thesis would have been impossible without the support of my family including my parents, my parents-in-law and my wife ABSTRACT Enterprises are the cells of the economy, sustainable development of the economy depends largely on the sustainability of enterprise development Low number of enterprises, low number of registered capital and external investment, accompanied with low income of employees working for enterprise, lead to the fact that the two mountainous regions of are remained underdeveloped The operating activities of enterprises in the two regions are poor in many aspects The master thesis aim to figure out determining factors influencing firm performance in Northern Midland and Mountainous and Central Highlands of Vietnam through which policy implications can be initiated to promote the performance of enterprises Multipleregression with cross-section fixed effect using Return on Asset and Return on Equity as dependent variables was used to testify the significance level of six factors As a result, leverage and sale performance are two most crucial factors Sets of policy related to promote sale performance and decrease the leverage level are recommended by the author LIST OF TABLES Table General information of two region in 2016 Table Average annual income of employees in enterprise in 2012 and 2015 Table Performance dimension and indicators selected Table Summary of hypotheses and expected sign Table Overview of companies‟ data Table Descriptive statistics Table Correlation matrix of model Table Correlation matrix of model Table Regression analysis of model Table 10 Regression analysis of model LIST OF FIGURES Figure Six socio-economic zones in Vietnam Figure Traditional model of organizational climate Figure Firm performance model Figure Policy implication for better firm performance CHAPTER 1: INTRODUCTION 1.1 Research Background Insufficient economic diversification deteriorates labor market in remote and mountainous region, causing lack of job opportunities for local youth which depopulate and reduce the resilience to external economic shocks (Price, Borec, Dax, & Giordano, 2016) Therefore, most governments endeavor to promote the business activities in rural, remote, mountainous areas In China, since 1949, three regional development strategies were adapted by the central government (balanced development in 1949, unbalanced development in 1979 and coordinated development in 1992) to reduce regional disparity between the East and the West (Lu & Deng, 2013) The special topography in Vietnam, as well as other countries in Asia such as Nepal, India, Myanmar, Thailand, Tibet and Yunnan (China), are facing with a wide ranges of challenges related to environment, economic and social issues (Cúc, 2011) the Doi Moi policy in Vietnam was adapted and gradually turned Vietnam into a lower middle-income country with remarkable economic development Vietnam‟s GDP per capita growth has been averaging 6.4 percent per year in the 2000s GDP of the country reached 6% in 2016 and 6.81% in 20172 However, the disparity between regions poses a real threat to the process of sustainable development of Vietnam Rural and mountainous areas with groups of ethnic minority are vulnerable and remain underdeveloped Based on analysis of various views on delimitation of economic zones, three crucial features have been clarified while dividing the country into separated socioeconomic zones as follow: (1) a territory with the same natural conditions and geographic location; (2) the level of economic development is compatible; (3) resources for development are similar (Huân, 2012) Therefore, according to Ninth Congress of Communist Party‟ document, Vietnam was divided into socioeconomic regions on the basis of 63 provinces and cities as follows: Northern Midlands and Mountain Region (14 provinces); Red River Delta Region (11 World Bank: Vietnam profile (http://www.worldbank.org/en/country/vietnam/overview) General Statistics Office of Vietnam (Report on the socio-economic status 2016) provinces and cities); North Central and Central Coast Region (14 provinces and cities); Central Highland Region (5 provinces); South East Region (6 provinces) and Mekong Delta Region (13 provinces and cities) Figure Six socio-economic zones in Vietnam (Source: http://www.mlit.go.jp) The Northern Midland and Mountainous region includes 14 provinces, bordered with Guangdong, Guangxi, Yunnan of China to the north, Laos to the west, the Red River Delta region to the southeast The region is mainly medium high mountains This is the highest, most fragmented and most rugged terrain in Vietnam The Central Highland is located in the South West of Vietnam, it includes provinces, The special feature is the terrain consisted of plateaus at the height of 600800 meters above sea level It is the roof of Indochina peninsula and the bridge from Vietnam to Laos and Cambodia The ecological environment of the Central Highland region not only affects the lives and production of the people in the region, but also millions of people in neighboring areas of Laos and Northeast Cambodia who are living in the border area Table General information of the two regions in 2016 (Source: Vietnam Statistical Year Book 2016) Region Natural acreage (thousand kilometer square) whole 331.2 Percent age of the whole country 100% Population Percentage (million of the people) whole country Population density (people/kilo meter square) 280 The 92.6 100% country Northern 95.2 28.7% 11.9 12.9% 126 Midland and Mountainous Provinces Central 55.5 16.9% 5.7 6.1% 104 Highland Provinces Central Highland Region and Northern Midland and Mountainous Region still the poorest areas in the country Up to the end of 2016, the rate of poor household in Northern Midland and Mountainous provinces and Central Highland provinces are 23% and 18.5%, highest rate in the country (average of the country: 13.15%) In 2016, the average income of residents lived in these areas are 2.03 million VND per month and 2.56 million VND per month, relatively low when compare to the country „average 3.044 million VND per month Enterprises are the cells of the economy, sustainable development of the economy depends largely on the sustainability of enterprise development (Lợi, 2017) Recently, in Vietnam, the activities of enterprises have made significant progress, contributing to socio-economic development through tackling effectively social issue, namely job creation, hunger eradication and poverty reduction, especially for the rural, remote and mountainous regions 1.2 Problem statement With the favorable social conditions, Vietnamese enterprises are mainly concentrated in two regions: the South East and the Red River Delta The remaining four regions account for a low proportion of enterprises and tend to decrease In 2016, the Northern midland and mountainous region had 17003 enterprises, central highland region had 10855 enterprises which are operating, only account for small portion of Vietnam Statistical Year Book 2016 Vietnam Statistical Year Book 2016 the country (442485 enterprises)5 Regarding to attracting foreign investment until 2016, the Northern midland and mountainous region attracted 723 projects with a total registered capital of 13.5 billion USD, central highland region attracted 139 projects with a total registered capital 762 million USD Compared with other regions, these numbers are in the bottom (Red River Delta Region: 7031 projects with 78.7 billion USD registered capital) Furthermore, the average annual income of employees who are working for enterprise is relatively low comparing to the average of the country and other regions The number had improved from 2012 to 2015 but it is still far behind the average of the country Table Average annual income of employees in enterprises in 2012 and 2015 (calculated from Vietnam Statistical Year Book 2016) Region Average annual income of Average annual income of employees in enterprises employees in enterprises (2012) (2015) Whole Country 63.01 million VND 80.58 million VND Red River Delta 60.95 million VND 82.2 million VND South East 69.43 million VND 88.73 million VND Northern Midland Mountainous and 51.97 million VND Central Highland 56.58 million VND 66.6 million VND 58.06 million VND Low number of enterprises, low number of registered capital and external investment, accompanied with low income of employees working for enterprise, lead to the fact that the two targeted region is remained underdeveloped The operating activities of enterprises in the two regions are poor in many aspects (Giang, 2012) Vietnam Chamber of Commercial and Industry provides the competitiveness index assessing the quality of business environment at provincial and city levels in Vietnam In general, 19 provinces in the two regions ranked very low in the 2017 Vietnam Statistical Year Book 2016 Vietnam Statistical Year Book 2016 ranking, except for Lao Cai (ranked 11/63), Thai Nguyen (ranked 15/63), Lam Dong (ranked 22/63) This implies that the provincial governments of the two regions are not determined to improve the business environment, thereby developing enterprise sector Therefore, “Determining factors influencing firm performance in midland and mountainous provinces of Vietnam” was chosen as master dissertation, through this topic, the determining factors which influencing firm performance are expected to be found and policy recommendations can be raised to promote business activities for Northern Midland and Mountainous region and Central Highland region 1.3 Research Objective and Research Questions The research aims to find out which factors influence to firm performance (return on assets, return on equity) of public companies operating in agriculture, forestry, construction material producing, hydropower, mining and quarrying sector in Northern Midland and Mountainous and Central Highlands These factors are previous year performance, tangible assets, leverage ratio, growth on sales, size of company and quality of local governance which are put into seven hypotheses presented in Chapter Three Base on the research objectives, the dissertation aims to answer two main questions: Which are determining factors influencing firm performance in midland and mountainous provinces of Vietnam? What can be done to promote business activities in mountainous regions? (based on factors from the previous question) 1.4 Research Scope The Law on Securities passed by the National Assembly in 2005 (amended in 2010) clarifies the concept of public companies as follows: A public company (or publicly traded company) is a joint stock company in one of the following three groups (1) The company has offered shares to the public; (2) A company whose shares are listed on a stock exchange or a securities trading center; (3) The Company has shares owned by at least one hundred investors, excluding professional securities investors and charter capital of VND 10 billion or more (Article 25) 10 CHAPTER 4: FINDINGS 4.1 Correlation matrix Table Correlation Matrix of Model Correlation ROA LROA TAN ROA 1.0000 LROA 0.6946 1.0000 TAN -0.0192 -0.11492 1.0000 GRO 0.1135 -0.12108 -0.12993 1.0000 LEV -0.2964 -0.30280 0.23815 -0.0697 1.0000 SIZ 0.0094 0.04094 -0.0056 0.4149 1.0000 PCI -0.0040 -0.05825 0.08731 0.07259 0.0775 0.2313 1.0000 REG -0.1669 -0.17107 -0.10709 0.09349 0.0934 0.0193 0.0189 0.07809 GRO LEV SIZ PCI Firstly, correlation test should be done to testify whether or not the independent variable has correlated Table above shows the correlation matrix of all independent variables in model Lagged Return on Assets has negative relationship with most of other independent variables except Size of firm (the coefficient is 0.04) It means that higher income yielding companies have a larger size with lower tangibility and leverage, they are also tent to have less fluctuation on sales The tangibility has positive relationship with leverage, size of firm and quality of provincial governance while it has negative relationship with lagged ROA, growth on sales and dummy regional variables The firm size has positive relationship with tangibility and leverage while has negative relationship with growth on sales (the coefficient is -0.005), it means that the bigger the firms are, the bigger fixed assets and larger amount of loan they make and the smaller firms tend to have much growth on sales than larger firms The quality of local governance has positive relation with 31 tangibility, leverage and firm size while it has negative linkage with lagged ROA (the coefficient is -0.058) Table Correlation matrix of Model Correlation ROE LROA TAN GRO LEV SIZE PCI ROE 1.0000 LROA 0.2377 TAN -0.0829 -0.114 1.0000 GRO 0.0827 -0.121 -0.129 1.0000 LEV -0.2494 -0.302 0.2381 -0.069 1.0000 SIZE 0.0040 0.0409 0.0780 -0.005 0.4149 1.0000 PCI -0.0228 -0.058 0.0725 0.0725 0.0775 0.2313 1.0000 REG -0.0863 -01710 -0.107 0.0738 0.0934 0.0193 0.0189 1.000 Table shows the correlation matrix of all independent variables in model The tangibility has positive relationship with leverage, size of firm and quality of provincial governance while it has negative relationship with growth on sales and dummy regional variables The firm size has positive relationship with tangibility, PCI, dummy regional and leverage while has negative relationship with growth on sales (the coefficient is -0.0056), it means that the bigger the firms are, the bigger fixed assets and larger amount of loan they make and the smaller firms tend to have much growth on sales than larger firms In both models, none of the correlation has an value ranges from 0.8 to 0.9, it means that there is no multi-collinearity problem in the model and all six independent variables can be stood together in regression analysis 32 4.2 Regression analysis Table 9: Regression Analysis of Model Variable Coefficient Std Error t-Statistic Prob C -0.282209 0.441078 -0.639817 0.5232 LROA 0.157987** 0.073675 2.144377 0.0335 TAN 0.002104 0.045406 -0.046329 0.9631 GRO 0.025862*** 0.006088 4.247752 0.0000 LEV -0.026696 0.053509 -0.498909 0.6185 SIZ 0.022483 0.039271 0.572516 0.5678 PCI 0.001317 0.002410 0.546374 0.5856 Effect Cross-section fixed specification Observations 232 R-squared 0.721344 Adjusted R-sq 0.606098 Table showed the results of multiple regression analysis of model The regression analysis presented that only growth on sales is strongly significant based on the pvalue of less than 0.01 Growth on sales is found significant and positive with regard to firm performance The coefficient of growth on sales is 0.025 which implies that when the growth on sales increase by percentage point then the ROA will increase by 0.025 percentage point Additional proceeds from sales represent an important factor for increasing profit This is consistent with the study of Sebastian Lazar (2016) Previous year performance is also found significant at level of 5% Specifically, lagged Return on Asset displays a significant positive impact on firm performance The coefficient of lagged ROA is 0.1579 indicating that when the 33 previous year ROA increase in percentage point (other things remained constant), then the latter year ROA will increase by 0.1579 percentage point This is consistent with the study of Issah and Antwi (2017), McNamara and Duncan (1995) In addition, In contrast, firm size coefficient and quality of local governance coefficient are proved insignificant, this is inconsistent with the previous study of Safarova (2010) and Trung Nhan (2013) R-squared value of the model is 0.606 indicate considerable aggregate explanatory power for the estimated models Table 10 Regression analysis of Model Variables Coefficient Std Error t-Statistic Prob C -0.742310 3.694927 -0.20900 0.8410 LROA 0.083167 0.616825 0.134830 0.8929 TAN -0.076882 0.380131 -0.202251 0.8400 GRO 0.050680 0.050974 0.994225 0.3216 LEV -0.517509*** 0.175470 -2.979475 0.0035 SIZ 0.156611 0.328783 0.476334 0.6345 PCI -0.016964 0.020173 -0.840930 0.4016 Effect Cross-section fixed specification Observations 232 R-squared 0.444560 Adjusted R- 0.212843 squared In this model, only leverage ratio is strongly significant based on p-value less than 0.01 In detail, leverage displays a significant positive impact on firm performance (ROE) The coefficient of leverage is -0.517509 indicating that when the leverage 34 increase in percentage point (other things remained constant), then the ROE will decrease by 0.658 percentage point Other independent variables are proved insignificant in model 2, thus the r-squared of the model is far less than model In short, at the significance level of 1%, previous year ROA, growth on sales and leverage ratio are highly correlated with the firm performance (ROA in model 1, ROE in model 2) Other variables generally provide no or less impact on firm performance 35 CHAPTER 5: DISCUSSIONS AND CONCLUSION 5.1 Policy Implication Over the years, the Communist Party of Vietnam and the State have paid special attention to promote business activities, support private companies and attract external investment to mountainous regions in Vietnam due to the fact that the two targeted regions had low starting point and terrain geographical feature (this was demonstrated by the Provincial Competitiveness Index by VCCI) The research investigated factors influencing performance of public companies operating in agriculture, forestry, mining, quarrying, construction material producing and hydropower in Northern midland and mountainous region and Central highland region from 2012 to 2017 From the result collected from regression analysis, growth on sales has significantly positive impact while leverage ratio has significant negative impact on firm performance at the significance level of 1% Previous year performance has significant positive impact at the level of 5% Some following discussion and policy implication can be taken seriously The first determining factor influencing firm performance is level of leverage Capital shortage is a key factor restricting the development of mountainous region and this shortage will probably continue for a long time (Lu & Deng, 2013) and financial supports instead of technical assistance impact positively on firms‟ financial performance (Co, Van, & Bartolacci, 2017) This indicated that the more loans the company makes, the higher performance it gets But the findings in this research proved that the level of leverage had negative impact on firm performance Therefore, financial and credit support from banks is not a good policy option for improving firm performances of mountainous public companies Higher level of leverage has disadvantages because it increases the cost of bankruptcy and financial distress (Hunjra, Chani, Javed, Naeem, & Ijaz, 2014) Corporate finance capacity of companies in the mountainous region of Vietnam is also limited thus capital injection should be decrease or allocate for other projects The government should discourage public companies making loan by eliminating of loan with preferential interest rate 36 for mountainous regions Public companies with poor performance should be restructured and their CEO must be appointed by the government Secondly, growth on sale also is the crucial determinant Improving growth on sale of companies is not only the task of the firm itself but also the government plays an important role, especially in mountainous regions Numerous policy options can be done by the government Technology assistance is one measurement According to Jefferson et al (2006), technology progress is the source of long-term economic growth as it not only improves factor productivity, but also contributes to optimizing industrial structure For instance, regarding to mining and quarrying sector in Vietnam, it is estimated that less than 10% of basic metal and precious metal resources discovered in Vietnam have been subjected to systematic exploration with modern technology in order to approach underground mines with large reserves thus mining and quarrying industry in Vietnam only concentrates on mineral deposits on the surface such as coal and bulk resources such as bauxite, iron ore (Nhóm cơng tác khống sản, 2017) The using of backward technologies led to inaccurate mineral exploration which ruined the environment Therefore, the government should encourage and support companies to invest and modern mining technologies in accordance with international standards, sustainable and effective mining, environmental protection and labor safety Moreover, according to Bradley (2000), in many cases, location plays an important role in increasing sale volume For mountainous regions, focusing on „hard‟ infrastructure transport and telecommunications investments may appear to be a natural choice (Price, Borec, Dax, & Giordano, 2016) In Northern Midland and Mountainous Region, large transport system with various types of roads including railways, waterways, airways, but due to the mountainous terrain, the traffic is difficult There is a fact that in numerous infrastructure projects in Vietnam, the road was expanding but due to the overrun cost, the progress was postponed When it rained, the road became muddy, when it was sunny, the road became dusty which caused unsafe traffic and affected the movement of the locals (Xuyến, 2015) Investment in transportation infrastructure has always been a policy priority but it 37 has been not received the proper attention of local authorities Infrastructure upgrading also facilitates the development of mountainous areas in promoting border economy, through which assist local companies access to foreign market which can directly increase their sale volume Another measurement can be done to improve sale performance of public companies in mountainous regions is improving access to market information and consultancy advisor Several European countries took specific emphasis on promoting programs in which companies have better access to financial and non-financial business development service, guiding the implementation of administrative procedures to enter the market and legitimate preferences, training to improve the level of corporate governance and matching platforms between existing information providers and companies to increase the transparency about existing structure Incentives and certain grants are provided to business to make use of professional consultancy services (market information, product and process improvement) Also, promoting access to new market, identification of investment opportunity in emerging markets become a source for increasing their outreach and growth potentials, consultancy on professional marketing of products, participation of national and international fairs The local authorities should also pay attention to the planning of industrial clusters and create favorable conditions for public companies to enhance their sale performance Lastly, previous year firm performance is also one crucial determinant Cost reducing is first mean of increasing company‟s income Another instrument comes from the government which is tax policy adjustment Natural resource tax and other taxes applied on mineral activities are too high compared to the world is a barrier to investors This cannot only protect the mineral resources for the future but also increase revenue to the government With the resource tax rate set out in Circular 44 by Minister of Finance, business has to pay taxes up to 15% of total revenue (Nam & Bịch, 2016) Therefore, mining and quarrying activities cannot be profitable or isolated in the market, leading to the closure of mines Tax preferential policy has 38 greatly stimulated the technological updating, industrial restructuring and the development of industrial clusters in mountainous regions Supporting the development of enterprises in mountainous areas is one of the policy priorities of the mountainous provinces‟ authority These mentioned policy suggestions are presented in the diagram showed below: Figure Policy implication for better firm performance 5.2 Limitation The limitation of the research is that the firm performance only focuses on public companies in Northern Midland and Mountainous and Central Highland operating in agriculture, forestry, mining, quarrying and manufacturing sector One important sector – services is excluded from the research In addition, due to the lack of data from micro, small and medium sized companies in these regions These types of company are also not included in the research Data availability of public companies is also an issue in the research because if one variable data is missing or incomplete, the entire year performance of firm has to be excluded 39 5.3 Future research For the future plan, I intend to expand the scope of companies in term of size (from only public companies to small and medium size companies, micro companies) and in term of sector (agriculture and manufacturing to service) The time period will also be extended from year term to 10 or more year to witness economic fluctuations 5.4 Conclusion From the research, numerous of policy measurements are raised with the aim of promoting the performance of public companies operating in agriculture, forestry, manufacturing, mining and quarrying in Northern Midland and Mountainous and Central Highland 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Northern Midland and Mountainous and Central Highland of Vietnam focused on increasing sales performance and reducing level of leverage Promoting performance of firms in mountainous region is important... Chamber of Commercial and Industy (2013) Promoting business environment and investment in Northern Midland and Mountainous Region Xu, M (2014) Factors affecting financial performance of firm listed