ERASMUS UNIVERSITY ROTTERDAM INSTITUTE OF SOCIAL STUDIES THE NETHERLANDS UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM VIETNAM – THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS THE RELATIONSHIP BETWEEN FINANCIAL CONSTRAINT AND SMEs TOTAL FACTOR PRODUCTIVITY By HỒ BẢO TRÂN MASTER OF ART IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, JANUARY 2016 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 THE RELATIONSHIP BETWEEN FINANCIAL CONSTRAINT AND SMEs TOTAL FACTOR PRODUCTIVITY By Hồ Bảo Trân A Thesis Submitted in Partial Fulfillment of the Requirements for the Degree of Master of Art in Development Economics Academic Supervisor Prof Dr Nguyễn Trọng Hoài Ho Chi Minh City, January 2016 DECLARATION This is to certify that this thesis entitled “The relationship between financial constraint and SMEs total factor productivity”, which 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.” Hồ Bảo Trân ACKNOWLEDGMENTS I would not be possible to write this master thesis without the support and the encouragement from many people I would like to express special appreciation to my supervisor, Prof Dr Nguyen Trong Hoai, 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 programmme In particular, I am grateful to Dr Tran Tien Khai, Dr Pham Khanh Nam, and Dr Truong Dang Thuy for their valuable comments and suggestions for my concept note, thesis research design as well as in the thesis writing process Next, I would like express my thank you to all my friends at VNP They have spent time learning and sharing memorable moments with me Finally, I dedicate my thesis to my parents and my sister, who always love, take care and support me ABBREVIATIONS CIEM: Central Institute for economic management GSO: General Statistic Office of Vietnam R&D: Research and development SMEs: Small and medium enterprises TFP : Total factor productivity UK: The United Kingdom ABSTRACT Using panel data from Vietnamese Small and Medium Enterprises Survey from 2004 to 2010, this study aims to examine the relationship between financial constraint and firm total factor productivity of small and medium enterprises (SMEs) in Vietnam To achieve this objective, this study measures the total factor productivity of the SMEs Then, this study identifies the relationship between financial constraint and total factor productivity of SMEs Levinson-Petrin approach is used in order to calculate the total factor productivity of firm in the first step In the second step, an estimation model is built to examine the linkage between financial constraint and firm total factor productivity The research finds that there is relationship between financial constraint and firm productivity For example, the relationship between firm leverage and total factor productivity of firm is positive It means that access to large external finance can help a firm ease the degree of credit constraints, thereby increasing its capacity and survival in the market Secondly, liquidity ratio does not have significant impact on firm productivity in Vietnam Thirdly, firm size and firm age have positive relationship with firm productivity In other word, firms with larger size and older will have higher productivity Finally, firms join in export activities are found to get higher productivity than the others TABLE OF CONTENTS Chapter 1: INTRODUCTION 1.1 Problem statement: 1.2 Research objective: 1.4 Research questions: 1.5 Scope of the study: 1.6 The structure of the study: Chapter 2: LITERATURE REVIEW 2.1 Productivity: Concepts and measurements 2.2 Financial constraint and firm productivity 2.2.1 Financial constraint definition 2.2.3 Financial constraint and firm’s productivity 2.2.4 Factors impact productivity 10 2.2.5 Conceptual framework 12 CHAPTER 3: RESEARCH METHODOLOGY AND DATA 14 3.1 An overview of SMES in Vietnam 14 3.2 Model specification 18 3.3 Research hypotheses and concept measurements 20 3.3.1 Research hypotheses: 20 3.3.2 Measurement of variables 20 3.4 Data collection 21 3.5 Estimation methodology 22 CHAPTER 4: EMPIRICAL RESULT 24 4.1 Total factor productivity of SMES 24 4.1.1 Data descriptions 24 4.1.2 Total factor productivity of SMEs in Vietnam 25 4.2 The relationship between financial development and total factor productivity 26 4.2.1 Data description 26 4.2.2 Regression result 29 Chapter 5: CONCLUSION 32 5.1 Main finding: 32 5.2 Policy implications 33 5.3 Limitations and further research 34 REFERENCES 35 APPENDIX 39 LIST OF TABLES Table 3.1: Definition of SMEs in Vietnam 14 Table 3.2: Concepts and measurements of variables in the study 21 Table 4.1: Descriptive statistic of production factor variables 24 Table 4.2: Levinsohn-Petrin Estimation of Production Technology 26 Table 4.3: Summary of Statistics 26 Table 4.4: The correlation matrix of Structural variables 28 Table 4.5.1: Regression result 29 Table 4.5.2: Regression result 30 LIST OF FIGURES Figure 2.1 Conceptual framework 12 Figure 3.1: Number of Small, Medium and Large Enterprises by Size of Capital resources 16 Figure 3.2: Number of Large, Medium and Small Enterprises by Size of Employees 17 Figure 4.1: A Fitted Plot of Total Factor Productivity versus Financial Indicators 27 Figure 4.1 provides preliminary illustration about the relationship between total factor productivity and liquidity ratio, and total factor productivity and leverage ratio Both diagrams show the positive correlation between financial factors and firm productivity Figure 4.1: A Fitted Plot of Total Factor Productivity versus Financial Indicators 27 15 10 0 10 15 Leverage lnTFP Fitted values The correlation matrix of structural variables are represented in table 4.4 Table 4.4: The correlation matrix of Structural variables lnTFP Leverage Liquidity SizeY Age lnTFP 1.00 Leverage 0.05 1.00 Liquidity 0.04 0.44 1.00 SizeY 0.01 0.23 0.15 1.00 Age -0.03 -0.19 -0.17 -0.17 1.00 Export -0.01 0.15 0.09 0.36 -0.06 Export VIF 1.30 1.25 1.21 1.07 1.00 1.16 Source: Author's calculation The above result shows that there is no significant correlation between independent variables The maximum correlation score of 0.44 is the correlation between Leverage and Liquidity Furthermore, the variance inflation factor (VIF) in this table is relatively low, compared to the bench mark of 10 which is an evidence of 28 the presence of multicollinearity in data This result indicates that the multicollinearity problem is not significant in this study Because the data is the short panel data, serial correlation is not a problem and it can be excluded However, the heteroskedasticity should be included in this study 4.2.2 Regression result Table 4.5 shows the estimation results Table 4.5.1: Regression result VARIABLES lnLeverage lnLiquidity lnSizeY lnAge Export Constant Observations R-squared Number of id (1) OLS lnTFP (2) RE lnTFP (3) FE lnTFP (4) FE1 lnTFP 0.009** (0.004) 0.006 (0.005) -6.69e-06 (0.004) -0.012 (0.008) -0.027 (0.021) 2.765*** (0.054) 0.011*** (0.004) 0.006 (0.005) 0.011*** (0.004) 0.008 (0.009) 0.006 (0.023) 2.585*** (0.061) 0.015*** (0.005) 0.004 (0.006) 0.038*** (0.009) 0.184*** (0.025) 0.091*** (0.033) 1.787*** (0.123) 0.015*** (0.005) 0.004 (0.006) 0.038*** (0.013) 0.184*** (0.025) 0.091*** (0.034) 1.787*** (0.167) 5,496 0.003 5,496 5,496 0.039 2,938 5,496 0.039 2,938 2,938 Standard errors in parentheses *** p