capital management in vietnam’s shipbuilding industry, applying accounting policy, supplying relevant information for financial managers a case study on vinashin (vietnam shipbuilding industry group)

LIST OF ABBREVIATIONS SOEs: State-Owned Enterprises VINASHIN: Vietnam Shipbuilding Industry Group VND: Viet Nam Dong DWT: Dead Weight Tonnage DVN: Det Norske Veritas ROTC: Return on tota

CAPITAL MANAGEMENT IN VIETNAM’S SHIPBUILDING INDUSTRY, APPLYING ACCOUNTING POLICY, SUPPLYING RELEVANT INFORMATION FOR FINANCIAL MANAGERS: A CASE STUDY ON VINASHIN (VIETNAM SHIPBUILDING INDUSTRY

GROUP)

BY NGO VIET ANH E0700271

Graduation Project Submitted to the Department of Business Studies, HELP University College, in Partial Fulfillment of the Requirements for

the Degree of Bachelor of Business (Accounting) Hons

OCTOBER 2011

DECLARATION OF ORGINALITY AND WORD COUNT

I hereby declare that the graduation project is based on my original work except quotations and citations, which has been duly acknowledged I also declare that it has not been previously or concurrently submitted for any other course/degree at Help

University or other institutions The word count is 13,564 words

NGO VIET ANH

17 October 2011

First of all, I would like to express my sincere appreciation to my supervisor, Dr Le Van Lien who has guided me throughout this thesis His constant guidance, insightful suggestions, and constructive ideas are the essential inputs and encouragement for me in order to complete this thesis

Next, In addition, I would like to send my gratitude to the International School and HELP University College for giving me an opportunity to conduct my study in my favorite area

Furthermore, I also address my appreciation to Mr Chu Van Hung (Financial Professor) who supported my thesis with information related to my thesis My thankfulness is also addressed to others who have helped me since the beginning of

my study until I can finish my thesis

Lastly, I would also like to extend my heartfelt gratitude to my family and my friends for their continuous support, encouragement and contribution, which have been crucial during the presentation of this report

My thesis cannot be finished without your supports

CAPITAL MANAGEMENT IN VIETNAM’S SHIPBUILDING INDUSTRY, APPLYING ACCOUNTING POLICY, SUPPLYING RELEVANT INFORMATION FOR FINANCIAL MANAGERS: A CASE STUDY ON VINASHIN (VIETNAM SHIPBUILDING INDUSTRY GROUP)

BY NGO VIET ANH

in managing capital effectively In this thesis, I would like to discuss the failure in capital management of VINASHIN, and then suggest some solutions and recommendations for the organization

2.1 Background of capital and the necessary to manage capital efficiency 7

2.1.1 Capital and important of capital in SOEs 7

2.1.1.2 Definition of efficiency of capital 8 2.1.2 Classification of capital and sources of capital 10 2.1.2.1 Capital classification method based on rotation 10 2.1.2.2 Classification by source of capital formation 13 2.1.2.3 Classification by time to acquisition 15

CHAPTER 3 RESEARCH METHODOLOGY

4.2 Assessment of capital management in VINASHIN 48

4.2.2 From of funding in VINASHIN 51 4.2.3 Analysis of efficiency of capital 53 4.3 The failure of VINASHIN in capital management 55

LIST OF FIGURES

Figure 1: VINASHIN’s organizational structure

Figure 2: Broad of management

LIST OF TABLES

Table 1: Balance sheet of VINASHIN from 2008 – 2009

Table 2: Asset volatility

Table 3: Capital volatility

Table 4: Ratio analysis for efficiency of capital

LIST OF ABBREVIATIONS

SOEs: State-Owned Enterprises

VINASHIN: Vietnam Shipbuilding Industry Group

VND: Viet Nam Dong

DWT: Dead Weight Tonnage

DVN: Det Norske Veritas

ROTC: Return on total capital

ROA: Return on assets

ROE: Return on equity

CR: Current ratio

WTO: World Trade Organization

CHAPTER 1: INTRODUCTION

In this chapter, we will lay a foundation for the entire thesis The chapter introduces background of the thesis Then, we will describe the objectives, problem statement, and limitation of the thesis Finally, the chapter will cover the structure of the thesis

1.1 BACKGROUND OF THE THESIS

To conduct business production activities, any business enterprises need to have

a certain amount of capital and financing Capital is the premise of production and business But how to use capital effectively is the key for determining factor for the growth of every business Therefore, in order to make a well ongoing enterprise, any enterprises should put capital management in the first priority then makes sure their management of capital effectively because the effective use of capital directly affected to the existence and development of the company

Capital is the backbone for success in any business because capital is first priority

to determine businesses’ existence and development Tasks of capital consist of establishing, operating, and developing the enterprise Moreover, capital is used not only to pay ongoing expenses but also to purchase both current and non-current

an organization is used for other purposes such as paying salaries, credit extension to customers, advertising expenses, insurance expenses, and many other day-to-day operations Furthermore, profitability is determined in part by the way, in which a business manages its capital There will be a drop in profit if the businesses are unable to manage the capital effectively Therefore, how the business obtains and use capital will determine its success

Vietnam is one of the fastest growing economies in the world Vietnamese market is committed to “market-oriented socialism” Therefore, state-owned sectors are backbone of our economy, especially State-Owned Enterprises (SOEs) By early

2006, there are 4,086 SOEs in Vietnam, accounting for only 3.6% of the total active enterprises (www.vn.economy.com.vn) The changes in Vietnam’s economy and market since the launch Doi Moi in the 1980s and the join in WTO in the twenty century have made the Vietnam’s market rapidly growth and strong development In the market economy, the strong and developed organizations will dominate the market Therefore, the role of SOEs will be overshadowed and private enterprises will alternative Nevertheless, in Vietnam the SOEs play key role to decide the State economy Therefore, the success or failure of SOEs in Vietnam has great affects on the growth of the market Nowadays, the world economic downturn has great affected to the operation of SOEs because of they are not successful when obtain and use their capital According to a report by the Ministry of Planning and Investment, Vietnam had 36,607 projects which used capital from the state budget in 2010 of which 296 projects have been close down because of squandering of investments SOEs is influenced from re-innovation when joining WTO as well as the trend of economic down turn so it caused big losses in SOEs According to Vietnam Business News, the biggest losses of SOEs in Vietnam when inefficient use of capital consist

of Vietnam Cement Corporation, Coffee Corporation, Transport Work Construction Companies 5 and 6, Thang Long Construction Corporation, Sericulture Corporation with losses from VND220 to VND1,352 billion, 13 times more than the average capital of SOEs (www.vn.economy.com.vn) The loss is caused from the weaknesses of SOEs The most major reasons for the weakness of SOEs come from weaknesses in capital management include weaknesses and wrongdoings of leaders, investment spread, poor use of capital investment, waste in preproduction process, and higher payment their expenditure The weak in capital management has corroded their capital Therefore, it is necessary to improve the capital management in SOEs, especially in today’s difficult times of obtaining capital

As results, it is necessary to have effective capital management, especially when capital has been scared day-by-day in today’s world In the thesis, we will have a specific view at the capital management in Vietnam Shipbuilding Industry Group (VINASHIN) as specific example of insufficient use of capital

1.2 AIMS OF THE PROJECT

The project is developed to explore the important, impacts of management of capital

on Vietnam’s organizations, especially in SOEs The thesis focuses on management

of capital within an organization by analyze the statistics, facts as well as underlying market drivers to provide the readers with real insights into real case study of VINASHIN

 Have background of capital, management of capital

 Appreciate situations related to the management of capital in specific case of

 What are problems of capital management of VINASHIN?

 Why problems have occurred?

 What are the best solutions and recommendations for VINASHIN’s situations?

Following this thesis, the readers will have acknowledgement related to the topic, which almost completed without its limitation

1.4 STRUCTURE OF THE THESIS

The thesis will be presented in five chapters as following:

 Chapter 1: Introduction

 Chapter 2: Literature review

 Chapter 3: Research and methodology

 Chapter 4: Case study analysis

 Chapter 5: Conclusion

The introduction of chapter 1 will present the general picture about the relating topic

With Literature review of chapter 2, you will have general knowledge about capital, efficiency of capital, classification of capital, roles of capital, factor affected efficiency of capital, important of decision making in managing capital, and criteria

to evaluate the efficiency of capital

In the chapter 3, it describes research methodology consist of research objective, data sources of which primary data and secondary data, data collection and research tools

Case study will be analyzed in chapter 4 Chapter 4 will analyze capital management

in specific case of VINASHIN, a SOE, to know general about how they obtain and use capital In addition, we will appreciate its issues from failure of management of capital, and then provide the reasons as well as solutions for the issues

The conclusion of chapter 5 will provide to you sum up of the analysis from above chapter, and then give recommendation for the problem

Because of limited time, in this thesis, I only concentrate on capital management related to management of efficient use of capital in enterprises, especially SOEs in the specific case of VINASHIN

CHAPTER 2: LITERATURE VIEW

The purpose of this chapter is to introduce the general view about capital and capital management In addition, this chapter provides financial instruments related to capital management Furthermore, in this chapter, we will know how capital management effected to decision-making in enterprises, especially in SOEs

2.1 BACGROUND OF CAPITAL AND THE NESSARY

TO MANAGE CAPITAL EFFICIENCY

2.1.1 Capital and Important of Capital in SOEs

2.1.1.1.Definition of Capital

Business activities require capital investment We can say that capital is a prerequisite for all activities of the business As we known, before going into operations business must register the legal capital

Capital is expressed as the value of all assets managed by the enterprise and used at a certain time There are various meaning of capital According to Jean Murray, “Capital is accumulated assets or ownership” Capital, in other word, is described as the amount of cash and other assets owned by the business

Money is a form of initial capital of enterprises, but not already surely there is money be there is capital Money is only as potential capital To turn into capital, money must put into business’s productions with the aim to making profits In addition, stock or ownership in an enterprise can be a form of company’s capital

In short, the capital is advanced by the value of all assets controlled by the enterprise to serve the business and production activities to obtain economic benefits

in the future

2.1.1.2.Definition of Efficiency of Capital

In order to eliminate management of capital, we need to understand how the business use their capital or in other word, efficiency of capital

Efficiency is a concept that is always mentioned in the economic market Enterprises always toward economic efficiency while government efforts to achieve economic and social efficiency

Efficient use of capital is required to ensure that businesses gain the benefit of investors, the employees, the State in terms of income and ensure the survival and development of the enterprises themselves Moreover, it is also the basis for business can be easy to raise capital on financial markets to expand production and business development

Therefore, it is important to clarify the nature and standard of efficiency use

of capital for enterprises Because the need to have broad consensus on awareness and views of our businesses, especially SOEs in current conditions At the same

time, it also helped solve the problem of appraising the quality of running business, the valuation of corporate assets, corporate restructuring, renovate corporate management structure and economic mechanism

Efficient use of capital is often misunderstood business efficiency but in fact,

it is only one side of the business performance, which is the most important aspect General speaking, one of the elements of business performance can be ineffective

On the other hand, speaking to efficient use of capital cannot be said that using capital effective but the results is loss, i.e the efficient use of funds is showed on two sides, preserving capital is created forward to the target results of the business, especially including the profitable of capital

Beneficial results from the use of capital must satisfy two requirements: To meet the interests of the business and interests of investors in the highest degree of desired benefits while improving benefits of the economy society In the modern market economy, any business brings more profit for themselves, but they harm the common interests of the social economy will not be allowed to operate Conversely,

if the business activities were beneficial to the economy, but created losses to the business, then it would make the business going to bankruptcy Thus, the results generated by the use of capital are consistent with the results of the business interests and the interests of socio-economic background

So efficient use of capital is typically only one side of the business performance, as a category reflects the degree of economic, energy exploitation and utilization of capital and assets in production and business activities to goals to maximize benefits and minimize costs

Analyze the effective use of capital and business can be conducted in three content: analysis of efficiency of working capital, fixed capital and capital efficient business use in general

2.1.2 Classifications of Capital and Sources of Capital

During production, business enterprises consume expenditures such as supplies, materials, equipment depreciation, and salaries That is the cost of the corporation spends to achieve business goals The problem is this cost arises frequently, continuous associated with production processes of the enterprises Therefore, enterprises must improve the efficiency of capital as much as possible to achieve the highest business objectives In order to manage and closely supervise the implementation of the cost, capital efficiency, cost savings at each stage of production and the entire company, it is needed to classify capital The effects of capital classification include inspect, analyze the process of the incurred costs, which the enterprise had to spend on business production There are many classifications of capital Depending on different point of view, we have different classifications of capital

2.1.2.1.Capital classification method based on rotation

a Fixed Capital

In business market, money is needed for payments of expenditures of a company related to fixed assets Under Vietnam’s government regulation, fixed

assets must have two characteristics: (1) have great value (over 5 million VND), and (2) worth used over one year The advance investment capital to buy, sell, construct, and transfer intangible and tangible fixed assets is called fixed capital According to David Ricardo, fixed capital is described as any kind of real or physical capital (fixed asset) that is not used up in the production of a product and is contrasted with circulating capital such as raw materials, operating expenses and the like (en.wikipedia.org) Fixed capital is essential because if we use it effectively, company will create large proportion of profits

In business enterprises, fixed capital plays a vital role in the production of product It determines innovation of technology, equipment of technical facilities, and primary factor to secured enlarging re-production as well as improving employees’ living standard Therefore, it is essential to manage capital effectively The size of fixed capital will determine the size of fixed assets that has huge effects

on business’s operations On the other hand, economic characteristics of fixed assets

in application process have a decisive influence in transferred cycle of fixed capital

Fixed capital expressed into two forms:

(i) In physical form: It is all fixed assets used in business enterprises It

includes land, buildings, property, office equipment and furniture, vehicles, etc

(ii) In monetary form: It is all fixed assets, which are not depreciation and

amortization of capital when not being used for the production of fixed assets It is part of fixed capital that finished the completely rotate and return to the original form of currency

b Working Capital

Working capital is managed to determine profitability of the firm It is defined as

a firm’s investment in capital (J.William Petty, A.J., J.D., Martin, et al) Working is described as the dollar amount or the total of a firm’s current assets by Josephe Finnerty Cash, accounts receivable, and inventories are the main form of current assets

Working capital can initially be broken into two types: permanent and temporary Permanent working capital is tied up in keeping the business flowing throughout the year Temporary working capital is needed from time to time to take account of seasonal, cyclical or unexpected fluctuation in the business In addition, it is usually serviced from an overdraft facility

There are three basic applications of working capital consist of inventories, debtors, and cash

Firstly, inventories comprise primary stocks of goods that are held for resale, a prominent asset for retailers, wholesalers and manufacturers Inventories can be further split into inventories of raw materials, work in progress and finished goods If inventories do not well managed, they can soak up an enormous amount of excess working capital It is the job of the financial manager to minimize the stocks of raw materials, the level of the work in progress, and the quantity of finished goods

Secondly, on the debtor side, working capital is required to finance the gap between payment due to suppliers and payment owned by customers Main types of working capital on the debtor side are account payables and notes payable Accounts payable are the converse of account receivable, comprising mainly the firm’s debts

that arise from trade credit that creditors have advanced to the firm while Notes payable are shorter sources of finance that are payable on maturity date The primary task of financial manager on the debtor side is examining whether generous credit term are negotiated with suppliers but minimal credit is offered to customers

Finally, cash is needed to management of working capital Cash consists of cash

in hand (money) and bank accounts and credits Financial managers manage cash to ensure that it is always available for meeting the company’s day-to-day transactions and debts

2.1.2.2.Classification by source of capital formation

According to this classification, the capital of the enterprise includes Liabilities and Owners’ Equity In the process of production of business, outside of its own capital, the businesses themselves have also to use a large borrowing capital through banks, customers and partners All these elements are formed the liabilities of the business

a Liabilities

According to The IASB Framework, paragraph 49b, liability is described as a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits (ww.iasb.org)

Definition of liability has two main elements relating to the existence of a present obligation and a past transaction Obligation can come from numerous ways such as cash payment, provision of services, transfer of assets, and a credit One example of obligation is accounts payable

In SOEs, sources of liability come from banks, intermediary financial instruments such as pension funds and lease financing, issued bonds, and borrowed from members of the entity

b Owners’ Equity

Owner’s Equity is capital belong to the owner of the business who have ownership, management, and making decisions on the assets of the business There are three primary sources to create owners’ equity of the business as following:

(i) Venture capital includes capital contributions (The State, venture

firms, shareholders, and owners of the business) and the undistributed profits of results of business production

(ii) Differences on revaluation of assets (mainly fixed assets): When the

State allowed or members of company decided

(iii) The funds of the enterprise: forms of the business production such as

development funds, reserve funds, pension funds

In addition, the owners’ equity of the business also including capital investment in infrastructure and business funds (funds granted by the State budget,

development of non-refundable so that companies spend on long-term economic goals, basic social and political purposes )

2.1.2.3.Classification by time to acquisition

There are two types of capital based on time to acquisition consist of:

 Permanent funds: Permanent funds are capital that businesses use to finance

all of their fixed assets It includes owners’ equity and long-term debt of the business Long-term loan is used to pay for company expenditures will be used in long-term period Sources of these funds are clearing banks, merchant

banks, and even pension funds

 Temporary funds: These are funds used to finance the assets of the business

temporarily This fund includes bank loans, advance payment, immediate

payment of buyers, etc

2.1.3 Roles of Capital

In economic market, capital has its own characteristics Capital is a tool to achieve company’s objectives included economic development and enhance labors’ living standard In addition, capital is a kind of good because it is valuable We can buy, sell, and transfer capital in the market Capital is important part in production

activities Furthermore, capital will increase when business managed capital effectively As result, profit of business will increase as well

In business’s perspective, capital’s demand comes from demand of maintain business’s production, innovative technology equipment, enlarge business’s operations, improve quality of goods, increase employment for labors, and contribute

to society, etc Therefore, capital plays a vital role in business It is principle tool to gain business’s goals In addition, capital respects business’s relationship related to economic benefits among enterprises Capital improve self decision-making for business when analyzing demand of market such as what will manufacture, how will manufacture, and to whom in order to achieve highest production Therefore, capital

is essential for company’s existence and development

Capital also is a tool to examine business activities of the enterprise: Venture capital business is a key factor in value If capital were not preserved and increased after each cycle of business, it will no longer promote its role and have been damaged - it is a loss of capital Capital of the enterprise was a waste to use, will not

be effective will lead businesses to unable to pay and go bankruptcy Therefore, management of capital is important part in business production processes, especially managing efficient use of capital

2.1.4 Factors affected the Efficiency of Capital

2.1.4.1.Objective factors

(i) Economic Conditions

The economic condition has large effect on the efficiency use of capital It influences the funding of the business because of the demand and supply of capital in the marketplace always changes by times For example, expectations of inflation will influence the cost that is paid for capital Higher rates of inflation erode the values of investments and thus, investors will demand higher rates of return (www.mba.program.org)

(ii) Economic policies of the State

On the basic of the Law and economic measures, the State creates environment and corridor for business development and business production activities under the direction of macroeconomic planning of the country In Vietnam, business enterprises are direction under “market-oriented socialism” With any changes in current policies are governed array of business activities The legal documents on finance, accounting and statistics, on regulations affecting large investment in business process, especially the regulations on capital allocation mechanism and evaluation of fixed assets, the deduction depreciation rate appropriate funds may increase or decrease the efficiency of capital, etc

(iii) Market Conditions

The fluctuations in the number, price, equipment, raw materials, will greatly influence the plan of fixed capital, working capital of enterprises In addition, the loan interest is also an important influencing factor Interest on loans affect the investment costs of the business, changes in interest rates will lead to fundamental changes of the purchase of equipment investment, fixed assets The more cost of capital, the more demand for high rate of return For example, if we raise capital with

a security that is not highly marketable, investors will require higher rates of return for the increased risk (www.mbaprograms.org)

At the same time, the strong development of scientific and technical progress has produced a series of the same type of property with existing assets in enterprises with more advanced features have made the fixed assets of enterprises wear invisible lead

to fallen in business capital

2.1.4.2.Subjective Factors

This is the main factor determining the efficiency of fixed capital and thus affects the efficiency of business capital This factor consists of several factors with direct impact to the final-result of business production activities in both the short and long term

Therefore, the consideration, evaluation and decision making for these factors are extremely important Normally people usually consider the following factors:

(i) Financial Conditions

Any business has efficiency use of capital must has a well financial condition In other word, their debts is limited as well as their financial situation is able to pay their debts If the level of debt is higher than their obligation that must be paid, the company could bankruptcy This is referred to as financial risk

(ii) Risks from Capital

An illogical capital investment structure wills relative large impact to the efficient use of capital Because the capital invested in unused asset classes not only

is not promoting their useful in business production but also loss gradually diminished It leads to efficiency use of capital go down

In addition, determining of the demand of capital inaccuracies lead to excess or lack of funds in various stages of business production processes It also has negatively affected the operation and efficiency of business capital

Furthermore, the wasteful use of capital, especially working capital during production process, the procurement process such as buying materials incompatible with the process, and not completely utilization of materials have large impact to manage capital effectively

(iii) Production Cycles

This is an important feature to have direct impact on the effective use of capital

If short-cycle, companies will recover quickly to re-invest capital to expand

production and business Conversely, if long-cycle, business will be an accumulation

of capital and one more burden is debts and payments of interest borrowed

(iv) Management Level

The level management organizations, business organizations, internal accounting

of the business is one of major factors affect to efficiency use of capital so directly influenced management of capital as well To be effective, the management and organization’s production structure must orderly and fit smoothly together For each mode of production and patterns of production will be affected differently to the production schedule, methods and processes, and services

(v) The level of labor, incentives and material responsibility in the

enterprise

To develop the full potential of technological lines, machines and equipment for production required business management skills and the equipment used by workers high To use the most effective of potential employee, business need to have motivations as well as equal responsibilities Conversely, if incentives are not equal, the provisions are unclear responsibilities will definitely hinder the goal of improving capital efficiency

(vi) Selection of investment options

The selection of investment options is one of fundamental influences to the business performance of enterprises If business investment in products and services have good quality, good design, acceptable price the economic obtained will be greater In contrast, enterprise products produced poor quality, inconsistent with the needs of consumers' tastes and products cannot sell will exacerbate the capital accumulation and of course make efficient use of capital business is reduced

2.2 CAPITAL MANAGEMENT DECISION MAKING

IN SOEs

2.2.1 Factors affected financial decisions

When making financial decision related to efficiency use of capital, financial managers must consider six factors consist of flexibility, risk, inflation, income, control, and timing

First, flexibility is one of factors affect efficiency use of capital of financial decision Most SOEs in Vietnam are lack of the flexibility because they based on planed decisions for long-term period (may be 3 to 5 years) In addition, in today’s difficult time enterprises need to minimize their debts but it will also minimize their capital Therefore, financial managers need to have flexibility with future financial decisions based on the business’s current situation

Second, when making any decision company faced with many types of risk

of debt There is a limit to how much debt we can use to finance our business Too much debt can ultimately lead to bankruptcy

Third, inflation is another factor to consider in making decision in efficiently use of capital The rate of inflation in today’s world is high, it is a good condition to using debt financing because you will repay less money than original However, the rising of inflation caused unstable of political, economy, and social

Next, income influences the financial decision of the business because it influence earnings and thus affects return on equity If we are concerned about returns to equity shareholders, then our financing decision will need to be adjusted Income is also influenced by our ability to take advantage of tax deductions for interest on debt

After this, timing is necessary factor in financial decision Investment in the right time will make a lot of profit to a project Nevertheless, sooner or later investment can cause a loss or failure projects Financing decisions need to be timed

to take advantage of the marketplace What type of securities should be sold? When should they be sold? What length of maturity should be used for debt financing? Answering those questions will help the managers and leader take the right time to invest to get biggest profits

Last but not least, control is one of the most key factors affected to financial decision to efficiency use of capital If we have concerns about control over the organization, then we have to consider how financing will change control Financing decisions are connected to either ownership (equity) or creditors (debt) It is described as agency relationship in agency theory The most problem of agency theory is the conflict of interest between the agent and the owners If there is no

balance between their benefits, the company will make losses Unable to control the capital management can lead business go into the bankruptcy As results, control takes priority consideration in any business

2.2.2 Roles of SOEs in market economy

There are many notions about SOEs SOEs is called government-owned corporation, state-owned company, state-owned entity, state enterprise, publicly-owned organization or government business enterprise which is a legal entity created

by a government to undertake commercial activities on behalf of an owner government (en.wikipedia.org) A SOE can be either wholly or partially owned by a government and is typically earmarked to participate in commercial activities (walstreettape.investopedia.com) According to Michel Rambolt, there are three criteria in order to determine SOEs: (1) who is directly control SOEs? (2) Whether sell or not finished products? (3) Whether business’s operations for individual benefits or company’s benefits? Based on the criteria, Michel Rambolt defines SOEs are enterprises that are controlled by the government, which is divided into two categories:

i Organizations make products, which cannot buy or sell, called administrative agencies

ii SOEs manufacture products to create profits consist of two groups:

o SOEs operate for interests of whole organization, where manufacture products are public services

o SOEs operate for a specific interests and run business in competitive market

Pursuant to the Constitution of the Socialist Republic of Vietnam in 1992 that was amended and supplemented by the Resolution No 51/2001/QH10 dated 25 December 2001 of the National Assembly X, meeting session 10; this law governs law of enterprise (ww.vnbiz.com.vn) According to 2005 Vietnamese Enterprise Law, State-Owned Enterprise means an enterprise of which 50% of total capital owned by the state (Article 4, Paragraph 22)

SOEs have similar characteristics with other types of enterprise in term of business function, legal status, influenced by economic environment First, business function of SOEs included manufacturing, supplying, trading, cooperating, and consuming goods and services Second, SOEs have legal status It is the primary factor to consider the existence of the enterprise SOEs must have responsible for their management, financial roles to pay public debts when business dissolution or bankruptcy As an individual legal status, SOEs has rights and duties, as well as self responsibility for their own operations Third, operations of SOEs have affected by the economic environment such as high inflation rate, high price, and unemployment

However, SOEs can be distinguished with other enterprises because of following characteristics First, the government owns SOEs and has rights to make decisions related to business’s operations in order to obtain economic and society objectives, which the government was planned Unlike SOEs, other enterprises are not ownership of the government but they must have legal agreement document by government to form the business Second, SOEs run under government management

through management system that is controlled by the government The government will appoint positions in SOEs Besides, the government controls strategies, plans, profits, and payments of the SOEs Last, assets of SOEs are part of assets of the government

In competitive market, SOEs play at special important position because they are core part of state sectors and the backbone of economic in the country Roles of SOEs are represented through their functions There are three major functions included function-oriented development of economy, support and service function, and function-ensured financial strength First, function-oriented development of economy represents SOEs must be a pioneer in any state sectors based on government’s direction as well as integrate with other business in order to developing together Second, SOEs is developed to support the development of the country including all enterprises in the country Last, SOEs create economic surplus

to whole society when they run business effectively so it is necessary to ensure financial strength of SOEs

The government promulgates policy of capital management for the purpose

of strengthen financial independence of SOEs, improve SOEs’ responsibility in managing and using capital effectively, and ensure interests for labors, managers, company and the government SOEs is invested when start up the business or during the operation of the business In fact, the government funds SOEs through direct methods (directly from government budget) or indirect methods (through journal entries such as transferring capital or borrowing) Based on ability of government capital, each country will have different capital policy For example, in France, most SOEs are funding 100 percent except SOEs have individual development policy In Japan, proportion of capital has increasing but the level of management is high In

Malaysia, sources of capital in SOEs will fund 100 percent at the beginning every year but the company must pay interest based on market value In Vietnam, the management of capital in SOEs is specific guideline under the Resolution 62/1999/TT-BCT date 7 June 1999 When management of capital in SOEs the government needed to manage fixed capital and working capital

2.2.3 The Decision Making in SOEs of Vietnam

Decision making is one of the most important tasks that manager perform Decision-making process is described as the process by which people respond to opportunities and threats by analyzing options, and making decisions about goals and courses of action (www.csie.ncnu.edu.tw) Decisions are frequently influenced more

by the environment and structure of the organization than by the method itself Therefore, the process of decision-making will be examined in light of environment factors

To begin with, social and cultural background is example of environment factor Social and cultural background affects the interaction among people involved

in the decision process and provides the culture framework within which they may comfortable operate In Vietnam’s SOEs, corruption is seemed as business culture in Vietnam In any field, industry, or sector, any business should (must) give a money which called like a lobby or “rose money” if they want to invest in a potential project with high expectation of profitability If they do not have the money or the money is little than others, they will lose the opportunity to have good projects SOEs do not directly affect by the problem because they have priority to choose the best project

However, that does not mean they will choose positive projects Sometimes, negative

or even loss projects have chosen because of their profitability As results, SOEs will have their own decision to bring the best profitability to the leader Therefore, the leaders can have shortcomings decision which can lead the business go into recession

The next factor influences decision making in capital management is the structure of an organization Factors control decision-making process including the amount of flexibility within an organization, the available resources (facilities, technology, or fiscal reserves), and the amount of data available In addition, the important of the decision made in relation to other problems and responsibilities is one of primary factors determined decision-making process In Vietnam’s SOEs, the Government take control overall the organizational operations through the Chairman and the Broad of Management of which are CEO and other support directors SOEs must make decision follow the Government However, in general the organization’s leaders do not obey the decision of Government because they want profit come to their pockets as much as possible It is one of problem in agency theory Furthermore, in organizational structure of SOEs, the follower members not have rights to make decisions but they still make decision first then take response after This can leads weaknesses and wrongdoings in organizational management of SOEs

Finally, three other factors also influence the model of decision process in any business include SOEs when making decisions are time, creativity, and risk The managers and leader cannot determine the time, creativity, and risk of a project It is most affected by the environment Therefore, the manager must have well knowledge about the environment include both competitive advantages of their company and

position in the market to make right decision with have efficient time, creativity, and minimum risk It requires managers and leader must well manage

Summary, decision making is significant task of managers and leaders to create a profitability company

CAPITAL

2.3.1 The Need to Improve the Efficiency Use of Capital

Any business is interested in efficient use of capital It is the significant factor for the survival and growth of every business The effectiveness of the use of capital in general is to create more products that increase profits without increasing capital or invested more reasonable capital in order to expand the scope to increase revenue while ensuring requirements profit growth than the growth of capital Therefore, the fundamental task of business is to mobilize and use capital effectively on the basis of principles of financial, credit and compliance with law Regularly analyze capital and capital movements will help the state enterprise managers and the agency acknowledge the situations, causes and extent of influence of each factor to efficient use of capital of enterprises

2.3.2 Criteria to evaluate Effectiveness of Capital

Vietnamese’s enterprises with equity capital or loan capital, charter capital are profitable capital, which required paying interests or dividends, or paying tax, and must recognize capital into account The question is how much this capital raised is enough, is reasonable, and is effective for the business production of corporate? On the other hand, during business production, an enterprise creates products and services with greater consumption more stable and expand markets, and the increasing of customers’ demands will need capital as much as possible for business development Therefore, if the management of capital is not good it can lead the enterprise to bankruptcy because of the belief that business was very successful As results, to more accurately appraise the effective use of capital in enterprises, especially SOEs we can rely on “Return-on-Investment (ROI) Ratios” ROI ratios are the fundamental key ratios to measure the relationship between profitability and investment The common used of different return-on-investment consists of Liquidity, Leverage, Profitability, and Management Ratios In this thesis, I concentrate on several basic ratios appraising the efficiency of capital in the business

2.3.2.1.Based on Efficiency Ratios

According to many analysts, the key ratio measures the relationship between profitability and investment is “return-on-investment” Under the following is the common used of different return-on-investment