Firms’ investment – cash flow relationship in the context of state ownership and banking system reform in vietnam

TABLEOFCONTENTS ABBREVIATIONS...i LIST OFTABLES...ii LIST OFFIGURES...v ABSTRACT...vi CHAPTER1:INTRODUCTION...1 1.1.. Firm’sinvestment– cashflowrelationshipinthecontextofstateownershipin

DOCTORALTHESIS

HoChiMinhCity,August2020

STATEMENTOFAUTHORSHIP

Iherebydeclarethatthissubmissionismyownworkandexceptwhereduer ef e

r en c e ismade;thisthesiscontainsnomaterialpreviouslypublishedorwrittenbya n o t h e r person(s)

Thisthesisdoesnotcontainmaterialextractedinwholeorinpartfromathesiso r reportpresentedforanotherdegreeordiplomaatUniversityofEconomicsHoChiMinhCityoranyothereducationinstitution

TuThiKimThoaAugust

2020

ACKNOWLEDGEMENTS

Firstandforemost,Iwouldliketoexpressdeepestgratitudetomysupervisors,Dr.VuVietQuangandDr.NguyenThiUyenUyen,fortheircontinualguidanceandm e n t o r s h i p , invaluablesupport,remarkablepatience,usefulfeedback,andspiritualencouragementduringthecompletionofmythesis.Mythesiscannotbecompletedwithouttheirsupervisions,whichprovidedmewithmuchpreciousadvicetoexpeditemythesiscompletion

IwouldliketothanktheUniversityofEconomicsHoChiMinhCityforitsg e n e

r o u s financialsupportofmyPhDstudies.IalsowishtothankallthecolleaguesattheUEHSchoolofFinance,SchoolofUEHGraduatesandothersfortheirgreatan d continuingencouragementandfullsupportduringmyPhDcandidature

MygratitudealsogoestomycolleaguesatUEHwhohaveconstantlygivenag r eat help,supportandencouragementstomenotonlyduringbutalsobeforethecompletionofmythesis

Finallyandmostimportantly,Iwouldliketothankmyfriendsandfamilyfort h e i r unconditionallove,immense,constantandendlesssupportandencouragementsd u r i n g mylife.Iwouldhavebeenunabletofinishthethesiswithouttheirsupportsan dencouragement.AndIalsowishtodedicatethisthesistomylatemotherwhoisalwaysinmyheart

TABLEOFCONTENTS

ABBREVIATIONS i

LIST OFTABLES ii

LIST OFFIGURES v

ABSTRACT vi

CHAPTER1:INTRODUCTION 1

1.1 Thesismotivations 1

1.2 Thesis objectives 5

1.3 Firm’sinvestment– cashflowrelationshipinthecontextofstateownershipinVietnam 5

1.3.1 Objectivesandhypotheses 5

1.3.2 Data 6

1.3.3 Methodology 6

1.3.4 Empiricalfindings 7

1.3.5 Contributions 7

1.4 Firm’sinvestment–cashflowrelationinthecontextofbankingsystemreforminVietnam 8

1.4.1 Objectivesandhypotheses 8

1.4.2 Data 9

1.4.3 Methodology 9

1.4.5.Contributions 10

1.5 Thesisstructure 10

CHAPTER2:OVERVIEWONVIETNAM’SECONOMICREFORMS 11

2.1 OverviewonVietnam’seconomy 12

2.2 Overviewonequitizationof stateowned enterprisesof Vietnam 15

2.3 OverviewonVietnam’sbankingsystemreform 20

2.4 Chaptersummary 25

CHAPTER3:FINANCIALCONSTRAINTSANDINVESTMENT:ATHEORE

TICALFRAMEWORK AND LITERATUREREVIEW 27

3.1 Theoriesofinvestment 29

3.1.1 The Modigliani-MillerTheorem (MM) 30

3.1.2 Neo-classicalmodel 30

3.1.3 Salesacceleratormodel 31

3.1.4 Tobin’sQmodel 32

3.1.5 TheEulermodel 34

3.2 Financialconstraintsandinvestment:aliteraturereview 35

3.2.1 Financialconstraintandinvestment 35

3.2.2 StateOwnershipandInvestment–CashFlowRelations 44

3.2.3 Bankingsystemreformand investment–cashflowrelation 46

3.2.4 Financialleverage,growthopportunityandinvestmentrelation 48

3.3 Chaptersummary 49

CHAPTER4:FIRM’SINVESTMENT–CASH FLOWRELATIONSHIPINTHECONTEXTOFSTATEOWNERSHIPINVIET NAM 51

4.1 Thestudyintroduction 52

4.2 Literaturereviewandhypothesisdevelopment 54

4.2.1 Relationbetweeninvestmentandcashflow 54

4.2.2 StateOwnershipandInvestment–CashFlowRelations 57

4.2.3 StateOwnershipandInvestment–LeverageRelation 59

4.3 Researchdesign 60

4.3.1 TestingInvestment–CashFlowRelation 60

4.3.2 Testingt h e I m p a c t o f S t a t e

O w n e r s h i p o n I n v e s t m e n t –CashF l o w R e l a t i o n s 63

4.3.3 TestingtheImpactofState Ow ners hi p onInvestment – LeverageR e l a t i o n s 64

4.3.4 Data 64

4.4 Empiricalresults 65

4.4.1 DescriptiveStatistics 65

4.4.2 EmpiricalResults 67

4.4.3 Robustness Check 80

4.5 Conclusion 90

4.6 Chaptersummary 91

CHAPTER5:FIRM’SINVESTMENT–CASH FLOWRELATIONSHIPUNDERTHECONTEXT OFBANKINGSYSTEMREFORMINVIETNAM 92

5.1 TheStutyIntroduction 93

5.2 Literaturereview 96

5.2.1 Investment–cashflowrelation 96

5.2.2 Effectofbankingsystemreformoninvestment– cashflowrelation 985.3.Researchmethodology 99

5.3.1 Hypothesisdevelopmentandmodelspecification 99

5.3.2 Data 104

5.4 Empiricalresults 105

5.4.1 Descriptivestatistic 105

5.4.2 Correlations 107

5.4.3 Regression results 109

5.4.4 Robustness check 127

5.5 Studyconclusion 128

5.6 Chaptersummary 129

CHAPTER6:CONCLUSION 131

6.1 Introduction 131

6.2 Firm’sinvestment– cashflowrelationshipinthecontextofstateownershipinVietnam 131

6.2.1 Researchfindings 131 6.2.2 Researchcontributions,implicationsandpolicyrecommendations.132

6.2.3 Researchlimitationsandfutureresearchdirections 134

6.3 Firm’sinvestment– cashflowrelationshipinthecontextofbankingsystemreforminVietnam 135

6.3.1 Researchfindings 135

6.3.2 Researchcontributions,implicationsandpolicyrecommendations136 6.3.3 Researchlimitationsandfutureresearchdirections 138

LIST OFAUTHOR’SPUBLICATIONS 140

REFERENCES 141

APPENDIX 147

BankforForeignTradeofVietnamVietinba nkVietnamIndustrialandCommercialBanksWTO

WorldTradeOrganization

LISTOFTABLES

flowunderdifferentgrowthopportunities:GMMestimationmethod

enterprisesusingthethresholdof33.15percent

flowunderdifferentgrowthopportunitiesinwhichhighg r o wt h opportunityisclassifiedbyquartile

Figure5.2

Fittedvalueofinvestment(IK)oncashflow(CFK)onasubsampleofVietnameseStatecontrolledfirmsforthep e r i o d of2009-2014

111

Figure5.3

Fittedvalueofinvestment(IK)oncashflow(CFK)onasubsampleofVietnameseNon-

statecontrolledfirmsfortheperiodof2009-2014

112

Thist h e s i s a p p l i e s t h e styleo f a serieso f p a p e r s i n t h e f i e l d o f c o r p o r a t

e fin an ce, whichmainlycomposesofthetwostand-aloneessays

Thefirstessayinvestigatestheeffectofstateownershipontherelationship

b e t w e e n investmentandcashflowinVietnam,asmalltransitionaleconomy.Usinga sampleofcompanieslistedonthebothHoChiMinhCityStockExchanges(HOSE)a n d HanoiStockExchange(HNX)duringtheperiod2008to2015,theU-shapedi n v e s t m e n t –cashflowrelationsforbothstate-ownedandnon-state-

ownedfirmsaref o u n d

Inaddition,state-ownedcompanies(SOEs)havehighercashflowsensitivityo f investment,w h i c h p e r h a

p s i s d u e t o t h e i r s o c i o e c o n o m i c a n d p o l i t i c a l r e s p o n s i b i l i t i e s , poorcorporategovernanceandagencyp r o b l e m Theirgrowthopportunities alsoaffectthesensitivity

Thes e c o n d e s s a y examines t h e e f f e c t ofbankings y s t e m r ef or m, w h i c

vii

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CHAPTER 1INTRODUCTIO

a r l y s t a t e o w n e r s h i p a n d b a n k i n g systemreformonfirm’sinvestment–cashflowsofatransitioneconomy,Vietnam.Section1.2introducestheresearch

objectives.Section1.3andSection1.4r e s p e c t i v e l y summarizethetwoessays:firm’sinvestment–

cashflowrelationundert h e contextofstateownershipinVietnamandfirm’sinvestment–cashflowrelationu nd erthecontextofbankingsystemreforminVietnam.Finally,Section1.5presentsthestructureofthethesis

ationshipbetween investmentandcashflows, especially inthe co n t e x t offinancial constraints have

attractedinterestsofmanyscholars.Fazzari,Hubbard,Petersen,Blinder,andPoterba(1988)s h o w

t h a t f i n a n c i a l l y c o n t r a i n e d firmsh a v e h i g h i n v e s t m e n t –

c a s h flowsensitivitiesbecauseofhighercostofexternalfundsincomparedwiththatofinternalfu

nd s Differenttypesoftherelationhipbetweeninvestmentandcashflowhavebeenf o u n d infinancialliteratures.Fazzarietal

(1988)findthelinearrelationshipwhileCleary,Povel,andRaith(2007)documentthenon-linear(U-

shaped)ones,which h a v e b e e n c o n f i r m e d bymanyo t h e r s t u d i e s ( F i r t h , M

Hung,2014).So,thereisnoconsistent

relationbetweeninvestmentandcashflowsfoundintheliteratures.Moreover,therelationh a s notbeenunder-investigatedforVietnamcontext

Secondly,t h e in ves tme nt –

cash flowsensitivity iso neo fc om mo nl y usedmeasuresoffinancialconstraintwhichisdefinedasalimitincapitalaccessibility,e i t h e r internallyorexternally.InthecontextoftransitioneconomylikeChinaandVietnam,theroleofstateownershiponfinancialconstraintshasbeenunclear.Manystudiess h o w s e v i d e n c e t h a t s t a t e -

o w n e r s h i p d o e s h a v e i m p a c t o n f i r m f i n a n c i a l constraints,i.e.investment–cashflowrelation(Firthetal.,2012;Haider,Liu,Wang,

&Zhang,2018;Tsaietal.,2014)whileH.-C.M.LinandBo(2012)showsthatstate

– controlledbankingsystem

ownershipdoesnothelptoreducefinancialconstraintsoninvestmentevenviathestate-Vietnamusedtofollow

thecentrally-plannedeconomy whichwase n t i r e l y

dominatedbystate-ownedenterprises(SOEs).Thismechanismledthecountryintoc r i s i s andbackward,whichrequiredabroadandin–

depthrenovationofthewholeeconomy.Acomprehensiveprogramwhichiswell-knownasDoimoiwasintroducedi n 1986totransformtheeconomyfromasocialisttoamarketorien ted.Asoneofthec o m p o n e n t s o f t h e D o i m o i policy,a n e q u i t i z a t i o n ( p r i v a t i z a

t i o n pe r - se ) p r o g r a m ownedcompaniesintojoint-

launchedintheearly1990shastransformedanumberofstate-stockcompaniesbesideforthefirsttimeallowingexistenceofprivatecompanies.Anumberofprivatecompanies(bothequitizedandnon-equitized)has

sharesatmanye q u i t i z e d S O E s I n t h e l i t e r a t u r e s , t h e impacto f s t a t e o

w n e r s h i p o n f i r m performanceaswellasfinancialdecisionsisstillcontroversial.SunandTong(2003)r e p o r t thattheprivatizationprograminChinaimprovedearnings,sales,andworkers’productivityatChineseSOEsbutnotprofitability.DuandBoateng(2015)assertthatshareholdervalueissignificantlyaffectedbystateownership,formal institutional d i s t a n c

e , andreformsintheforeigncurrencyapprovalsystem.However,G.Chen,F ir th ,andXu(2009)findthatfirmperformanceisenhancedbycertaintypesofstateown er ship S O

E s h a v e s l o w , e v e n n e g a t i v e g r o w t h w h e r e a s t h e rapidlyg r o w i n g privatesectorsignificantlycontributestoeconomicgrowth(Allen, Qian,&Qian,

2 0 0 5 ) Itfinds thatSOEswith a softbudgetconstraint ca neasilyaccessexternalf i n an c in g , resultinginlowerdependenceoninternalcashflowsthanisthecaseatp r i v a t e l y ownedfirms(Allenetal.,2005;Cull&Xu,2003).Firthetal

(2012)alsoreportthatstateownershiphasanimpactontherelationbetweeninvestmentandcashf l o

w R.R.Chen,ElGhoul,Guedhami,andNash(2018)assertthatanincreaseinst a t

eo w n e r s h i p l e a d s t o a n i n c r e a s e i n c o r p o r a t e c a s h h o l d i n g s , w h i c hmeansa p osit iv e relationbetweengovernmentownershipandcorporatecashholdings.M

cashflowsensitivityt h a n privatelyo w n e d firms,especiallywhencashflowisnegative.So,whetherstateownershiphasanyimpactoncorporatefinancialconstraint, specifically, investment –

cashflowrelationofVietnamesecompaniesisstillanunanweredquestion

Thirdly,inVietnam,duetotheunderdevelopmentoffinancialmarket,besideinternalcashflows,bankloanshavebeenmainfinancingsourcesoffundsforfirm’si n v e s t m e n t s

forprivatecompaniesd u etosomehistoricalreasons1althoughVietnamhasdoneseveraleffortstoimprove

1 Vietnamusedtobeacentrally-plannedeconomyinwhichstate–ownedbanksmainlyservedforstate-ownedenterprises.

thesituation.NhungandOkuda(2015)showthatVietnameseSOEshaveanadvantageoverprivatelyownedfirmsinaccessingbankloansaswellasmakingaprofit,evenaftereconomicbooms.Thehigheraccessibilitytobankloans,thelessf i n a n c i a l l y

c o n s t r a i n e d t h e f i r m i s , meaningt h e l o w e r i n v e s t m e n t –

c a s h f l o w sensitivity.Therefore,bankings y s t e m reformisprovedtohaveani m p a

cashflowrelation(Tsaietal.,2014).Intheprocessoftransformingthee c o n o m y fromcentrally–

plannedtomarketoriented,Vietnamalsohasconductedanumberoffinancialsystemreformsasacomponentofoveraleconomicreform.Oneo f themistoallowtheentryofforeignbankstodobusinessinVietnam.Thisdoesnotonlycomefromtherealitybutfromentrancerequirementsofinternationalfreet r a d e agreementssuchasWTOalso.Thepresenceofforeignbanksononesidewouldincreasecompetitionincreditmarket,andontheothersideputpressuresondomesticb a n k s toimprovetheirtransparancy,effeciencyandprofitabilitytobesurvivalandg r o w inaintegratedmarket.Assuch,thepresenceofforeignbanks–

whichcanbeconsideredameasuretoreformthebankingsystem–

mayhavecertainimpactoncompaniesaccessibilitytoexternalfundstofinancetheirinvestment,orontheotherw o r d s , firm’s in ves tme nt –

cash fl ow relation T he re fo re, it alsomo ti va tes meto c o n d u c t thisthesis

Thet o p i c o f i n v e s t m e n t –

c a s h f l o w s h a v e b e e n i n t e n s i v e l y c o n d u c t e d inf i n an c i a l literatures,butmostofthemusethesamplesofdevelopedcountrieslikeU S , Cana da, orC hi na–

a b i g t r a ns i t i o n a l economy.T o mybest k n o w l e d g e , t h e relationshipbetweeninvestmentandcashflows,especiallyinthecontextofstate–

ownership andforeignbankentryhasstillnotinvestigatedforthecaseofasmalltransitione c o n o m y l i k e Vietnam.Furthermore,inspiteofsharingsomecutural,s o c i a

l andpoliticalsimilaritieswithChina,Vietnamalsohasmanydifferencessucha s sizeofeconomy,historyofthetransformation,opennesstotheworldeconomy,d e v e l o p m e n

t offinancialmarket,etc.StudyingtheVietnamesecontextisbelievedtob e worthwhileandvaluableforinternationalfinanceliteraturesbecauseresultsform

theratherspecificcaseofChinamaynotbegeneralizableforothersmallemergingmarkets.Therefore,Ichoosetoexaminetheimpactofbankingsystemreform,ands t a t e ownershiponinvestment–cashflowsensitivityinVietnamformyPh.Dthesis.

1.2 Thesisobjectives

Thegeneralobjectiveoftheresearchistoinvestigatetheimpactoffinancialconstraints,whicharemeasuredbystateownershipandbankingsystemreformont h e relationbetweenfirm’sinvestmentandinternalcashflowsinthecontextofsmalltransitionaleconomy–

Vietnam.ThegeneralobjectiveisimplementedbythetwoessayswhichareseparatelypresentedinthefollowingSectionsof1.3andSection1.4

Toachievetheresearchobjectives,followingresearchquestionsaresetforth:

ationswithmissingdataareomitted,andoutlierst h a t mayinfluencetheresultsarealsoexcludedbywinsorizing1%ofthetwotailsf o r eachvariable.

1.3.3 Methodology

Thestudyappliesquantitativemethod.First,thestudytestsifinvestment–

c a s h

flowinVietnamisU-shapedforVietnamesefirmsingeneral,statecontrolleda n d stateuncontrolledfirms,employingtwodifferentapproaches.ThefirstapproachfollowsC l e a r y e t a l

( 2 0 0 7 ) w h i c h i n c l u d e s s q u a r e o f c a s h f l o w methodint h e standardinvestmentregressionequationdevelopedbyFazzarietal

(2012)whichseparatescashflowsintopositiveandnegativecashflows.Secondly,theimpactofstateownershipontheinvestment

– cashf l o w r e l a t i o n s h i p i s i n v e s t i g a t e d byu s i n g b o t h d u m m y a

n d c o n t i n u o u s v a r i a b l e s ofstateownership.Theinvestigationisconductedforthefullsample,state

2 Theperiodischosenbecausethere

werejustalimitednumberoflistedequitizedSOEsbefore2008andthes t u d y wasconductedin2016.

controlled,s t a t e

-u n c o n t r o l l e d s -u b s a m p l e s a s w e l l a s h i g h a n d l o w g r o w t h o p p o r t

u n i t i e s

sub-subsamples.Thirdly,theinvestment-leveragerelationshipisalsoexaminedinthesamemanner.AlltheregressionsareestimatedbyusingGeneralizedL e a s t S q u a r e d ( G L S ) methodo n a p a n e l d a t a s a m p l e s t o c

1.3.5 Contributions

Thefollowingcontributionsareaddedintothecurrentliteraturefromdifferentper spectiv e

s First,Ishedfurtherlightontheimplicationsoffinancialconstraintsbyinvestigatingtheassociationbetweenstateownershipandcorporateinvestment–

cashf l o w inasmalltransitionaleconomysuchasVietnam.Second,generallypre

contextofd e v e l o p e d countriesorChina(Clearyetal.,2007;Firthetal.,2012;Tsaietal.,2014).T heintensiveliteraturereviewhasindicatedthattheimpactofstateownershiponinvestmentrelationsinanemergingandtransitionalcountrysuchasVietnamhasl a

r g e l y beenunder-examined

e s e n t a t i v e officesatthelocationwherethecompanyislocated.Followingsarethestudyobjectives:

Examinet h e U

-s h a p e r e l a t i o n -s h i p b e t w e e n i n v e -s t m e n t a n d c a -s h f l o w forVietnamesecompanies

- Examinei m p a c t o f b a n k i n g s y s t e m r e f o r m o n t h e i n v e s t m e n t– leveragerelationingeneral,andforstatecontrolledandnon–

statecontrolledfirms

- Examinei m p a c t o f b a n k i n g s y s t e m r e f o r m o n t h e i n v e s t m e n t– leveragerelation ingeneral,andforstatecontrolledandnon–

statecontrolledfirms

- Proposesomepolicyreccommendationstovariousrelatedpartiesbasedonther e s e a r c h findings

1.4.2 Data

Thefinalsampleofthestudyconsists2,858firm-yearobservationsofnon-f i n a n c i a l companieslistedonthetwostockexchangesoThefinalsampleofthestudyconsists2,858firm-yearobservationsofnon-fVietnam,HOSEandHNXThefinalsampleofthestudyconsists2,858firm-yearobservationsofnon-f o r theperiodof2009–

20143.BothfinancialandmarketdataareextractedfromtheThomsonReutersdatabase.Observationswithmissingdataandoutliersareexcluded

1.4.3 Methodology

cashf l o w relationsinVietnamaretested.Thetestsareconductedforthefullsample,statecontrolledandstateuncontrolledsubsamples,employingtwodifferentapproaches.T h e firstapproachfollowsFazzarietal.(1988)andthesecondapproachfollowsFirthe t al

(2012).Secondly, Iinvestigatetheimpactofbanking systemreformontheinvestmentrelationshipforvariousgroupsofbusinesssuchasstatecontrolled,nonst a t e controlled,highgrowthopportunityandlowgrowthopportunity,etc.Theproxyv a r i a b l e f o r b a n k

i n g s y s t e m r e f o r m i s m a n u a l l y c o l l e c t e d fromc o m p a n y a n n u a l reports.Thirdly,Iexaminetheinvestment-leveragerelationshipundertheimpactofstate–

o w n e r s h i p A l l t h e r e g r e s s i o n s a r e e s t i m a t e d byu s i n g G e n e r a l i z e d

L e a s t S q u a r e d ( G L S ) methodt o f i x t h e h e t e r o s c e d a s t i c i t y p r o b l e m a

n d r o b u s t i f i e d byG e n e r a l i z e d MethodofMoment(GMM)forendogeneitypotential

1.4.4 Empiricalfindings

ThefindingsshowtheU–

shaperelationbetweeninvestmentandcashflowfo r Vietnamesecompanies.IalsofindevidencethatthepresenceofforeignbanksinV i e t n a m resultsinadecreaseindependenceofcorporateinvestmentsonlocalbanksandh a s c h a n g e d c o r p o r a t e i n v e s t m e n t b e h a v

i o r s C o m p a n y i n v e s t m e n t s a r e l e s s

3 Theperiodischosenbecausethere

werejustalimitednumberoflistedequitizedSOEsbefore2008andthes t u d y wasconductedin2015.

cashflowrelation,e sp e c i al l y inacontextofsmalltransitioncountry.Mostofmyfindingsaresimilartot h e pr ev io us studyresultsexce pt t h a t o v e r i n v e s t m e n t p r o b l e m o f s

t a t e c o n t r o l l e d firmsisnotmitigatedinthepostreformperiod.Perhaps,inthepostreformperiodstatecontrolledfirmsarestillmaincustomersofstate-

ownedlocalbankswhoared o m i n a t i n g thecreditmarket.Moreover,presenceandoperationof foreignbanksinV i e t n a m isstilllimited

1.5 Thesisstructure

Theremainingofthethesisisstructuredasfollows.Chapter2presentstheoverviewo n V i e t n a m ’ s e c o n o m i c r e f o r m s C h a p t e r 3 r e v i e w s r e l a t e d i

n v e s t m e n t theoriesandliteraturesonfinancialconstraints,anditsimpactoninvestment–cashf l o w r e l a t i o n s h i p C h a p t e r 4 a n d C h a p t e r 5 r e s p e c t i v e l y p r e

s e n t s t w o i m p o r t a n t studiesofthethesis:impactofstateownershipandbankingsystemreformonthefirm’srelationshipbetweeninvestmentandcashflows.Finally,thethesisisc o n c l u d e d byChapter6

Doimoipolicy,includingeconomic,financial, corporationetc…reforms.Thepolicyaimsattransformingthee c o n o m y fromc e n t r a l l y p l a n n e d ,

w h i c h l a c k s motivationsf o r d e v e l o p m e n t , t o m a r k e t

-o r i e n t e d w h i c h a l l -o w s t h e multiplef-orms-o f b u s i n e s s -o r g a n i z a t i -o n s ,

a n d o peni ng thedoortotheworld.Thepolicyhasmadeagreatimpactontheeconomya

s awhole.Economicstructurehassignificantlychangedwiththebirthandincreasingrole ofprivate sectorin the economy,including foreign investors Two–

t i e r e d b a n k i n g s y s t e m wase s t a b l i s h e d , t o g e t h e r w i t h ani n c r e

a s e i n e n t r y a n d e x p a n s i o n offoreignbanks.Manylegalframeworkshavebeenintroducedorrevisedtosupportthetransformationandopennessoftheeconomy

UndertheDoimoipolicy,thecorporationreformwhichisknownasequitizatio

norprivatizationprogramwasthekeycomponentoftheeconomicreform.A largenumberofstate–

ownedenterpriseshasbeenequitizedviarestructuring,mergerandacquisition,divestitures,ownershiptransfer,etc.Theequitization

programhaveborneanumberofjointstockcompanies,whichhavebeenoneofthed e t e r m i

n a n t s ofVietnameseeconomicdevelopmentforthelastfewdecades.Similarly,thetransformationfromaone-tieredtotwo-

tieredbankingsystemaswella s allowingtheentryofforeignbankswerethefocalissuesofthebankingsystemref orm asapartoffinancialreform.Boththereformshavegreatlycontributedtothew e l l - k n o w n successoftheVietnam’seconomysofar

Chapter2isstructuredasfollow.Section2.1highlightsanoverviewabou

theequitizationp r o g r a m inV i e t n a m a n d S e c t i o n 2.3d e s c r i b e s a n o v e r

v i e w o f t h e Vietnam’sbankingsystemreform.TheChapterwillbeconcludedbySection2.4

2.1 OverviewonVietnam’seconomy

Vietnam’seconomy,aftertheunificationofthecountryin1975,followedthec e n t r a l

l y

-p l a n n e d mechanism,inwhichallim-portantdecisionsmustbemadebythec e n t r a l governmentalbodies.Theperiodof1976–

1985canbedescribedbythelownational incomegrowthrate(3.7percent),supperhighinflation(453.54percentbyt h e endof1986);domesticproductioncouldnotmeetthebasicneedsforpeople,leadingtorelianceonimports;severe

budgetdeficitandforeigndebtproblems.Thef a i l u r e ofthismodelledtheeconomytotheedgeofeconomiccrisis.Therefore,theS i x t h P a r t y Congress inDecember1 9 8 6 madea n importantd e c i s i o n t o l a u n c h a c o m p r e h e n s i v e economicreform,shiftingthecentrallyplannedeconomytoasocialist-

orientedm a r k e t e c o n o m y , w h i c h i s c a l l e d D o i m o i policy.T h e D o i m o i policy,

i s i s i n 1 9 9 7 , i t d r o p p e d downtothelowestpointoverthelast30yearsat4.77%,arelativelyhighincomparedw i t h t h a t o f m a n y d e v e l o p e d c o u n t r i e s S i n c e t h e n , t

h e e c o n o m y h a s maintainedaprettystablegrowthataround6percentannually.In2018,GDPperc a p i t a r e a c h e d a b o u t U S $ 2 , 5 5 1 p e r c a p i t a a year.E c o n

o m i c s e c t o r s h a v e b e e n restructured

towardthedevelopmentofamarket-orientedsocialisteconomywherebyprivatesectorisfreelyestablishedandoperatesinareaslegallyapproved

Lawin1987andthewell-knownResolutionNo.10(issuedonApril5,1988)4.Thesepoliciese m p h a s i z e d onf a i r e r e

q u a l i t y i n l a n d h o l d i n g , w h i c h e n h a n c e d f a r m e r s ’ accessibilitytol an d;applyingn e w an da d v a n c e d tec hn ol og y i n ag ri cu lt ur al p r o d u c t i o n , d i v e

r s i f y i n g a g r i c u l t u r a l p r o d u c t s o t h e r t h a n rice,i n c r e a s i n g c o m p e t i v e

n e s s andefficiency foragricultural i np ut an d output m ar ket s, etc.Asar e s

u l t , agriculturalproductivitywasboosted,shiftingVietnamfromafoodimportert o oneofmajorexportersinmanyagriculturalproductssuchasrice,peppers,coffee,c as h ew nuts,rubber,etc

4 TheResolutionNo.10referstheofficialagriculturalmanagementrenovationwhichallowedthei m p l e m

e n t a t i o n oftheoutputcontractsystemtohouseholdfarmersinsteadofonlysigningtheoutputcontracta c c o r d

i n g todifferentstagesofworkinproductionashadbeendonesince1981.

andmanagerialmethodsi n ordertoraise t h e efficiencyandcompetitivenessof

th e economy (Article1 ofD e c r e e 59).Withthisscheme,thegovernmentwouldaccepttheexistenceofvariousformsofbusinessorganizationsotherthanSOEsandcollectiveenterprises,andhopetocreateamoreequalplayfieldforalleconomicplayers.Theheartofthescheme

wasa s o c a l l e d S O E e q u i t i z a t i o n ( p r i v a t i z a t i o n p e r

-s e ) p r o g r a m w h i c h h a -s b e e n tr a n -s f o r m i n g anumberofSOE-sintojoint-stockcompaniesinaslowandgradualmanner

anumberofSOEsintojoint-ApilotSOErestructuringprogram5waslaunchedinearly1990s,whichstartedw i t h profitablebutnotstrategicsmallandmediumsizeSOEstobeequitized,andth en expandedtol

companiesshouldbeprioritizedinpurchasingtheshares.Besides,thegovernmentcontinuedt

oh o l d tightcontrolroleoversomekeyimportantindustriessuchasbanking,oilandg

a s , electricity,etc.viacontrollingownership.Inthesecompanies,thegovernmentplaysadualrole–

regulatorandowner.Thesestatecontrolledcompanieshavetoperformnotonlybusinessbutalsonon-

businessfunctionssuchasbeinginchargeofe n s u r i n g socialsecurityandpovertyalleviation.Therefore,state-ownershipdoesplaya n importantroleincompany’sfinancialdecisions

exceptTransportationS erv ices Company(18percent).Besides,inthisperiod,18generalcorporationsand64largeconglomerates(specialcorporations)specializinginvariousindustriesandareaswhicharefullystate-ownedwereformed

5 T h epilotschemewaslaunchedin1992basedonaresolutionofthetenthsessionoftheEighthNationalA s s e

m b l y andthePrimeMinisterDecision202-CTonequitizationprogramson8June1992

14% 600

537

12% 500

nalofFinanceandEconomicsISSN1450-2887Issue169 Sep.2018

Source:Author’scompilationbasedonstatisticsISEASreport(LeHongHiep(2017),Vietnam’sNewWave

ofSOEEquitization:DriversandImplications,Perspective,No.57,MinistryofFinance.NguyenV a n T a n (2018)Equitizationa n d FirmPerformancei n Vietnam:Theorya n d Practice,InternationalResearchJou

rnalofFinanceandEconomicsISSN1450-2887Issue169Sep.2018.

Figure2.3.ProgressofSOEequitization,1992–2018

Then,thepilotstagewasextendedfor2moreyearsfrom1996to1998witht h e issuanceofDecreeNo,28/

uidancetoSOEsonpurposesofequitization,c r i t e ri a ofSOEsselection,equitizationmethods,employmentandinvestmentincentivesf o r e q u i t i z e d e n t e r p r i s e s Wit

ht h i s D e c r e e , t h e g o v e r n m e n t o f f i c i a l l y a l l o w e d n o n

-s t r a t e g i c p r o f i t a b l e -smalla n d m e d i u m -s i z e d S O E -s i n t o j o i n t -s t o c

k companies,consequentlypushinguptheprocessofequitizationwith130companiesS O E s equitizedd ur in gt hi s twoyears,o f w hic h there wereonly125SOEsbeingequitizedin1998

Theacceleratedstagewhichwerefrom1999to2010wereguidedbyDecreeso f4 4 issuedin1998;64issuedin2002;187issuedin2004and109issuedin2007.Witht h e o pe n i n g o f

t h e V i e t n a m S t o c k M a r k i n H o C h i Mi n h Cityin2 0 0 0 a n d e sp e c i al l y constantriseinstockmarketindexunderthepositiveexpectationofbeingt h e 1 5 0thW T Om e m b e r i n e a

r l y 2 0 0 7 t r u l y a f f e c t e d t h e p r o c e s s o f e q u i t i z a t i o n acceleration.The nu

mb er ofe q u i t i z e d S OE s st e a d i l y increasedf ro m yearto years i n c e 2 0 0 2 w i

t h 1 6 4 tot h e p e a k o f 8 1 3 i n 2 0 0 5 A s o f 2 0 0 6 , m o r e t h a n 3 , 4 3 3 companieshavingbeingequitized,inwhich3,295hadbeenequitizedsince1999.H o w e v

e r , mostofequitizedcompaniesupto2006werestillsmallandmediumsize.SomelargeSOEswereplannedtobeequitizedin

2007buttheplanwasslowerduet o somereasons,includingtheconcernsonoversupplyinthestockmarketafterthee a r l i e r rocketedstageofacceleration.As initiallyplanned,1,500SOEs shouldbeeq u i t i ze d i n t h e p e r i o d 2 0 0 7 –

2 0 1 0 , i n w h i c h m o s t o f s u b s i d i a r i e s o f g e n e r a l corporationswereplannedtobeequitizedin2008;decreasingtomorethan500SOEsl e ft However,therewereonlytwobignames-BaoVietInsuranceandVietcombank

20bigSOEnamestob e implementedintheperiod2008–

2010.Theaccelerationstageof10yearperiodconcludedw i t h 3 , 9 8 3 S O E s b e i n g

e q u i t i z e d , c o m p r i s i n g 8 4 5 9 p e r c e n t o f t o t a l numberofequitizedSOEs

Vietnam’sprocessofequitizationhasbeenineconomicrestructuringstage( 2 0 1 2 –now).Underthenegativeimpactoftheglobalfinancialcrisisandthe

crasho fthestockmarket,speedofequitizationhasbeensharplydroppedatearlyofthisst ag e(2010–

2012).Inaddition,generaleconomicandstockmarketconditionshaven o t beeninfavorableshapeforSOEsespeciallybigonestobeequitized.Severalp o l i c i e s h a v e b e e nmadet o stimulatetheS O E equitizations u c h asD e c i s i o n 9 2 9 i s su ed i n 2 0 1 2 ; d e c

r e e s o f 5 9 ( 2 0 1 1 ) , 1 8 9 ( 2 0 1 3 ) , 1 6 ( 2 0 1 5 ) andD e c i s i o n 1 2 3 2 (2017).ThisleadtoasharpincreaseinnumberofequitizedSOEsinthefollowingyears2012–2015.However,theprocessseemstobeslowdownforthelastcoupleo f years

Thankstotheequitizationprogram,anumberofSOEshasgraduallydecreasedf o r thelastmorethan20years,to1,204enterprisesfrommorethan6,000enterprisesin1995,provingtheeffortofthegovernmentincorporaterestructuring

Source:A ut ho r’ s compilationfrom Nguyen(2017)forperiodof1995 –

2008,Vietnam’sGSO,variousyearsfor period of 2009–2017

Figure2.4.NumberofSOEs,1995-2017

thef i n a n c i a l marketforforeignbanks,etc.

wasaone-tierbankingsystem,inwhichtheStateBankofVietnam(SBV)playedbothcentralbankandcommercialbankfunctions.Therewereneitherprivatenorforeignbankoperatingintheeconomy.Following theOrdinance onBanks, CreditCooperatives,and FinancialCompaniesissuedinearly1990,SBVwasreconstructedbyremovingthecommercialf u n c t i o

n s f r o m S B V sot h a t S B V onlyg o v e r n e d t h e w h o l e b a n k i n g s y s t e m a n d performedthetraditionalroleofcentralbanksthesuchasmanagingthecountry’sf

o r e i g n exchangereserves;formattingofmonetarypolicies;licensingandsupervisingc r e d i t organizations,etc.,whilecommercialbankingfunctionssuchasfundsm o b i l i z a t i o nandlendingweredelegatedtoseparatedcommercialbanks.Assuch,SBV’ s fourfunctionaldepartmentswereseparatedtoestablishfournewstate-

6 Specifically,thecurrentBankforForeignTradeofVietnam(VCB),VietnamBankforAgricultureandRuralDevelopment(Agribank),BankforInvestmentandDevelopmentofVietnam(BIDV)andVietnamIndustrialandCommercialBanks( Vietinbank)wereestablishedfromthesplitsofSBV’sformerInternationalTrade