THE IMPACT OF INFORMATION TECHNOLOGY ON IMPROVING BANKING PERFORMANCE EVIDENCE FROM VIETNAM

1267 Tran Lan Huong, Le Tri Nhan Nguyen Thi Ngoc Anh, Nguyen Thuy Linh Faculty of Management Science, National Economics University THE IMPACT OF INFORMATION TECHNOLOGY ON IMPROVING BAN

4th International Conference on Contemporary Issues in

ECONOMICS, MANAGEMENT AND BUSINESS

November 11th – 12th, 2021, Hanoi - Vietnam

NATIONAL ECONOMICS UNIVERSITY PUBLISHING HOUSE

4th International Conference on Contemporary Issues in

ECONOMICS, MANAGEMENT AND BUSINESS

November 11th – 12th, 2021, Hanoi - Vietnam

MULTINATIONAL COMPANIES: DO WE NEED INNOVATIVE HUMAN

RESOURCE MANAGEMENT? 1189

Tran Huy Phuong

National Economics University

THE INFLUENCE OF TALENT DEVELOPMENT PRACTICES ON TEACHER PERFORMANCE IN GENERAL SCHOOLS IN HANOI 1209

Nguyen Thuy Van Anh

Faculty of Human Resource Management and Economics,

National Economics University

Pham Tung Anh

International School of Management and Economics,

National Economics University

THE FACTORS AFFECTING DEVELOPMENT OF HIGH QUALITY HUMAN RESOURCE IN HIGH-TECH AGRICULTURAL ENTERPRISES IN VIETNAM 1233

Le Thi Hien

Thuongmai University

THE DIRECT AND INDIRECT EFFECTS OF GREEN HUMAN RESOURCE MANAGEMENT ON EMPLOYEES’ ORGANISATIONAL COMMITMENT 1252

Nguyen Ngoc Phu, Nguyen Ngoc Thang

Hanoi School of Business and Management, Vietnam National University

Tran Thi Van Hoa

National Economics University

Nguyen Thi Thu Huong

Ghent University

SESSION 16: TECHNOLOGY & INNOVATION

OPEN INNOVATION AND INTERNAL R&D EXPENDITURES: THE

MEDIATING ROLE OF ABSORPTIVE CAPACITY 1267

Tran Lan Huong, Le Tri Nhan Nguyen Thi Ngoc Anh, Nguyen Thuy Linh

Faculty of Management Science, National Economics University

THE IMPACT OF INFORMATION TECHNOLOGY ON IMPROVING

BANKING PERFORMANCE: EVIDENCE FROM VIETNAM 1287

Vu Thi Huyen Trang

Thuy Loi University

THE IMPACT OF INFORMATION TECHNOLOGY ON IMPROVING BANKING PERFORMANCE: EVIDENCE FROM VIETNAM

Vu Thi Huyen Trang

Thuy Loi University

Abstract:

The paper analyses the impact of investment in information technology (IT) on the performance of Vietnamese commercial banks The study applies the random-effects model (REM) to the data of 30 Vietnam’s commercial banks in the period from 2016

to 2020 The results show that an increase (decrease) in IT investment (Technical infrastructure, IT human resource infrastructure, Online banking service) leads to an increase (decreased) ROA, ROE of Vietnamese commercial banks Based on the findings, the authors give some recommendations to Vietnamese commercial banks

in case of investments in IT to improve performance

Keywords: Commercial banks, information technology, performance, ROA, ROE

1 Introduction

Gunasekaran et al (2001) argue that because of globalization and development

in information technology, thereby stimulating and strengthening the establishment

of global competition As a result, businesses are forced to spend billions of dollars

on investments in new IT infrastructure to remain sustainable and competitive in the market (Nustini, 2003) However, the economic recession of 2008, has compelled companies to reassess IT investments, the benefits or returns they are likely to derive

in the future investments in IT infrastructures (Alves, 2010; Creswell, 2004; Czerwinski, 2008; Gunasekaran et al., 2001; Tynan, 2005) Many companies have responded to the changing business environment by transforming their IT strategies and investing significant sums in new IT infrastructure to improve their performance and stay competitive However, the returns from these IT expenditures are difficult

to measure (Dehning and Richardson, 2002; Gunasekaran et al., 2001; Nustini, 2003)

Lloyd-Walker and Cheung (1998) have shown that in the banking industry, IT can help deliver superior customer services by providing a fast, accurate, and reliable service Kim and Davidson (2004) stated that the banking industry environment has become IT-intensive Porter and Millar (1985) emphasizes that the banking industry has a high IT content in both products and processes, just like journalism and aviation Thus, the banking industry is one of the industries that use accounting information systems (AIS) with a very high IT content, which has contributed to banking operations, reducing costs, time and improving service quality offered to customers

However, investing in information technology is an expensive process that requires considerable effort, time, and money at every stage (planning, analysis, design, development, implementation and upgrade)

Many studies have tried to show the direct impact of accounting information systems, specifically investment in information technology on business performance, but the results of these studies are different The researchers conducted in the first half of the 1990s by Strassmann (1990), Weill (1992), Brynjolfsson (1993), and Landauer (1995) showed that there was no link between investments in IT and business performance However, the researchers conducted in the second half of the 1990s by Brynjolfsson (1995), Dewan (1997), Hitt (1996) concluded that there is a positive relationship between investment in IT and enterprise performance Because the research results on the relationship between IT investment and business performance in the world show many different results, so empirical studies in this area are still very necessary

By interpreting the previous findings on "the productivity paradox", our research attempts to empirically validate the relationship between IT investment and performance in the context of the emerging country of Vietnam Our study is therefore devoted to examining the following key question: What is the impact of information technology on the performance of Vietnam commercial banks?

To empirically validate the relationship between IT investment and the performance of Vietnam commercial banks, we use the most commonly used traditional measures such as ROA and ROE Thus, the objective of this work is to evaluate the performance of banks during the period 2016–2020 while identifying, the impact of different information technologies components introduced by banks on their performance The paper is organized as follows Section 2 provides the theoretical Foundation and literature review for our study Section 3 outlines the methodological approach and illustrates the sample and data Finally, Section 4 describes the empirical results, and Section 5 is the conclusion

2 Literature review

Through the review, the author found that there are many studies on the relationship between IT investment and performance, and these studies give different results Several studies examine the correlation between IT investment and ROA (Shin, 2001; Rai et al., 1997; Hitt and Brynjolfsson, 1996; Weill, 1992; Strassmann, 1997), between IT spending and ROE (Shin, 2001; Rai et al., 1997; Hitt and Brynjolfsson, 1996), and between investment in IT and intermediate variables of performance, which

is turn drive profits (Markus and Soh, 1993; Barua et al., 1995) However, these studies only focus on other industries, but there are few studies in the banking industry

Brynjolfsson and Hitt (1994) separate the benefits of investing in information technology into three distinct areas: increased productivity, improved business performance, and increased value for consumers The sample includes 367 Fortune

500 manufacturing and service companies in surveys conducted by the International Data Group and from Standard and Poor's Compustat The author's analysis is based

on production theory, competitive advantage theory, and consumer theory The dependent variables measuring the business performance include value-added, total shareholder return, ROA, ROE The independent variables that measure investment

in information technology are used by the same author in his research in 1993, including information system labor, information labor, computer capital, non-computer capital, firm size, year, industry The research methods used by the author for each different data set are OLS regression analysis, estimation methods unrelated regressions (ISUR), 2-stage regression method (2SLS) The author finds that there are many contradictions around the Productivity Paradox, where IT spending has a positive impact on productivity and creates significant value for consumers However, IT expenditures have little, if any, positive impact on business performance and may have a negative impact

Brynjolfsson and Hitt (1996) used 1000 observations between 1987 and 1991 that appeared simultaneously in the International Data Group (IDG) and Standard and Poor's Compustat II data sources The independent variable measuring IT spending

in the study is IT stock - the market value of a company's IT systems plus three times the company's spending on IT personnel Dependent variables measure the performance of the business: ROA, ROE Research results show that there is a positive relationship between IT stocks and ROA for three consecutive years, but there is no relationship between IT stocks and ROE

Shin (1997) studied the relationship between IT investment and coordination costs – selling and administrative costs minus non-administrative costs (e.g., advertising costs, research and development costs) Shin's research results are in contrast with the research results of Mitra and Chaya (1996) Shin (1997) shows that

IT spending has a negative relationship with coordination costs Further, Shin (1997) found that there was a positive relationship between non-administrative expenses and administrative costs Therefore, Mitra and Chaya's (1996) finding was a result of the exclusion of non-administrative expenses from general and administrative Apparently, Mitra and Chaya's (1996) research design was based on scaling by sales, while Shin's (1997) research design was based on scaling by employees’ census To harmonize these conflicts in findings and obtain understandable relationships between IT expenditure and selling, general and administrative expenses, additional studies are inevitable (Dehning and Richardson, 2002) Further, Shin (1997)

examined the combination of IT expenditure and coordination costs plus the cost of capital, cost of labor, and research and development costs in order to elucidate a company’s aggregate number, which is sales plus change in inventory number Shin found a company’s productivity is positively related to IT expenditure, costs of coordination, cost of capital, cost of labor, and research and development expenses

Rai et al (1997) was an attempt to validate Shin’s findings and it, by and large, confirmed Shin’s findings Rai et al (1997) used a sample of 497 companies from

1994 Information Week and 1994 Compustat Selected companies are among the top

500 with the highest cost data for IT The independent variables used by the author to measure IT investment include IT capital, budget, server, staff training, hardware, software, telecommunication equipment Dependent variables to measure performance include company output (direct labor division revenue, total revenue), operating efficiency (ROA, ROE), intermediate operating efficiency (direct labor productivity, management productivity) Control variables: firm size and company sector Rai et al (1997) found a positive relationship between a company’s productivity and all expenditure measures Additionally, they found a positive relationship between IT capital, server expenses, and ROA Rai et al (1997) conducted a productivity test, and the results indicated that labor productivity is positively associated with IT capital, IT budget, server expenses, IT employee expenses, software expenses, and telecom expenses IT investment positively affects labor productivity directly but negatively affects the productivity of managers The limitation of this study is that it used cross-sectional data at one point in time, not multiple time points

According to the author's knowledge, there are some studies on the relationship between IT investment and bank performance The author focuses on studies that use the same research method in this research

Beccalli (2007) expanded on previous studies on IT investment and performance of 737 banks in Europe (specifically in France, Germany, Italy, Spain, UK) for the period from 1995 to 2000 Independent variables: IT investment in hardware, software, and other IT services Dependent variables: ROA, ROE, cost-effectiveness, profit efficiency The author uses methods: OLS regression, two-stage regression (2SLS), and SFA Despite banks being major investors in IT the research finds little relationship between total IT investment and improved bank profitability

or efficiency indicating the existence of a profitability paradox The impact of different types of IT investments is heterogeneous: while investments in hardware and software reduce the efficiency of banks, IT services from external providers have

a positive effect on ROA, ROE, and profit efficiency This study of the author has overcome some limitations of previous studies by using both a traditional accounting profit measure (ROA, ROE) and a more advanced measure of operational efficiency

called X-efficiency Moreover, the author does not study investment in IT as a single variable like previous studies but has specifically divided it into three components of

IT investment namely hardware, software and IT services to consider the IT investment in different areas have different effects on bank performance

Karim and Hamdan (2010) studies the impact of IT investment on the performance of 15 Jordanian banks in the period from 2003 to 2007 Independent variables on IT investment in the article include investment in hardware, software, online banking, telephone banking, number of ATMs, use of online branches, and SMS banking Dependent variables include: financial performance such as market value added (MVA), return on investment (ROI), and return per share (EPS), and operating efficiency includes net profit margin (NPM), return on assets (ROA), and employee profitability (PE) Using the regression method, the research results show that IT affects market value added (MVA), return per share (EPS), and return on total assets (ROA) and net profit margin (NMP), but IT has no effect on return on equity (ROE)

Kabiru (2012) studies the impact of IT investment on the performance of banks

in Nigeria in the period from 2000 to 2010 Independent variables on IT investment include investment in hardware, software, and the number of ATMs The performance-dependent variable is a return on assets (ROA) The study used multivariate regression analysis Research results show that investment in software, investment in hardware, and the number of ATMs have a significant impact on return

on assets (ROA) because the t-statistics are all significant at this point 1 percent level

Bilkisu and Kabiru (2015) studies the impact of IT investment on the performance of 10 banks in Nigeria in the period from 2006 to 2010 The independent variable of IT investment includes hardware investment, software investment, and ATMs The dependent variables include return on total assets (ROA), return on equity (ROE), net profit margin (NPM), and earnings per share (EPS) The control variables: total revenue (TR) and total cost (TC) Research using regression method, the results show that IT investment has a negative effect

on ROA, ROE, and EPS at 5% significance level, but not statistically significant with NPM at 5% and 10% level significance This means that an increase in IT investment leads to a decrease in the performance of Nigerian banks, hence the IT productivity paradox in the Nigerian banking industry

Tam (2015) researched the impact of technology investment on the performance of the commercial banking system in Vietnam, thereby assessing the impact of technology investment on banks At the same time, give recommendations

to commercial banks on the level of investment in technology to improve the operational efficiency of Vietnamese commercial banks Using the GMM method for

one-year lagged dynamic panel data of 15 commercial banks in Vietnam with data for six years (2009-2014), the study analyzed the impact of IT on ROE and ROA The resulting research showed that when other factors held constant, increasing IT (ratio of technology investment on fixed assets) by 1% will increase ROA (rate of return on total assets) by 10% In addition to IT, the operational efficiency of the commercial banking system in Vietnam was also affected by factors such as the ratio

of liquid assets to total assets (liquidity) and macro factors such as economic growth rate (GDP), consumer price index (CPI) and exchange rate change (tygia), but the level of impact of these factors was quite low in the model

Many researchers have researched the relationship between IT investment and operational performance However, the research results still lack consistent in research results and the author found that previous studies have the following limitations:

- The cross-sectional research designs adopted and the nature of the problem also do not make it possible to indicate the causality of any relationship It is conceivable that high performance causes high investment in IS A more historical approach is required that gathers time investment in IT A more historical approach

is required that gathers time-series data and presents more cautious conclusions about the relationships involved

- The variables chosen to represent IT investment and performance were different

- The following three issues remain unresolved: (1) All companies were assumed to convert their IT investments to produce outputs with the same level of success, (2) All IT investments were treated equally, (3) The time lag between investment and performance was ignored

The limitations of these prior studies are also the prior research gaps that this paper attempts to fill Our paper, therefore, aims to investigate the existence of the IT profitability paradox for the Vietnam banking industry, and to extend and integrate the above IT literature by focusing on the traditional profitability measures derived from the banking literature

3 Methodology

3.1 Methodology

The study uses a regression method to examine the relationship between IT investment and performance of Vietnamese commercial banks whether it follows the productivity paradox The author uses a model to analyze the relationship between IT investments and performance according to Strassmann (1990), Beccalli (2007) as follows:

P t = β 0 + β t IT t + Ɛ t

where: Pt: annual accounting performance ratios; ITt: IT capital investment or

IT ratios (IT to various size measures); Ɛt: error term Each variable refers to the banking industry at time t

It should be noted that the performance measure used in these models refers

to financial profitability Two measures of bank performance have been employed here: 1- ROA, which measures how effectively a bank utilizes its assets to earn income 2- ROE, which provides a measure – increasingly examined by managers –

of how well the bank is managing resources invested by shareholders

In this research, similar to Beccalli's (2007) study, the author does not use only one overall IT variable, but the author will divide the IT variable into four component variables: technical infrastructure (TI), human resource infrastructure (HR), banking internal IT application (IA) and online banking services (OS)

where:

- Technical infrastructure (TI) is an average variable from 5 indicators: Server and workstation infrastructure; Communication infrastructure, ATM/POS infrastructure; Deploying information security and data safety solutions; Datacenter and disaster recovery center

- Human resource infrastructure (HR) is an average variable from 3 indicators: Percentage of staff specialized in IT, Percentage of staff in charge of information security, Percentage of IT professionals with international information technology certificates/Total number of specialized IT staff

- Bank's internal IT application (IA) is an average variable from 3 indicators: deploy Core banking, deploy basic applications, deploy electronic payments

- Online banking service (OS) is an average variable from 5 indicators: website

of the bank, internet banking for individual customers, internet banking for corporate customers, other e-banking services, other e-banking services

The author chooses such IT investment variables to overcome two limitations

in previous studies First, the previous studies assumed that all firms are converting their IT investments into outputs with the same degree of success (Huang, 2002) Previous studies were based on data on IT investment costs, but the results of the IT investment process could not be clarified Therefore, the use of IT investment performance indicators will overcome this limitation These are the general indicators developed by the Ministry of Information and Communications of Vietnam for the general assessment of commercial banks, so the indicators are comprehensive in terms of IT aspects and are quite reliable Second, many previous studies assume that all investments in IT are treated equally by using only one aggregate IT variable