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

Firms’ Investment – Cash FlowRelationshipIn The Context Of State Ownership AndBankingSystemReformInVietnam DOCTORALTHESIS HoChi MinhCity,June2020... sensitivityofinvestment,whichperhapsi

Firms’ Investment – Cash Flow

RelationshipIn The Context Of State Ownership AndBankingSystemReformInVietnam

DOCTORALTHESIS

HoChi MinhCity,June2020

Firms’ Investment – Cash Flow

RelationshipIn The Context Of State Ownership AndBankingSystemReformInVietnam

STATEMENTOF AUTHORSHIP

I hereby declare that this submission is my own work and except whereduereferenceismade;thisthesiscontainsnomaterialpreviouslypublishedorwrittenbyanotherperson(s)

ThisthesisdoesnotcontainmaterialextractedinwholeorinpartfromathesisorreportpresentedforanotherdegreeordiplomaatUniversityofEconomicsHoChiMinhCityoranyothereducationinstitution

Tu Thi Kim

ThoaJune2020

First and foremost, I would like to express deepest gratitude to mysupervisors,Dr.VuVietQuangandDr.NguyenThiUyenUyen,fortheircontinualguidanceandmentorship, invaluable support, remarkable patience, useful feedback, and spiritualencouragement during thecompletion of my thesis My thesis can not becompletedwithouttheirsupervisions,whichprovidedmewithmuchpreciousadvicetoexpeditemythesiscompletion

I would like to thank the University of Economics Ho Chi Minh City foritsgenerousfinancialsupportofmyPhDstudies.Ialsowishtothankallthecolleaguesat theUEH School of Finance, School of UEH Graduates and others for their greatandcontinuingencouragementandfullsupportduring myPhD candidature

My gratitude also goes to my colleagues at UEH who have constantly givenagreat help, support and encouragements to me not only during but also before thecompletion ofmythesis

Finally and most importantly, I would like to thank my friends and familyfortheirunconditionallove,immense,constantandendlesssupportandencouragementsduring my life Iwould have been unable to finish the thesis without their supportsand encouragement And I also wish todedicate this thesis to my late mother who isalwaysinmyheart

TABLEOFCONTENTS

ABBREVIATIONS i

LISTOFTABLES ii

LISTOFFIGURES v

ABSTRACT vi

CHAPTER1:INTRODUCTION 1

1.1 Thesis motivations 1

1.2 Thesisobjectives 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 Thesis structure 10

CHAPTER2:OVERVIEWONVIETNAM’SECONOMICREFORMS 11

2.1 Overviewon Vietnam’seconomy 12

2.2 OverviewonequitizationofstateownedenterprisesofVietnam 20

2.3 Overviewon Vietnam’sbankingsystemreform 24

2.4 Chaptersummary 29

CHAPTER 3:FINANCIAL CONSTRAINTS AND INVESTMENT:

ATHEORETICALFRAMEWORKANDLITERATUREREVIEW 31

3.1 Theoriesofinvestment 33

3.1.1 The Modigliani-MillerTheorem (MM) 34

3.1.2 Neo-classicalmodel 34

3.1.3 Salesacceleratormodel 35

3.1.4 Tobin’sQmodel 36

3.1.5 The Eulermodel 38

3.2 Financialconstraintsandinvestment:aliteraturereview 39

3.2.1 Financialconstraintandinvestment 39

3.2.2 State Ownership andInvestment–Cash FlowRelations 48

3.2.3 Bankingsystemreformandinvestment –cashflow relation 50

3.2.4 Financialleverage,growth opportunity andinvestmentrelation 51

3.3 Chaptersummary 53

CHAPTER 4:FIRM’S INVESTMENT – CASH FLOW RELATIONSHIP INTHECONTEXTOFSTATEOWNERSHIPINVIETNAM 54

4.1 Thestudyintroduction 55

4.2 Literaturereviewandhypothesisdevelopment 57

4.2.1 Relationbetweeninvestmentandcashflow 57

4.2.2 State Ownership andInvestment–Cash FlowRelations 60

4.2.3 State Ownership andInvestment–LeverageRelation 62

4.3 Researchdesign 63

4.3.1 TestingInvestment–CashFlowRelation 63

4.3.2 TestingtheImpactofStateOwnershiponInvestment–CashFlowRelations 66 4.3.3 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 – L e v e r a g e Relations 67

4.3.4 Data 67

4.4 Empiricalresults 68

4.4.1 DescriptiveStatistics 68

4.4.2 EmpiricalResults 70

4.4.3 Robustness Check 83

4.5 Conclusion 92

4.6 Chaptersummary 93

CHAPTER 5:FIRM’S INVESTMENT – CASH FLOW RELATIONSHIPUNDER THECONTEXT OF BANKINGSYSTEM REFORMINVIETNAM 94

5.1 TheStutyIntroduction 95

5.2 Literaturereview 98

5.2.1 Investment–cashflowrelation 98

5.2.2 Effect of bankingsystem reformoninvestment– cash flowrelation.1005.3.Researchmethodology 101

5.3.1 Hypothesisdevelopmentandmodelspecification 101

5.3.2 Data 106

5.4 Empiricalresults 107

5.4.1 Descriptivestatistic 107

5.4.2 Correlations 109

5.4.3 Regression results 111

5.4.4 Robustness check 129

5.5 Studyconclusion 130

5.6 Chaptersummary 131

CHAPTER6:CONCLUSION 133

6.1 Introduction 133

6.2 Firm’sinvestment– cashflowrelationshipinthecontextofstateownershipinVietnam 133

6.2.1 Researchfindings 133

6.2.2 Researchcontributions, implications andpolicy recommendations.134 6.2.3 Researchlimitationsandfutureresearchdirections 136

6.3 Firm’sinvestment–

cashflowrelationshipinthecontextofbankingsystemreforminVietnam 137

6.3.1 Researchfindings 137

6.3.2.Researchcontributions,implicationsandpolicyrecommendations138 6.3.3 Researchlimitationsandfutureresearchdirections 140

LISTOFAUTHOR’SPUBLICATIONS 141

REFERENCES 142

APPENDIX 148

flowrelation of state – controlled listed companies by differentgrowthopportunities.

122

flowrelation of non state – controlled companies by differentgrowthopportunities

124

sensitivityofinvestment,whichperhapsisduetotheirsocioeconomicandpoliticalresponsibilities,poorcorporategovernanceandagencyproblem.Theirgrowthopportunitiesalsoaffectthe sensitivity.

The second essay examines the effect of banking system reform, whichisdefined by the presence of foreign banks, on investment-cash flow relation inacontext of a small transition economy I find evidence that the presence offoreignbanks in Vietnam results in decreasing in firm’s dependence on local banksand haschanged their financial constraint Company investments are less reliant oninternalcash flow in the post reform period Although overinvestment of statecontrolledfirmscannotbereducedbutunderinvestmentproblemofnon-state-

controlledlistedfirms is mitigated due to better accessibility to bank loans The investigatedrelationbetweeninvestmentandleverageisrobustforthisconclusion

JELclassification:G30,G31,G32

Keywords: financial constraints, investment – cash flow relations, state

ownership,bankingsystemreform, small transitioneconomy

CHAPTER 1INTRODUCTION

This thesis applies the style of a series of papers in the field ofcorporatefinance,whichmainlycomposesofthetwostand-

aloneessays.Thischaptersummarizes the content of the thesis, which brieftly

motivations,objectives,methodologies,contributionsandstructure.Section1.1presentsthethesismotivationsonimpactof financialconstraints,particularly stateownershipandbanking systemreform on firm’s investment – cash flows of a transition economy,Vietnam Section1.2 introduces the research objectives Section 1.3 and Section 1.4respectively summarize the

cashflowrelationunderthecontextofbankingsystemreforminVietnam.Finally,Section1.5presentsthestructureofthethesis

1.1 Thesismotivations

Thethesis wasinspired bythefollowing motivations:

Firstly,investmentisoneofthemostimportantdecisionsincorporatefinancialdecisions The company managers will make all of efforts to conductpositive NPVinvestment opportunities because these investmens are expected toincrease the firm

o p p o r t u n i t i e s , the availability of financing funds (internal or/and external) isanother importantfactor affecting the firm’s investments Therefore, relationshipbetween

investmentandc a s h f l o w s , e s p e c i a l l y i n t h e c o n t e x t o f f i n a n c i a l c

o n s t r a i n t s h a v e a t t r a c t e d

interests of many scholars Fazzari, Hubbard, Petersen, Blinder, and Poterba(1988)showthatfinanciallycontrainedfirmshavehighinvestment–

cashflowsensitivitiesbecause of higher cost of external funds in compared with that of internalfunds.Differenttypesoftherelationhipbetweeninvestmentandcashflowhavebeenfoundinfinancial literatures Fazzari et al (1988) find the linear relationship while Cleary,Povel, and Raith (2007) document the non-linear (U-shaped)ones, which have beenconfirmed by many other studies (Firth, Malatesta, Xin, & Xu, 2012; Guariglia,2008;Tsai,Chen,Lin,&Hung,2014).So,thereisnoconsistentrelationbetweeninvestmentand cash flows found in the literatures Moreover, the relation has notbeenunder-investigatedforVietnamcontext

Secondly, the investment – cash flow sensitivity is one of commonlyusedmeasures of financial constraint which is defined as a limit in capitalaccessibility,either internally or externally In the context of transition economy

andVietnam,theroleofstateownershiponfinancialconstraintshasbeenunclear.Manystudiesshows evidence that state-ownership does have impact on firm financialconstraints,i.e.investment–cashflowrelation(Firthetal.,2012;Haider,Liu,Wang,&Zhang,2018;Tsaietal.,2014)whileH.-C.M.LinandBo(2012)showsthatstate

– ownership does not help to reduce financial constraints on investment even viathestate-controlledbankingsystem

Vietnam used to follow the centrally-planned economy which wasentirelydominated by state-owned enterprises (SOEs) This mechanism led thecountry intocrisis and backward, which required a broad and in–depth renovation

wholeeconomy.Acomprehensiveprogramwhichiswell-knownasDoimoiwasintroducedin1986totransformtheeconomyfromasocialisttoama rketoriented.Asoneofthecomponents of theDoi moipolicy, an equitization (privatization per-

programlaunchedintheearly1990shastransformedanumberofstate-

ownedcompaniesintojoint-stockcompaniesbesideforthefirsttimeallowingexistenceofprivatecompanies.Anumberofprivatecompanies(bothequitizedandnon-equitized)has

been constantly increasing However, the government still plays an important roleina large number of companies by holding a large percentage of outstanding shares atmany equitized SOEs In the

firmperformanceaswellasfinancialdecisionsisstillcontroversial.SunandTong(2003)reportthattheprivatizationprograminChinaimprovedearnings,sales,andworkers’productivityatChineseSOEsbutnotprofitability.DuandBoateng(2015)assertthatshareholder value is significantly affected by stateownership, formal institutionaldistance, and reforms in the foreign currency approval system

Chen,Firth,andXu(2009)findthatfirmperformanceisenhancedbycertaintypesof

stateownership SOEs have slow, even negative growth whereas the rapidly growingprivate sector significantlycontributes to economic growth (Allen, Qian, & Qian,2005) It finds that SOEswith a soft budget constraint can easily access externalfinancing, resulting in lowerdependence on internal cash flows than is the case atprivately owned firms (Allen

et al., 2005; Cull & Xu, 2003) Firth et al (2012)alsoreportthatstateownershiphasanimpactontherelationbetweeninvestmentandcashflow R R.Chen, El Ghoul, Guedhami, and Nash (2018) assert that an increase instate ownership leads to an increase incorporate cash holdings, which means apositive relation between governmentownership and corporate cash holdings Morespecifically,SOEshavehigherinvestment–cashflowsensitivitythanprivatelyownedfirms,especiallywhencashflowisnegative.So,whetherstateownershiphasany impact on corporate financial constraint, specifically, investment – cashflowrelationofVietnamesecompaniesisstillanunanweredquestion

Thirdly, in Vietnam, due to the underdevelopment of financial market,besideinternalcashflows,bankloanshavebeenmainfinancingsourcesoffundsforfirm’sinvestments However, credit market is not a fair play ground for privatecompaniesdueto so me h i s t o r ic a l r e a s o n s1althoughV ie t n a m hasdone s e v e r a l e ffortst oi mp ro ve

1 Vietnamusedtobeacentrally-plannedeconomyinwhichstate–ownedbanksmainlyservedforstate-ownedenterprises.

thesituation.NhungandOkuda(2015)showthatVietnameseSOEshaveanadvantageover privately owned firms in accessing bank loans as well as making aprofit, evenafter economic booms The higher accessibility to bank loans, thelessfinanciallyconstrainedthefirmis,meaningthelowerinvestment–

cashflowsensitivity.Therefore,bankingsystemreformisprovedtohaveanimpactoninvestment–cashflowrelation(Tsaietal.,2014).Intheprocessoftransformingtheeconomy from centrally –

anumberoffinancialsystemreformsasacomponentofoveraleconomicreform.Oneof them is toallow the entry of foreign banks to do business in Vietnam This doesnot only come from the reality but from

freetradeagreementssuchasWTOalso.Thepresenceofforeignbanksononesidewouldincreasecompetitionincreditmarket,andontheothersideputpressuresondomesticbanks to improve their transparancy,effeciency and profitability to be survival andgrow in a integrated market As such, the presence offoreign banks – which can beconsidered a measure to reform the banking system –may have certain impact oncompanies accessibility to external funds to financetheir investment, or on the otherwords, firm’s investment – cash flow relation Therefore, it also motivates metoconductthis thesis

The topic of investment – cash flows have been intensively conductedinfinancial literatures, but most of them use the samples of developed countrieslikeU.S, Canada, or China – a big transitional economy To my best knowledge,therelationship between investment and cash flows, especially in the context ofstate –ownership and foreign bank entry has still not investigated for the case of asmalltransition economy like Vietnam Furthermore, in spite of sharing somecutural,social and political similarities with China, Vietnam also has manydifferences suchas size of economy, history of the transformation, openness to theworld

economy,developmentoffinancialmarket,etc.StudyingtheVietnamesecontextisbelievedtobeworthwhileandvaluableforinternationalfinanceliteraturesbecauseresultsform

the rather specific case of China may not be generalizable for other smallemergingmarkets Therefore, I choose to examine the impact of banking system

ontherelationbetweenfirm’sinvestmentandinternalcashflowsinthecontextofsmalltransitionaleconomy – Vietnam The general objective is implemented by the twoessays which are separately presented inthe following Sections of 1.3 and Section1.4

Toachievetheresearchobjectives,followingresearchquestionsaresetforth:

- Does the investment and cash flow relation of Vietnamese

non-20152.BothfinancialandmarketdataareextractedfromtheThomsonReutersdatabase.Observationswithmissingdataareomitted,andoutliersthat may influence the results are also excluded by winsorizing 1% ofthe two tailsforeachvariable

1.3.3 Methodology

The study applies quantitative method First, the study tests if investment –cashflowinVietnamisU-

shapedforVietnamesefirmsingenternal,statecontrolledandstateuncontrolledfirms,employingtwodifferentapproaches.Thefirstapproachfollows Cleary et al (2007) which includes square of cash flowmethod in thestandard investment regression equation developed by Fazzari et al.(1988), and thesecond approach follows Firth et al (2012) which separates cashflows into positiveand negativecash flows.S e c o n d l y , the impact ofstateownershiponthe investment

– cashflowrelationshipisinvestigatedbyusingbothdummyandcontinuousvariablesofstateownership.Theinvestigationisconductedforthefullsample,state

2 TheperiodischosenbecausetherewerejustalimitednumberoflistedequitizedSOEsbefore2008andthestudy

wasconductedin2016.

controlled,state-uncontrolledsubsamplesaswellashighandlowgrowthopportunitiessub-subsamples Thirdly, the investment-leverage relationship isalsoexaminedinthesamemanner.AlltheregressionsareestimatedbyusingGeneralizedLeastSquared(GLS)methodonapaneldatasamplestocontrolfortheheteroscedasticityproblemandrobustedbyGeneralizedMethodofMoment(GMM)forendogeneititypotential.

1.3.4 Empiricalfindings

The results show that the investment–cash flow relation for both ownedand non-state-owned firms is U-shaped In addition, state-owned companieshavehighercashflowsensitivityofinvestment,whichperhapsisduetotheirsocioeconomi

state-c and politistate-cal responsibilities, poor state-corporate governanstate-ce andagencyproblem.Moreover,theinvestmentofhigh-growthcompanies,bothwithandwithoutstateownership, has lower dependence on internal cash flow Additionally, low-growth state-owned companies have

thanthosewithoutstateownership,suggestinginefficientinvestmentbytheformer

1.3.5 Contributions

Thefollowingcontributionsareaddedintothecurrentliteraturefromdifferentperspectives First, Ished further light on the implications of financial constraintsbyinvestigatingtheassociationbetweenstateownershipandcorporateinvestment–cashflow in a small

previousstudiesexaminingthisimportantissuehavebeenconductedinthecontextofdevelopedcountriesorChina(Clearyetal.,2007;Firthetal.,2012;Tsaietal.,2014).The intensive literature review hasindicated that the impact of state ownership oninvestment relations in an emerging and transitionalcountry such as Vietnam haslargelybeenunder-examined

1.4 Firm’sinvestment–cashflowrelationinthecontextofbankingsystemreformin Vietnam

1.4.1 Objectivesandhypotheses

The study examines the effect of banking system reform on cashflow relation in a context of a small transition economy The banking systemreformis measured by presence of foreign banks or their branches, outlets,representativeofficesatthelocationwherethecompanylocatesitsheadquarter.Followingsarethestudyobjectives:

1.4.2 Data

The final sample of the study consists 2,858 firm-year observations of financial companies listed on the two stock exchanges of Vietnam, HOSE andHNXfortheperiodof2009–

non-20143.BothfinancialandmarketdataareextractedfromtheThomsonReutersdatabase.Observationswithmissingdataandoutliersareexcluded

1.4.3 Methodology

The study applies quantitative method First, the U-shaped investment –cashflowrelationsinVietnamaretested.Thetestsareconductedforthefullsample,statecontrolledand state uncontrolled subsamples, employing two different approaches.ThefirstapproachfollowsFazzarietal.(1988)andthesecondapproachfollowsFirthet al (2012) Secondly, I investigate the impact of banking system reform ontheinvestment relationship for various groups of business such as state controlled,nonstate controlled, high growth opportunity and low growth opportunity,etc.Thevariable proxied for banking system reform is manually collected fromcompanyannual reports Thirdly, I examine the investment- leverage relationshipunder theimpact of state – ownership All the regressions are estimated by usingGeneralizedLeast Squared (GLS) method to fix the heteroscedasticity problem androbusted byGeneralized Methodof Moment(GMM)forendogeneititypotential

1.4.4 Empiricalfindings

The findings show the U – shape relation between investment and cashflowforVietnamesecompanies

IalsofindevidencethatthepresenceofforeignbanksinVietnamresultsinadecreaseindependence

ofcorporateinvestmentsonlocalbanksandh 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 TheperiodischosenbecausetherewerejustalimitednumberoflistedequitizedSOEsbefore2008andthestudy

wasconductedin2015.

reliant on internal cash flow in the post reform period Although overinvestmentofstate controlled firms is not reduced but underinvestment problem of non- state -controlled listed firms is mitigated due to better accessibility to bank loans.Theinvestigatedrelationbetweeninvestmentandleverageisrobustforthisconclusion.

1.4.5 Contributions

Thisstudycontributesadditionalempiricalevidencetothefinancialliteratureon the topic

of impact of banking system reform on investment – cash flowrelation,especiallyinacontextofsmalltransitioncountry.Mostof myfindingsaresimilartothe previousstudy results except that overinvestment problem of state controlledfirms is not mitigated in the post reformperiod Perhaps, in the post reform periodstate controlled firms are still maincustomers of state-owned local banks who aredominating the credit market.Moreover, presence and operation of foreign banks inVietnamisstilllimited

1.5 Thesisstructure

The remaining of the thesis is structured as follows Chapter 2 presentstheoverview on Vietnam’s economic reforms Chapter 3 reviews relatedinvestmenttheories and literatures on financial constraints, and its impact on

cashflowrelationship.Chapter4andChapter5repectivelypresentstwoimportantstudiesof the thesis:impact of state ownership and banking system reform on the firm’srelationship between investment and cashflows Finally, the thesis is concluded byChapter6

economic reform program, which is calledDoi moipolicy, including economic,

financial, corporation etc… reforms The policy aims attransformingtheeconomy

planned,whichlacksmotivationsfordevelopment,tomarket-orientedwhichallowsthemultipleformsofbusinessorganizations, and openning thedoor to the world The policy has made a greatimpact on the economy as a whole.Economic structure has significantly changedwiththebirthandincreasingroleofprivatesectorintheeconomy,includingforeigninvestors Two – tiered banking system was established, togetherwith an increase inentry and expansion of foreign banks Many legal frameworks have beenintroducedorrevisedtosupportthetransformationandopennessoftheeconomy

UndertheDoimoipolicy,thecorporationreformwhichisknownasequitizationorp

rivatizationprogramwasthekeycomponentoftheeconomicreform.A large number of state – owed

restructuring,mergerandaquistion,deinvestitures,ownershiptransfer,etc.Theequitization

program have borne a number of joint stock companies, which have been one ofthedeterminantsofVietnameseeconomicdevelopmentforthelastfewdecades.Similarly, thetransformation from a one-tiered to two-tiered banking system as wellas allowing the entry

of foreign banks were the focal issues of the bankingsystemreformasapartoffinancialreform.Boththereformshavegreatlycontributedtothewell-knownsuccess oftheVietnam’seconomysofar

Chapter 2 is structured as follow Section 2.1 highlights an overviewaboutVietnam’seconomyforthelastmorethan30years.Section2.2presentstheequitizati

on program in Vietnam and Section 2.3 describles an overview oftheVietnam’sbanking systemreform.TheChapterwillbeconcludedbySection2.4

2.1 OverviewonVietnam’seconomy

planned mechanism, in which all important decisions must be made bythecentralgovernmentalbodies.Theperiodof1976–1985canbedescribedbythelownational incomegrowth rate (3.7 percent), supper high inflation (453.54 percent bythe end of 1986); domestic production couldnot meet the basic needs for people,leading to reliance on imports; severe budgetdeficit and foreign debt problems Thefailure of this model led the economy to the edge of economic crisis.Therefore, theSixth Party Congress in December 1986 made an important decision tolaunch

Vietnam’seconomy,aftertheunificationofthecountryin1975,followedthecentrally-

acomprehensiveeconomicreform,shiftingthecentrallyplannedeconomytoasocialist-oriented market economy, which is calledDoi moipolicy TheDoi moipolicy, which

cored by economic reform, aiming at implementing the country’sindustrializationandmodernizationobjectives,aswellasopened-

door,globalintegration policy and it has brought recognized remarkable

thepastmorethan30years,sinceDoimoi,Vietnamhasbeenoneofthecountrieswhichhave had the

most rapid economic growth and development in the world Figure2.1showsthethegrowthrateofGDPfortheperiodfrom1986to2017

10.00

8.00

9.54 8.65 8.15 7.54 7.36

Source:WorldDevelopmentIndicators

Figure2.1.AnnualGDPgrowthratefortheperiodof1986 –2018(%)

Although being an agricultural country, before theDoi moiVietnam had

anunderdeveloped andunderproductive agriculture sector, resulting in

1987 and the well-known Resolution No 10 (issued on April 5, 1988)4.Thesepolicies emphasized on fairer equality in land holding, which enhancedfarmers’assessibilitytoland;applyingnewandadvancedtechnologyinagriculturalproduction,diversifyingagriculturalproductsotherthanrice,increasingcompetivitness andefficiency for agriculturat input and output markets, etc As aresult, agriculturalproductivity was boosted, shifting Vietnam from a foodimportertooneofmajorexportersinmanyagriculturalproductssuchasrice,peppers,coffee,cashewnuts, rubber, etc.

One of major success of theDoi moiprogram was the control of

seriousinflation problem In the early stage of the reform, Vietnam fell intohyperinflationperiod with the peak was 453.54 percent in 1986, which mainly

caused by failure oftheGeneral Adjustment of Price, Wage and Money(1985) policy.

showstheinflationfluctuationsovertheperiod1986-2018.Fromthepeakofhyperinflation(453.54%)in1986,theconsumerpriceindex(CPI)sharplydroppedtotwodigitandthen1digitnumberin3to5years.Since1990suptonow,Vietnam’sinflationrateshavebeenwellcontrolledatfairlystableratesatbelow10percentannually.Inflationof2018wasonly3.54percent

4 TheResolutionNo.10referstheofficialagriculturalmanagementrenovationwhichallowedtheimplementationoft he

outputcontractsystemtohouseholdfarmersinsteadofonlysigningtheoutputcontractaccordingtodifferenqtstagesofwork inproductionashadbeendone since 1981.

Figure2.2.Vietnam’s Inflation(%changeofCPI),1986-2018

Vietnam used to be considered closed economy in the period before

theDoimoi, when goods and services was not freely traded Foreign trade

transactions weremainly conducted with former socialist counterparts and did not follow the marketmechanism.Since the reform was launched, Vietnam has been gradually openeditseconomytotheworld.Manymeasureshavebeendonetopushupbothdomesticandinternationaltradesuchasremovingunnecessarytradebarriers;engaginginmembershipofAssociationofSouthestAsianNations(ASEAN)in1995,theASEAN Free Trade Agreement

(WTO)in2007;signingmanybilateralandmultilateraleconomicandtradeagreementswithforeign countries and organization such as with EU (1992), US-Vietnam BilateralTrade Agreement (2001), etc As aresult, both exports and imports have beenconstantly increased for the last morethan 30 years As shown in the Figure 2.3, thevolume of exports of goods and services as a ratio of gross

(GDP)rosefromonly6.62%percentin1986to101.59percentin2017,whiletheratioof

importsofgoodsandservicestoGDPalsoincreaseto98.79percentin2017fromalowlevelof16.6 percentin1986.

Source:WorldDevelopmentIndicators

Figure2.3 Vietnam’s volumeof importsandexports(%of GDP),1986-2018

In the process of opening the economy, Vietnam also issued the LawonForeign Investment in 1987 and its amendment in 1990 to attract foreigndirectinvestment (FDI) The law has been revised or issued the new versions forseveraltimes5sincethentomeetthecurrentstatusoftheworldandtheVietnameseeconomy.With theadvantages of cheap, young, skillful and hard working labors force, richnatural resources, openness ofinvestment laws, etc Vietnam has been an emergingdestination for FDI And FDIhas also played an important role in the developmentof Vietnamese economy.Figure 2.4 shows the net inflows as percentage of GDP ofFDI into Vietnam since the opening the

theperiodof1993-1997,from7.03percentofGDPin1993,risedtothepeakof11.94

5 The first version of the Law on Foreign Investment was issued in 1987, then amended in 1990 A

newversion wasissuedin1996toreplacethe firstversion, and thenamended in2000.

Especially,theHoChi MinhStock Exchange(HOSE)andHanoiStockExchange(HNX) was founded in 2000 and 2005, respectively to establishanotherhelpfulfinancingandinvestingchannelsforcompaniesandinvestors.LawonSecuritieswasfirstissuedin2006andthenamendedin2010inordertomakeagoodenvironmentforthedevelopmentofstock marketsinVietnam.

In terms of investment, the introduction of Law on Domestic Investmentin1998, which aimed to stimulate the investment of domestic investors, set forththeinitial formation of private sector in Vietnam This sector has been expandedandstrengthened by the equitization of state owned enterprises (SOEs) which willbediscussedmoreindetailsinfollowingpart.

Table2.1 Main EconomicIndicatorsofVietnam,1986 –2018

$US)

GDP perca pita($

US)

Totalinvest ment(%ofG DP)

Inflation (%

change inCPI)

Imports

of goodsand services (%

change)

Exports

of goodsand services (%

change)

Currenta ccountba lance(bil.

$US)

Current account balance(%

ofGDP)

FDI, netinflo ws(% ofGDP)

2.2 OverviewonequitizationofstateownedenterprisesofVietnam

Vietnam used to be a centrally planned economy entirely dominated by ownedenterprises(SOEs)whichhadlargeinefficiencyregardlessofmuchfavourable

state-privilege Vietnam began to transform its economy from a socialist to amarket

economy by lauching a comprehensive reform, namelyDoi moi policyin1986, in

which corporate restructuring scheme was one of the major components ofthereform The corporate restructuring scheme aimed to transform stateownedenterprises into the form of multiple owners, in which it is unnecessary forthe stateto own 100% capital; to mobilize capital from both domestic and foreigninvestors;to increase financial capacity; and, to renovate technology andmanagerial methodsin order to raise the efficiency and competitiveness of the

ofDecree59).Withthisscheme,thegovernmentwouldaccepttheexistenceofvariousformsof

businessorganizationsotherthanSOEsandcollectiveenterprises,andhopeto create a more equal playfield for all economic players The heart of the schemewas a so-called SOE equitization (privatizationper-se) program which has beentransforming a number of SOEs into joint-stockcompanies in a slow and gradualmanner

ApilotSOErestructuringprogram6waslaunchedinearly1990s,whichstartedwith profitable but notstrategic small and medium size SOEs to be equitized, andthen expanded to larger and more difficult ones.Employees of equitized companiesshould be priorited in purchasing the shares.Besides, the government continued tohold tight control role over some keyimportant industries such as banking, oil andgas, electricity, etc via controllingownership In these companies, the governmentplays a dual role – regulator andowner These state controlled companies have toperformnotonlybusinessbutalsonon-businessfunctionssuchasbeinginchargeof

6 Thepilotschemewaslaunchedin1992basedonaresolutionofthetenthsessionoftheEighthNationalAssembly and the PrimeMinisterDecision202-CTonequitizationprogramson8 June 1992

stage

2011 to 2017 Decision929( 2 0 1 2 ) , D e c r e e s 5 9 ( 2 0 1

1 ) , 1 8 9(2013),16(2015),anddecision 1232(2017)

Source: Author’s compilation based on statistics ISEAS report (Le Hong Hiep (2017),

Vietnam’sNewWaveofSOEEquitization:DriversandImplications,Perspective,No.57,MinistryofFinance.Ngu yen Van Tan (2018) Equitization and Firm Performance in Vietnam: Theory and Practice,International Research Journal of Finance

and EconomicsISSN 1450-2887 Issue 169 September,2018

ThepilotstagewasenforcedbyDecisionsNo.202/

CTdatedonJune8th1992andtheDirection84datedAugust4th1993.Inthepilotstageof4years,only5SOEs(3centralSOEsand2localSOEs)wereequitized,whichwereTransportationServiceCompany,RefrigerationandElectricalEngineeringCompany,HiepAnShoeCompany,AnimalFoodProcessingCompanyandLongAnExportProductProcessing Company After theequitization, state held only 30 percent of totalownership except TransportationServices Company (18 percent) Besises, in thisperiod, 18 general corporations and

corporations)specializinginvariousindustriesandareaswhicharefullystate-ownedwereformed

12% 500

No equitized SOEs Percentage

Source: Author’s compilation based on statistics ISEAS report (Le Hong Hiep (2017),

Vietnam’sNewWaveofSOEEquitization:DriversandImplications,Perspective,No.57,MinistryofFinance.Ngu yen Van Tan (2018) Equitization and Firm Performance in Vietnam: Theory and Practice,International Research Journal of Finance

and EconomicsISSN 1450-2887 Issue 169 September,2018.

Figure2.5.ProgressofSOEequitization,1992 –2018

Then, the pilot stage was extended for 2 more years from 1996 to 1998

pilotprogram.ThisDecreegavesystematicguidancestoSOEsonpurposesofequitization,criteriaofSOEsselection,equitizationmethods,employmentandinvestment incentivesfor equitized enterprises With this Decree, the governmentofficially allowed non-strategic profitable small and medium sized SOEs into jointstock companies,consequently pushing up the process of equitization with130companiesSOEsequitizedduringthistwoyears,ofwhichtherewereonly125SOEsbeingequitizedin1998

Theaccelerated stagewhichwerefrom1999to2010wereguidedbyDecreesof44issued in 1998; 64 issued in 2002; 187 issued in 2004 and 109 issued in 2007.With theopening of the Vietnam Stock Mark in Ho Chi Minh City in 2000andespectiallyconstantriseinstockmarketindexunderthepositiveexpectationofbeingthe

equitizationacceleration The number of equitized SOEs steadily increased fromyear to yearsince 2002 with 164 to the peak of 813 in 2005 As of 2006, more than3,433companies having being equitized, in which 3,295 had been equitized since1999.However, most of equitized companies up to 2006 were still small and

planedtobeequitizedin2007buttheplanwasslowerduetosome reasons, including the concerns on oversupply

in the stock market after theearlier rocketed stage of acceleration As initially planed, 1,500SOEs should beequitized in the period 2007–2010,in whichmost of subsidiaries ofgeneralcorporationswereplanedtobeequitizedin2008;decreasingtomorethan500SOEsleft.However,therewereonlytwobignames-BaoVietInsuranceandVietcombank

– out of 118 being equitized SOEs in 2007, leaving more than 20 big SOE namestobe implemented in the period 2008 – 2010 The acceleration stage of 10 yearperiodconcludedwith3,983SOEsbeingequitized,comprising

84.59percentoftotalnumberofequitizedSOEs

Vietnam’s process of equitization has been in economic restructuringstage(2012 – now) Under the negative impact of the global financial crisis and thecrashof the stock market, speed of equitization has been sharply dropped at early ofthisstage(2010–2012).Inaddition,generaleconomicandstockmarketconditionshavenot been

in favourable shape for SOEs especially big ones to be equitized Severalpolicies have been made to stimulate theSOE equitization such as Decision 929issued in 2012; decrees of 59 (2011), 189

1232(2017).ThisleadtoasharpincreaseinnumberofequitizedSOEsinthefollowing

Thanks to the equitization program, a number of SOEs has graduallydecreasedforthelastmorethan20years,to1,204enterprisesfrommorethan6,000enterprisesin1995,provingtheeffortof thegovernment incorporate restructuring

Source:Author’scompilationfrom Nguyen (2017)forperiodof1995 –

2008,Vietnam’s GSO,various years for period of 2009– 2017

Figure2.6 NumberofSOEs,1995-2017

2.3 OverviewonVietnam’sbankingsystemreform

Over the past thirty years, as a part of the comprehensive economicreforms,the Government of Vietnam has initiated many banking reforms toimprove

theefficiencyandcompetitivenessofthenationalbankingsystem.Moreover,thereformshave also been motivated by Vietnam’s commitments in the processofgrowingp a r t i c i p a t i o n i n i n t e r n a t i o n a l a g r e e m e n t a s w e l l a s a d o p t i n g i

n t e r n a t i o n a l

standards such as Basel capital framework The primary objectives of thereformswere restructuring banking system, gradually opening doors for foreigninvestors,partiallyequitizingstateownedbanks,andimprovingcompetitivenessoftheVietnamesebanks.Themajorbankingsystemreformwastheremovalofthecommercialfunctions from the State Bank of Vietnam (SBV) in 1990 which havebeen followed

by several reforms such as equitizing state owned banks, openingthefinancialmarketforforeignbanks,etc

Before 1990, the Vietnamese banking system was a one-tier bankingsystem,inwhichtheStateBankofVietnam(SBV)playedbothcentralbankandcommercialbankfunctions.Therewereneitherprivatenorforeignbankoperatingintheeconomy

Following the Ordinance on Banks, Credit Cooperatives, and FinancialCompaniesissued in early 1990, SBV was reconstructed by removing the commercialfunctionsfrom SBV so that SBV onlygoverned the whole banking system andperformed thetraditional role of central banks the such as managing thecountry’sforeignexchangereserves;formatingofmonetarypolities;licensingandsupervisingcreditorganizations,etc.,whilecommercialbankingfunctionssuchasfundsmobilizatio

n and lending were delegated to separated commercial banks Assuch,SBV’sfourfunctionaldepartmentswereseparatedtoestablishfournewstate-

me time, a number of joint-stock commercial banks (JSCBs) have been foundedandquickyincreased bothinbanknumbersand size

Intheprocessofinteratingwiththeworld,toopentheeconomyingeneralandfinancialsectorinparticularaswellastomeettherequirementsofmembershipfrominternationaltradeandinvestmentorganizations,Vietnamhasbeengradually

7 Specificallly,thecurrentBankforForeignTradeofVietnam(VCB),VietnamBankforAgricultureandRuralDevelopment (Agribank), Bank for Investment and Development of Vietnam (BIDV) and Vietnam Industrialand Commercial Banks (Vietinbank) were established from the splits of SBV’s former International TradeDepartment; Agricultural Department, Infrastructure Department, and Industrial and Commercial LendingDepartment,respectively.

removing barriers to allow the entry of foreign banks in Vietnam In 2008, SBVforthe first time granted the licences for 100% foreigned owned banks to dobusiness inVietnam In April 2014, the cap for a single and total foreign ownership inlocalcommercialbanksandcreditorganizationswasleveledupto20%and30%,respectively.Table2.3presentsVietnam’sstructureofcreditinstitutions(byDecember31,2017)

Table2.3 Creditinstitutionsof Vietnam,2010 -2017