INTRODUCTION
Problem Statement
The remarkable merger and acquisition (M&A) stories of well-known Vietnamese brands often leave financial researchers puzzled As reported by Kinhtedautu magazine in April 2014, foreign companies negotiated these acquisitions at surprising prices, exceeding the total tangible assets of the companies involved, such as Phở 24.
Many businesses, such as those valued at 20 million dollars or more, raise questions about the intrinsic value of firms, particularly regarding intangible assets Companies often struggle to accurately assess the benefits of these invisible assets, leading to potential miscalculations in operational efficiency and project payback periods For instance, a strong brand, as an intangible asset, can significantly enhance product sales and pricing If analysts fail to evaluate the strength of a brand, they may encounter difficulties in forecasting future revenue accurately.
Proper evaluation of intangible assets is crucial due to the volatile nature of the economy, which significantly impacts both company management and investor decisions Companies must continuously adapt their operations and expansion strategies to maintain market share and revenue However, traditional financial statements often fail to capture the full extent of a company's efforts to innovate and grow, as highlighted by Baruch Lev and Paul Zarowin (1999), who noted a decline in the usefulness of reports like balance sheets and income statements Investments in research and development or advertising are frequently recorded merely as expenses, obscuring their true value Additionally, as economic conditions evolve, firms must engage customers with innovative offerings to sustain sales, making investment in intangible assets essential for fostering innovation.
10 companies couldn’t appropriately assess value of intangible asset, they might be violated matching concept in accounting standard Each earned revenue need to suitable with expense creating it
Valuating intangible assets is crucial for key sectors such as financial reporting, commercial strategy, and development strategy Clear presentation of these factors enhances the company's financial position and expectations, fostering shareholder loyalty and potentially lowering the cost of equity.
Intangible assets, including brand equity and intellectual capital, play a crucial role in enhancing a firm's financial performance by boosting customer loyalty and enabling higher profit margins on sales (Parble Fernandez, 2013) A well-known brand can command premium pricing for its products and negotiate better input costs with suppliers In terms of strategic development, these factors are essential for achieving a competitive advantage.
(2014), manager of company could plan their investment strategy, how much for factory constructing and what proportion for marketing…
After all, demand for measuring value of intangible assets is very clear
Finding the right method is crucial in the research of intangible assets According to Parble Fernandez (2013), we are only at the beginning of evaluating these assets Currently, there are three established methods for calculating their total value This research will introduce a new method to enhance this evaluation process.
Research Objective
This research evaluates the impact of intangible assets on company performance across various industries, providing valuable insights for firms to optimize resource allocation Utilizing a novel indirect approach with panel data methods, the study aims to calculate the total value of intangible assets for selected companies in Vietnam.
This thesis also solves another objective related to development policies It rises a problem about supporting policies between small and medium enterprise (SME) and larger companies.
Research Questions
Base one research objectives above, this research will solve two questions:
Why should companies allocate their resources in both tangible and intangible assets?
What policies control market power of both SME and large companies?
Structure of Thesis
The study will encompass four key components: a literature review, a conceptual framework, an econometric model, and an empirical study The initial section will outline prior research conducted by various authors regarding intangible assets.
This article explores various methods for evaluating intangible assets, analyzing the strengths and weaknesses of each approach, with a focus on T Yamaguchi's 2014 model It discusses improvements made to Yamaguchi's valuation method and visualizes the evaluation process through diagrams The article also examines qualitative methods used in the econometric model and interprets the specific econometric applications in the study Finally, it details the application of the intangible asset evaluation method for businesses in the Vietnamese stock market, providing specific calculations to illustrate the value of intangible assets across different industries and analyzing their impact on business performance.
LITERATURE REVIEW
What Are Intangible Assets
Intangible assets are defined differently due to varying perceptions, with accounting perspectives emphasizing a more rigorous definition based on prudence In contrast, investors and managers tend to adopt a broader assessment and definition of intangible assets.
International Accounting Standard 38 (IAS 38) defines an intangible asset as "an identifiable non-monetary asset without physical substance." Additionally, it emphasizes that a key characteristic of intangible assets is the expectation of future economic benefits.
According to OECD project (2011), with a different perspective, OECD defines
Intangible assets are defined as assets that lack a physical or financial form According to the OECD, there is a distinction between intangible assets and intellectual assets, with the latter being a subset of the former.
Besides that, intangible asset include three different: “computerized information”;
“innovative property”; “and economic competencies"
In this research, we will follow OECD’s definition to estimate aggregate value of intangible asset It means that we will use the word “intangible asset” instead of
“intellectual property” or “intellectual asset” This definition allows us not to have problem with matching concept and undervaluation of current financial reporting system.
Types Of Intangible Assets
Intangible assets can be categorized in various ways, with researchers often focusing on specific types such as brand names, customer lists, and corporate culture One notable category of intangible assets is highlighted in the work of Petros A.
Kostagiolas and Stefanos Asonitis (2009) identified various types of intangible assets, highlighting their significance in the modern economy.
Table 1: Category of Intangible Asset tot nghiep down load thyj uyi pl aluan van full moi nhat z z vbhtj mk gmail.com Luan van retey thac si cdeg jg hg
This research focuses on the impact of total intangible assets on a company's income, despite the various types of intangible assets available Understanding the categorization of these assets is essential for selecting the appropriate valuation approach and will aid in interpreting the underlying factors contributing to industrial growth rates in subsequent sections.
Intangible Asset Valuation Approaches
According to the book Valuing Intangible Assets of Reilly, R F., and Schweis, R P
In 1999, three primary approaches were established for evaluating intangible assets: the cost approach, the market approach, and the income approach Each method relies on distinct data sources and involves various procedures, leading to a range of reasonable valuations for intangible assets Typically, researchers tend to utilize only one of these approaches due to constraints related to the availability of information and the costs associated with data collection.
Lev and Sougiannis (1996) propose that the cost approach evaluates intangible assets based on the total expenditure required to recreate or build a similar asset with equivalent functionality They analyze the value of R&D activities in relation to a company's earnings, necessitating the calculation of intangible asset value derived from past R&D expenditures While this method can accurately reflect certain intangible assets like R&D and advertising expenses, it poses challenges in valuing other intangible assets, such as brand names, employee experience, or customer lists.
Determining the useful life of intangible assets is crucial for accurate financial reporting and compliance with accounting standards.
15 challenge because it is repeatedly examined to find out suitable lag term of R&D expense affecting operating earnings
The market approach evaluates the value of intangible assets by referencing the market price of similar assets within the same market Kossovsky (2002) utilized this method to indirectly assess the value of intellectual assets by analyzing the difference between a firm's book value and its market equity value This approach offers an objective measurement of intangible asset value through comparison with a company's market price However, a company's stock price reflects not only its current intrinsic value but also shareholder perceptions regarding future prospects, which can be influenced by temporary speculation Additionally, if an appraiser relies solely on comparable assets to estimate the value of intangible assets, challenges arise when no similar assets can be identified, as it is often difficult to find two comparable intangible assets.
The income approach assesses the value of intangible assets by comparing the significant benefits of possessing these assets against the scenario of their absence Specifically, the value of an intangible asset is determined by the difference between the net present values of cash flows in both situations.
Interbrand employs an income approach to assess a brand's value, incorporating various earnings linked to a new variable known as brand strength However, Paulo Fernandez highlighted several issues with Interbrand's valuation method in his paper, "Valuing Intangible Assets and Intellectual Property."
In 2013, Interbrand highlighted the significant advantages of intangible assets by comparing the EBITs of well-known brands to those of private label companies A key challenge lies in identifying private label companies, as these firms lack market power associated with their brand names, making them difficult to recognize.
16 this factor Second, with Paulo Fernandez, the procedures to calculate brand’s strength are subjective and it could be manipulate by appraisers
The panel data approach utilizes panel data analysis to assess unobservable firm effects, which Motohashi (2005) interprets as management ability, labor motivation, and R&D expenses While R&D expenses can be precisely identified, Motohashi includes them as an independent variable in his model His method analyzes the production function components to evaluate the impact of labor, capital, and internet networks on a firm's value added However, in this model, Motohashi only interprets the effects of internet networks, while other intangible assets are considered part of the error term He also suggests using cross-sectional data, fixed effects, and random effects for estimation.
Ramirez and Hachiya (2006) introduced a method utilizing fixed effects to assess the value of intangible assets, employing sales growth rate as the dependent variable and various production factors, including R&D expenses and sales and administrative costs, as independent variables While this approach is connected to the firm's market value, it may still exhibit bias similar to the market approach, despite its foundation in production functions and the use of production factors.
Sadowski and Ludewig (2003) explored panel data by using added value as the dependent variable, focusing on capital, labor, human capital, and social capital as explanatory variables In contrast, Tomohiro Yamaguchi (2014) employed panel data to assess intangible assets through firm-specific fixed effects, introducing a novel approach to valuing company assets Yamaguchi's methodology uniquely combines both production and cost functions to evaluate a firm's added value, considering the impact of intangible assets.
Conceptual Framework
Through the studies, we found that each study was caught in specific matters
T Yamaguchi's study (2014) introduced a more effective method for assessing intangible assets by utilizing panel data and indirect approaches, addressing the limitations of previous research His methodology involved several intermediate calculations, starting with the production and cost functions to determine a firm's equity, excluding the influence of intangible assets The value of intangible assets was then derived by subtracting the total value of tangible assets from the enterprise's overall value This practical approach relies on realizable data, avoiding speculative assumptions about the future economic value of intangible assets The final analysis involved regression to explore the relationship between enterprise value, such as revenue or stock price, and different asset types, allowing for a comprehensive evaluation of the significance of intangible assets in businesses.
Equity of firm Equity of firm withour Intangible Asset
Book Value of Equity Tangible Asset
Calculate α and β in production function tot nghiep down load thyj uyi pl aluan van full moi nhat z z vbhtj mk gmail.com Luan van retey thac si cdeg jg hg
ECONOMETRIC MODEL
This research utilizes Tomohiro Yamaguchi’s method for calculating the value of intangible assets and explores their impact on a firm's added value and equity in comparison to tangible assets.
The formula of growth of company is based on Cobb and Douglas production function (1928):
𝑄 𝑖𝑡 = 𝑎 𝑖 𝐾 𝑖𝑡 𝛼 𝐿 𝛽 𝑖𝑡 𝑒 𝜀 𝑖𝑡 𝑄 (1) Where: 𝑄 𝑖𝑡 is added value of firm i in year t,
𝐾 𝑖𝑡 stands for capital of firm i in year t,
𝐿 𝑖𝑡 is labor of firm i in year t
The parameter 𝑎 𝑖 in equation 1 indicates effects of total factor productivity (TFP)
Key factors influencing a company's growth rate include the advantages of internet usage, buyer and seller power, intellectual capital, and employee motivation, all of which are effects of intangible assets The growth rate of a company's value is not solely dependent on its total assets but also on the changes in the firm's value over time (Hulten, 2000) Consequently, the impact of intangible assets on growth can be represented by firm-specific effects \(A_i\) and the growth rate \(\lambda\) of industry \(h\) at time \(t\).
𝑄 𝑖𝑡 = 𝐴 𝑖 𝑒 ∑ λ 𝑀 ℎ ℎ 𝐷 ℎ (𝑖)𝑡 𝐾 𝑖𝑡 𝛼 𝐿 𝛽 𝑖𝑡 𝑒 𝜀 𝑖𝑡 𝑄 , ℎ = 1, … , 𝑀 (2) Where: λ ℎ presents growth rate λ of industry h
𝐷 ℎ (𝑖) is dummy variable of firm i in industry h
To estimate the function, we take the logarithmic form of equation 2 T Yamaguchi (2014) simplified the equation by substituting β with 1-α This substitution is based on the assumption that the companies under study maintain a constant state.
19 economies of scale However, in this paper, αand β will be estimated separately to study aggregate market with assumption that we could bot primarily identify type of economic of scale
The added value of the i-th firm is derived from its financial statements, beginning with operating profit This value encompasses depreciation, personnel expenses, and operating profit Furthermore, it is essential to adjust the firm's added value for inflation, as it will be utilized in deflator form.
𝑝 𝑡 𝑄 𝑖𝑡 = 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑃𝑟𝑜𝑓𝑖𝑡 + 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝐶𝑜𝑠𝑡 + 𝑃𝑒𝑟𝑠𝑜𝑛𝑛𝑒𝑙 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠 (4) With p t is deflator in year t
The primary focus of this research is to determine the value of the sum of intangible assets, which prevents us from regressing equation 3 without the value of \( A_i \) The initial step involves estimating equation 3 to obtain the parameters \( \alpha \) and \( \beta \) We will utilize the difference form of the variables in this equation, with the expectation that \( \ln A_i \) will equal zero, allowing us to extract fixed effects.
Where d(…) is difference form of variables
Because firm’s added value includes cost of production factors, we couldn’t compute value of company by discount just firm’s added value flow Instead, we will use company’s profit
= Operating Profit – Interest Rate – Tax (6) = 𝑝 𝑡 𝑄 𝑖𝑡 – (Depreciation Cost + Personnel Expense + Interest + Tax) (7)
We also have the firm’s total cost C excluding cost of goods sold:
So that, firm’s profit is available to compute via formula:
𝜋 𝑖𝑡 = 𝑝 𝑡 𝑄 𝑖𝑡 − 𝐶 𝑖𝑡 (9) tot nghiep down load thyj uyi pl aluan van full moi nhat z z vbhtj mk gmail.com Luan van retey thac si cdeg jg hg
The cost of a company is determined using the duality approach, a key concept in microeconomics that addresses production and cost functions, as discussed by economists such as Samuelson (1947), Shephard (1953, 1970), and Uzawa (196) This approach allows manufacturers to produce goods by optimally combining production factors to minimize costs Consequently, the cost function is estimated based on the production function.
Where 𝑅 𝑖𝑡 is nominal cost of capital of firm i in year t
𝑊 𝑖𝑡 is nominal wage of firm i in year t
We will calculate cost function through equation 10 After that, firm’s added value
𝑄 𝑖𝑡 and α, β will be obtained from estimating equation 5
The next step involves estimating the nominal value of equity, denoted as \$E_{it}\$, which accounts for the impact of intangible assets This estimation will be derived from the net present value of two key cash flows: the firm's added value flow and the total cost flow.
𝑟 𝑖 is cost of equity of firm i in year t
The value of intangible assets is included in 𝐸 𝑖𝑡 To determine the value of these intangible assets, we subtract the value of tangible assets from 𝐸 𝑖𝑡 The nominal value of equity excluding intangible assets, denoted as 𝐸 𝑖𝑡 𝑛𝑜𝑛𝐼, can be calculated using the following formula:
𝑟 𝑖 (13) tot nghiep down load thyj uyi pl aluan van full moi nhat z z vbhtj mk gmail.com Luan van retey thac si cdeg jg hg
Where: 𝑅 𝑖𝑡 𝑛𝑜𝑛𝐼 is nominal cost of capital without intangible assets
𝑊 𝑖𝑡 𝑛𝑜𝑛𝐼 is nominal wage of labor without intangible assets
𝑅 𝑖𝑡 𝑛𝑜𝑛𝐼 and 𝑊 𝑖𝑡 𝑛𝑜𝑛𝐼 are able to be identified by:
𝑝 𝑡 𝑄 𝑖𝑡 𝑒 λ ℎ (15) From equations 12 and 13, we could calculate value of intangible assets 𝐼 𝑖𝑡 by the difference between 𝐸 𝑖𝑡 and 𝐸 𝑖𝑡 𝑛𝑜𝑛𝐼
The proportion of intangible assets in a firm's total assets can be derived from equation 16, which allows us to analyze the impact of intangible assets compared to tangible assets on the firm's market value and overall performance.
Where: 𝑇 𝑖𝑡 is value of firm’s tangible assets,
The stock price of a firm, denoted as \(Y\), reflects its added value.
EMPIRICAL RESEARCH
Data Sources
This research will be conducted for Vietnam listed companies in different industries These are 214 chosen companies and data are collected from 2008 to 2012
We chose this time range to lower effect of economic recession from previous period
Firstly, firm’s operating profit multiplying deflator stands for firm’s added value
This data could be calculated through equation 4 There are some researches estimating Cobb-Douglas model which use different proxies for firm’s added value
Hsing and Yu (1996) used value added to represent for output On the other hand, B
Lev and S Radhakrishnan (2003) identify revenue as a proxy for output, while T Yamaguchi (2014) utilized earnings before tax, depreciation, and amortization in his research on intangible assets This study will adopt EBIT as the output measure, as it reflects the added value after accounting for raw input costs The necessary components for calculating the equation will be sourced from the VEC database, including accounts TS131, TS132, TS161, TS162 (depreciation), TN11 (personal expenses), and KQKD8, KQKD12 (operating profit).
Capital K and Labor L data will be sourced from the VEC database, with net plant, property, and equipment (PP&E) representing capital K, as defined by B Lev and S Radhakrishnan (2003) Construction in process is excluded from this definition, as it does not currently generate profit For labor, the number of employees in a firm will be used to represent the labor component T Yamaguchi (2014) utilized the same labor and capital data as Lev and Radhakrishnan This research will further calculate total labor expenses to represent L, as the number of employees more accurately reflects the labor factor's impact on a firm's added value when using the Cobb-Douglas function in its logarithmic derivative form This method effectively interprets the relationship between labor and capital factors concerning EBIT Additionally, K and L in the Cobb-Douglas function will be employed to assess equity values, making total labor expenses a more suitable measure than the number of employees Data for K and L will be gathered from specific accounts in the VEC database, including TS11 and TS12 for capital K.
LD11, LD13, TN11, TN12 (labor L)
The nominal cost of capital (R) is calculated using the Capital Asset Pricing Model (CAPM) Before determining R, it is essential to calculate the firm's rate of return (r), which represents the expected return that common shareholders anticipate from the firm's operations, also known as the cost of equity Unlike R, which is a weighted average of capital flows including equity, debt, and liabilities, r is challenging to calculate due to the uncertainty of future cash flows Forecasting future inflows and outflows is difficult because they can vary in both amount and timing To address this issue, we can utilize common approaches such as the Capital Asset Pricing Model, the Dividend Discount Model, or the Bond Yield Plus Risk Premium method In this research, we will focus on the Capital Asset Pricing Model.
Base on CAPM approach, William Sharpe (1964) find out expected firm’s rate of return from relationship between risk-free rate and premium from bearing the stock’s market risk (beta*(r m -r f ))
𝑟 = 𝑟 𝑓 + 𝑏𝑒𝑡𝑎 ∗ (𝑟 𝑚 − 𝑟 𝑓 ) With: 𝑟 is firm’s cost of capital,
The risk-free rate is derived from assets with minimal default risk, commonly represented by Treasury bonds or government debt instruments To accurately calculate a firm's rate of return, it is essential to select a bond that aligns with the duration of the firm's stock Typically, this involves using a Treasury bond with a duration that matches the stock; however, due to the accounting assumption of going concern, a firm's stock is considered to have infinite duration Therefore, a long-term Treasury bond, specifically a ten-year bond, is utilized as the appropriate proxy for the risk-free asset.
When considering risk premium, it is essential to account for various risks, including inflation, business cycles, and credit risk The three-factor Fama-French model, developed by Fama and French in 1992, aims to address multiple risks in this context.
The historical equity risk premium approach is a reliable method for estimating risk premiums using long-term data This method calculates the risk premium by analyzing the average market return and risk-free rate of a country over an extended period A crucial requirement for the data is that the collection period must encompass nearly an entire economic cycle, including both expansion and recession phases In their 2003 paper, Dimson, Marsh, and Staunton applied this method to compute the risk premium for 16 countries, including the United States, over the period from 1900 to 2002 Their findings provide a clear understanding of the equity risk premium in relation to Treasury Bonds, enhancing readers' comprehension of the existence of risk premiums.
This research employs the historical equity risk premium approach to calculate equity's risk premium, while acknowledging its limitations Key limitations include the fluctuating nature of stock indices, the unstable risk aversion among investors, and the restricted historical data coverage Despite these challenges, this method has demonstrated its validity over time and has been widely utilized by researchers Additionally, the IFS database will provide deflator data for the study years.
First estimation: Calculate α and β
To determine the parameters α and β, we will utilize equation 5, starting with the derivative form of the data The challenge lies in processing time series data for numerous companies across three industry categories, particularly sorting them by their tax ID numbers To address this, I employed both SPSS and Excel Initially, we will gather and categorize the necessary data by industry Subsequently, each firm will have its derivative calculated separately, and dummy variables will be created for the industries, resulting in 49 dummy variables for the 50 industries Once we have the derivative forms of K, L, Q, and the dummy variable D, we can proceed with equation 5.
In this research, we will apply a panel data fixed-effect model to regress equation 5, following T Yamaguchi's (2014) methodology We will conduct Hausman’s test to evaluate the efficiency of the fixed-effect model compared to the random-effect model The results of the Hausman test indicate that the fixed-effect model is the more suitable choice for our analysis.
In this study, we focus on firm-level cross-sections due to the inability to match industry IDs and time periods We will incorporate an industrial dummy variable to assess the impact of industry growth rates on firm performance Utilizing the Panel Least Squares Method with a Fixed Effects Model, as applied by T Yamaguchi, we will analyze the relationship between added value and various inputs, including capital, labor, and industrial growth rates.
The choice between the fixed effect model and the random-effects model can be guided by the Hausman test To address potential issues, we will conduct heteroskedasticity and multicollinearity testing, correcting for heteroskedasticity if necessary However, serial correlation testing will not be performed due to the limited duration of the micro panels, which span only five years.
This article compares the fixed effects model and the random-effects model using equation 5, with regression results presented in Table 3 The coefficients for labor and capital are nearly identical across both models To determine the most suitable model, we apply the Hausman test, with results shown in Table 4 indicating that the random-effects model provides a better explanation of the relationship between labor, capital, and firm performance It is crucial to ensure that the results in Table 3 are free from heteroskedasticity and multicollinearity The Wald test is employed to check for heteroskedasticity, with findings in Table 5 revealing its presence Appendix 4 presents the regression results after addressing the heteroskedasticity issue Additionally, the VIF index is utilized to assess multicollinearity, and the results in Table 6 confirm that the regression does not exhibit multicollinearity problems.
The regression using random-effects model (Appendix 4) presents an interesting result that is sum of α and β less than 1 (estimation of α equal 0.63 and of β equal 0.24)
Vietnamese listed companies are experiencing decreasing returns to scale, meaning that as firms increase their labor force and invest more in capital to grow their operations, their operating profit turnover diminishes.
Table 3: Result of equation 5 using fixed-effects and random-effects model α β R 2
(1) Fixed effect model without industrial dummy variables
(2) Random effect model without industrial dummy variables
(3) Random effect model with industrial dummy variables
Table 5: Testing for heteroskedasticity using Wald test
Modified Wald test for groupwise heteroskedasticity in fixed effect regression model
H0: sigma(i)^2 = sigma^2 for all i chi2 (214) = 3.4e+37
Prob>chi2 = 0.0000 tot nghiep down load thyj uyi pl aluan van full moi nhat z z vbhtj mk gmail.com Luan van retey thac si cdeg jg hg
Table 6: Testing for multicollinearity using VIF index
Variable | VIF 1/VIF -+ - dlnK | 1.60 0.63 dlnL | 1.60 0.63 -+ - Mean VIF | 1.60
Table 7: Effect of Industry on Firm’s Output
Garment -0.04 2 tot nghiep down load thyj uyi pl aluan van full moi nhat z z vbhtj mk gmail.com Luan van retey thac si cdeg jg hg
Travel Agency -0.187 2 tot nghiep down load thyj uyi pl aluan van full moi nhat z z vbhtj mk gmail.com Luan van retey thac si cdeg jg hg
Despite the sum of α and β being less than one, the dummy variable analysis reveals that many industries in Vietnam are experiencing positive growth rates This is a promising indicator for the Vietnamese economy, suggesting that the development of listed companies is driven not only by tangible assets but also by intellectual contributions T Yamaguchi (2014) posits that the primary source of long-term, high growth rates will stem from intangible assets Table 9 illustrates the growth rates of various Vietnamese industries, and we will analyze specific sectors that have demonstrated remarkable growth in recent periods to uncover the underlying reasons.
The five high-growth industries—consumption, industrial machinery, chemicals, banking, and steel—experienced significant development from 2008 to 2012 due to various factors Understanding these factors is essential for comprehending the business environment of firms within these sectors By recognizing the forces driving industrial growth, we can better interpret the scope of intangible assets related to a company's activities.
Vietnam consumption market is one of the most developing markets in comparing with other neighbor countries and maintains high growth rate in previous period
According to the Global Retail Development Index (GRDI), Vietnam's retail market experienced a decline from 23rd place in 2011 to 32nd in 2012, before improving to 28th in 2014, indicating significant potential for future growth in this sector Several factors have influenced the past development of the consumption industry.
The growth rate of Vietnam's population is a crucial factor driving the development of the retail market As the population continues to increase annually, the demand for retail products correspondingly rises, highlighting the potential for growth in this sector.
As of 2011, Vietnam's population reached approximately 87.84 million, reflecting a growth rate of 1.04% compared to 2010 The citizen population was around 26.88 million, constituting about 30.6% of the total By 2012, the population is estimated to have grown to around 90 million, highlighting the expanding market and its potential.
- Spending on consumption: Average income per capita in 2002-2007 periods was about 7.3% per year and lead to 10.3% per year in the next period from
From 2008 to 2012, increased earnings enhanced customer purchasing power, positively impacting the revenue of the consumption industry The share of consumption in total personal income remained stable at approximately 14.8% during both the 2002-2007 and 2008-2012 periods, ultimately generating $89.7 billion by the end of 2012.
Economic development plays a crucial role in the growth of the retail market, particularly in Vietnam, which is one of Asia's developing economies With an annual GDP growth rate of approximately 6-7%, Vietnam's GDP surged from $31 billion in 2000 to $140 billion in 2011 Despite the global economic recession, Vietnam's growth forecast remains resilient at around 5%.
- Urbanization: One of reasons of high-growth economic is high speed of urbanization This factor will create more demand and higher level of demand
The retail model in Vietnam predominantly targets urban areas due to the larger market size and the tendency of urban citizens to adopt new products more readily than their rural counterparts This trend presents significant opportunities for the growth of the Vietnamese retail market According to a World Bank report, Vietnam is experiencing an urbanization rate of approximately 3.4% annually.
The young population structure in Vietnam is a key driver for increased earnings and sustained economic demand According to a report from the General Statistics Office (GSO), this demographic advantage positions the country for significant economic growth.
32 labor force is about 46.48 million people in 2013, and will maintain its growth in the next few years
Estimate Cost Function
Firms aim to achieve maximum profit, which is influenced by production and costs, as noted by Samuelson (1947) To optimize profit, companies can either increase revenue or reduce total costs Utilizing the Cobb-Douglas formula, firms can determine the optimal output based on the combination of labor and capital This combination is crucial for maximizing profit, as it represents the firm's primary objective The profit function of a firm can be expressed as follows:
We take first derivative to find out maximizing profit point
𝜕𝐾 − 𝑊 (20) tot nghiep down load thyj uyi pl aluan van full moi nhat z z vbhtj mk gmail.com Luan van retey thac si cdeg jg hg
Firm will come to maximum profit when (19) and (20) equal zero We will change these two equation a little bit and have two equations as below:
We multiplied K in both side of equation 21 and L in both side of equation 22, then
𝛽𝐴 𝑖𝑡 𝐾 𝛼 𝐿 𝛽 = 𝑊𝐿 (24) From equation 23 and equation 24, factor labor L could be expressed via factor capital K:
The marginal products of capital and labor are determined using equations 21 and 22, leading to the cost minimization condition where the ratio of marginal product of capital to marginal product of labor equals the ratio of labor cost to capital cost This relationship can be expressed as:
𝑊 (26) Base on equation 2 and substitute L for K as equation 25, formula of target output will become:
𝑊] −𝛽 𝑒 𝜀 𝑖𝑡 𝑄 (28) Take power 1/(𝛼 + 𝛽) for both side of equation 28, we have:
In this analysis, we will substitute equation 29 with equation 25 to evaluate the impact of labor as a key input in our model.
Up to now, we could measure cost of company base on cost function as below:
𝐶(𝑅 𝑖𝑡 , 𝑊 𝑖𝑡 , 𝑄 𝑖𝑡 ) = 𝑅 𝑖𝑡 𝐾 𝑖𝑡 + 𝑊 𝑖𝑡 𝐿 𝑖𝑡 = 𝐵 ℎ 𝑅 𝑖𝑡 𝛼/(𝛼+𝛽) 𝑊 𝑖𝑡 𝛽/(𝛼+𝛽) 𝑄 𝑖𝑡 1/(𝛼+𝛽) (30) With B in equation 30 is expressed as:
Equation 30 is similar to equation 10 Data for calculating cost function includes𝛼, 𝛽, 𝑅 𝑖𝑡 , 𝑊 𝑖𝑡 , 𝑄 𝑖𝑡 and 𝐵 ℎ 𝛼, 𝛽 and 𝑄 𝑖𝑡 are regression results of equation 5 𝑊 𝑖𝑡 could be collected from VEC database and 𝑅 𝑖𝑡 will be computed using CAPM model
It is another input we need to compute for equation 30, 𝐵 ℎ 𝐵 ℎ is presented in equation
31 and data we need to finish this computation is [𝐴 𝑖 𝑒 ∑ λ 𝑀 ℎ ℎ 𝐷 ℎ (𝑖)𝑡 ] −1/(𝛼+𝛽) We can use formula of equation 2 to do this calculation
Equation 30 show total cost of company with effect of both intangible asset and tangible asset To determine value of intangible asset, value of intangible asset need to be subtracted from total firm’s equity We will calculate equity with and without intangible asset to compute intangible asset value in the next steps.
Compute Firm’s Equity Value
The equity value of a firm represents the total value it can generate throughout its lifetime, calculated as the present value of its future operating profit flow While the calculation method is straightforward, challenges arise in accurately forecasting operating profits and selecting the appropriate discount rate.
In 2014, T Yamaguchi conducted research on discounted cash flow, operating under the assumption that the growth rate would be sustained indefinitely This foundational assumption plays a crucial role in financial modeling and valuation.
The calculation process can be simplified to address the challenges posed by changing economic conditions When applied to listed companies in Vietnam, this method reveals additional issues related to the high growth rates of certain firms In reality, sustaining long-term growth appears to be an unattainable goal for most companies.
While companies may experience strong sales currently, this positive trend is unlikely to persist due to external factors such as competition, substitute products, and changing macro policies that influence business cycles Each product has its own life cycle, and some companies can extend their development periods through effective control systems and mergers and acquisitions A company's financial position is crucial for maintaining its leading status, although only a few exceptions exist where firms successfully prolong their development phases as an intangible asset of their management systems Many industries are currently in an expansionary phase, but this upward trend is not sustainable in the long term Therefore, the assumption regarding long-term growth rates lacks strength For the next five years, I propose that companies will maintain their current growth rates, aligning with the Vietnamese government's five-year economic plan Following this period, firms are expected to enter a stable phase, capturing a share of the market and generating consistent annual profits Consequently, our formula for calculating a firm's equity value will require slight adjustments.
𝑟 𝑖 (1 + 𝑟 𝑖 ) −𝑛 (33) With n is the number of year that company still remains it growth speed
The weighted average cost of capital (WACC) is commonly utilized to discount a company's cash flow In this study, we will adopt WACC as other researchers have, assuming that changes in the cost of equity and cost of liability are minimal and do not significantly affect WACC This assumption is crucial as it simplifies the model.
Compute Firm’s Equity Value with Non Intangible Asset
The total value of a firm's equity reflects its future profit potential, derived not only from physical assets like PP&E and labor force size but also from intellectual properties and intangible assets In the early stages of a business, growth typically stems from company expansion, with management issues remaining manageable due to the smaller scale As the company grows, it must explore new markets, launch additional brands, and hire more staff, leading to increased management challenges that encompass financial and marketing management Each decision can significantly impact profitability, necessitating careful budget allocation for projects and marketing activities Therefore, alongside building a strong brand and company culture, hiring exceptional leaders such as CEOs and CFOs becomes crucial as they represent valuable intangible assets Additionally, the impact of growth varies between small and large companies, with equity value assessed without considering intangible assets, effectively answering the question of a company's worth based solely on labor and capital inputs.
13 In the left-hand side of equation 13, added value of firm’s equity is computed using Cobb-Douglas model with just two components, L and K We also use WACC as discount rate to discount future added value flow In formula of added value of firm’s equity with non-intangible asset, company’s growth rate will not exist Cobb- Douglas function indicates optimal output with each combination of K and L In the rest of equation 13, total firm’s expense with non-intangible asset will be calculated by tot nghiep down load thyj uyi pl aluan van full moi nhat z z vbhtj mk gmail.com Luan van retey thac si cdeg jg hg
The total expenses of a firm can be expressed using the same formula, with distinctions made between the nominal cost of capital and the nominal cost of labor In the context of non-intangible assets, both the cost of capital and the cost of labor will be adjusted from their values in normal conditions.
Evaluating Firm’s Intangible Asset
We have determined both the total value of the firm and its value excluding intangible assets The next step involves identifying the value of intangible assets, which can be calculated using Equation 16: the value of intangible assets equals the equity value of total assets minus the firm's equity value without intangible assets After performing this calculation, we obtain the firm's intangible asset value Figure 5 illustrates the proportion of intangible assets relative to total assets across various industries.
Examine Relationships among Firm’s Revenue, Intangible Asset and
In the final step, we will explore the significance of intangible assets in relation to a firm's value Yamaguchi (2014) identifies a correlation between a firm's revenue and its intangible assets through a regression analysis that initially focused on the relationship between revenue and book value of equity By incorporating additional variables such as industry growth rate and intangible assets, the findings reveal that intangible assets have a greater impact on a firm's value than the book value of equity.
Industrial growth rates significantly influence a firm's value, but this impact is less pronounced than that of the firm's asset structure In Japan, company performance is more closely tied to asset composition than to industry trends Firms with strong brand recognition, efficient management systems, and diversified distribution networks, or those that invest more in intangible assets, tend to achieve greater growth compared to their industry peers.
Figure 4: Change of total factor of production (TFP)
Source: Own calculation tot nghiep down load thyj uyi pl aluan van full moi nhat z z vbhtj mk gmail.com Luan van retey thac si cdeg jg hg
Figure 5: Ratio of Intangible asset on Total asset
Source: Own calculation tot nghiep down load thyj uyi pl aluan van full moi nhat z z vbhtj mk gmail.com Luan van retey thac si cdeg jg hg
This study investigates the impact of intangible assets on the added value of listed companies in Vietnam, emphasizing the distinct effects of tangible versus intangible assets We will utilize the value of tangible assets instead of the book value of equity for a clearer analysis A non-linear model is theoretically proposed for estimation, as firms simultaneously decide on inputs to maximize revenue and minimize costs However, as noted by Samuelson (1947), practical implementation of non-linear estimation is complex Therefore, we will adopt a linear approach with logarithmic transformations of the variables The estimation process will begin with a comprehensive set of variables, followed by a reduction in the number of variables to assess the influence of each factor on the firm's added value.
This estimation analyzes data from 214 companies across various industries, focusing on the changes in variables that impact earnings before interest and taxes (EBIT) in 2012 A limitation of this dataset is that it only reflects observations from that single year, which may include the effects of the business cycle without accounting for seasonal factors Expanding the data range could address this issue.
Table 8: Estimation with all variables
REVENUE Coefficient Std Error t-Statistic Prob
Table 9: Effect of intangible asset and industry development on firm’s added value
REVENUE Coefficient Std Error t-Statistic Prob
C 1.8 0.21 8.42 0 tot nghiep down load thyj uyi pl aluan van full moi nhat z z vbhtj mk gmail.com Luan van retey thac si cdeg jg hg
Table 10: Effect of intangible asset on firm’s added value
REVENUE Coefficient Std Error t-Statistic Prob
Intangible assets significantly enhance a firm's added value, while tangible assets have a less clear impact A positive correlation exists between intangible assets and profitability; specifically, a 1% increase in intangible asset investment can lead to a 0.04% rise in profits This effect is likely to be greater over time, although current data only reflects a one-year impact For instance, when a consumption firm expands its distribution network into new markets, it initially attracts younger consumers who are more adaptable to new products, as opposed to older consumers who tend to seek more information before making a purchase This initial group, known as innovators, constitutes about 2.5% of customers (Rogers, 1983) As more young consumers try the product, interest from older consumers grows, leading to increased future revenue for the firm This pattern holds true for investments in various types of intangible assets.
The growth rate of industries significantly influences a firm's EBIT, contrasting with findings in Yamaguchi's research The development resources for Vietnam's listed companies are derived from unstable factors, particularly the industry's profitability The attractiveness of each industry is closely tied to its position in the economic cycle; for instance, during recovery, sectors like financials and transportation thrive early on, while technology and capital goods excel in the middle stage, and basic industries and energy peak later Conversely, some industries, such as utilities, perform better during recession phases, particularly in the middle or at the trough Consequently, the growth rate of Vietnam's listed companies remains unstable and unpredictable.
In analyzing the market value of a company, we explore the relationship between independent variables and stock price, as illustrated in Table 11 The findings reveal that tangible assets hold a significant coefficient, whereas intangible assets and the industry's growth rate do not play a substantial role.
Table 11: Association among intangible asset, tangible asset, industrial growth rate and stock price
Stock Price Coefficient Std Error t-Statistic Prob
Table 12: Association between tangible asset and stock price
Stock Price Coefficient Std Error t-Statistic Prob
Adjusted R-squared 0.03 S.D dependent var 0.57 tot nghiep down load thyj uyi pl aluan van full moi nhat z z vbhtj mk gmail.com Luan van retey thac si cdeg jg hg
Stock prices are influenced by various factors, including a company's performance, financial position, cash flow, and policies Each country's stock market has unique characteristics, and Vietnam's market is relatively small, making it susceptible to manipulation by large financial entities A significant number of investors in Vietnam prioritize short-term profits, which can skew investment decisions away from a company's core value and future profitability Consequently, certain critical information, such as administrative expenses and brand value, may be overlooked in investment analyses.
Tables 8 and 11 reveal distinct impacts of intangible assets on a company's performance and stock price The analysis indicates that intangible assets represent a significant contributor to a firm's future profitability Therefore, in addition to enhancing production capabilities, companies should prioritize the accumulation of intangible assets to foster long-term growth.
4.8 Firm’s Intangible Asset and Policy Implications
Intangible assets hold significant value in a company's operations and are closely linked to its future growth potential Understanding the strong impact of intangible assets on business performance requires a detailed, long-term analysis of each specific case.
Market power is a key concept in economics, often associated with monopoly markets In perfectly competitive markets, individual businesses hold minimal market shares and do not significantly influence market outcomes, resulting in negligible market power However, when firms or groups of firms emerge that can control prices, they become price makers, and this is when market power becomes relevant Understanding market power is essential for analyzing competition and pricing strategies in various market structures.
According to Lawrence (May 2012), market power is the ability to generate excess profits of the company from the difference between the price and marginal cost
Market power arises from product differentiation, as highlighted by Bain's research (1956), which identifies barriers to entry and the ability to distinguish products as key factors Without differentiation, products compete solely on price, leading to market equilibrium and the elimination of excess profits, thereby negating market power The uniqueness of products is shaped by three main elements, akin to the creation of intangible assets Lawrence points out several origins that contribute to product differentiation.
A resources-owned monopoly refers to a situation where a company has exclusive access to essential inputs, such as proprietary trade rights granted by the government, like the right to operate taxi services in a city, or exclusive patents These monopolistic companies often require significant social capital and a strong financial position, along with a robust brand reputation, to ensure that suppliers are willing to engage solely with them Additionally, proprietary trade rights from the government serve as a vital aspect of social capital, further solidifying the monopoly's control over exclusive raw materials and mineral resources.
Intangible assets, such as patents, are crucial for businesses and stem from strong relationships with government entities These patents can arise from research and development activities or acquisitions, reflecting a company's commitment to long-term growth A firm that possesses numerous patents demonstrates its leadership's focus on fostering structural capital.
- Economic of scale: This is the origin of "natural monopoly" To participate in the industry, enterprises have accumulated an amount of capital needed and thereby create barriers to entry
Entering the industry requires significant investment, which can be a substantial financial burden for businesses If these funds are not utilized within the industry, they cannot be repurposed for other sectors, making the decision to invest a critical one for companies considering their future in this market.