The imfact of transaction cost on competitiveness level, case study in vietnam at the provincial level

Whether an increase in Entry cost; Informal charges; Time cost of regulatory compliance transaction costs will give lager negative effect on the Provincial Competitiveness.. They can pre

THE VIETNAM- THE NETHERLANDS PROJECT FOR M.A PROGRAM

IN DEVELOPMENT ECONOMICS

THE IMPACT OF TRANSACTION COST

ON COMPETITIVENESS LEVEL, CASE STUDY IN VIETNAM AT THE PROVINCIAL LEVEL

so GIAO DVC fJAO T,;O "CJ

TRVONG 8~1 HQC KINH TE TP.HCM

By BUI QUANG HUY

Firstly, I would like to express my acknowledgment and thank to my academic supervisor, Dr Nguyen Trong Hoai, for his guidance and comments through

my thesis writing period His scientific instructions make my thesis become more clearly and concise

I sincerely thank Mr Nguyen Duy Khanh, who has provided me to have the data set of GDP of The General Statistics Office; and Mr Nguyen Anh Tuan

- the expert of the VCCI & VNCI for giving me help in the statistical and calculation issues of the PCI data for my thesis

I am very grateful to my teachers and staff in Vietnam -Netherlands Project,

friendship

And finally, as for my family, specially my wife, I can not thank them enough for their unconditional support and love They has encouraged and supported

me in during this program

Ho Chi Minh City, April2008

The Transaction cost & Competitiveness include multidimensional feature of

an economic entity operating in a market economy In this thesis, therefore, different aspects of them can be explored The meaning of Transaction cost &

Competitiveness for different economic entities will be determined and their relationship will be shown on the provincial level The major determinants of Transaction cost are presented And, the main objectives of the thesis are firstly, to build a measurement regression model of the Competitiveness level basing on data which is collected from some resources (The VNCI & VCCI (2005-2006); General Statistics Office); and then to use that model to evaluate the impact of transaction cost on the Competitiveness level From which, some important policies can be given so that the transaction cost can be reduced and the provincial competitiveness in Vietnam can be increased remarkably

Tc Time cost of regulatory compliance

TAl Transparency and access to Information

PSD Pro-activity of Provincial Leadership

X Time of researching

Vietnam Chamber of Commerce and Industry

PIB Produit Interieur Brut (meaning GDP/head)

SWF social welfare function OLS Ordinary Last Square

VND Vietnamese dong

% Percent

TABLE OF CONTENTS

CHAPTER 1: INTRODUCTION !

1.1 Problem statement 1

1.2 Research objectives 2

1.3 Research questions: 2

1.4 Research hypotheses: 2

• 1.5 Research methodology: 3

1.6 Research limitation: 3

CHAPTER 2: LITERATURE REVIEW 5

2.1 Definitions 5

2.1.1 Competitiveness 5

2.1 2 Transaction costs 8

2.2 Theoretical backgrounds 9

2.2.1 The competitiveness model 10

2.2.2 Transaction cost model 14

2.2.3 Human capital, Quality of Infrastructure and Proximity to market: 17

2.3 Empirical studies 19

2.3.1 Dale B Thompson (1998) 19

2.3.2 Ning Wang (2003) 25

2.3.3 J Luis Guasch & Alvaro Escribano (2005) 26

• 2.3.4 World Bank (2006) 28

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2.3.5 Empirical study of the USAID-funded Vietnam Competitiveness Initiative (VNCI) and the Vietnam Chamber of Commerce and Industry

(VCCI) (2005-2006) 31

2.4 Chapter Remarks 31

CHAPTER 3: DATA AND ECONOMETRIC MODEL FINDINGS 34

3.1 The Econometric Design 34

3.2 The Definition of variables 35

3.2.1 Dependent Variable (Competitiveness) 35

3.2.2 Independent variable 35

3.2.3 Model specification 38

3.3 Data collection method 39

3.3.1 Competitiveness 40

3.3.2 The determinants of Transaction costs on the Provincial Competitiveness 40

3.3.3 Variable analysis 40

3.4 Main hypothesis: 46

3.5 Estimation of result by regression equation 46

3.6 Explanation of coefficient 48

3.7 Chapter remarks 54

CHAPTER 4: CONCLUSIONS AND POLICY IMPLICATIONS 56

4.1 Conclusions 56

4.2 Policy implications 57

REFERENCES 60

APPEND IX 1 66

APPEND IX 2 • ••••.•• ••.•• • •• ••.•• • •• •• • ••.• 70

APPEND IX 3 73

APPENDIX 4 74

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LIST OF TABLES

Table 2.1: Checklist for the Institutional Transaction Costs Framework 22

Table 2.2: Some Important Types of Transaction Costs 28

Table 2.3: Transactions Cost Related to the Legal and Regulatory

Environment 29 Table 3.1: Variable summary 39

Table 3.2: Descriptive statistics of ratio difference of the variable

Table 3.5: The results of regression 47

Table 3.6: The results of restricted regression SO

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CHAPTER 1: INTRODUCTION 1.1 Problem statement

In recent years, globalization has brought new opportunity as well as challenges to both policy makers and enterprises of Vietnam In the context of globalization, regional and international organizations have been established, growing and setting new standards to influence business activities and various sectors It means that the competitiveness improvement becomes one of most important issue in the economy So, what is competitiveness? And, why does competitiveness have important role in economy?

According to the Reports of the National Council for Competitiveness and Development (2006); Competitiveness, as the ability to maintain and improve the standards of living in a country, advance the business environment, strengthen employment, cohesion, environmental protection, and to constantly upgrade productivity and increase market shares in a globalize context Thus, when Vietnam becomes a member of WTO, competitiveness is the key to the further economic success Recently, Vietnam's Government focuses on efficiency to enhance the national competitiveness of Vietnam as well as provinces That is why more and more Vietnam has become an attractive destination for foreign investors

However, investors still complain about complicated procedures (vietnamnet.vn (2006)) It is because they have to spend a lot of times and costs for overlapping law, regulation, and bureaucratic official staff And, they have to lose a lot of transaction cost before they get anything So, what is transaction cost? How is its role in modern social? And whether a reduction in transaction cost and an increase in competitiveness is a really urgent demand?

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Based on the ideas stated above, the objectives of the thesis are firstly, to build a measurement model of Provincial Competitiveness and then to use the model to evaluate the impact of transaction cost on provincial competitiveness, from which, some important strategies can be given so that the transaction cost can be reduced and the provincial competitiveness in Vietnam can be increased remarkably

1.2 Research objectives

+Measuring the effects of determinants on Provincial Competitiveness + Evaluating and giving conformable policies and strategies that can improve the Provincial Competitiveness

1.3 Research questions:

1 What factors will be directly influence to the Competitiveness level?

2 How can these factors affect the Provincial Competitiveness?

3 How has the competitiveness level improved overtime?

4 What the policies that should be suggested to improve the Provincial Competitiveness?

1.4 Research hypotheses:

1 Whether an increase in Entry cost; Informal charges; Time cost of regulatory compliance (transaction costs) will give lager negative effect on the Provincial Competitiveness?

2 Whether an increase in Transparency and access to Information; activity of Provincial Leadership (transaction costs) will give lager positive effect on the Provincial Competitiveness?

Pro-3 Whether a decrease the transaction cost will improve the Provincial Competitiveness?

4 Is there a positive improvement for competitiveness level in Vietnam provinces in the two different periods?

1.5 Research methodology:

The main purpose of this thesis is to measure the impact of Transaction costs

on the competitiveness level from 2005 to 2006 (and the case study is in Vietnam at the provincial level) So, some the data sources will be shown, such as: the determinants of the transaction cost on the provincial competitiveness (The VNCI & VCCI (2005-2006)); And the competitiveness

is represented by GDP/capita (General Statistics Office (2002-2005)); After that they will be checked by the regression double-log econometric model in this thesis with Ordinary Last Square technique; Besides, the independent variables and dependent variable of the econometric model will be slightly analyzed by descriptive statistics and chart basing on the above sources of data to help this thesis become more richly, clearly and concise

1.6 Research limitation:

About the economic aspect: The Transaction cost & Competitiveness include multidimensional feature of an economic entity operating in a market economy However, in this thesis is only to focus on measuring the impact of transaction costs on the competitiveness level, thus it can not evaluate exactly, specifically and all

About the data aspect: The determinants of Transaction cost on the provincial competitiveness only are colleted covered 42 provinces in Vietnam by the VNCI & VCCI 2005, accounting in total 90% of the national GDP while the Vietnam includes 64 provinces This leads that the all other data in 2005-2006

only also can be collected basing on these 42 provmces Besides, the Competitiveness are measured by GDP per capita However, the data of GDP/capita only are taken in General Statistics Office from 2002 to 2005; so, data of GDP/capita in 2006 for 42 provinces in Vietnam, which will be calculated by estimation method from the data in 2002 to 2005

CHAPTER 2: LITERATURE REVIEW

This literature review includes three main parts The first part defines concepts related to the research such as competitiveness, transaction costs The second part is the theoretical backgrounds, as in the competitiveness model, transaction cost model The competitiveness has to consider four problems including transaction costs, human capital, infrastructure, proximity

to markets The third part introduces different empirical studies in Vietnam and other countries, which bring about a conclusion of the most significant variables that can be employed to explain the competitiveness

2.1 Definitions

f According to the World Bank (2006) the competitiveness for country, enterprise, and region level can be critically affected by the cost of business transactions So in this part, some concepts will be defined to readers to avoid the confusion of its meanings It includes competitiveness and transaction cost

2.1.1 Competitiveness

The concept of competitiveness has always been subject to a great interest for both researchers and people involved in practical business because competitiveness is a multidimensional feature of an economic entity that operates in a market economic performance So, in the recent studies it has become widely used the term in economic literature However, wide and frequent usage of the term is not always based on the clearly defined contents

of the word, and this cause a lot of misunderstanding and contradiction based

on terminological non-exactitude In this study, it should be considered some concepts clearly & focus on various aspects of competitiveness as:

According to Porter (1990); Trabold (1995); and Garelli (1997), competitiveness reflects a position of one economic entity (country, region, industry, enterprise ) in relation to other economic entities by comparing the qualities or results of activities reflecting superiority or interiority and competitiveness can be defined both in a narrower and in a broader sense:

+ In a narrow approach, the competitiveness is explored in conditions where entities' interests are contradictory (achievement of the aim by one entity would make it impossible for another entity to execute its interests)

+ In a broader approach to the concept encompasses also the indirect and potential competition between entities, analyzing the areas where entities' direct interests are not contrary

Broader approach makes competitiveness analysis similar to the comparative analysis in its most general meaning Positive feature of such a general approach would be emphasizing the importance of the method of comparison

in evaluating entity's qualities and activities Any quality or performance can

be thoroughly evaluated only in comparison with similar entities However, too general competitiveness analysis would leave the establishment and execution of concrete managerial tasks obscure

More specific competitiveness analysis (narrow approach) would determine the confrontation of interests and thereby find the solutions to overcome contradictions In operative management emphasis is put on direct conflicts on markets and use of operative means to win the competition Strategic management encompasses also the analysis of indirect and potential controversies that are likely to occur in the future and the ways to solve them

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Competitiveness is "the ability to provide products and services as or more effectively and efficiently than the relevant competitors" (The Competitiveness Institute (2007))

According to the National Competitiveness Council (2007), The Competitiveness is the ability of a country to achieve sustained high rates of growth in GDP per capita

The concept of competitiveness m Vietnam (The VNCI & VCCI (2005, 2006)), it is determined by the productivity and quality of the business environment between the provinces together They can present the factors used to measure the competitiveness as Entry Costs, Access to land, Transparency and access to information, Time costs of regulatory compliance, Informal Charges, State sector bias, Pro activity of provincial Leadership, Private sector development policies, Labor training, Legal institutions

According to Porter (1998), he used common determinants analysis to create a Microeconomic Competitiveness Index (MICI) Many determinants of the microeconomic environment tended to move together He explored the relation between a nation's score on MICI and its relative GDP per capita and found a strong correlation Thus, in this thesis; The concept of competitiveness

is ability to create business environment clearly to attract investment from different resources in region as a province, can be related to the GDP per capita of the region and it is reflected by many factors as transaction cost: area' economic policy, development level (human capital), quality of infrastructure, distance to main markets

It's easy to understand about the basic concept of transaction cost that are those costs of buying and selling in markets which are not passed on in the transaction

According to Ronald Coase (1937.p.388), the definition of transaction cost introduced as "cost of using the price mechanism" is based on the notion of the costliness of exchange and the recognition of information as scarce and valuable asset Another definition of transaction cost by Arrow (1969 p.48)

"transaction costs are the costs of running the economic system" Both definitions imply that transaction costs are costs that it includes the direct and indirect costs of making the products, such as the costs of labor, energy, raw materials, semi-manufactured products, components, depreciation of the machinery, and maintenance

Besides, Williamson (197 5) uses the concept of transaction cost market imperfection in his analytical framework Transaction cost economics focuses

on the most efficient governance structure for a given type of transaction A transaction is defined as the transfer of a good or service across a technologically separable interface (Williamson, 1985) A "most efficient" governance structure means that the total cost of production and transaction are, in the long term, less than those of any other governance structure So, transaction costs are the costs connected with finding a contractual partner, specifying a contract, and securing that the ex-ante defined goals will be met ex-post

In addition, transaction costs are the time, effort, and money necessary, including such things as commission fees and the cost of physically moving the asset from seller to buyer, and transaction costs should also include the

bid/ask spread as well as price impact costs (for example a large sell order could lower the price) It can include: round-trip transactions costs, information costs, search costs (The Free Dictionary, 2007) So, nowadays, the concept of transaction costs are determined by fee on transaction, which often paid for the acquisition and management of information, searching costs, bargaining costs, policing costs, enforcement costs

However, in this thesis; we only remind and limit the concept in sphere from Government to Business It means that, we measure the impact of transaction costs on new institutional economics (public services and public policies); and the concept of transaction costs are costs (include direct & indirect cost) in business environment of every province as Entry cost (EC); Transparency and access to Information (TAl); Time cost of regulatory compliance (Tc); Informal charges (IC); Pro-activity of Provincial Leadership (PSD); because they are considered to be important factors and therefore they are chosen as the unit of analysis in this thesis research

2.2 Theoretical backgrounds

For the region, according to The Competitiveness Institute (2007), the competitiveness level is the ability of the region's people to achieve a high and rising standard of living Almost region, the standard of living is determined by the productivity with which the region's resources are deployed

as the output of the economy per unit of labor and/or capital employed A high and rising standard of living for all the region's people only can sustained by continual improvements in productivity, either through achieving higher productivity in existing businesses or through successful entry into higher productivity businesses Thus, the competitiveness level is measured by the level and growth of the region's standard of living, the level and growth of

2.2.1 The competitiveness model

According to Porter (1990), the traditional model, competitiveness 1s determined by the productivity, can be related to some factors (determinants) such as human resources, new knowledge and technologies, capital This Porter's theory of competitiveness has had powerful implications for the way

in which governments, organizations and firms in developed, transition, and developing countries have pursued competitiveness In addition, according to the World Bank (2006) the competitiveness of a firm or a region can be critically affected by the cost of business transactions In this literature, it has been mentioned and also measured competitiveness of business environment based on analysis of transaction costs, which focuses on the extent to which

- - - -

the private sector incurs unnecessary transaction costs that make it unable or unwilling to invest and compete domestically and internationally Elevated transaction costs could originate from excessive regulation and/or inefficient and corrupt government enforcement of regulations, excessive costs of infrastructure services, poor contract enforcement, and unfair and lengthy conflict resolutions It means that competitiveness hasn't only relationship with transaction costs but also some factors of the productivity as human resources, new knowledge and technologies, physical capital

Through the above literatures, it can be concluded that competitiveness 1s depending on:

Besides, according to the score of competitiveness (presented in World Competitiveness Scoreboard (WCS)) computed by the International Institute for Management Development (IMD) in Geneva takes into account four determinants such as economic performance, government efficiency, business efficiency, and infrastructure Each of them is divided into five sub factors which emphasize the fundamental aspects of the domain under analysis, as follows:

Economic performance would be performed by the health and stable level of domestic economy, international trade, international investment, employment, and prices

Government efficiency can be included public finance, fiscal policy, institutional framework, business legislation, societal framework

Business efficiency can be included productivity, labor market, finance, management practices, attitudes and values

Co = f(Economic performance, Government efficiency, Business efficiency, Infrastructure) (2.2)

Although, all above theories are not complete but they present only the most important links between the different instruments and the involved competitiveness level Based on this theory and purpose of this study, it can

be selected some main factors and only focused to measure competitiveness among different regions

From the 2.1 & 2.2 models, therefore Competitiveness can be expressed as a following function:

Co = f(Transaction costs, Human resources, Infrastructure, Government

But, that the one of most important we can't ignore in this theory is the most general indicator of regional competitiveness, which is ability to earn, can be related to the GDP per capita (Poter, 1998) Besides, with that sense, according to Gardiner (2003), the competitiveness, as measured by GDP per capita, which can be depended on many factors because the GDP per capita is considered to be the best representation of the productivity It may be broken down in more factorial components, each having its own economic interpretation (Gardiner, 2003):

GDPicapita = GDP/Total Population= (PIB 1 Total number of hours worked)* (Total number of hours worked I Employment) * (Employment I Working age population)* (Working age population I Total Populationf (2.4)

So, we have a function of competitiveness:

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2.2.2 Transaction cost model

According to Coase (1937, 1961) original formulation of transaction costs, refer to "the cost of using the price mechanism" or "the cost of carrying out a transaction by means of an exchange on the open market" As Coase (1961 p 15) explains, "in order to carry out a market transaction it is necessary to discover who it is that one wishes to deal with, to inform people that one wishes to deal and on what terms, to conduct negotiations leading up to a bargain, to draw up the contract, to undertake the inspection needed to make sure that the terms of the contract are being observed, and so on" However,

at that time, his these theories are limited, which only focus to solve certain economic tasks by firms and when they would be performed transaction clearly on the market (fixed cost)

Arguably, transaction cost reasoning became most widely known through Oliver E Williamson's Transaction Cost Economics (1975, 1985, 1996, 1998, 2000) Transaction costs seem important for economic development Wallis and North comment on their results that: " throughout history, the costs of transacting may have been as much a limiting factor on economic growth as transformation costs" (Wallis & North, 1987 p 121) According to them, there are two kinds of TC:

1 Ex ante costs of drafting, negotiating, and safeguarding an agreement In the case of partnerships, these costs arise at the beginning

2 Ex post costs that emerge when a contract's execution is misaligned with the costs of running the economic system, as a result of gaps, errors, omissions, and unanticipated disturbances In the case of partnerships, these costs occur during the partnership's lifespan

Ex ante costs can be further divided into search costs and contracting costs For partnerships, search costs include the costs of identifying and evaluating potential partners Contracting costs are associated with negotiating and writing an agreement between partners These costs occur mostly before the partnership formally begins (Wallis & North, 1987)

Ex post costs can be divided as well into monitoring and enforcement costs Monitoring costs are associated with monitoring the agreement to ensure that each partner fulfills the predetermined obligations Enforcement costs are associated with ex post bargaining (renegotiation) and sanctioning a partner that does not perform according to the agreement (Wallis & North, 1987) In this theory also has some limitations because it still focuses on partnership performance, it means that from Business to Business, while transaction costs inherent to the market mechanism are also relevant to instruments designed in order to correct market failures

Until, in recently, the literature on institutions (law, financial markets, trust, social capital, corruption, etc.) and economic growth are another body of work that involves proxy measurement of transaction costs as broadly understood (e.g., Besley 1995; Knack and Keefer 1995; Hall and Jones 1999; Acemoglu

et al2001; see Lin and Nugent 1995; Rodrik 2000; the World Bank 2002) The primary contribution of this body of work is to demonstrate empirically and systematically the simple point that institutions do matter for economic development (Matthew, 1986) In these theories describe that transaction costs include direct costs & indirect costs as fixed costs, negotiation costs, information costs, uncertainly costs (property right, contracts), transfer fees, taxes, distributive costs, contextual costs, institution costs, execution costs, opportunity costs Besides, according the VCCI & VNCI (2005, 2006), transaction costs also are included & measured as Entry cost; Transparency

and access to Information; Time cost of regulatory compliance, Informal charges, Pro-activity of Provincial Leadership, Access to land, Implementation and consistency of policies, private sector development policies, legal institutions All the previously mentioned types of costs can most probably be divided into 'variable' transaction costs, in the sense that they depend on the volume or number of certain transactions and into 'fixed' ones

Although, all above theories are not complete, but they also present the most important links between the different instruments and the involved transaction costs Based on this theories, and the limited of this study, so this thesis only can be selected by some main factors to influence competitiveness and now which has been related to GDP per capita and it can be only focused to measure the effects of transaction costs on public policy (Government to Business & vice versa)

Therefore transaction cost can be expressed as a function of some factors:

TC = k (EC, TAl, Tc, IC, PSD) (2.6)

Where: Transaction cost (TC) and Entry cost (EC); Transparency and access

to Information (TAl); Time cost of regulatory compliance (Tc); Informal charges (I C); Pro-activity of Provincial Leadership (PSD)

On the other hand, Transaction cost economics can applied to the transactions required development and sustain the attributes of competitiveness Another, Wallis and North estimated that transaction costs amounted to one half of the Gross Domestic Product (Wallis & North, 1987)

From the 2.3 & 2.6 models, therefore, the Competitiveness can be regressed

as a function of transaction costs:

Co= f (EC, TAl, Tc, IC, PSD) (2.7)

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Where C: Competitiveness measured by GDP per capita

TC: that transaction costs include Entry cost (EC); Transparency and access to Information (TAl); Time cost of regulatory compliance (Tc); Informal charges (I C); Pro-activity of Provincial Leadership (PSD)

2.2.3 Human capital, Quality of Infrastructure and Proximity to market:

Human capital theory emphasizes the importance of schooling, labor market experience, seniority, and training in explaining individual productivity (Willis, 1985) In the context of firms it should be then expected these human capital variables to positively impact productivity The lack of data has thus far prevented us from learning how education and training affect productivity and earning in regional with different macro environment and protection of property rights Like human capital, quality of infrastructure and proximity to market are significant and that they have important implications for economic development as competitiveness

A main stream of competitiveness today has moved towards the role of education and skills, transportation facility and institutions, geography -human capital, quality of infrastructure and proximity to market models of development

Therefore, TC only explain X% of GDP regional variation, thus other factors including Human Capital, Quality of Infrastructure and Proximity to Market are used to explain the regional variations and these become controlled variables in the following function

Where GDP: Gross Domestic Product per capita

C = f (TC, HK, QI, PM)

Where C: Competitiveness measured by GDP per capita

Assumptions of theoretical backgrounds

+ Reductions in transaction cost

+ This reflects negative or positive between the of transaction costs The strengths and characteristics of the Transaction costs can further analyzed

by separating the indirect cost & direct cost factors:

+Direct costs are costs as fee, purchase

+ Indirect costs are costs as the institution, legal, information

For all of the above problems, the (2.9) & (2.10) models are used to estimate the competitiveness level in the research

It also provides a checklist of variables and parameters that are necessary to construct estimates of these costs With these estimates, an analyst can properly weigh the relevance of these institutional factors The methodology model was based social welfare function (SWF) by Polinsky and Shavell to determine optimal fines and detection costs It shows a variety of instruments with respect to a policy: lobbying the legislature directly, lobbying regulatory agencies during rule making procedures, self-monitoring to avoid penalties for non-reporting, compliance actions to avoid penalties for violating standards under a policy, noncompliance and payment of penalties, and noncompliance and defense of themselves in court They also operate under imperfect information With empirical study's purpose is maximize profits By introducing utility aspects of this empirical study, the impact of these factors

on public policy can be estimated

The Model by Thompson (1998) is briefly presented as following:

SB: the social benefit from compliance with the policy

Cc: the compliance cost of an individual party

r(Cc), R(Cc): the Probability and Cumulative distribution functions of the compliance cost variable (the PDF(Cc) and CDF(Cc), respectively)

W: The wealth of individuals who are responsible to comply with the policy g(W), G(W): the Probability and Cumulative distribution functions of

individuals' Wealth (the PDF(W) and CDF(W), respectively)

F: the Fine imposed on those convicted of noncompliance, if it is not higher than their wealth

Cp: the Cost of Prosecution each individual for noncompliance with the policy Cd: the Cost of Detection incurred while enforcing this policy

Pd: the Probability of Detection someone in noncompliance

Pp: the Probability of Prosecuting a detected non-complier

Pc: the Probability of Conviction of someone prosecuted

After that Dale B Thompson has some modification & SWF is:

0: the time discount rate

te: the year a policy is enacted

to: the year a policy is operational

Ce: the Cost of Enacting this policy

Ci: the Cost of Implementing this policy

Or in words:

SWF = - Enactment Costs - Implementation Costs + (Proportion of

Compliance) * (Discounted Social Benefit from Compliance - Discounted

Compliance Costs) - Discounted Detection Costs - ( 1 - Proportion of

Compliance)* (Discounted Prosecution Costs)

Thus, the SWF can be understood as being equal to the social benefits, which

is the full spectrum of social costs These social costs include both private

compliance costs and institutional transaction costs They help us understand

and expand the sphere of transaction costs lead to significant positive

relationship between transaction cost with public policy & public service

Table 2.1: Checklist for the Institutional Transaction Costs Framework

Social Cost Parameters Variables Directly Variables Indirectly component Directly Affecting this cost Affecting this cost

Affecting this cost

Number of Firms whether site-specific

Compliance quantity of whether substitution of

Costs product affected lower cost firms is allowed

average cost of average yearly rate of cost

reduction from initial investment

technological innovation average ongomg

costs of operation distribution of compliance costs Enactment Opportunity cost

policy Hourly Cost of

How much time staff Staff

spends for background Technical nature of research, drafting, and policy

other things Proportion of

how much Costs Employee per agency working on

how much time agency what level of

spends on determining documentation goals and means of policy support

how many comparisons how long will a policy take

to implement what social inefficiencies

I

are incurred during the implementation process Detection Costs what is the which group is responsible

relative for monitoring efficiency of the

different

I

monitoring groups how many sites need to be how frequent do the sites monitored need to be monitored

what is the cost of equipment used during monitoring tests

how frequent do audits need to be made what is the duration of audits

I

I wages of auditing how many people are

personnel involved in an audit

procedures the duration of the inducement period cost of agency

legal fees spent by the

I

defendants the cost of time spent on the process agency staff by the prosecuting agency General time discount length of time between

rate proposal and operation of

policy

Source: Thomson (1998)

Table 2.1 shows that the parameters and variables which affect the different cost components in the Institutional Transaction Cost framework This checklist will be quite helpful when using the Institutional Transaction Cost frameworks

From this empirical study, it can be shown that the social welfare function (SWF) is a part of Institutional Transaction Cost framework, which include a lot of variables of Transaction cost function (direct costs & in direct costs) as Compliance Costs, Enactment Costs, Implementation Costs, Detection Costs, Prosecution Costs, General On the other hand, the empirical study showed that the variables of Transaction cost function have the impact to public policies (public services), which are significant positive relationship with new institutional economics Besides, in among variables of Transaction cost function; Based on this empirical study, we can consider & select some variables the same meaning to add into the research model: Compliance Costs

as Entry cost ; General as Time cost of regulatory compliance, after that we will be used to explain the meaning of model, which help to make richer and easy to understand in my thesis

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2.3.2 Ning Wang (2003)

Wang (2003) studied "Measuring Transaction Costs: An Incomplete Survey"

As in Transaction cost model, which are introduced by Collins and Fabozzi (1991) & developed by Wang (2003) in financial economics at USA Because,

in financial economics, transaction costs is generally understood as the cost of investing in financial markets, including brokerage fees and ask-bid spreads (Demsetz 1968; Stoll and Whaley 1983; Bhardwaj and Brooks 1992) However, empirical studies in this area do not suffer from lack of attention Actually, there is a mature specialized business providing international transaction cost measurement services to investment professionals In addition

to demand factors, two factors on the supply side are relevant here: the widely accepted agreement on what transaction costs are in financial markets, and easy access to financial data This body of research is by and large not self consciously linked to the general New Institutional Economics literature, with

a few exceptions (Demsetz 1968)

The Model by Wang (2003) is briefly presented as following:

Transaction costs = fixed costs + variable costs;

Fixed costs= commissions+ transfer fees+ taxes;

Variable costs= execution costs+ opportunity costs;

Execution costs = price impact + market timing costs;

(2.15) (2.16) (2.17) (2.18) Opportunity costs = desired results - actual returns - execution costs - fixed

Price impact captures the movement in the price of an asset that is the result

of a trade plus the market- maker's spread Market timing costs refer to the movement in the price of an asset at the time of a transaction that can be

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attributed to other market participants Execution costs anse out of the demand for immediate execution and reflect both the demand for liquidity and the trading activity Opportunity costs are the difference between the performance of an actual investment and the performance of a desired investment, adjusted for fixed costs and execution costs

From this empirical study, it can be found that the model empirical studies discussed above is used in stock market to evaluate the impact of transaction costs on stock market, so stock market is a part of financial market It means that the transaction costs have a positive relationship with financial market, which also include some variables can't be measured directly as execution costs, opportunity costs & direct cost as fixed cost Based on this empirical study, we can consider & select some variables the same meaning to add into the research model: fixed cost as Entry cost, execution costs and opportunity costs as Transparency and access to Information (TAl); Time cost of regulatory compliance (Tc); Informal charges (IC)

2.3.3 J Luis Guasch & Alvaro Escribano (2005)

Luis & Escribano (2005) studied "Assessing the Impact of the Investment Climate on Productivity" In this empirical study, they focus on estimating the productivity impact of investment climate variables and after that they develop an appropriate and consistent econometric methodology to be used as

a benchmark for evaluating the impact of investment climate variables on productivity at the firm level To illustrate its applicability and usefulness, the methodology is used to assess the productivity impact in three different countries, Guatemala, Honduras and Nicaragua, with the investment climate firm-level survey data collected for 2001 and 2002 Because, according to them; competitiveness as the set of factors, policies and institutions that

determine the level of productivity of a regional, furthermore raising productivity, meaning making better use of available factors and resources Thus, a more competitive economy will be one which will likely grow faster

in a medium to long-term perspective

The Model by Guasch and Escribano (2005) is briefly presented as following:

In particular, they have considered the impact of investment climate (IC) variables and other firm control variables (C) on several productivity measures The IC variables belong to five broad categories: infrastructure, bureaucracy/corruption, crime, finance and other plant characteristics Productivity (P) refers to the effects of any variable different from the inputs labor (L), intermediate materials (M) and capital services (K) affecting the production (sales) process To be more specific, consider that the production function Q= f (L,M,K) and the productivity (Pit) equation of the firm (i) at period (t) are given by:

Yit = F (Lit, Mit, Kit) Pit

Pit= G (ICit, Cit) exp (Uit)

(2.20) (2.21) where Uit is a random error term with properties that will be specified later

on The individual firms are indicated by the sub-index i = 1, 2, N, where N

is the total number of firms in the sample (the three countries) and by the index timet= 1, 2, , T, where Tis the total number of years in the sample

sub-In our data base, N is large and T is small

From this empirical study, it can be presented that the competitiveness has a relationship with productivity as GDP per capita So, GDP/capita should be presented a proxies with competitiveness in this thesis On the other hand, the empirical study showed that the investment climate (IC) variables as human capital, quality of infrastructure and proximity to market are significant

-positive relationship with productivity and the productivity now has been measured by GDP per capita

2o3o4 World Bank (2006)o

They studied the "A transactions cost approach to evaluating the environment for business"

According to World Bank (2006), the competitiveness of a country's enterprises can be critically affected by the cost of business transactions (as opposed to direct costs of production) Analysis of transaction costs focuses on the extent to which the private sector incurs unnecessary transaction costs that make it unable or unwilling to invest and compete domestically and internationally Elevated transaction costs could originate from excessive regulation and/or inefficient and corrupt government enforcement of regulations, excessive costs of infrastructure services, poor contract enforcement, and unfair and lengthy conflict resolutions

Some transaction costs, such as the formal costs of infrastructure services, can

be directly observed in local markets or obtained through published statistics, but most must be derived either directly from the experience of representative enterprises (for example, through surveys) or indirectly using reasonable proxy measures

T bl 2 2 S a e 0 0 0 orne mpor an I t tT ~eso fT ransac Ion to c OS S t

Regulatory Burden

collection

Time costs for Regulatory Burden, business Useful to capture regulatory government Transactional monetary costs

Monetary outlays for Regulatory Burden, business Direct costs

professional government transactional

assistance to comply measure

with taxes and other

Source: World Bank (2006)

Table 2.2 shows that another cost related to regulation and other government controls in the economy is the cost of bribes, which is increasingly quantifiable Through business surveys, costs imposed by different regulatory procedures and administrative practices can be measured and compared across countries and over time, from which, some important determinants can

be employed in my research model as Time costs, entry barrier/cost

Table 2.3: Transactions Cost Related to the Legal and Regulatory

Entry +Predictability delays economy

+ Enforcement + Facilitation Rate of domestic +Conflict costs investment

resolution + Facilitation Rate ofFDI

Bankruptcy +Number of Rate of exit (and entry) Liquidation rules, Prevalence of credit Severance/Layoffs formalities Average and distribution +Rule + Rate of change of profitability of

Business + Predictability + Changes in costs

Exit + Enforcement and number of

+ Resolution +Rate of

compliance and/

or evasion

Trade-related alternatives to Export growth, regulation formal institutions generally and in non-Labor hiring/firing + Rates of conflict traditional exports Size Logistics and of conflict of shadow economy

Rate of investment, forei_gn and domestic

Source: World Bank (2006)

Table 2.3 shows some variables, which can be used & mentioned in my research model as Time costs for regulatory compliance, Entry barrier cost or especially, Business Operation depend on Pro-activity of Provincial Leadership Besides, based on this empirical study, it can be shown that the competitiveness had a strong relationship with transaction costs; and they presented that transaction costs have included many costs as above

2.3.5 Empirical study of the USAID-funded Vietnam Competitiveness Initiative (VNCI) and the Vietnam Chamber of Commerce and Industry (VCCI) (2005-2006)

They studied "Evaluating the provincial competitiveness index in Vietnam"

In this study, they survey data from businesses that describe their perceptions

of their local business environments, as well as credible and comparable data from official and other sources regarding local conditions, the PCI rates provinces on a 100-point scale In 2005, the overall index is comprised of nine sub-indices that explain much of the variation in performance across provinces in Vietnam In 2006, two new sub-indices were developed to capture other aspects of Provincial Government efforts to enhance the business environment In addition, a number of the existing indices were strengthened by modifying certain indicators Ten indicators including: Entry Costs, Access to land, Transparency and access to information, Time costs of regulatory compliance, Informal Charges, State sector bias, Pro activity of provincial Leadership, Private sector development policies, Labor training, Legal institutions After that they evaluate the environment for business between provinces in Vietnam & explain why some parts of the country perform better than others in terms of private sector dynamism, job creation and economic growth

Especially, it can be found out some of factors of transaction costs as Entry cost (EC); Transparency and access to Information (T AI); Time cost of regulatory compliance (Tc); Informal charges (IC); Pro-activity of Provincial Leadership (PSD) that have impacted the provincial competitiveness

2.4 Chapter Remarks