DSpace at VNU: Training and firm performance in economies in transition: a comparison between Vietnam and China

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Asia Pacific Business Review

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Training and firm performance in economies in transition: a comparison between Vietnam and China

Thang Ngoc Nguyen a , Quang Truong b & Dirk Buyens c a

University of Economics and Business, Vietnam National University , Hanoi, Vietnam

b The Northern University of Management and Technology Ubon Ratchathani , Thailand

c Vlerick Leuven Gent Management School , Belgium Published online: 22 Jan 2011

To cite this article: Thang Ngoc Nguyen , Quang Truong & Dirk Buyens (2011) Training and firm

performance in economies in transition: a comparison between Vietnam and China, Asia Pacific Business Review, 17:01, 103-119, DOI: 10.1080/13602381003773982

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Training and firm performance in economies in transition:

a comparison between Vietnam and China

Thang Ngoc Nguyena, Quang Truongb* and Dirk Buyensc

a

University of Economics and Business, Vietnam National University, Hanoi, Vietnam;

b

The Northern University of Management and Technology Ubon Ratchathani, Thailand;

c

Vlerick Leuven Gent Management School, Belgium

This paper provides a comparative analysis on the role of training and its impact on firm performance in some economies in transition in Asia The starting point is

an examination of country contexts and training, and how these have shaped organizational approaches to human resource (HR) training The paper also reviews the results of recent studies that have investigated the relationship between training and firm performance in Vietnam and China The review results show that training is positively related to firm performance and reveals some convergence of HR training in both countries On the basis of this, some caveats on HR training development in the future in these two countries are given The paper ends with theoretical and practical implications Keywords:China; economies in transition; firm performance; HR training; Vietnam

Introduction

The relevance of human capital, defined to include both education and post-school training, contributes to economic growth and firm performance through raising the productivity of an enterprise and facilitating the adaptation and use of new technologies (Martocchio and Baldwin 1997, Lawler et al 1998) However, there is currently a debate regarding whether or not the private sector or the government is the best provider of training In addition, training among countries seems to be associated with stages

of industrial and economic development, cultural features, country institutions, or globalization (Rowley and Benson 2002, Rowley et al 2004) There are only a few studies

on comparative training and its impact on firm performance in terms of economies in transition and very little bilateral comparative study of Vietnam and China This paper attempts to make a contribution to close this research gap

It is difficult to compare training and its impact on firm performance in different countries (e.g different cultures and economic values) and this study is no exception This study was undertaken among typical developing countries in Asia – Vietnam and China These countries were chosen because: (1) they are developing countries which have joined the World Trade Organization (WTO) and are attempting to make a transition from a centrally-controlled economy towards a market economy; (2) they show high and constant economic growth in the last decades, the restructuring and downsizing of state-owned enterprises (SOEs) are increasing and SOEs have been playing a very significant role with respect to employment; (3) foreign investment has increased exponentially since the introduction of Foreign Investment Law and its influence on training; and (4) governments

ISSN 1360-2381 print/ISSN 1743-792X online

q2011 Taylor & Francis

DOI: 10.1080/13602381003773982

*Corresponding author Email: qtruong65@yahoo.com

Vol 17, No 1, January 2011, 103–119

are anxious to invest in education and training to make their workforce more competent and competitive internationally

This comparative analysis focuses on the social-economic context of the two HR training systems and aims to provide an answer to the question ‘How the different country contexts have shaped company approaches to HR training in typical economies in transition?’

The paper begins with an examination of the country contexts and training and how these have shaped organizational approaches to HR training In the next section, we briefly review the results of current studies that have investigated the influence of HR training

on firm performance in Vietnam and China The subsequent section provides results, discussion, and caveats that might happen for HR training in the future in the two countries with consequent implications for theory and managerial practice The conclusions and suggestions for future research are then outlined in the last section

Methodology

In an effort to integrate the effects of globalization in the analysis, various socio-economic factors were taken into consideration as the starting-point for this paper, in order to analyze the possible contextual dependency of different HR training systems While empirical study is comparatively easy in terms of the different HR training systems, this type of research design is not a realistic option for a study which primarily aims to review the variety of cultural, economic and management-related context of each country (Pudelko 2006) Therefore, to answer the research question as stated above, an empirical study seems to be unrealistic A literature review approach was chosen to provide a wider scope

of socio-economic contextual factors and sub-areas of management in the analysis and to assess the existing intellectual territory and diversity of knowledge of management studies (Tranfield et al 2003, Weick 2007)

In addition, by reviewing and analyzing the multitude of findings from previous empirical studies that used econometric techniques to estimate the impact of HR training

on firm performance in Vietnam and China, and integrating the obtained information with socio-economic contextual factors, we obtained a more complete overview of HR training and firm performance between these two countries than any single empirical study would

be able to provide As such, we have also addressed the lack of critical assessments and tried to further develop the existing body of knowledge on this specific subject

Country context and HR training

Vietnam context

Vietnam embarked on the Doi Moi (renovation) policy in 1986 Since then, the country has experienced radical changes, first and foremost in its fundamental economic thinking The centrally planned economy following the Soviet Union model was replaced by a market economy, albeit of a socialist character, which started with a sweeping restructuring of the state-owned sector This also allowed the private sector to take part in the economy and facilitated the process of full integration into the region and world economic mainstream (Thang and Quang 2005a) During the first 20 years of Doi Moi, the gross domestic product (GDP) of Vietnam has seen sustained growth (CIEM 2006) The rate of increase, which was 8.2% each year on average in the 1991 – 1995 period, reached 8.5% in 2007 (GOS 2008)

The Doi Moi policy has opened up new opportunities for Vietnam to make full use of its inherent comparative advantages, notably relatively untapped natural resources and

an abundant and low-cost workforce These advantages have been exploited to raise Vietnamese exports, which helps generate an increasing flow of foreign income to support its economic growth and industrialization strategy The country has also attracted significant inflows of foreign direct investment (FDI) FDI not only generates profits for foreign investors, but also represents an important capital source, which brings in technology transfer and advanced managerial skills (Thang and Quang 2007) to upgrade the quality of the local workforce Paradoxically enough, Vietnamese labour remains relatively abundant and inexpensive while many companies are faced with a chronic shortage of skilled workers As a result of Vietnam becoming a member of the WTO in January 2007, a surge in FDI and international trade is expected, which will undoubtedly lead to much higher growth in labour demand (Anh and Thang 2007), especially in the high-end of the market

HR training in Vietnam

The educational system in Vietnam has developed from pre-school education to doctoral level at university The system had been dominated by public and formal schools, but there are now some private schools and other different forms of informal education (e.g open learning, distance education), and joint ventures with foreign institutions (Thang and Quang 2007) The Vietnamese government considers vocational training as one of the main tasks of education and HR development because the majority of the most needed jobs

in Vietnam’s transitional economy relate to technical skills Annually, over one million new workers seek jobs (GOS 2008); most of them are in the younger age group The growing economy requires more qualified workers, which all together has made the employment problem become more critical Although the Vietnamese government has implemented several policies and designed specific programmes to revamp the education and training system, there still is an urgent need to improve the quality of Vietnamese workers at all levels of the labour structure It is reported that only 20% of the working age population has vocational education or training and that education

is not linked strongly with practical and organizational needs (CIEM 2006) Up to 80% of graduates need specific employer training to match specific job requirements

The shortage of qualified workers in sectors with opportunities for growth and employment has had a negative impact on the quality of the production process and endangers the growth strategies of companies (CIEM 2006) Vocational education development is challenged from both a supply and demand perspective On the supply side, there has been and continues to be a shortage of faculty, facilities, equipment, materials and practical training programmes On the demand side, many students consider that vocational education lacks the prestige attributable to a university education in a society where education is still regarded as the biggest investment any parent can make for their children’s future (Thang and Quang 2007) Consequently, many potential students will not pursue a vocational education in favour of a college or university degree, even though the unemployment rate among college and university graduates is extremely high The percentage of students enrolling in professional secondary and vocational schools remains low with a slight and slow increase (GOS 2008) This has caused a huge imbalance in the labour market in Vietnam and exerted a serious effect on the sustainable development of the country

Most Vietnamese companies recognize the importance of training and development for their success, but are faced with problems in funding these activities Employers often decide upon acquiring modern equipment and expanding factories rather than training and developing people At the same time, the quality of education in general is not adequate, often failing to meet regional and world standards or the actual needs of the companies (CIEM 2006) The majority of graduates are critically limited in practical skills and in the ability to adapt to professional work, work discipline and teamwork To close this gap, private and state-owned enterprises have begun to reserve a proportion of their budget for employee training (Thang and Quang 2007, Thang et al 2008) According to the new Education Law, incentives are offered to enterprises to encourage in-house training for their employees Exemption from taxes relating to training is permitted, as is subsidized credit for newly established training institutions The practice of the ‘dual’ system of training in both schools and enterprises has been relatively successful because theory and basic skills can be more efficiently taught in schools and institutions, whereas advanced technical and practical skills are better learned in the workplace (CIEM 2006)

China context

China launched its first attempt at economic reform at the end of the 1970s with

‘open door’ policies and entered a period of rapid and sustainable economic growth The majority of reforms were aimed at replacing direct government administration at the enterprise level, facilitating the introduction and expansion of private enterprises, and attracting foreign direct investment (Ahlstrom et al 2005) However, the socialist market mechanism has been maintained in a general context of political stability Real GDP growth rates for China have averaged about 10% each year for the past 30 years (China Statistical Yearbook 2004) These reforms have led to an emergent external labour market, which requires a large amount of labour and brought a great opportunity to employees of the country’s huge working population A more flexible labour market is being developed to replace government assignment and firms have gained more autonomy

to recruit employees and other HR functions In the first 20 years of reform, 300 million job positions have been created (Xie and Wu 2001)

HR training in China

Although China has made some great achievements in economic growth and increased annual spending on education, the skills and knowledge of the workforce are still poor According to the China Statistical Yearbook 2004, 19% of the Chinese population has received higher education However, firms that must seek workers from this graduate pool have remained unimpressed with the quality of recruits and have had to rely on their own job-training programmes that provide re-education for their newly hired workers The public, also, has not been very enthusiastic over vocational secondary education which, unlike general education, does not lead to the possibility of higher education This situation has forced the central government to pay more attention to education and training needs

Some laws and regulations related to training were issued (Xie and Wu 2001) While the Vocational Education Law in 1996 encouraged financial institutions to support and develop vocational education by applying a means for credit or cooperation between enterprises and vocational schools for the training of students, the Labour Reserve System imposed in 1996 was prepared for those who graduated from high school but were not

qualified for higher education to undertake vocational school However, the training and development infrastructure was still weak There is a constant lack of equipment and qualified teachers, and most infrastructures for this development remain under construction, especially in the rural and remote areas Therefore, enterprises have faced

an acute deficiency of skilled workers (Yan 2007)

Economic reform developed the classification system of SOEs and non-SOEs Non-SOEs include local private enterprises and foreign-invested enterprises (FIE) FIEs tend to offer more training programmes than other types of enterprises The large FIEs often pay more attention to training and offer training and development packages to their employees (Tang et al 1996, Ngo et al 1998) The introduction and exponential increase of foreign investors has created the opportunity for local non-SOEs to adopt some of the ‘new’ HR training policies (Zhu et al 2007) SOEs are often less receptive to adopting sound human resource management (HRM) than the local private companies In addition, SOEs provide less training for their employees This situation has been caused by many factors but the main reason is the ‘old’ training vision of managers and their allocated budgets, which lack internal resources for training They view expenditure for training as an expense rather than as a HR capital investment Commonly, employers decide upon other investment priorities (such as technological changes) rather than the training and development of people, which has left employees with no choice but to seek self-development in external vocational schools, colleges and universities (Xie and Wu 2001)

Literature on the relationship between training and firm performance

Human resource academics and professionals together have identified training policies that are critical for improving employee skills, firm performance, and organizational survival (Schuler 1995) and are considered essential if a firm is to remain competitive (Barney 1991, MacDuffie 1995, Salas and Cannon-Bowers 2001) A number of authors have attempted to examine the relationship between training and firm performance

In one of the first contributions to this topic, Bartel (1994) used data on the training policies and economic characteristics of firms in the Columbia Business School survey to measure the impact of formal training programmes on labour productivity The survey contained information on training activities, number of employees and output in 1983 and

1986 The major finding of this study is that firms that were operating below their labour productivity in 1983 and implemented training programmes after 1983 caused significant productivity gains during the 1983 – 1986 period Bartel (1994) also found that returns on training investment increased productivity by about 16%

Black and Lynch (1996) looked at the relationship between training and productivity

by using the final sample of 2945 firms from the National Center on the Educational Quality of the Workforce’s National Employer Survey They used a Cobb-Douglas production function in their estimation and found that a 10% increase in average education will lead to an 8.5% increase in manufacturing productivity and a 12.7% increase in non-manufacturing productivity

Using general and specific training for their studies, Barrett and O’Connell (2001) used data from two waves of Irish firms surveyed in 1993 and 1995, where the response rate of the second wave was only one-third of the initial firms They found that general training has a statistically positive effect on productivity growth but specific training had no significant effect on firm productivity

Zwick (2006) used data collected from the Institute for Employment Research establishment panel with a five year observation period He estimated the impact of

training intensity on establishment productivity The research result indicated that increasing training intensity has a positive and significant effect on firm productivity in Germany

The evidence of the links between training and firm performance is extremely strong in developed countries (e.g Bartel 1994, Black and Lynch 1996, Barrett and O’Connell

2001, Zwick 2006) and recently in emerging countries such as Vietnam and China Other studies have estimated the impact of training on firm performance by using firm-level data collected through mail surveys The most frequently cited China studies are those by Tang

et al (1996), Zhu (1998), Ng and Siu (2004) and the most frequently cited Vietnamese studies are those of Quang and Dung (1998), Thang and Quang (2005a, 2005b), and Thang

et al (2008) The main attributes and findings of these studies are summarized in Table 1 The first study on China looked at 156 FIEs and was conducted by Tang et al (1996) in late 1995 It indicated that training had a positive and significant effect in: (1) improving the administrative ability of management; (2) enhancing productivity; (3) expanding employees’ skill range; (4) developing employees’ ability to cope with technical innovation; (5) responding to production changes; and (6) improving employees’ morale

In addition, the authors also found that staff turnover had a powerful effect on employer decisions to provide training to employees because the high mobility of employees implies that a given rate of investment in employees results in a smaller stock of workers with firm-specific skills

The second study of 253 enterprises by Ngo et al (1998) analyzed the relationship between training and firm performance of Chinese, American, Japanese and British firms that had been operating in China The findings indicated that training had positive effects

on employee satisfaction, employee retention, competitive sales performance, competitive new product development, and competitive net profit In addition, they found that local Chinese firms tended to provide less structural training and development than American, British, and Japanese firms

The third study of 440 enterprises of various ownership types in Shanghai by Zhu (1998) showed that training was recognized as an effective tool to improve firm performance More specifically, the author found that training was used to help employees understand the organizational business strategy and value system In addition, the results also indicated that training focused more on job-related skill and the improvement of employee productivity

Finally, a study by Ng and Siu (2004) estimated the impact of training on firm performance in SOEs and non-SOEs They found that managerial training had a positive and significant effect on sales in both SOEs and non-SOEs However, technical training made no contribution to firm productivity The study also indicated that training objectives have three major dimensions, namely enhancing working relationships, tackling skill deficiencies, and skill development In addition, SOEs tended to focus more on skill development whereas non-SOEs concentrated on enhancing both working relationships and skill development

On a comparative basis, three Vietnamese studies have sought a link between workforce training and firm performance First, Quang and Dung (1998) used data collected from 47 SOEs in southern cities and provinces in Vietnam to examine the role of human resource training in firm performance They found that 96% of the SOEs claimed

to provide training for their employees and 62% of the SOEs provided training for new employees The study also indicated that the major reason for training was to improve employee performance, thus improving the performance of the enterprises In addition,

Sample size

other reasons for training were job satisfaction, the acquisition of professional qualifications, and a type of compensation

Second, Thang and Quang (2005a) used data from a study of 137 cross-sector enterprises to estimate the impact of training on firm performance The survey was conducted in 2003 They found that there was a positive association of training with market share and organizational performance In a follow-up paper, Thang and Quang (2005b) indicated that FIEs tended to provide more on-the-job training than other types of enterprises However, off-the-job training was preferred less by FIEs than by SOEs Finally, Thang et al (2008) studied the impact of training programmes on firm performance by using the data from the Vietnam Employer Survey Instrument (VNSI), which was undertaken by a group of researchers of Ghent University, Belgium in 2007 From a survey of 196 companies, the major findings indicated that those manufacturing companies that implemented training in 2006 had increased sales and productivity by 0.18%

in manufacturing companies In addition, manufacturing companies which implemented training programmes after 2005 increased their total sales and productivity by 0.32% per year between 2005 and 2006 However, we found no statistically significant effect on 2005 –

2006 percentage changes in the sales and productivity of non-manufacturing companies if these companies provided training after 2005 The survey result also shows that manufacturing companies had been solely focusing on training for technical engineers The econometric analysis method in this study which assisted the authors in overcoming the limitations of estimation depends on the accuracy of the assumption regarding the cost of training and the accuracy of the subjective estimates of firm performance (Bartel 2000)

Results and discussion

Differences

There are a number of studies indicating that organizational differences in HR policies and practices, including training policy, are related to variations in national legislation and the cultural framework of a country (Brewster and Bournois 1991, Lane 1991, Randlesome

1993, Shaw et al 1993, Brewster and Hegewisch 1994) In addition, the contexts for training policy differ widely between Vietnam and China due to the timing and the pace of economic reform, educational policy, and employment status Therefore, there are three major differences in training between Vietnam and China

First, both Vietnam and China have followed an export-oriented industrialization strategy and have been gradually shifting to export-oriented economies This strategy is linked to particular HR management policies that stress training and HR development (Kuruvilla and Venkataratnam 1996) More specifically, Kuruvilla (1994) suggests that there are variable stages in the strategy The first stage focuses on the low-cost production

of light manufacturing goods for export coupled with a highly compliant labour force However, the advanced stage of export-oriented strategy is based on higher technology and highly skilled labour requirements At this stage, both countries have made efforts to develop the skills of their workforce through various training programmes as well as providing better-qualified workers for the growing export industry Therefore, the stage of economic development and the industrial strategies adopted affect the decisions of both government and employers with regard to the provision of training to employees Vietnam and China are currently at different stages of economic development Comparatively, local non-SOEs in China have made significant investments in a variety of training programmes

to upgrade the skills of their employees (Yan 2007) because they are in the advanced stage

of export-oriented strategy, whereas local non-SOEs in Vietnam seldom have training