The influence of institutional quality of firm size and number of non state firm at province level in vietnam

VIET NAM – NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS THE INFLUENCE OF INSTITUTIONAL QUALITY ON FIRM SIZE AND NUMBER OF NON – STATE FIRMS AT PROVINCE LEVEL IN VIETNAM By T

VIET NAM – NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

THE INFLUENCE OF INSTITUTIONAL QUALITY

ON FIRM SIZE AND NUMBER OF NON – STATE FIRMS

AT PROVINCE LEVEL IN VIETNAM

By TRINH MINH HAN

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

HO CHI MINH, November 2017

VIET NAM THE NETHERLANDS

VIET NAM – NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

THE INFLUENCE OF INSTITUTIONAL QUALITY

ON FIRM SIZE AND NUMBER OF NON – STATE FIRM

AT PROVINCE LEVEL IN VIETNAM

A thesis submitted in partial fulfillment of the requirements for the degree of

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

By TRINH MINH HAN

Academic Supervisor:

Dr TRUONG DANG THUY

The relationship between institutions and firm size is now well established This paper investigates the influences of the institutional quality of local government on firm size and number of non – state firms by using the panel data of 52 provinces in Vietnam from the period 2009 to 2013 We use a unique dataset and ranking of provincial governance institutions from Vietnam as measure of the institutional quality We deal with the endogeneity issue by using the distance from the 17th parallel as the instrument for the institutions variable Interestingly, we find no evidences to clarify the relationship between the institutional quality, firm size and number of non – state firms at province level in Vietnam

Keywords: institutions, the PCI, average firm size, number of non – state firms

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supervisor Dr Truong Dang Thuy There is nothing more valuable than his instructions and advice since I was lost in the final stage to finish this program His spirit and responsibility is definitely the most memorable and impressive for me even when I am no longer a student of VNP After all, Dr Thuy, I would like to say that thank you so much

In addition, I thank my family, friends, VNP officers so much for supporting me to complete this program

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ACKNOWLEDGEMENT II TABLE OF CONTENTS III ABBREVIATIONS V LIST OF FIGURES VI LIST OF TABLES VII

CHAPTER ONE: INTRODUCTION 1

1.1 PROBLEM STATEMENT 1

1.2 SCOPE AND OBJECTIVE OF RESEARCH 2

1.3 RESEARCH HYPOTHESES 3

1.4 THESIS STRUCTURE 3

CHAPTER TWO: LITERATURE REVIEW 4

2.1 THE RELATIONSHIP BETWEEN INSTITIONS AND FIRM SIZE 4

2.2 THE FIRM SIZE AND THE EMPLOYEE – WEIGHTED AVERAGE FIRM SIZE 8

2.3 HOW TO MEASURE INSTITIONAL QUALITY 10

2.4 OTHER STATE VARIABLES 12

2.5 THE RELATIONSHIP BETWEEN INSTITUTIONS AND NUMBER OF FIRMS 13

CHAPTER THREE: METHODOLOGY AND DATA 16

3.1 DATA SOURCES AND CHARACTERISTICS 16

3.1.1 DATA SOURCES 16

3.1.2 EMPLOYEE – WEIGHTED AVERAGE FIRM SIZE and NUMBER OF FIRMS 16

3.1.3 MEASURE OF INSTITUTIONS 18

3.1.4 OTHER CONTROL VARIABLES 21

3.2 ENDOGENEITY ISSUE 21

3.3 MODEL SPECIFICATION 23

CHAPTER FOUR: RESEARCHING RESULT 26

4.1 STATISTIC ANALYSIS 26

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CHAPTER FIVE: CONCLUSION 39

5.1 CONCLUSION 39

5.2 LIMITATION 40

5.3 SUGGESTION FOR FUTURE RESEARCHES 40

REFERENCES 41

APPENDICES 44

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AFS Average firm size

EWAS Employee – weighted average firm size

FE Fixed effects

GDP Gross Domestic Product

GSO General Statistics Office

IV Instrumental variable

Obs Observation

OLS Ordinary least squares

PCI Provincial Competitiveness Index

RE Random effects

Std Dev Standard deviation

VCCI Vietnam Chamber of Commerce and Industry

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Employee – weighted average firm size 30Figure 2: Scatter plot of the effect of PCI, Market size, GDP per capita, Schooling on average firm size 31Figure 3: Scatter plot of the effect of PCI, Market size, GDP per capita, Schooling on number

of non – state firms 32Figure 4: Scatter plot of the effect of Distance, Market size, GDP per capita and Schooling on PCI index 33

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Table 2: Correlation of variables 29

Table 3: What determines firm size? 34

Table 4: What determines firm size? (using IV) 36

Table 5: What determines number of non – state firms? 37

Table A 1: List of Vietnamese provinces 44

Table A 2: Data sources and definition of variables 45

Table A 3: Top five leading provinces of PCI Ranking from 2009 to 2013 47

In various studies that exploit either cross – country variation or single country variation have investigated the influences of institutional quality on firm size Kumar, Rajan, and Zingales (henceforth KRZ) (2001) concluded that higher efficient legal systems lead to larger firm sizes across thirteen European countries, the effect are stronger for industries where physical assets are less important In Mexico, Laeven and Woodruff (2007) found that the positive relationship between average firm size and judicial efficiency, this link is more prevalent for proprietorships than for corporations Beck et al (2006) had similar result when they used firm – level data on the largest industrial firms in forty - four countries

Based on those previous researches, this paper will investigate the relationship between the local governance and entrepreneurs in Vietnam Interestingly, this country has a homogenous political system and government structure, but economic performances is substantially different among provinces (VNCI – VCCI, 2005)

Vietnam is a nation with more than ninety million persons, a developing country organized into sixty - three provinces By launching the renovation reforms (Doi moi) in 1986, Vietnam’s GDP per capita increases from around 100$ to over 2000$ by the end of 2014 within a quarter of a century, and the poverty rate diminishes from 50% in the early 1990s to 3% in 2015 (World bank, 2015) The story may continue to follow the positive direction, but unfortunately, it does not

In recent years, Vietnamese economics has revealed many troubles: the public debt is too high, the population aging, the polluted environment, the exhausted natural resources,

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middle income trap… After a long period of renovation reforms, Vietnam just has approximately a half of a million enterprises, and remarkably, the size of firm tends more and more small, come to extremely small1

Many action programs are addressed by the central government of Vietnam to expound the economics restructuring endeavors By improving the business environment, increasing the efficiency of governmental operations and administrations, eliminating the business constraints… policy makers desire to achieve the target having a million enterprises in 2020 Even though this target is quite modest in comparing with population scale, the result of this one is still hard predictable

The Provincial Competitiveness Index (PCI) is an annual ranking of economic governance in Vietnam’s sixty-three provinces produced by the Vietnam Chamber of Commerce and Industry (VCCI) Fundamentally, the VCCI gathers the opinions of about 7,000 domestic private firms regarding economic governance in their provinces

The PCI has the intention to improve the efficiency of administration of local governments by putting them into a competition with each other, though at the beginning, this index lacks of their attention When the people and enterprise society have more and more interest in this index, they are no longer ignore it, the competition becomes the real one among sixty-three provinces and the PCI has proved its meaning

By clarifying the influences of institutions on economic outcomes through the lens of the PCI index and firm size, this paper presents strong arguments to policy makers to improve the business environment that is one of primary growth rate constrains of Vietnam

1.2 OBJECTIVE AND SCOPE OF RESEARCH

This paper investigates the influences of the quality of municipal institutions on firm size and number of non – state firms In order to acquire that, this one uses a unique dataset and ranking of provincial governance institutions from Vietnam – The PCI - to measure the

1 http://tuoitre.vn/quy-mo-doanh-nghiep-vn-ngay-cang-nho-602008.htm

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quality of institutions The final findings will support directly central and local government to make policies and to complete their strategic objectives

The dataset used in this paper comes from fifty – two provinces with the period from

2009 to 2013 With every province, the respective PCI data and the distance from it to the 17thparallel are also gathered

1.3 RESEARCH HYPOTHESES

H1: The PCI index is associated with average firm size

H2: The higher PCI index has a positive effect on number of non – state firm

1.4 THESIS STRUCTURE

The thesis comprises five chapters Chapter two reviews the literature about institutions, firm size, number of firms and the relationship among them This one also illustrates the method to measure variables and empirical results Chapter three discusses the dataset: data sources and characteristics, the approach of estimations employed in this study Chapter four unveils the finding from the scope data of 52 provinces/ cities in Vietnam The last one presents conclusions, recommendations and the limitations of this paper

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CHAPTER TWO: LITERATURE REVIEW

This chapter presents empirical results of prior researchers when they investigate the influences of institutional quality on firm size and number of firm In addition, this chapter discusses techniques to measure the quality of institutions and firm size

2.1 THEORY OF FIRM

According to Ronald Coase (1937): “people begin to organize their production in firms when the transaction cost of coordinating production through the market exchange, given imperfect information, is greater than within the firm”

He stated that a firm’s interactions with the market may not be under its control (for example because of sales taxes), but its internal allocation of resources He wondered why alternative methods of production such as price mechanism or economic planning, could not either achieve all production, hence either firms use internal prices for all their production, or one big firm runs the entire economy He augured that the main reason to establish a firm is to avoid some of the transaction costs of using the price mechanism These include discovering relevant prices (which can be reduced but not eliminated by purchasing this information through specialists), as well as the costs of negotiating and writing enforceable contracts for each transaction (which can be large if there is uncertainty)

If a firm operated internally under the market system, many contracts would be required (for instance, even for producing a pen or delivering a presentation) In contrast, a real firm has very few (though much more complex) contracts, such as defining a manager’s power of direction over employees, in exchange for which the employee is paid

He noted that government measures relating to the market (sales taxes, rationing, price controls) tend to increase the size of firms, since firms internally would not be subject to such transaction costs Thus, Coase defined the firm as “the system of relationships which comes to existence when the direction of resources is dependent on the entrepreneur”

The question then arises of what determines the size of firms, why does the entrepreneurs organize the transactions they do, why no more or less? Since the reason for the firm’s being is

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to have lower costs than the market, the upper limit on the firm’s size is set by costs rising to the point where internalizing an additional transaction equals the cost of making that transaction in the market In practice, diminishing returns to management contribute most to raising the costs of organizing a large firm, particularly in large firms with many different plants and differing internal transactions (such as conglomerate), or if the relevant prices changes frequently

Ronald Coase concluded that the size of firms is dependent on the costs of using the price mechanism, and on the costs of organization of other entrepreneurs

Acemoglu and Johnson (2005) studied contracting institutions with the legal formalism measure of Djankov et al., the procedural complexity necessary to collect on a nonpaying commercial debt, and the number of procedures necessary to collect on such a debt For property rights institutions, they used various measures of constraints on government power and protection of property rights Their identification strategy was to exploit differences in the historical experiences of former European In this sample, there are strong and distinct first – stage relationships between legal origin and various measures of contracting institutions on the one hand and between colonization strategy and property rights institutions on the other Using this multiple instrumental variables strategy, they found robust evidence that property rights institutions have a major influence on long – run economic growth, investment, and financial development, while contracting institutions appear to affect the form of financial

2.3 THE RELATIONSHIP BETWEEN INSTITIONS AND FIRM SIZE

Many researchers have studied the impact of the quality of institutions on firm size, and almost findings indicate that the existence of positive relationship between them

Kumar et al (2001) concluded that the quality of institutions is higher, firm size is greater on average, when they studied in thirteen Western European countries Moreover, they also observed the effects of physical assets and human capital on firm size The outcomes are physical assets play an important role in the influencing magnitude of judicial systems on firm size, since the effect of human capital is not obvious

Gathering the data at firm level of forty – four economics, Beck et al (2006) had the similar conclusions with Kumar et al ‘s finding, not only with the development of institutions, but the development of financial intermediaries Both of them have positive effect on average firm size

In Mexico case, Laeven and Woodruff (2007) discovered the existence of positive link between legal environment and average firm size, when they developed a framework in which institutions influences eccentricity risks of entrepreneur intending to increase share of his assets in a single firm In addition, the quality of legal environment has stronger impact on proprietorships than that on corporations, and they recommended that the decrease in those risks should be taken into account

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Using the data in Spanish, Fabbri (2010) supposed that firm size will increase and bank financing will cheaper, when the courts are more efficient In this paper, Fabbri considered the trial judgments as a measure of the efficiency of a judicial district, more details, she computed the length of those ones on average, or the ratio between those trial judgments after a year and the total number of proceeding judgments In addition, she argued that the endogeneity issue

of the research was solved due to the influences of firm level decisions on macroeconomics or the cost of law enforcement are limited

By researching the influences of institutional efficiency on firm size, those authors clarify various channels – investment decisions, the employment protection legislation, transaction cost, credit environment … - through which they affect each other

Firstly, firm size is affected by the inefficient institutions system through investment decisions of entrepreneurs, when they will consider carefully risks they have to deal with and their expected incomes This could lead to decrease probabilities of investment and growth

Secondly, the institutions could effect on employment decisions of firms by regulations

of labor force protection law, even though this relationship is not obvious conclusion The literature could argue that firm’s performance could be relied on its actual implementation to adapt this law

Thirdly, the transaction cost will increase since the quality of contract enforcement is not good, firms may change uprightly integrating their production procedure, and firm size will larger

Next, the inefficiency of formal contract enforcement institutions increases the subordination of parties on relational contracting, and makes the collaboration of them with new partner becomes more difficult However, there is another channel, in which barriers created by those relational contractions hinder the entrance of new firms, and this channel could increase the average firm size due to the fact that new firms are usually small in size in compare with operating firms

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Finally, Laeven and Woodruff (2007) or Beck et al (2006) have investigated the impact

of credit market on firm size, when they use private credit as a measure of financial institutions variable The idea behind that is more efficient functioning judicial systems, creditors will be safer, the availability of credit and the contractual terms for potential borrowers will be increased and enriched, as a consequence, financial constraints to growth for existing firms will be monitored and eliminated However, it is hard to state that this link is a causation relationship: more efficient credit market leads to the increasing of number of new firms, and because new firms are usually small in size, average firm size would smaller

In summary, the first two channels indicate the negative relationship between institutions and average firm size, the third channel proposes a positive one, while the two last channels are ambiguous

2.2 THE FIRM SIZE AND THE EMPLOYEE – WEIGHTED AVERAGE FIRM SIZE

Many empirical studies suggested various methods to measure firm size based on the richness of their dataset

Kumar et al (2001) suggested three techniques to calculate firm size: value added, output of firms or the number of employees In Mexico, Laeven and Woodruff (2007) added the capital stock as measurement of firm size, along with the number of employees, while Giacomelli and Menon (2012) proposed to use two methods: the total employment and the turnover of firms

The data on distribution of firm size could be released not completely its potential richness when the average firm size is produced simply by the ratio between total employment and total number of firms in the country or sector combination In addition, the simple average firm size is not able to monitor in the case that a giant firm has dominating share in the sector

it belongs to

Using data from Enterprises in Europe, Kumar, Rajan and Zingales (2001) computed the Employee Weighted Average Number of Employees based on Davis and Henrekson’s suggestion (1997)

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Davis and Henrekson (1997) suggested another approach to calculate firm size Firstly, they computed the ratio between the number of employees and the number of firms in given bin Then, this ratio will be controlled by its share on the sector (the ratio between the number

of employees in this bin and the total number of employees in the sector)

The weighted – average firm size of the entire sector is weighted sum of these bin averages The formula is:

𝑁𝑏𝑖𝑛𝑒𝑚𝑝 is the total number of employees reported in the given bin

𝑁𝑡𝑜𝑡𝑎𝑙𝑒𝑚𝑝 is the total number of employees in the sector

𝑁𝑏𝑖𝑛𝑓𝑖𝑟𝑚𝑠 is the number of firms in the bin

Laeven and Woodruff used data from Mexican economic census in 1998, followed the same method of Kumar et al (2001) and Davis and Henrekson (1997) to calculate firm size Their data were gathered from plant – level data while many studies producing firm size distribution use enterprise – level data, however, they argued that almost 100 % of firms in their dataset are single – establishment, then the issue of plant – level data or enterprise – level data is no longer matter

In Italy, Giacomelli and Menon (2012) used two methods to compute average firm size coming from two data sources: ASIA database and CERVED database The first one includes the data at province level: the number of firms, the number of plants, the number of employees and the distribution of rims and plants by size bins Based on this dataset, they computed average firm size followed the method of Kumar et al (2001) In addition, they also observed

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the influences of institutions on total employment and the number of plants, they argued that small average firm size maybe come from the high entrepreneurship rate

Their another method to measure firm size is the turnover by gathering the information

of balance sheet of most corporations in Italy Based on the second dataset, they computed the turnover of corporation on average at province level for the two periods 2001 – 2002 and 2008 – 2009 The average turnover for the second period indicates firm size, while the growth rate between those two periods indicates firms’ growth

Garcia Posada and Mora Sanguinetti (2013) used two approaches – employee weighted average and arithmetic average – to measure firm size While the employee – weighted average firm size followed Kumar et al (2001) and Davis and Henrekson (1997), another one was the index aggregated from the information of employment, revenue and total assets The dataset used in this paper contained firm – level data for the period 2001 – 2009 One of their concerns is the impact of inefficiency judicial system on the existence of large firms, and they argued that while the arithmetic average could not control the situation in which a large amount of very small firm that account for a very small share of regional economics, the employee weighted average could do In addition, the employee – weighted average firm size could minimize the influences of entry and exit since news firms and exiting firms are usually much smaller in size than operating ones

2.3 HOW TO MEASURE INSTITIONAL QUALITY

The second major variable of this study is the institutional quality With every circumstance, the author has special approach to measure the quality of institutions

Laeven and Woodruff (2007) used a survey conducted in 1998 to measure institutional quality This survey comprised elements: “(i) the quality of judges, (ii) the impartiality of judges, (iii) the adequacy of judicial resources, (iv) the efficiency of enforcement of rulings, (v) the efficiency of judicial administration more generally, (vi) the cost, ease of use, and completeness of property registries, and (vii) the adequacy of local legislation related to contract enforcement”, and the institutional quality is the final index computed be averaging

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those seven element This survey observed the collection of bank debt from thirty – two courts

in each respective states of Mexico

Kumar et al (2001) used the database of Business International Corp as a measure of the quality of institutions This database is a scale from 0 to 10, in which lower marks indicate lower level of efficiency and integrity of legal environment

Desai, Gompers, Lerner (2003) defined corruption as “the misuse of public power for private benefits, bribing of public officials, kickbacks in public procurement, or embezzlement

of public funds” They used an index calculated by averaging the corruption marks from given sources as: “(1) Freedom House Nations in Transit, (2) Gallup International, (3) the Economist Intelligence Unit, (4) the Institute for Management Development, Lausanne, (5) the International Crime Victim Survey, (6) the Political and Economic Risk Consultancy, Hong Kong, (7) the Wall street Journal’s Central European Economic Review, (8) the World Bank the University of Basel, (9) the World Economic Forum” From “the Global Competiveness Report 2000 of World Economic Forum”, they used an index of property right protection as the second measure to institutions To measure the efficiency of legal system, they used an index called the Formalism Index, and they examined how well the legal system functions by using an index from “the Survey of World Business Environment from the World Bank Group between 1998 – 2000”

In Italy, Giacomelli and Menon (2016) suggested a method to measure the efficiency

of contract enforcement at court level as “the average length of first instance civil proceedings

in each court” This proxy indicates that more requiring time to resolve a conflict of a contract, the efficiency of contract enforcement will reduce The database was gathered from the Italian Ministry of Justice

The primary variable of legal system efficiency in paper of Beck et al (2006) was: “the time estimate in calendar days of process of dispute resolution named as contract enforcement” Moreover, they also observed the influences of financial development on firm size, and they computed private credit as their primary variable of financial development They defined the private credit as: “the claims of deposit money banks and other financial

2.4 OTHER STATE VARIABLES

Almost papers controlled for the effect of market size on firm size by using log of municipal population In the paper of Laeven and Woodruff, they also included GDP per capita and education level in states, in which education variables was defined as “the share of population in each state aged fifteen years and over with at least nine years of schooling education in 1990”

In the paper of Kumar et al (2001), they used “log of total employment in the industry

in that country” as their measure of market size, though they argued that maybe existing causality issue between two variables – average firm size and market size To deal with this use, they applied instrument variable method, in which their instruments were: “log of GDP, the country population and the ratio of exports to GDP” They also added a measure of human capital produced by “the average years of schooling in the population over age 25”

Following the same way, Giacomelli and Menon (2012) included “the share of high schooling graduates on population as a measure of local human capital” In addition, they used municipal population as a measure for their market size variable

Beck et al (2006) used some variables such as: GDP, GDP per capita, the inflation rate, the share of trade in GDP to clarify what determines firm size In which the inflation rate was

a measure of the macroeconomic risks, the share of trade in GDP was produced by the ratio between the sum of exports, imports with the GDP They argued that the degree of openness

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of economies was a determinant influencing on firms’ market power Finally, they defined

“the rate of gross enrollment in secondary education” as a measure of “the level of human capital accumulation the economy”

2.5 THE RELATIONSHIP BETWEEN INSTITUTIONS AND NUMBER OF FIRMS

In Italy case, Giacomelli and Menon (2012) not only observed the relationship between institutions and firm size, but also the effects of institutions on total employment and the number of firms While the poor institutions had negative effect on firm size, their findings also indicated that this one had negative effect on total employment, but did not have a link with the number of firms In detail, they run the similar regressions with four dependent variables (in logs): “the average plant size, the employee weighted average firm size, the total number of plants, and the total employment” They illustrated three main different scenarios:

Firstly, the inefficiency of judicial system has a negative and comparable effect on the growth and entry of firms This thing results in the coefficients between the institutions variables with the total number of plants and total employment should be negative, while this one has insignificant for average firm size

Secondly, the judicial inefficiency affects only firms’ growth but not firms’ entry In this one, the coefficients between institutions variable with the total employment and average size should be negative, while this one of institutions variable and the number of plants should

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regulations with the establishment of new limited – liability firms, the average sizes of firms, and the growth of incumbent firms In this case, they considered the cost to adapt regulatory requirements for the establishment a new limited – liability firms as their potential explanation

Their dependent variable defined as “the ratio of new firms to total firms” was controlled by the industry share, the characteristics at country level and industry level In which, the country characteristic was: “the cost of fulfilling the bureaucratic requirements to register a company”, the industry characteristic was: “the ratio of new firms to total firms in the US”, and the industry share was: “the ratio of the industry’s sales to total sales of firms in the country”

Their works comprised three actions Firstly, they investigated the influence of entry costs on the extent of incorporation They explored that poor performance of regulations has negative effect on the establishment of new firms, this one is stronger in naturally high – entry industries

Secondly, they observed the connection between the bureaucratic entry regulations with the average size of new firms As their outcomes, these regulations obligate new entry firms to be bigger, while these ones make existing firms in naturally high – entry industries to grow at lower speed

Finally, they considered other indicators of business environment such as: “financial development, labor regulation, protection of intellectual property” supposed that these ones are likely able to influence on entry In the end, their results did not have difference

In the paper of Edmund and Markus (2009), they studied the effect of the quality of Vietnamese local governance on the selection of entrepreneurs - stay in informal sector or to submit to formal government regulation Their research answered the question: “how the quality of local institutions in Vietnam influences on the decision to transition from avoiding government attention to accepting it”

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Their research followed the paper of Simeon Djankov (2008), when he stated that the selection of firms – stay in the informal economy or move to formal economy – is the most significant due to the efficiency of governance and institutions has improved The argument behind this is: when entrepreneurs decide to keep the position in the informal economy, the tax revenues will diminish, ineffective health and environment regulations will hamper the public,

a vicious circle ensure that breaks rules of laws This one lead to poor institutions, greater informality since policy makers miss the necessary information to adjust the business environment and guard the social welfare

Although Vietnam has more than two decades of renovation (doi moi) reforms to establish a legal environment for private firms, the fact is that in this country, entrepreneurs have to face more business constraints from regulatory system than that of household business (ho kinh doanh ca the) It is not difficult to predict that what sector plays the leading proportion in GDP And the true is the household sector remains the highest position in not only agriculture, but also industry and services

In general, regulatory responsibilities for household businesses and entrepreneurs are separated cross two distinct administrative levels The regulatory environment that monitors the activities of entrepreneurs is more comprehensive, more transparent, and more strictly implements across provinces that the one that influences on household businesses

Using the PCI as a measure of institutional quality in Vietnam, Edmund and Markus (2009) found that the quality of local governance is associated with the decision to operate in formal sector of entrepreneurs In addition, they also discovered that even though entrepreneurs initially choose into the informal sector, the time these ones spend there is less if local governances are better

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CHAPTER THREE: METHODOLOGY AND DATA

This chapter illustrates the technique to measure variables: employee – weighted average firm size, number of firms, institutional quality and other variables This chapter also details characteristics and components of variables In addition, causality issue and model specification will be discussed

3.1 DATA SOURCES AND CHARACTERISTICS

3.1.1 DATA SOURCES

The panel data of 63 provinces in Vietnam for the period 2009-2013 was gathered from the Provincial Statistical Yearbook, website of General Statistics Office of Vietnam (GSO), website of Vietnam Chamber of Commerce and Industry (VCCI), and Google Maps

A full list of our data sources was showed in Appendix 2

3.1.2 EMPLOYEE – WEIGHTED AVERAGE FIRM SIZE and NUMBER OF FIRMS

The simple average firm size produced by the ratio between total employees and total number of firms can be biased in case of a large number of small firms or a sector dominated

by a single giant firm Hence, an alternative measure of firm size is taken into account

Methodologically, the alternative method to measure firm size of this paper follows the approach of KRZ (2001) and David and Henrekson (1997) who produced employee – weighted average firm size that weights each bin by the number of employees in that bin

𝑁𝑏𝑖𝑛𝑒𝑚𝑝 is the total number of employees reported in the given bin

𝑁𝑡𝑜𝑡𝑎𝑙𝑒𝑚𝑝 is the total number of employees in the sector

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𝑁𝑏𝑖𝑛𝑓𝑖𝑟𝑚𝑠 is the number of firms in the bin

In Vietnam, the dataset gathered from the Provincial Statistical Yearbook and General Statistics Office (GSO) does not have the data of number of employees in enterprise by size of employees and types of industries, in addition there is no the consistency among provinces when they collect and group the data followed type of industries Hence, in this paper, the bin

is the types of enterprise

According to the definition of Vietnamese Laws: “Enterprises are economic units that independently keep business account and acquire its own legal status They may be set up by State Enterprise Law, Cooperative Law, Enterprise Law, Foreign Investment Law or by Agreement between the Government of Vietnam and Government of Foreign Countries There are three following types of enterprise:

State owned enterprises include following types: (1) Enterprises with 100% of state

capital operating according to enterprise law and under control of central or local governmental agencies; (2) Limited companies under management of central or local government; (3) Join stock companies with domestic capital, of which the government shares more than 50% charter capital

Non – state enterprises are enterprises set up by domestic capital The capital may be

owned by cooperative, private with 1 or individual group or the government when capital of government is equal or less than 50% of registered capital There are following types of non – state enterprises: (1) Cooperatives; (2) Private enterprises; (3) Cooperative name companies; (4) Private limited companies; (5) Joint stock companies without capital of State; (6) Joint stock companies with 50% or less than of charter capital shared by the government

Foreign direct invested enterprises are enterprises with capital directly invested by

foreigners, not separated by percent of capital shared There are following types of foreign direct invested enterprise: Enterprises with 100% of capital invested by foreigners and Joint venture enterprise between domestic investor and foreigner”

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In addition, Employees of enterprise are: “total of persons who the enterprise employs and pays wage or salary Employees of enterprise do not include: (1) Persons who receive material of the enterprise to produce goods at their home (household employees); (2) Persons who are working as apprentices sent from schools, training center for practice and enterprise does not pay salary; (3) Persons who are sent to enterprise to work by joint venture of other enterprises and the enterprise does not pay salary”

We eliminate some provinces that have no data or their data do not meet general requirements After filtering, fifty – two provinces with 260 observations are used to run regression

3.1.3 MEASURE OF INSTITUTIONS

The second major component of this study is institutional quality In Vietnam, many researchers have used the PCI as a measure of institutional quality For instance, Tran, Grafton and Kompas (2008) studied what determines growth in the number of private firms, firm investment, Vu, Le, and Vo (2009) investigated determinants of foreign direct investment, or Malesky (2007) had a paper discussed the economic growth

Fundamentally, the PCI is the collective voice of approximately 7,000 domestic private firms The responses of private entrepreneurs regarding economic governance in their provinces are gathered in a twenty - pages survey

The final index ranking Vietnam’s sixty-three provinces is combined from ten index of governance2:

sub-Entry costs: including three smaller components: the time to register or re-register

measured in days, the number of licenses have to have to start operating a firm, and evaluations of entrepreneurs to finalize the whole process

2 More detail is reported in Appendixes and annual reports from website of VCCI

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Land access and security of tenure: a component relevant to the land issue of firms –

land accessing constraints and the safeguard level when land is acquired

Transparency and access to information: according to VCCI, this component is: “a

measure of whether firms have access to the proper planning and legal documents necessary to run their businesses, whether those documents are equitably available, whether new policies and laws are communicated to firms and predictably implemented, and the business utility of the provincial Web page”

Time costs of regulatory compliance: is a component measured by the amount of

time in which firms have to spend to deal with local regulations after establish

Informal charges: the VCCI defines the informal charges are: “a measure of how

much firms pay in informal charges, how much of an obstacle those extra fees pose for their business operations, whether payment of those extra fees results in expected results or “services” and whether officials use compliance with local regulations to extract rents”

Policy Bias: this component relevant to the perceived prejudice level including some

elements such as: “the domination of state-owned enterprises (SOEs) and corporations, land access, credit access, mineral exploitation license, priority to SOEs, FDI …”

Proactivity of provincial leadership: this component measures endeavors of

provincial leader to support private sector development, or to execute policies of central government

Business support services: according to VCCI: “this is a measure of provincial

services for private sector trade promotion, provision of regulatory information to firms, business partner matchmaking, provision of industrial zones or industrial clusters, and technological services for firms” This one includes some elements such as: “number of trade fairs held by province in previous year and registered for present year, ratio of the total number of service providers to the total number of firms, firm has used business information search services, firm used private provider for above