The relationship between internationalization and manufacturing firms’ performance in vietnam the moderating effect of organizational slacks

UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLAND VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS The Relationship

UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES

HO CHI MINH CITY THE HAGUE

VIETNAM THE NETHERLAND

VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

The Relationship between Internationalization and Manufacturing Firms’ Performance in

Vietnam: The Moderating Effect of

Organizational Slacks

BY

HUYNH THI NGOC HIEN

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

HO CHI MINH CITY, Dec 2014

UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES

HO CHI MINH CITY THE HAGUE

VIETNAM THE NETHERLANDS

VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

The Relationship between Internationalization and Manufacturing Firms’ Performance in Vietnam: The

Moderating Effect of Organizational Slacks

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

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

In order to successfully complete this thesis, I received unconditional helps from many people I very appreciate the contribution of everyone involved and apologize to those I do not mention by name

Firstly, I would like to express my gratitude to my supervisor, PhD Nguyen Van Phuong His instructions as well as encouragements are the key factor of my dissertation completion and enabled me to turn my concerns into a serious academic research He was not afraid of time-consuming to hold frequent meetings and response timely to my thesis problems Moreover, he also took time to review the STATA programming and offer many flexible ways to support me in data processing step – the most challenging part in my study

Secondly, I am also grateful for PhD Nguyen Trong Hoai and PhD Tran Tien Khai because their valuable comments and suggestions for my TRD at the beginning helped me to orient and revise my research design in a proper way

Next, I also received the surprising help from PhD Truong Dang Thuy who appears to be available on email regardless day or night

Then, I want to say thanks for the moral support from my peer - Ms Vu Thi Khanh She was very patient in applying many different approaches to find the most appropriate model for her research Therefore, I have learned from her too much, both econometric knowledge and a serious attitude toward addressing the thesis issues

Finally, I wish to express my sincere thanks to my parents, my younger brother,

my relatives and my friends for their continual encouragements, love for my progress and success

As the world moves toward global expansion, the global enterprises in both developed and developing countries have been becoming the main drivers of this process Although there are many empirical studies on the actual relationship between internationalization and performance, the question is still relatively ambiguous due to controversial findings Thus, this study uses a panel sample of 45491 unlisted Vietnam manufacturing enterprises during the six-year period (2007-2012) surveyed by GSO (General Statistic Office) to investigate the impact of internationalization degree on firm performance It is widely admitted that the Vietnamese economy is mainly based

on the credit market which is relatively frail and frequently affected by the changes in the local fiscal and monetary policies Under these contexts, firm’ abundant slack resource is a miracle tool to enable the successful implementation of internationalization strategies After conducting the fixed effect analysis, the study finds a significant S-shaped relationship between degree of internationalization (DOI) and firm performance Specifically, the performance firstly decrease then increase and decline in the later stage Furthermore, the regression depicts that the higher level of slacks on both kind of high-discretion and low-discretion is, the better the firm performs Especially, the sufficient slacks contribute to enhance the relationship between internationalization and performance

ASEAN Association of Southeast Asian NationsDOI Degree of internalization

FDI Foreign direct investment

FEM Fixed effect model

REM Random effect model

FS Foreign sale

IFs Internationalized firms

OLS Ordinary Least Squares

R&D Research and Development

ROA Return on assets

US United Joint Stocks

VIF Variance Inflation Factors

TABLE OF CONTENTS

I INTRODUCTION 1

I.1 Problem Joint Stockment 1

I.2 Research objectives: 6

I.3 Research questions: 6

I.4 Research Methodology 6

I.5 Organization of the Study 7

II LITERATURE REVIEW 8

II.1 Theoretical review 8

II.1.1 Concept of Internationalization 8

II.1.2 The degree of internationalization and firm performance 11

II.1.3 Organizational slacks 16

II.2 Empirical review 19

II.2.1 Internationalization and firm performance 19

II.2.2 Organizational slacks, internationalization and firm performance23 III METHODOLOGY 28

III.1 Data and Sample 28

III.2.1 Performance 29

III.2.2 Independent variable 30

III.2.3 Organizational slacks – the moderating variables 30

III.2.4 Control variables 31

III.2.4.1 Firm size 31

III.2.4.2 Firm age 32

III.2.4.3 ICT use 32

III.2.4.4 Learning capability 33

III.2.4.5 R&D intensity 33

III.2.4.6 Ownership types 34

III.3 Analytical approach 36

IV FINDINGS 41

V CONCLUSION AND RECOMMENDATIONS 55

V.1 Main findings 55

V.2 Recommendations 55

V.3 Limitation 56

REFERENCES

LIST OF TABLES

Table 1: Summary of variables, measures and expected sign 34Table 2: Variables definition 41Table 3: Descriptive statistic and correlations 44Table 4: The comparison between the FEM models with different added variables 45Table 5: Fixed effect analysis 49Table 6: Results of OLS, fixed-effect and random-effect regression analyses on firm performance 50

LIST OF FIGURES

Figure 1: Structure of Vietnam export turnover in 2012 2Figure 2: Vietnam’s export destination has changed little in the last ten years 3Figure 3: Internationalization process 9Figure 4: Three-stage theory (S-shaped) of international expansion (Contractor et al, 2003) 13Figure 5: Role of slacks within an organization 18Figure 6: Firm’s internationalization and performance: the moderating effect of high-

Figure 7: Firm’s internationalization and performance: the moderating effect of discretion slack (Lin, Liu & Cheng, 2011) 27Figure 8: Illustration of moderating variable 37Figure 9: Model 40

low-I INTRODUCTION

I.1 Problem statement

In the early twenty-first century, the world witnessed a spectacular change that the firms from developing countries have started to play an important role in the global market (Chittoor, 2009) However, it was also admitted that most of these new internalized firms are still in the early stage of internationalization process and mainly focus on the market exploration and export activities (Aulakh, Kotabe & Teegen, 2000)

In recent years, Vietnam has also developed the important steps in the global integration by the increasing level of international sales The total export turnover in 2012 reached an impressive number of US$ 114.6 billion thanks to the sustainability of labor-intensive manufacturing industries and the dramatic rise of high-tech manufacturing industries

Especially, in 2012, the export volume of high-tech items (US$12.7 billion) such as computers, cell phones and parts, accessories, automobile components tend to gradually outperform than the key traditional export items such as garments, footwear, furniture and processed agricultural products as the figure 1 In the first quarter of 2013, the export volume continued to increase by 16% compared to the same period in 2012 (World Bank, 2013) These are the good signals for Vietnam toward our global expansion strategy

Undoubtedly, a wide range of manufacturing industries from handicraft

to high-tech have been becoming the key sectors for promoting the global

integration process in Vietnam The manufacturing industry also relates many stakeholders in the supply chain and uses inputs such as materials, tools, machines, chemical & biological methods, etc to make the final goods for consumption or sale (Porter, 1985) Therefore, this study takes into account the case of Vietnamese manufacturing firms due to their considerable contributions to Vietnam’s internationalization process in recent years.

Figure 1: Structure of Vietnam export turnover in 2012

Although there is a very brilliant picture for Vietnamese firms toward the global expansion, Aulakh, Kotabe & Teegen (2000) believed that most of newly internationalized firms from emerging world are still in the early stage

of global expansion The three-stage theory of Contractor, Kundu, & Hsu

(2003) pointed out that at the early stage, IFs suffer the instability of importing markets and arise an urgent demand to increase market knowledge

The figure 2 depicts that the export share of Vietnamese manufacturing firms tothe large markets such as Europe, United Joint Stocks, Japan, ASEANcountries is relatively stable during the past decade from 2002 to 2012 However, in fact some giants in the manufacturing industry have been accounted for a major proportion of total export volume rather than the new IFs who have little chances and inadequate financial resources to sustain their new ventures So far, the gains of internationalization, specifically the gains from export intensity, are still ambiguous for domestic IFs That is the reason why many enterprises choose to be safe in the local market without taking risks

to expand globally

Figure 2: Vietnam’s export destination has changed little in the last ten years.

It is widely accepted that internationalization occurs when the domestic enterprises get involved in the international markets (Johanson, & Vahlne, 1977) In this way, these firms will take competitive advantages from company brand identity and market expansion (Hutchinson et al., 2007) However, the internationalization process contains both benefits and costs, especially; it is a big challenge for domestic firms to deal with fierce competition, transaction cost, market volatility and cultural diversity (Eriksson, Johanson, Majkgård & Sharma, 1997)

Further, many Vietnamese enterprises must consider the tradeoff whether only operating locally or entering the international markets Especially, under the Joint Stock of Vietnam’s tightening monetary policy and relentless crises, the available financial resources for firms to internalize become too scarce to invest on global expansion

Bourgeois (1981) introduced the concept of organizational slacks referring to the availability of financial resources used for implementing internal and external changes Once the firms possess the high level of organizational slacks, they are more willing to invest on new chances, for instance, invest to expand the markets globally (Sharfman, Wolf, Chase & Tansik, 1988) Moreover, organizational slacks also directly contribute to firm performance by providing the capabilities to handle the uncertainties and sustaining the competitiveness (Tan, 2003)

Organizational slacks are divided into 2 kinds: high discretion and low discretion based on the level of flexibility for use (Sharfman, Wolf, Chase &

Tansik, 1988) High-discretion slacks refer to liquid resources such as cash and receivables that can immediately meet the financial needs Low-discretion refers to more illiquid resources such as debt and fixed assets that can be transferred to borrowing power Therefore, the relationship between internationalization and firm performance under the moderating effect of organizational slacks should be investigated thoughtfully to have a moreobvious perspective on this issue The study is also expected to raise some practical recommendations for Vietnam manufacturing firms.

In the research aspects, many previous studies have investigated the internationalization-performance relationship in various industries However, it was undeniable that the findings are very controversial and even raise more question than answers (Glaum & Oesterle, 2007) In addition, the issue mostly supported by data from developed world rather than emerging world because

of the penetration of diverse international activities from multinational corporations (Chittoor, 2009)

Also, no study researching on this issue in Vietnam was found Moreover, the controversial results from these studies continue to attract the concerns of international business community Under firm’s behavior perspective, this study aims to explore the relationship between internationalization degree and firm performance and how the availability of organizational slacks influences on the internationalization-performance relationship as in Lin, Liu & Cheng (2011)

I.2 Research objectives:

 Investigate the impact of internationalization degree on Vietnam manufacturing firms’ performances

 Estimate how organizational slacks affect the relationship between internationalization and firm performance

I.3 Research questions:

This study is expected to clarify the three main research questions as follows:

1 Does higher internalization degree lead to higher Vietnam manufacturing firms’ performances?

2 Does higher level of high-discretion slack have a positive effect on internationalization-performance relationship in Vietnam manufacturing firms?

3. Does higher level of low-discretion slack have a positive effect on internationalization-performance relationship in Vietnam manufacturing firms?

I.4 Research Methodology

This study conducts the quantitative analysis on the unbalanced panel data of 45,491 Vietnamese manufacturing firms in various manufacturing industries from 2007 to 2012 Using panel data is more reliable because the behaviors of the enterprises are observed thoughtful across a period of six

years Both fixed-effect model and random-effect model are used to test this panel data Also, the study conducts the Hausman test to check whether fixed-effect or random-effect is more appropriate.

I.5 Organization of the Study

There are totally five chapters in this paper The study starts with Chapter 1 - Introduction revealing the practical and academic problems as well

as the research objectives Chapter 2 – Literature review presents the theoretical and empirical backgrounds of the topic to form a robust scientific framework to follow throughout the research This part primarily focuses on the definition of internationalization, organizational slack resources, the relationship between internationalization and firm performance, empirical findings and how to choose the measures for variables Then, Chapter 3 –Research Methodology discuss the method, the calculations and the data to conduct the quantitative analysis based on the conceptual framework Chapter

4 – Findings and Discussions depicts the testing results and the overall discussions on these results Finally, the study ends with the Chapter 5 –Conclusion and Recommendations raising some suggestions for the policy-makers from the research perspectives

II LITERATURE REVIEW

II.1 Theoretical review

II.1.1 Concept of Internationalization

Johanson & Vahlne (1977) defined internationalization as a multi-stage process that the firms make the incremental efforts to strengthen their market involvement and gradually achieve the commitments from foreign consumers There are two incremental channels of firms’ internationalization process (Johanson, & Vahlne, 1977; Westhead et al 2001; Contractor et al, 2003) The first channel is that IFs enable firms’ products and services to penetrate the foreign markets, for example, start exporting to an individual foreign country

or establish the export channels The second channel is that IFs start to expand their operations abroad such as developing the sale subsidiaries and outsourcing their production to the favorable locations in the host countries as figure 3 (Westhead et al, 2001)

However, Aulakh et al (2000) emphasized that the export activities are the main focus of most of IFs from developing countries to address the problem of insufficient domestic market In this way, export is the best option

to develop the market nature and size under the least costly basis (Johanson, & Vahlne, 1977)

In addition, Aulakh et al (2000) also assumed that those firms almost continue to be in the early stage of internationalization process and less likely

to go further due to inadequate capacity and lack of international experiences

It seems to be true because firms from emerging economies primarily get involved in international markets by taking the comparative advantages from their production and exporting their products to other countries (Aulakh et al, 2000) Therefore, most of these emerging firms consider export as their key internationalization strategy and their export performance as performance of the entire internationalization process.

Figure 3: Internationalization process

Similar to Aulakh et al, 2000; Assaf et al (2012) also emphasized that the firms tend to start their internationalization process by exporting to similar

markets This may be due to the fact that the IFs are more confident and proactive to implement the appropriate internationalization strategies in the homologous business environments (Aulakh et al, 2000)

Further, the initial success will motivate IFs to expand the internationalization visions and strategies to reach quite different markets and customers In this way, the exporters with strong capacity and relatively stable consumption markets will consider outsourcing their production abroad in term

of FDI (Westhead et al, 2001) The shift from export to FDI is a progressive step to pursue the economies of scope and scale as well as take the advantage

of risk diversification (Assaf et al, 2012 as cited in Cave, 1971; Lessard, 1976).Regardless of which internationalization strategies the firms choose to implement, it is widely accepted that they always start with developing the market knowledge and exploration (Contractor et al, 2003) Then, the firms will make decisions whether they should export or not Undeniable, the increase of market knowledge not only stimulate or discourage firms’ decision

to internationalize; but also it is the key for success of almost IFs once they decide to participate in the global market (Westhead et al, 2001)

Indeed, the internationalization process is often implemented incrementally along with the increasing market knowledge By learning the characteristics, tastes and cultures as well as attaining the useful information of the aimed foreign markets, the firm can enable their products and services to meet a wide range of standardized requirements and accumulate the international experiences for further expansions For example, the firm can

adapt their products’ package, trend and tastes with appropriate features for the specific languages and cultures (Simai, 1983)

Another effective tool is taking advantages from the power of Information and Communication Technology (ICT), for instance, the firms can develop their user interfaces, websites based on international standards and in multi-national languages for global visitors In those ways, the increase of market knowledge enable the IFs easily introduce and sell their products or services globally (Contractor et al, 2003; Aulakh et al, 2000)

II.1.2 The degree of internationalization and firm performance

The question whether higher degree of internationalization will lead to a certain higher level of firm performance is a very controversial issue until now

It even generated more questions than answers after many decades of researching (Glauum & Oesterle, 2007) Especially, the mechanisms how the IFs gradually get involved in the global market are a very attractive for the international business community The previous empirical studies have created

a stable springboard for further researches with many established theoretical frameworks There are people on both sides have arguments either for or against the impact of internationalization

Internationalization is considered as a successful driver to expand firm’s growth and enhance competitive advantage (Hutchinson et al, 2007; Aulakh et

al, 2000) Moreover, firms are more likely to internalize under the circumstance of insufficient domestic market In this way, this process can help

them expand their market size without too costly expenditures and also take many advantages from global expansion such as economies of scale, the applicable practice of price discrimination strategy and access to cheaper resources (Contractor et al, 2003)

On the other hand, many people argue that internationalization triggersthe negative impacts on firm performance Eriksson et al (1997) pointed out many disadvantages that the IFs must face once being global such as fierce competition, high transaction cost, market volatility and cultural diversity Up

to this point, it is admitted that even though the market size of IFs may become double, triple or even grow exponentially, however, the increasing number of strong competitors as well as a wide range of adjusted standards and restrictions may trigger a real burden rather than a good chance for IFs in short run (Bobillo et al, 2010)

In a more comprehensive view, Contractor et al (2003) fully described the internationalization process with a new three-stage theory of internationalization including three separating stages with different impacts on performance

Figure 4: Three-stage theory (S-shaped) of international expansion

(Contractor et al, 2003)

The first stage is often called as the early stage The main purpose of this stage is launching the initial market exploration to support export activities (Johanson, & Vahlne, 1977) In this way, the new internationalized firm starts

to experience the familiar foreign markets by exploring the specific characteristics such as cultures, languages, habits, tastes, etc first and then export their products and services to those markets Undeniable, at this stage, the firms must confront many legal and market barriers as well as payments for learning cost to obtain the entry and market information (Johanson, & Vahlne, 1977).Those costs are known as “the liability of foreignness”(Contractor et al, 2003)

Moreover, it seems to be very risky for firms due to the high level of uncertainties and insufficient economies of scale at this initial stage (Westhead

et al, 2001) However, Johanson, & Vahlne (1977) emphasized that the firms are willing to spend their budget in this stage to acquire market knowledge and international experiences in order to integrate and successfully increase foreign commitments Therefore, at the early stage, internationalization may negatively affect the firm performance Nevertheless, this effect may vary among firms depending on the financial capacity, human capital, management know-how and the flexibility of each enterprise when joining in the global market (Johanson & Vahlne, 1990; Westhead et al, 2001; Contractor et al, 2003)

In the second stage or the mid-stage, IFs is believed to have initial gains from internationalization process Once the IFs successfully move to the second stage, they gradually absorb the increasing gains from global expansion The cost of learning is now offset by the greater revenues (Contractor et al, 2003) At the mid-stage, they now obtain adequate market knowledge and know how to implement their exporting strategies more efficiently

Up to this point, most of firms reach the economies of scale and can apply price discrimination strategy for different markets (Hutchinson et al, 2007) After initial success, the firms will be more ambitious to move to further steps of internationalization process Commonly, they start to expand their operation abroad in form of FDI or outsourcing because they now have access to cheaper local resources such as material inputs and labor (Assaf et al,

2012) It is obvious that internationalization offers a good chance to seek new potential markets and expand their growth Thus, in stage 2, internationalization is believed to lead to higher firm performance.

In the third stage or “beyond an optimal threshold” stage, it is admitted that not all expansion now is beneficial because the firms may lose their control over a too-broad system over many countries and regions (Contractor

et al, 2003) This may trigger a cost burden for firms rather than a new opportunity (Assaf et al, 2012 as cited in Ramaswamy, 1992; Siddharthan & Lall, 1982) Once the firms reach the optimal level of internationalization process, any more international expansion appears to be not efficient in term of opportunity cost

In the previous stages, the firms aimed to expand to the profitably familiar markets with the convenient conditions of geographical distance, customers’ tastes, resources, etc Johanson and Vahlne (1990) believe that the more the markets diversifies, the more international involvement the firms can achieve while Assaf et al (2012) argued that the governance and transaction costs become too high along with the market diversification Moreover, the firms are forced to pay for timely information as a good way to sustain their competition in different foreign markets In addition, the operation in many countries with diversified cultures is a costly and complex process Therefore,

in stage 3, the firm performance is assumed to be diminished when international expansion goes beyond the optimal level

Based on the theories above, domestic firm decides to internalize because this process may bring them many great advantages and especially help them

to overcome the insufficient domestic market Be global is the best way to sustain firm’s growth and enhance performance at lower cost basis in the long run However, these benefits may be overwhelmed by a wide range of barriers and cost such as learning cost, transaction and governance cost as the internationalization degree becomes higher and higher Thus, the first hypothesis is as below

 Hypothesis 1: Internationalization has an S-shaped relationship with Vietnam manufacturing firms’ performance.

(An S-shaped relationship means that the performance decreases in the early stage, then increases until the optimal point and declines in later stageunder the incremental degree of internationalization process)

II.1.3 Organizational slacks

Bourgeois (1981) defined slacks as a strategic tool that is used to deal with the firms’ uncertainties Besides, Sharfman et al (1988) by describing the antecedents of organizational slacks pointed out that the slacks come from the surplus of financial resources out of the needed amount of resources to produce

a given output

Bourgeois (1981) also emphasized that an actual or potential resources are considered as slacks when they are targeted to relieve internal and external pressures during firm’s operation (Bourgeois, 1981, as cited in March, 1963)

This concept is very operational because it not only indicates the objective of slack expenditures but also illustrates how they are allocated among the organization resources Specifically, slacks can be used to adapt the sudden change in the internal or external environment; for example, meet urgent situations or invest on new chances such as expanding a new market.

Bourgeois (1981) discussed thoughtfully the four main roles of slacks (as figure 5) as the best way to explain why he considered organizational slacks as a miracle to successfully initiate and contribute to internationalization process and firm performance Slacks are firstly considered as a buffer to experiment the potential alternatives and effectively motivate the labor force within the organization, for example, income and bonus so as to retain and encourage the organizational actors’ contributions (Bourgeois, 1981 as cited in Cyert & March, 1963)

Secondly, slacks serve as an effective tool to deal with firm’s contradictions (Bourgeios, 1981, as cited in Pondy, 1967) For instance, sufficient slacks help organizations facilitate the making-decision process by offering more choices to reach the common goal Thirdly, Bourgeios also emphasized the theory of Thompson (1967) that the firms with abundant slacks have more capacity and incentives to conduct R&D activities as well as invest

on the updated techniques and technology toward sustaining the competitive advantage

Finally, under the perspective of external changes, Bourgeios (1981) organizational slacks act as the facilitators to turn the strategic plans into

reality Undeniable, this surplus amount allows firms to implement the external strategic changes, for instance, launching new products, starting new ventures, entering new markets as well as providing funds for innovations (Bourgeios, 1981; as cited in Hambrick & Snow, 1977).

Figure 5: Role of slacks within an organization

Organizational slacks based on their flexibility for use and where they come from, divided into two kinds - high-discretion slack and low-discretion slack (Sharfman et al, 1988; Daniel et al, 2004)

High-discretion slack implies the financial resources which are quite liquid such as cashes and receivables Higher level of high-discretion slack means firm has higher actual capacity to meet instant financial requirements It

is undeniable that higher level of high-discretion slack will offer more available resource to encourage the top management decisions to internalize

Besides, it provides a good fund to deal with uncertainties and obtain market knowledge during internationalization process Therefore, we come up with the second hypothesis as below.

 Hypothesis 2: Higher level of high discretion slack enhances the relationship between internationalization and performance.

Low-discretion slack implies more illiquid resources such as debt and unused fixed assets Higher level of low-discretion slack means firm has more potential slacks and greater borrowing power to have access to the funds from financial market Similarly to high-discretion slacks, higher level of low-discretion slacks is also a good signal for firms to internalize Hence, the third hypothesis is:

 Hypothesis 3: Higher level of low discretion slack enhances the relationship between internationalization and performance.

II.2 Empirical review

II.2.1 Internationalization and firm performance

The studies on global expansion have used various methodologies, variables, measurements and have found the controversial results Furthermore, they mainly focus on the common questions whether internationalizationstimulates or discourages the performances of IFs However, this appears to raise even more questions because these studies did not take account into the

existence of moderating effects which can have both direct and indirect influences on DOI and firm performance

In recent time, some scholars have used various moderating factors as a effective tool to fully investigate this relationship by different perspectives, for example, internal and external competitive advantages (Bobillo et al, 2010), organizational slacks and attainment discrepancy under firm’s behavior perspective (Lin, Liu & Cheng, 2011)

As most of initial studies on multinational corporations, Riahi-Belkaoui (1998) researched on how internationalization affect to the performance of 100 American manufacturing and services firms from 1987 to 1993 He used the piecewise linear regression model in order to account for the variances in the slope of internationalization for each DOI certain thresholds DOI was measured by the ratio of foreign sale to total sale and divided into three levels; specifically, DOI1, DOI2, DOI3 stand for the ratio ranging from 0-14%, 14-47% and above 47%, respectively Besides, this relationship was controlled by firm size (logarithm of assets) as the equation below:

PERFORMANCE = a1 + a2DOI1i+ a3DOI2i+ a4DOI3i+a51Ai+ui

This study found an S-shaped relationship between DOI and firm performance which is consistent to the theory of Contractor et al, 2003 Whereby, the firm performance falls in the first range then rises in the secondrange and finally diminishes in the third range Up to this point, the study implied that the theory “more multi-nationality is better” is no longer a valid

theory and the firms should determine their optimum threshold of their internationalization process.

Similar to Riahi-Belkaoui (1998), Bobillo et al (2010) also found an shaped relationship between international diversification and firm performance under the moderating effects of internal and external capabilities The Worldscope database provides more than 1500 manufacturing firms’ financial statements from 1991-2001 in five various EU to form a panel data of more than 15,000 observations So, the fixed effect analysis in this case was the most appropriate model after running the Hausman test DOI (measured as the ratio

S-of foreign sale to total sale) and other control variables such as size (measured

by logarithm of total employees) and ownership (measured by insiders’ shareholdings) were contained in the regression model Moreover, the study attempted to capture the effects of internationalization on performance acrossthree different stages by using quadratic and cubic regression models as below ROAit= β0+ β1DOIit+ β2DOIit2+ β3DOIit3+ β4SIZEit+ β5OWNERSHIPit

+ ηi+ εit

In their conclusion, Bobillo et al (2010) found that the firm performance varies in different directions as the internationalization degree moves upward The initially negative impact on performance may be caused by higher transaction cost, the burden on more complicated governance structure, the urgent demand for adopting market knowledge and technology However, the downward or upward trend of performance toward DOI also depends on internal and external factors at both firm level and country level In the

implications, they believed that firm can only succeed in their internationalization strategy once they can take advantages of their own capabilities which are in favor of country’s institutional factors such as financial system and labor market

Pangarkar (2008) measured the effects of degree of internationalization

on the performance of listed SMEs in Singapore in 2004 using the OLS method He used the lagged value of internationalization degree in 2013 as predictor to explain for the firm performance resulted in 2004 Degree of internationalization is primarily by the sale expansion over the foreign market measured as the ratio of foreign sale to total sale The sample includes 94 completed questionnaires following the likert scale and surveyed in the mid-

2005 The control variables such as firm size, capabilities, host market attractiveness are added to the regression equation as follow:

PERFORMANCET = β0 + β1DOIT-1 + β2SIZEit + β3CAPABILITIES +

β4HOST_MARKET_ATTRACTIVENESS + εit

Finally, he found a linear positive relationship between DOI and firm performance The study also discovered that Singapore firms as well as some firms from developing countries such as Vietnam, Thailand and India has more incentives to get involved in the international markets because the insufficient local markets However, the problem is how they can cooperate with each other to conquer their common barriers and develop their own capabilities Under the perspective of firm behavior, Lin, Liu & Cheng (2011)

in Taiwan for the period from 2000 to 2005 They primarily focused on the moderating effects of organizational slacks and attainment discrepancy Also, they added firm size, firm age, insider shareholding, diversifications and R&D intensity as the control variables.

Firm performance = β0+ β 1 Internationalization + β2firm_size +

β3firm_age + β4Insider_Shareholding+ β5Diversification + β6R&D_ratio +

II.2.2 Organizational slacks, internationalization and firm

performance

Tan (2003) conducted the empirical studies on the longitudinal data set

of more than 17,000 large and medium state-owned enterprises in China from

1995 to 1996 to investigate the contribution of slacks on IF’s performance In order to test the causal relationship between slack and internationalization performance, he applied the lagged model which lagged ROA is used as predictor By reviewing many previous researches on how to classify the types

of slacks depending on the research purposes, capital depreciation funds and retained earnings are selected to reflex two major sources of slacks among Chinese internationalizing firms

The performance was measured by ROA which is also the performance proxy in the study of Lin, Liu & Cheng in 2011 Besides, firm size and firm age were also added as control variables Finally, he found that firm performance is improved by higher level of slacks In order to explain for this,

he discussed that once IFs possess abundant slacks, they are more willing to invest on higher-risk markets which are expected to bring higher returns Moreover, by higher level of slack resources, they also have more capabilities

to manage the risks and maintain their competitiveness in the long-run survival (Tan, 2003)

So as to investigate this issue more deeply and find out the most common trend of the relationship between slack and internationalization performance, Daniel et al (2004) conducted the meta-analysis on 80 samples from 66 studies from 1991 to 2000 From these previous empirical studies, slacks were differently classified, but the most common classification of slacks includes available, recoverable and potential slacks

In addition, there are also controversial findings on whether we should consider slacks as a resource– a positive impact on performance (Cyert and March, 1963; Thompson, 1967) or inefficiency of resource allocation – a negative impact on performance (Jensen, 1986; March & Simon, 1958) and the recent finding is that different types of slacks have various impacts on

performance By calculating the mean correlation and variance of the combined studies, Daniel et al (2004) used them for testing the relationship between slack and performance In their findings, Daniel et al (2004) emphasized the contribution of organizational slacks on firm performance by dealing with both internal and external obstacles.

Lin, Liu & Cheng (2011) attempted to discover the moderating role of organizational slacks on firm’s internationalization performance Under the perspective of firm behavior, the research defined slack resources based on the flexibility for use and used the financial indicators to estimate (as adopted in George, 2005) The proxies for these two types of slacks – high-discretion slack and low-discretion slack are calculated as current assets to current liabilities ratio and equity to debt ratio, respectively

This work appeared to be the extended work of their study in 2009 when they had already researched how organizational slacks affect to the degree of internationalization for the same sample and the same defined types of organizational slacks By using the general linear squares (GLS) random-effect model, Lin, Liu & Cheng (2009) found a U-shaped relationship between high-discretion slack and DOI while low-discretion slacks play as a facilitator for firms to internalize all of the time

However, Lin, Liu & Cheng (2011) not only considered organizational slacks as their direct contributions to firm performance or DOI, but also their moderating effect on enhancing the relationship between internationalization degree and firm performance Also, there is a wide range of control variables

were added to the model such as firm size, firm age, insider shareholding, degree of diversification and R&D intensity.

Despites using different methodology and measures, Lin, Liu & Cheng (2011) also had the same finding with Tan (2003) and Daniel et al (2004) that the relationship between DOI and performance was positive or less negative for IFs which possess sufficient slacks Even though DOI negatively associated with firm performance, slacks were proved to enhance the relationship between DOI and performance In other words, the possession of higher high level of slacks would lead to higher internationalization degree and firm performance (as figure 6 and figure 7)

The finding reinforced for the theory Bourgeios (1981) that the abundant resources of slacks in both kinds of high-discretion and low-discretion will encourage the top management to launch new chances, specifically, enter new foreign markets in this case Moreover, the organizational slack is also one of important sources of the performance improvement due to its capability to support the firm overcome the bad times

as well as the uncertainties during international expansion process

Figure 6: Firm’s internationalization and performance: the moderating

effect of high-discretion slack (Lin, Liu & Cheng, 2011)

Figure 7: Firm’s internationalization and performance: the moderating

effect of low-discretion slack (Lin, Liu & Cheng, 2011)

III METHODOLOGY

III.1 Data and Sample

The study uses the enterprises data set of Vietnamese enterprises obtained surveyed by General Statistics Office (GSO) throughout the six-year period 2007 – 2012 The survey on Vietnamese enterprises is conducted each year to collect the data from all existing firms and agencies The observations

of unlisted firms provide an adequate cross-sectional data operating in various industries such as food processing, textiles & garments, stationery, construction materials, high-tech, water and electricity supply, etc

The investigated enterprise data in 2011 and 2012 recorded each indicator twice per year; once at the beginning of the year (1/1) and another at the end of the year (31/12) In this case, the study used the last indicators (31/12) for estimations Moreover, the data for export volume was not available during the period of 2007-2010, so it is relatively estimated by dividing the export-tax expenses for 10% export tax

Moreover, the study only uses the data of the Vietnam manufacturing firms as the initial research objective Thus, the 100% foreign-invested companies and cooperatives (lhdn = 12 and lhdn =6, respectively) were excluded from the testing model In addition, in order to obtain the sample from the whole population, the appropriate Vietnamese manufacturing firms were filtered carefully The manufacturing firms with the “nganh_kd” code from 10*-33* are kept for the testing model Then, the filtered data is removed

for detected duplicates based on id (madn + macs + nganh_kd + year) and year basis

The outliers are also eliminated to improve the reliability of the coefficients The panel data is initially balanced in term of id and years However, after removing duplicates and eliminating outliers, the processed data becomes unbalanced in term of year Thus, the final sample includes

59770 observations which belong to 45491 unlisted manufacturing firms over the six-year period from 2007 to 2012

III.2 Variables and measures

III.2.1 Performance

There are many measures of firm performance from the empirical studies such as cost efficiency index (Assaf, Josiassen, Ratchford & Barros, 2012), the composite index of ROA and ROS (Pangarkar, 2008), the composite index of accounting value (ROA) and market value (EPS) (Tsai, 2014) However, in this study, performance is measured by return on assets (ROA) as

a very popular proxy for performance of many empirical studies Belkaoui, 1998; Lin, Liu & Cheng, 2011; Lin & Liu, 2012; Hsu, Chen & Cheng, 2013; Tan, 2003) Although it is a single measure, Hsu, Chen & Cheng (2013) emphasized that ROA is a very appropriate indicator to show how efficient the internationalization strategy performs and contributes to the economies of scope and scale (as cited in Kim, Hwang, & Burgers, 1989)

(Riahi-III.2.2 Independent variable

Lin, Liu & Cheng (2011) used the composite value of three indicators of internationalization including (1) internationalization performance measured

by the ratio of foreign sales to total sales, (2) internationalization structure measured by the ratio of foreign assets to total assets and (3) internationalization geographic dispersion as number of countries that firm has

a subsidiaries In their study, Lin, Liu, Cheng analyzed the case of Taiwanese high-tech firms who outsourced their production abroad and invested on firms

in the other countries in kind of FDI, thus the composite indicator above is quite adequate and appropriate

However, the case of Vietnam manufacturing firms is quite different because the firms here almost focus on export activities via commercial agents Also, the data to estimate internationalization structure and dispersion is unavailable Thus, in order to measure internationalization degree of Vietnamese IFs, this study only uses the single measure of foreign sale to total sale (FS/TS) as many previous empirical studies (Tsai, 2013, Riahi-Bekaoui, 1998; Chiao, Yang & Yu, 2006, Bobillo et al, 2010)

III.2.3 Organizational slacks – the moderating variables

Lin, Liu & Cheng (2011) measured high-discretion slack as the ratio of current assets to current liabilities and low-discretion slacks as the equity to debt ratio This study adopts these proxies to estimate because they are available in the data set and also reflect the idle firm resources which are