An inquiry into the development of SMEs in Vietnam: The roles of human capital and social capital

SMEs contribute greatly to GDP and job creation in Vietnam. Studies of what factors are important to the development of SMEs in Vietnam are, however, scarce. Particularly, there has been little rigorous research focusing on the roles of human and social capital of the owners. This study reveals that education, knowledge, and social networks of the owners are essential for innovations in management and performance of the SMEs in Vietnam.

1 Introduction

In line with the country’s economic reform and

growth, the past 25 years from “đổi mới”

(Re-newal) have seen a dramatic development of

SMEs in Vietnam As an important part of the

country’s development policy, SMEs have the vital

roles to play in terms of GDP contribution, job

cre-ation, and poverty reduction

The Decree 56/2009/Nđ-CP categorizes SMEs

as very small, small, and medium enterprises

ac-cording to their employment and capital size In

fact, the promulgation of the 1999 Companies Law

created a breakthrough in development of the

pri-vate sector Since then, there has been an enor-mous increase in the number of the enterprises in all sectors, and SMEs accounted for 97% of the total number of enterprises of all types in 2008 (Table 1) According to this table, the trading and service sector attracts the best part of SMEs in Vietnam, followed by the manufacturing and con-struction sector

During the past 10 years, SMEs have been con-tributing significantly to the Vietnam economy

They accounted for 40% of the GDP (Vietnam Business News, 2010); 56% of the total investment and and 35% of export value (GSO, 2009) SMEs

SMEs contribute greatly to GDP and job creation in Vietnam Studies of what factors

are important to the development of SMEs in Vietnam are, however, scarce Particularly,

there has been little rigorous research focusing on the roles of human and social capital

of the owners This study reveals that education, knowledge, and social networks of the

owners are essential for innovations in management and performance of the SMEs in

Vietnam.

Keywords: SMEs, human capital, social capital, firm performance, determinants

Number of SMEs / total number of enterprises (%) 91.9 94.8 97.1

Average number of employees per enterprise 26.09 28.06 23.27

Distribution of SMEs by sectors (%)

Table 1: SME development in Vietnam

Source: SME Development Bureau, MPI, December 2009

created jobs for 67% of the total labor force and

the number of workers in SMEs rose by 4.5 times

during the period 2000 – 2008, therefore, they

play a key role in poverty reduction in Vietnam

A question arises as to what determines the

de-velopment of SMEs The rest of the paper

at-tempts to find an answer to this question and

comprises: (i) Section 2 that presents a review of

literature on determinants of SME development

and empirical results of the analysis of SMEs in

Vietnam; and (ii) Section 3 that offers a

conclu-sion

2 Determinants of SME development: human

capital and social capital

a The roles of human and social capital

in the development of SMEs:

There are a range of determinants of SMEs

de-velopment To the extent of this study, the focus

will be on human and social capital Human

capi-tal, of which the level of formal education or the

number of schooling years are often proxies, is

widely accepted as the key factor that determines

firm performance Many researchers emphasize

that formal education is the most important

com-ponent of human capital (Becker, 1962; Foster,

1987; and Schultz, 1993) However, others such as

Arrow (1962), Howell and Wolff (1991), Young

(1992), Madison et al (2003), and Hackler et al

(2008) argue that human capital should be divided

into formal education (general or basic knowledge)

and specific education such as “learning-by-doing”

and on-the-job training The latter understanding

of human capital is often more appropriate for

analysis of SMEs, especially in developing

coun-tries Despite differences in understanding human

capital, all of the previous studies find a strong

re-lationship between human capital and firm

per-formance Welch (1970) argues that increased

education may enhance a manager’s ability to

ac-quire and decode information about costs

Simi-larly, Fluitman and Ondin (1991) find that the

entrepreneurs who have attended school longer

tend to produce better performance Focusing on

technological innovation, Nelson et al (1966)

point out that the more educated a manager is, the

quicker he/she will be to introduce new techniques

of production and the earlier he/she will be to

adopt productive innovations because of his/her

better ability to understand and evaluate the

in-formation about new products and processes There have been, however, few rigorous studies about the role of human capital, especially of the owners, in development of SMEs in Vietnam We, therefore, advance the following hypotheses:

Hypothesis h1a: Human capital of the owners

has positive impacts on multifaceted innovations

of the SMEs

Hypothesis h1b: Human capital of the owners

contributes positively to the performance of SMEs Apart from human capital, social capital is also recognized as an important factor Talking about social capital, it is far from judicious when not mentioning the two most well known theorists, namely James Coleman and Robert D Putnam, who have created a breakthrough in social capital theory Coleman (1988) argues that social capital comes through changes in the relations among persons that facilitate productive activity Social capital is similar to but less tangible than physical and human capital Meanwhile, Putnam (1995) in-dicates that the central premise of social capital

is that social networks have value Social capital refers to the collective value of all "social net-works" and the inclinations that arise from these networks to do things for each other He also dis-tinguishes between informal and formal social net-works Formal networks include ties to voluntary associations such as trade associations and the like, while informal networks include ties held be-tween family members, friends and neighbors In-deed, many studies have attempted to examine the effects of social capital on firm performance Lech-ner et al (2005) find the important role of rela-tionships with direct competitors on firm development in years after foundation Johnson et

al (2003) in their investigation of enterprises in Columbia, stress that social capital, as measured

by the number of relationships that a firm main-tains, which strongly depends on its owner’s net-works, contributes positively and significantly to its economic performance, as measured by revenue per worker Besides, a number of other studies on social capital such as Akoten et al (2006), Nadvi (1999), Vu et al (2010) agree on the importance

of social capital to enterprise performance There-fore, we would like to advance the following hy-potheses:

Hypothesis h2a: Social capital has a positive

relationship with innovations of the SMEs

Hypothesis h2b: Social capital is a positive

factor that determines performance of the SMEs

b The case of SMEs in Vietnam:

In this study, we use the panel data extracted

from the surveys of SMEs in Vietnam in 2004,

2006, and 2008 The surveys were carried out by

Institute of Labour Studies and Social Affairs

(ILSSA) under the Ministry of Labour, War

In-valids and Social Affairs in collaboration with

De-partment of Economics, University of Copenhagen

with funding from DANIDA Characteristics of the

enterprises and their owners are shown in Tables

2 and 3 According to Table 2, the average number

of employees in SMEs is smaller than that in

Table 1 Although the number of employees

slightly decreased, added value and profit of the

SMEs increased remarkably in 2008 In addition,

the percentage of enterprises that have new

prod-ucts or new production process has been

signifi-cantly reduced, suggesting that such innovations

are becoming more difficult for the enterprises

Table 3 presents characteristics of the enterprise

owners In this table, it is worth noting that over

time more owners complete higher education, i.e

college and university study, suggesting that

edu-cation becomes increasingly important There is

not much change other than the said ones in

char-acteristics of the owners

In order to test the hypotheses advanced in the

previous section, we estimated the determinants

of innovations and performance of the enterprises

We expect to empirically show that human capital

and social capital contribute to multifaceted

inno-vations and such innoinno-vations determine

perform-ance of the enterprises Such estimation strategy requires instruments because innovations are en-dogenous in the performance functions Also, vari-ables indicating social capital including “number

of people the owners often have contact with” and

“whether the owner is a member of any associa-tion” are endogenous Therefore, the availability

of instruments is the key to the perfect estimation scheme

Unfortunately, we were not able to find good instruments in the data set We, thus, decided to use another method as the second best choice

First of all, we conducted first stage regression to estimate the determinants of innovations and per-formance of the enterprises We also estimated the determinants of social capital using the same set of explanatory variables, which include human capital If we find that those regressions are struc-turally similar, we may conclude that human cap-ital and social capcap-ital contribute to innovations and performance of the enterprises We may also infer that innovations are important to good per-formance of the enterprises Secondly, we tried to estimate the structural equations using Fixed Ef-fects models Even though these models cannot solve the endogeneity problem, they help to reduce the inefficiency in the OLS models when we in-clude social capital and innovations in the per-formance estimation functions

In summary, in the first stage, we estimated the determinants of: (1) performance of the enter-prises measured by added value, gross profit, and labor productivity ; (2) innovation in production of the enterprises measured by the application of

Business strategy dummies

Table 2: Performance of SMEs in Vietnam

Source: Authors’ calculation from the data set

power machines, introduction of new products, and

introduction of new production process; (3)

inno-vation in marketing measured by the use of

adver-tisement and the registration of the enterprises;

and (4) the social capital of the enterprises

meas-ured by the size of the networks in which the

en-terprises are operating Furthermore, we

regressed performance of the enterprises on the

social capital and innovations using Fixed Effects

models

The first-step regression function of the

esti-mations mentioned above is as follows:

PERINSOit = b0 + b1GEDUCi + b2PEDUCi +

b0POCCUi + b0KNOWi + b0Xit+ b0PROVi + b0t +

eit

in which:

i means observation i, and t means time period, which is 2004, 2006, or 2008;

PERINSOitis can be either enterprise perform-ance, enterprises innovation, or social capital of the enterprises;

GEDUCi is a set of dummy variables for the highest general education that the enterprise own-ers have acquired, which takes values of 1 if the owner completed either senior secondary school, junior secondary school, or primary school; or has

General education (%)

Professional education (%)

Knowledge about laws *

Social capital

Table 3: Basic characteristics of the owners of SMEs

Note: (*): Owners were asked to self mark their knowledge about laws, scoring from 0=no knowledge to 4= very good (**): Contacts with other firms that produce the same product (same ISIC code) at least once every 3 months, which the owner finds useful for his/her business operations

(***): Contacts with other firms that produce different products (different ISIC code)

Source: Authors’ calculation from the data set

not completed primary school but spent at least

several years of schooling and takes values of 0 in

case of having not attended any school yet;

PEDUCi is a set of dummy variables for the

highest professional education that the enterprise

owners have acquired, which takes values of 1 if

the owner has obtained either elementary worker,

technical worker without certificate, technical

worker with certificate, or

college/university/post-graduate degree and take values of 0 if none of

these mentioned above is obtained;

POCCUi is a set of dummy variables for the

previous occupation of the enterprise owners,

which takes values of 1 if the owner used to be a

manager, highly educated professional worker,

medium educated professional worker, office and

customer service worker, service/sales/security

worker, agricultural worker, production worker,

operator/installation worker, or military worker

and takes values of 0 otherwise;

KNOWi is a set of dummy variables for the

knowledge about different laws that the

enter-prises owners have mastered, which takes values

of 1 if the owner has knowledge about either

Com-panies Law, Labor Code, Customs Law, Insurance

Law, Tax Law, Environmental Law, Land Law, or

Investment Law and takes values of 0 otherwise;

Xitis a set of variables of other characteristics

of the enterprises and the owners including

owner’s age, owner’s gender, owner’s ethnicity;

three dummy variables concerning the owner’s

so-cical background (war veteran or cadre), number

of adults in owner’s household, enterprise’s

oper-ation years; a dummy variable for enterprise’s

business sector, which takes value of 1 if

manu-facturing and 0 otherwise; and two dummy

vari-ables for the infrastructure of the enterprise’s

location, which take values of 1 if the enterprise

has good access to either road or port and 0

oth-erwise;

PROVi is a set of dummy variables that takes

values of 1 if the enterprises are located in either

Hà Nội, Phú Thọ, Hà Tây, Hải Phòng, Nghệ An,

Quảng Nam, Khánh Hòa, Lâm đồng, HCMC and

takes values of 0 if in Long An

Tables 4 to 7 present the first stage

regres-sions The same set of explanatory variables

con-sists of five groups: (1) variables indicating human

capital possessed by enterprise owners including

dummies for general education of the owners,

dummies for professional education of the owners, dummies for previous occupation of the owners, owner’s knowledge about different laws; (2) vari-ables indicating other characteristics of the own-ers and their households such as age, gender, ethnicity, number of adults in the households; (3) variables indicating characteristics of the enter-prises including operation years and business sec-tor; (4) dummy variables indicating infrastructure conditions including access to road and port; and (5) nine dummy variables for provinces where the enterprises are located and two year dummy vari-ables We use OLS estimations in Tables 6 and 7 and Logit estimations in Tables 4 and 5

Table 4 shows that general education of the owner is important to his innovation in production management, especially for the development of new products The positive and significant coeffi-cients of professional education variables in this table suggest that professional education of the owners contributes greatly to innovations in man-agement including application of power machines, development of new products, and application of new production process In addition, knowledge about different types of laws in this table also has positive and significant effects on innovations in the SMEs These findings support our Hypothesis h1a about the role of human capital in innovations

in the SMEs in Vietnam Moreover, the coeffi-cients of the infrastructure variables are generally positive and highly significant in Table 4, suggest-ing that good infrastructure facilitates innovations

of the SMEs in Vietnam It is interesting that the variables we are interested in generally have the same signs and significance in other regressions

in Tables 5, 6, and 7

The structural similarity of the regressions in Tables 4 to 7 may suggest that human capital and social capital are important determinants of the enterprise innovations and performance We, how-ever, would like to directly estimate the effects of social capital and innovations by including two groups of endogenous variables, which are social capital and various kinds of innovations, and ap-plying Fixed Effects models in the regressions of enterprise performance Table 5 shows that the owners who completed university or post-graduate study and those who have knowledge of Compa-nies Law perform better than others In addition, social capital measured by the number of contacts

with people in the same industry and with people

in other industries contributes to greater

opera-tion size measured by both value added and gross

profit of the enterprises Being a member of an

as-sociation is, however, not important to

perform-ance of the enterprises as the coefficients of the

association dummy are positive but not

statisti-cally significant in all three regressions in this

table It is reasonable and consistent with other

studies about the inefficiency of the associations

in Vietnam These findings about the role of human and social capital support our Hypotheses h1a, h1b, h2a, and h2b Moreover, the variables indicating innovations in the enterprises are gen-erally positive and significant This finding sug-gests that innovations in the enterprises are important to their better performance

Using power machines (=1 if yes; =0 if no) (=1 if yes; =0 if no)New product New production process (=1 if yes; =0 if no) General education (Yes=1; No education=0)

Professional education (Yes=1; Unskilled=0)

Previous occupation (Yes=1; Unskilled worker =0)

Knowledge about laws (Yes=1; No=0)

Age of the owner 0.01 (-1.14) -0.02*** (-4.07) -0.02*** (-6.25) Gender of the owner 0.33*** (4.04) 0.35*** (4.01) 0.19*** (3.03)

Table 4: Determinants of production management of SMEs in Vietnam

Owner is a war veteran (Yes=1; No=0) -0.19 (-1.39) 0.14 (0.92) 0.20* (1.84)

Owner used to be a cadre (Y=1;N=0) -0.31** (-1.97) 0.18 (1.11) 0.09 (0.70)

Owner ethnicity (Kinh=1; Others=0) -0.26 (-1.48) 0.11 (0.67) 0.22* (1.84)

No of adults (15-60) in owner's household 0.01 (0.45) -0.04* (-1.69) -0.01 (-0.07)

Operation years of enterprise -0.01*** (-3.53) 0.01 (0.07) -0.01 (-4.08)

Enterprise sector (Manufacturing=1; Others=0) -0.10 (-0.96) 0.44*** (2.82) 0.88*** (12.26)

Infrastructure (Yes=1; No=0)

Numbers in parentheses are t-statistics based on heteroskedasticity-robust standard errors

*, **, and *** indicate the significance level at 10%, 5%, and 1%, respectively.

Registration Advertisement

General education (Yes=1; No education=0)

Professional education (Yes=1; Unskilled=0)

Previous occupation (Yes=1; Unskilled worker=0)

Knowledge about laws (Yes=1; No=0)

Table 5: Determinants of advertisement and formality of SMEs in Vietnam

Labor Code 0.01 (0.08) 0.19** (2.33)

Owner is a war veteran (Yes=1; No=0) 0.06 (0.39) -0.08 (-0.41) Owner used to be a cadre (Y=1;N=0) -0.32** (-2.01) -0.20 (-0.93) Owner ethnicity (Kinh=1; Others=0) -0.24 (-1.42) -0.10 (-0.50)

No of adults (15-60) in owner's household 0.06** (2.36) -0.01 (-0.29) Operation years of enterprise -0.01*** (-3.11) -0.01*** (-2.17) Enterprise sector (Manufacturing=1; Others=0) 0.35*** (3.92) -0.04 (-0.29) Infrastructure (Yes=1; No=0)

Numbers in parentheses are t-statistics based on heteroskedasticity-robust standard errors

*, **, and *** indicate the significance level at 10%, 5%, and 1%, respectively.

Contacts with the same business Contacts with other businesses association Member of

General education (Yes=1; No education=0)

Professional education (Yes=1; Unskilled=0)

Technical worker without

Technical worker with certificate 0.09** (2.02) 0.06 (1.29) 0.04*** (2.89)

College/university/post-graduate 0.06 (1.56) 0.10** (2.47) 0.04*** (3.26) Previous occupation (Yes=1; Unskilled worker=0)

Table 6: Determinants of social capital

Highly educated professional

Medium educated professional

Office and customer service

Service, sales, and security

Operator and installation worker -0.09 (-1.60) -0.13** (-2.20) -0.03*** (-2.59)

Knowledge about laws (Yes=1; No=0)

Owner is a war veteran

Owner used to be a cadre (Y=1;N=0) 0.01 (0.09) -0.05 (-0.87) 0.06*** (3.11)

Owner ethnicity (Kinh=1; Others=0) 0.01 (0.21) -0.14** (-2.48) 0.01 (-0.06)

No of adults (15-60) in owner's

Operation years of enterprise 0.01*** (4.00) -0.01*** (-3.69) 0.01*** (3.47)

Enterprise sector

(Manufacturing=1; Others=0) 0.03 (0.95) -0.21*** (-6.08) 0.03*** (3.00)

Infrastructure (Yes=1; No=0)

Main road leading to enterprise 0.19 (6.60) 0.24*** (6.94) 0.03*** (2.95)

Numbers in parentheses are t-statistics based on heteroskedasticity-robust standard errors

*, **, and *** indicate the significance level at 10%, 5%, and 1%, respectively.

Table 7: Determinants of performance of SMEs in Vietnam

log(value added) log(gross profit) log(VA per employee) General education (Yes=1; No education=0)

Finished senior secondary 0.46*** (2.77) 0.48*** (3.23) 0.22** (2.11) Professional education (Yes=1; Unskilled=0)

Technical worker without certificate 0.54*** (6.22) 0.53*** (6.02) 0.11* (1.67)

Technical worker with certificate 0.43*** (8.67) 0.39*** (7.49) 0.09*** (2.74)

College/university/post-graduate 0.21*** (4.93) 0.11*** (2.72) 0.05* (1.93) Previous occupation (Yes=1; Unskilled worker=0)

Highly educated professional worker 0.07 (0.97) 0.04 (0.53) 0.02 (0.42)

Medium educated professional worker -0.09 (-1.47) -0.14** (-2.16 -0.01 (-0.15)

Office and customer service worker -0.04 (-0.59) -0.01 (-0.15) 0.04 (1.01)

Service, sales, and security worker -0.11 (-1.25) -0.06 (-0.75) 0.07 (1.50)

Operator and installation worker -0.15*** (-2.68) -0.11* (-1.88) 0.01 (0.25)

Knowledge about laws (Yes=1; No=0)

Age of the owner -0.01** (-2.11) -0.01 (-1.22) -0.01*** (-5.27) Gender of the owner 0.10*** (2.88) 0.07** (2.22) 0.04** (2.13) Owner is a war veteran

(Yes=1; No=0) -0.12** (-2.30) -0.12** (-2.33) -0.09*** (-3.10) Owner used to be a cadre (Y=1;N=0) -0.03 (-0.41) -0.05 (-0.90) -0.01 (-0.22) Owner ethnicity (Kinh=1; Others=0) -0.15*** (-2.90) -0.22*** (-4.05) -0.14*** (-4.06)

No of adults (15-60) in owner's household 0.04*** (3.99) 0.05*** (5.32) -0.01 (-0.20) Operation years of enterprise -0.01*** (-6.96) -0.01*** (-6.35) -0.01*** (-6.78) Enterprise sector

(Manufacturing=1; Others=0) 0.18*** (5.35) 0.05 (1.33) 0.05** (2.08) Infrastructure (Yes=1; No=0)

Main road leading to enterprise 0.61*** (17.36) 0.54*** (15.54) 0.19*** (8.36)