Mối quan hệ giữa đầu tư và dòng tiền trong bối cảnh sở hữu nhà nước và cải cách hệ thống ngân hàng ở việt nam

MINISTRY OF EDUCATION AND TRAINING OF VIETNAM UNIVERSITY OF ECONOMICS HO CHI MINH CITY TU THI KIM THOA Firms’ Investment – Cash Flow Relationship In The Context Of State Ownership And

MINISTRY OF EDUCATION AND TRAINING OF VIETNAM

UNIVERSITY OF ECONOMICS HO CHI MINH CITY

TU THI KIM THOA

Firms’ Investment – Cash Flow Relationship

In The Context Of State Ownership And Banking System Reform In Vietnam

DOCTORAL THESIS

Ho Chi Minh City, June 2020

Kim Thoa Tu Thi

[Date]

MINISTRY OF EDUCATION AND TRAINING OF VIETNAM

UNIVERSITY OF ECONOMICS HO CHI MINH CITY

TU THI KIM THOA

Firms’ Investment – Cash Flow Relationship

In The Context Of State Ownership And Banking System Reform In Vietnam

NGUYEN THI UYEN UYEN, Ph.D

Ho Chi Minh City, 2020

STATEMENT OF AUTHORSHIP

I hereby declare that this submission is my own work and except where due reference is made; this thesis contains no material previously published or written by another person(s)

This thesis does not contain material extracted in whole or in part from a thesis

or report presented for another degree or diploma at University of Economics Ho Chi Minh City or any other education institution

Tu Thi Kim Thoa

June 2020

ACKNOWLEDGEMENTS

First and foremost, I would like to express deepest gratitude to my supervisors,

Dr Vu Viet Quang and Dr Nguyen Thi Uyen Uyen, for their continual guidance and mentorship, invaluable support, remarkable patience, useful feedback, and spiritual encouragement during the completion of my thesis My thesis can not be completed without their supervisions, which provided me with much precious advice to expedite

Finally and most importantly, I would like to thank my friends and family for their unconditional love, immense, constant and endless support and encouragements during my life I would have been unable to finish the thesis without their supports and encouragement And I also wish to dedicate this thesis to my late mother who is always in my heart

TABLE OF CONTENTS

ABBREVIATIONS i

LIST OF TABLES ii

LIST OF FIGURES v

ABSTRACT vi

CHAPTER 1: INTRODUCTION 1

1.1 Thesis motivations 1

1.2 Thesis objectives 5

1.3 Firm’s investment – cash flow relationship in the context of state ownership in Vietnam 5

1.3.1 Objectives and hypotheses 5

1.3.2 Data 6

1.3.3 Methodology 6

1.3.4 Empirical findings 7

1.3.5 Contributions 7

1.4 Firm’s investment – cash flow relation in the context of banking system reform in Vietnam 8

1.4.1 Objectives and hypotheses 8

1.4.2 Data 9

1.4.3 Methodology 9

1.4.5 Contributions 10

1.5 Thesis structure 10

CHAPTER 2: OVERVIEW ON VIETNAM’S ECONOMIC REFORMS 11

2.1 Overview on Vietnam’s economy 12

2.2 Overview on equitization of state owned enterprises of Vietnam 20

2.3 Overview on Vietnam’s banking system reform 24

2.4 Chapter summary 29

CHAPTER 3: FINANCIAL CONSTRAINTS AND INVESTMENT: A

THEORETICAL FRAMEWORK AND LITERATURE REVIEW 31

3.1 Theories of investment 33

3.1.1 The Modigliani-Miller Theorem (MM) 34

3.1.2 Neo-classical model 34

3.1.3 Sales accelerator model 35

3.1.4 Tobin’s Q model 36

3.1.5 The Euler model 38

3.2 Financial constraints and investment: a literature review 39

3.2.1 Financial constraint and investment 39

3.2.2 State Ownership and Investment–Cash Flow Relations 48

3.2.3 Banking system reform and investment – cash flow relation 50

3.2.4 Financial leverage, growth opportunity and investment relation 51

3.3 Chapter summary 53

CHAPTER 4: FIRM’S INVESTMENT – CASH FLOW RELATIONSHIP IN THE CONTEXT OF STATE OWNERSHIP IN VIETNAM 54

4.1 The study introduction 55

4.2 Literature review and hypothesis development 57

4.2.1 Relation between investment and cash flow 57

4.2.2 State Ownership and Investment–Cash Flow Relations 60

4.2.3 State Ownership and Investment–Leverage Relation 62

4.3 Research design 63

4.3.1 Testing Investment–Cash Flow Relation 63

4.3.2 Testing the Impact of State Ownership on Investment–Cash Flow Relations 66

4.3.3 Testing the Impact of State Ownership on Investment–Leverage Relations 67

4.3.4 Data 67

4.4 Empirical results 68

4.4.1 Descriptive Statistics 68

4.4.2 Empirical Results 70

4.4.3 Robustness Check 83

4.5 Conclusion 92

4.6 Chapter summary 93

CHAPTER 5: FIRM’S INVESTMENT – CASH FLOW RELATIONSHIP UNDER THE CONTEXT OF BANKING SYSTEM REFORM IN VIETNAM 94

5.1 The Stuty Introduction 95

5.2 Literature review 98

5.2.1 Investment – cash flow relation 98

5.2.2 Effect of banking system reform on investment – cash flow relation 100 5.3 Research methodology 101

5.3.1 Hypothesis development and model specification 101

5.3.2 Data 106

5.4 Empirical results 107

5.4.1 Descriptive statistic 107

5.4.2 Correlations 109

5.4.3 Regression results 111

5.4.4 Robustness check 129

5.5 Study conclusion 130

5.6 Chapter summary 131

CHAPTER 6: CONCLUSION 133

6.1 Introduction 133

6.2 Firm’s investment – cash flow relationship in the context of state ownership in Vietnam 133

6.2.1 Research findings 133

6.2.2 Research contributions, implications and policy recommendations 134 6.2.3 Research limitations and future research directions 136

6.3 Firm’s investment – cash flow relationship in the context of banking system

reform in Vietnam 137

6.3.1 Research findings 137

6.3.2 Research contributions , implications and policy recommendations 138 6.3.3 Research limitations and future research directions 140

LIST OF AUTHOR’S PUBLICATIONS 141

REFERENCES 142

APPENDIX 148

ABBREVIATIONS

LIST OF TABLES

Table 4.3 Differences between non state-owned and state-owned

enterprises

70

Table 4.5 Impact of state ownership on investment – cash flow

relation

76

Table 4.6 Impact of state ownership on relation between investment

and cash flow under different growth opportunities

78

Table 4.7 Impact of state ownership on the investment and leverage

relations

81

Table 4.8 Impact of state ownership on the relations between

investment - leverage under different growth opportunities

82

Table 4.9 State ownership and relations between investment and cash

flow under different growth opportunities: GMM estimation method

84

Table 4.10 Classification of state-owned and non-state-owned

enterprises using the threshold of 33.15 percent

87

Table 4.11 State ownership and relations between investment and cash

flow under different growth opportunities in which high growth opportunity is classified by quartile

90

Table 5.5 Effect of banking system reform on investment – cash flow

relation

119

Table 5.6 Effect of banking system reform on investment –cash flow

relation of state – controlled listed companies by different growth opportunities

122

Table 5.7 Effect of banking system reform on investment –cash flow

relation of non state – controlled companies by different growth opportunities

124

Table 5.8 Effect of banking system reform on investment – leverage

relation

126

Table 5.9 Effect of banking system reform on investment – leverage

relation for both low and high growth opportunities

128

LIST OF FIGURES

Figure 2.3 Vietnam’s volume of imports and exports (% of GDP),

Figure 5.1 Fitted value of investment (IK) on cash flow (CFK) on a

full sample of Vietnamese listed firms for the period of

2009 – 2014

112

Figure 5.2 Fitted value of investment (IK) on cash flow (CFK) on a

subsample of Vietnamese State controlled firms for the period of 2009 - 2014

113

Figure 5.3 Fitted value of investment (IK) on cash flow (CFK) on a

subsample of Vietnamese Non - state controlled firms for the period of 2009 - 2014

114

of investment, which perhaps is due to their socioeconomic and political responsibilities, poor corporate governance and agency problem Their growth opportunities also affect the sensitivity

The second essay examines the effect of banking system reform, which is defined by the presence of foreign banks, on investment-cash flow relation in a context of a small transition economy I find evidence that the presence of foreign banks in Vietnam results in decreasing in firm’s dependence on local banks and has changed their financial constraint Company investments are less reliant on internal cash flow in the post reform period Although overinvestment of state controlled firms can not be reduced but underinvestment problem of non- state -controlled listed firms is mitigated due to better accessibility to bank loans The investigated relation between investment and leverage is robust for this conclusion

JEL classification: G30, G31, G32

Keywords: financial constraints, investment – cash flow relations, state ownership,

banking system reform, small transition economy

CHAPTER 1

INTRODUCTION

This thesis applies the style of a series of papers in the field of corporate finance, which mainly composes of the two stand-alone essays This chapter summarizes the content of the thesis, which brieftly presents the thesis’ motivations, objectives, methodologies, contributions and structure Section 1.1 presents the thesis motivations on impact of financial constraints, particularly state ownership and banking system reform on firm’s investment – cash flows of a transition economy, Vietnam Section 1.2 introduces the research objectives Section 1.3 and Section 1.4 respectively summarize the two essays: firm’s investment – cash flow relation under the context of state ownership in Vietnam and firm’s investment – cash flow relation under the context of banking system reform in Vietnam Finally, Section 1.5 presents the structure of the thesis

1.1 Thesis motivations

The thesis was inspired by the following motivations:

Firstly, investment is one of the most important decisions in corporate financial decisions The company managers will make all of efforts to conduct positive NPV investment opportunities because these investmens are expected to increase the firm value Beside availability of positive NPV investment opportunities, the availability of financing funds (internal or/and external) is another important factor affecting the firm’s investments Therefore, relationship between investment and cash flows, especially in the context of financial constraints have attracted

interests of many scholars Fazzari, Hubbard, Petersen, Blinder, and Poterba (1988) show that financially contrained firms have high investment – cash flow sensitivities because of higher cost of external funds in compared with that of internal funds Different types of the relationhip between investment and cash flow have been found

in financial literatures Fazzari et al (1988) find the linear relationship while Cleary, Povel, and Raith (2007) document the non-linear (U-shaped) ones, which have been confirmed by many other studies (Firth, Malatesta, Xin, & Xu, 2012; Guariglia, 2008; Tsai, Chen, Lin, & Hung, 2014) So, there is no consistent relation between investment and cash flows found in the literatures Moreover, the relation has not been under-investigated for Vietnam context

Secondly, the investment – cash flow sensitivity is one of commonly used measures of financial constraint which is defined as a limit in capital accessibility, either internally or externally In the context of transition economy like China and Vietnam, the role of state ownership on financial constraints has been unclear Many studies shows evidence that state-ownership does have impact on firm financial constraints, i.e investment – cash flow relation (Firth et al., 2012; Haider, Liu, Wang,

& Zhang, 2018; Tsai et al., 2014) while H.-C M Lin and Bo (2012) shows that state – ownership does not help to reduce financial constraints on investment even via the state-controlled banking system

Vietnam used to follow the centrally-planned economy which was entirely dominated by state-owned enterprises (SOEs) This mechanism led the country into crisis and backward, which required a broad and in–depth renovation of the whole

economy A comprehensive program which is well-known as Doi moi was introduced

in 1986 to transform the economy from a socialist to a market oriented As one of the

components of the Doi moi policy, an equitization (privatization per-se) program

launched in the early 1990s has transformed a number of state-owned companies into joint-stock companies beside for the first time allowing existence of private companies A number of private companies (both equitized and non-equitized) has

been constantly increasing However, the government still plays an important role in

a large number of companies by holding a large percentage of outstanding shares at many equitized SOEs In the literatures, the impact of state ownership on firm performance as well as financial decisions is still controversial Sun and Tong (2003) report that the privatization program in China improved earnings, sales, and workers’ productivity at Chinese SOEs but not profitability Du and Boateng (2015) assert that shareholder value is significantly affected by state ownership, formal institutional distance, and reforms in the foreign currency approval system However, G Chen, Firth, and Xu (2009) find that firm performance is enhanced by certain types of state ownership SOEs have slow, even negative growth whereas the rapidly growing private sector significantly contributes to economic growth (Allen, Qian, & Qian, 2005) It finds that SOEs with a soft budget constraint can easily access external financing, resulting in lower dependence on internal cash flows than is the case at privately owned firms (Allen et al., 2005; Cull & Xu, 2003) Firth et al (2012) also report that state ownership has an impact on the relation between investment and cash flow R R Chen, El Ghoul, Guedhami, and Nash (2018) assert that an increase in state ownership leads to an increase in corporate cash holdings, which means a positive relation between government ownership and corporate cash holdings More specifically, SOEs have higher investment–cash flow sensitivity than privately owned firms, especially when cash flow is negative So, whether state ownership has any impact on corporate financial constraint, specifically, investment – cash flow relation of Vietnamese companies is still an unanwered question

Thirdly, in Vietnam, due to the underdevelopment of financial market, beside internal cash flows, bank loans have been main financing sources of funds for firm’s investments However, credit market is not a fair play ground for private companies due to some historical reasons1 although Vietnam has done several efforts to improve

1 Vietnam used to be a centrally-planned economy in which state – owned banks mainly served for state-owned enterprises

the situation Nhung and Okuda (2015) show that Vietnamese SOEs have an advantage over privately owned firms in accessing bank loans as well as making a profit, even after economic booms The higher accessibility to bank loans, the less financially constrained the firm is, meaning the lower investment – cash flow sensitivity Therefore, banking system reform is proved to have an impact on investment – cash flow relation (Tsai et al., 2014) In the process of transforming the economy from centrally – planned to market oriented, Vietnam also has conducted a number of financial system reforms as a component of overal economic reform One

of them is to allow the entry of foreign banks to do business in Vietnam This does not only come from the reality but from entrance requirements of international free trade agreements such as WTO also The presence of foreign banks on one side would increase competition in credit market, and on the other side put pressures on domestic banks to improve their transparancy, effeciency and profitability to be survival and grow in a integrated market As such, the presence of foreign banks – which can be considered a measure to reform the banking system – may have certain impact on companies accessibility to external funds to finance their investment, or on the other words, firm’s investment – cash flow relation Therefore, it also motivates me to conduct this thesis

The topic of investment – cash flows have been intensively conducted in financial literatures, but most of them use the samples of developed countries like U.S, Canada, or China – a big transitional economy To my best knowledge, the relationship between investment and cash flows, especially in the context of state – ownership and foreign bank entry has still not investigated for the case of a small transition economy like Vietnam Furthermore, in spite of sharing some cutural, social and political similarities with China, Vietnam also has many differences such

as size of economy, history of the transformation, openness to the world economy, development of financial market, etc Studying the Vietnamese context is believed to

be worthwhile and valuable for international finance literatures because results form

the rather specific case of China may not be generalizable for other small emerging markets Therefore, I choose to examine the impact of banking system reform, and state ownership on investment – cash flow sensitivity in Vietnam for my Ph.D thesis

1.2 Thesis objectives

The general objective of the research is to investigate the impact of financial constraints, which are measured by state ownership and banking system reform on the relation between firm’s investment and internal cash flows in the context of small transitional economy – Vietnam The general objective is implemented by the two essays which are separately presented in the following Sections of 1.3 and Section 1.4

1.3 Firm’s investment – cash flow relationship in the context of state ownership in Vietnam

1.3.1 Objectives and hypotheses

The study examines the effect of state ownership on the relationship between investment and cash flow in Vietnam, a small transitional economy The study objectives are as follows:

- Examine the nonlinear relationship (U-shape) between investment and cash flows of Vietnamese listed companies

- Examine impact of state ownership on the investment – cash flow relation in general, and for state controlled and non –state controlled firms

- Examine impact of state ownership on the investment – leverage relation in general, and for state controlled and non –state controlled firms

- Propose some policy reccommendations to various related parties based on the research findings

To achieve the research objectives, following research questions are set forth:

- Does the investment and cash flow relation of Vietnamese companies

have U-shape?

- Do state controlled companies have higher investment–cash flow

sensitivity than non-state controlled companies?

- Does state ownership has a positive impact on a firm’s investment–

debt relations

1.3.2 Data

The final sample of the study consists 3,366 firm-year observations of non- financial companies listed on the two stock exchanges of Vietnam, HOSE and HNX for the period of 2009 – 20152 Both financial and market data are extracted from the Thomson Reuters database Observations with missing data are omitted, and outliers that may influence the results are also excluded by winsorizing 1% of the two tails for each variable

1.3.3 Methodology

The study applies quantitative method First, the study tests if investment – cash flow in Vietnam is U-shaped for Vietnamese firms in genternal, state controlled and state uncontrolled firms, employing two different approaches The first approach follows Cleary et al (2007) which includes square of cash flow method in the standard investment regression equation developed by Fazzari et al (1988), and the second approach follows Firth et al (2012) which separates cash flows into positive and negative cash flows Secondly, the impact of state ownership on the investment – cash flow relationship is investigated by using both dummy and continuous variables of state ownership The investigation is conducted for the full sample, state

2 The period is chosen because there were just a limited number of listed equitized SOEs before 2008 and the study was conducted in 2016

controlled, state-uncontrolled subsamples as well as high and low growth opportunities sub-subsamples Thirdly, the investment-leverage relationship is also examined in the same manner All the regressions are estimated by using Generalized Least Squared (GLS) method on a panel data samples to control for the heteroscedasticity problem and robusted by Generalized Method of Moment (GMM) for endogeneitity potential

1.3.4 Empirical findings

The results show that the investment–cash flow relation for both state-owned and non-state-owned firms is U-shaped In addition, state-owned companies have higher cash flow sensitivity of investment, which perhaps is due to their socioeconomic and political responsibilities, poor corporate governance and agency problem Moreover, the investment of high-growth companies, both with and without state ownership, has lower dependence on internal cash flow Additionally, low-growth state-owned companies have higher cash flow sensitivity of investment than those without state ownership, suggesting inefficient investment by the former

1.3.5 Contributions

The following contributions are added into the current literature from different perspectives First, I shed further light on the implications of financial constraints by investigating the association between state ownership and corporate investment–cash flow in a small transitional economy such as Vietnam Second, generally previous studies examining this important issue have been conducted in the context of developed countries or China (Cleary et al., 2007; Firth et al., 2012; Tsai et al., 2014) The intensive literature review has indicated that the impact of state ownership on investment relations in an emerging and transitional country such as Vietnam has largely been under-examined

1.4 Firm’s investment – cash flow relation in the context of banking system reform in Vietnam

1.4.1 Objectives and hypotheses

The study examines the effect of banking system reform on investment-cash flow relation in a context of a small transition economy The banking system reform

is measured by presence of foreign banks or their branches, outlets, representative offices at the location where the company locates its headquarter. Followings are the

To achieve the research objectives, following research questions are set forth:

- Is there a nonlinear investment – cash flow relation (U-shape) at Vietnamese

1.4.2 Data

The final sample of the study consists 2,858 firm-year observations of non- financial companies listed on the two stock exchanges of Vietnam, HOSE and HNX for the period of 2009 – 20143 Both financial and market data are extracted from the Thomson Reuters database Observations with missing data and outliers are excluded

1.4.3 Methodology

The study applies quantitative method First, the U-shaped investment – cash flow relations in Vietnam are tested The tests are conducted for the full sample, state controlled and state uncontrolled subsamples, employing two different approaches The first approach follows Fazzari et al (1988) and the second approach follows Firth

et al (2012) Secondly, I investigate the impact of banking system reform on the investment relationship for various groups of business such as state controlled, non state controlled, high growth opportunity and low growth opportunity, etc The variable proxied for banking system reform is manually collected from company annual reports Thirdly, I examine the investment- leverage relationship under the impact of state – ownership All the regressions are estimated by using Generalized Least Squared (GLS) method to fix the heteroscedasticity problem and robusted by Generalized Method of Moment (GMM) for endogeneitity potential

1.4.4 Empirical findings

The findings show the U – shape relation between investment and cash flow for Vietnamese companies I also find evidence that the presence of foreign banks in Vietnam results in a decrease in dependence of corporate investments on local banks and has changed corporate investment behaviors Company investments are less

3 The period is chosen because there were just a limited number of listed equitized SOEs before 2008 and the study was conducted in 2015

reliant on internal cash flow in the post reform period Although overinvestment of state controlled firms is not reduced but underinvestment problem of non- state -controlled listed firms is mitigated due to better accessibility to bank loans The investigated relation between investment and leverage is robust for this conclusion

1.4.5 Contributions

This study contributes additional empirical evidence to the financial literature

on the topic of impact of banking system reform on investment – cash flow relation, especially in a context of small transition country Most of my findings are similar to the previous study results except that overinvestment problem of state controlled firms is not mitigated in the post reform period Perhaps, in the post reform period state controlled firms are still main customers of state-owned local banks who are dominating the credit market Moreover, presence and operation of foreign banks in Vietnam is still limited

1.5 Thesis structure

The remaining of the thesis is structured as follows Chapter 2 presents the overview on Vietnam’s economic reforms Chapter 3 reviews related investment theories and literatures on financial constraints, and its impact on investment – cash flow relationship Chapter 4 and Chapter 5 repectively presents two important studies

of the thesis: impact of state ownership and banking system reform on the firm’s relationship between investment and cash flows Finally, the thesis is concluded by Chapter 6

launched the comprehensive economic reform program, which is called Doi moi

policy, including economic, financial, corporation etc… reforms The policy aims at transforming the economy from centrally planned, which lacks motivations for development, to market-oriented which allows the multiple forms of business organizations, and openning the door to the world The policy has made a great impact on the economy as a whole Economic structure has significantly changed with the birth and increasing role of private sector in the economy, including foreign investors Two – tiered banking system was established, together with an increase in entry and expansion of foreign banks Many legal frameworks have been introduced

or revised to support the transformation and openness of the economy

Under the Doi moi policy, the corporation reform which is known as

equitization or privatization program was the key component of the economic reform

A large number of state – owed enterprised has been equitized via restructuring, merger and aquistion, deinvestitures, ownership transfer, etc The equitization

program have borne a number of joint stock companies, which have been one of the determinants of Vietnamese economic development for the last few decades Similarly, the transformation from a one-tiered to two-tiered banking system as well

as allowing the entry of foreign banks were the focal issues of the banking system reform as a part of financial reform Both the reforms have greatly contributed to the well-known success of the Vietnam’s economy so far

Chapter 2 is structured as follow Section 2.1 highlights an overview about Vietnam’s economy for the last more than 30 years Section 2.2 presents the equitization program in Vietnam and Section 2.3 describles an overview of the Vietnam’s banking system reform The Chapter will be concluded by Section 2.4

2.1 Overview on Vietnam’s economy

Vietnam’s economy, after the unification of the country in 1975, followed the centrally-planned mechanism, in which all important decisions must be made by the central governmental bodies The period of 1976 – 1985 can be described by the low national income growth rate (3.7 percent), supper high inflation (453.54 percent by the end of 1986); domestic production could not meet the basic needs for people, leading to reliance on imports; severe budget deficit and foreign debt problems The failure of this model led the economy to the edge of economic crisis Therefore, the Sixth Party Congress in December 1986 made an important decision to launch a comprehensive economic reform, shifting the centrally planned economy to a

socialist-oriented market economy, which is called Doi moi policy The Doi moi

policy, which cored by economic reform, aiming at implementing the country’s industrialization and modernization objectives, as well as opened-door, global integration policy and it has brought recognized remarkable achievements Over the

past more than 30 years, since Doi moi, Vietnam has been one of the countries which

have had the most rapid economic growth and development in the world Figure 2.1 shows the the growth rate of GDP for the period from 1986 to 2017

Since the Doi moi in 1986, Vietnam’s GDP growth rate has notably rocketed

from 2.79 percent in 1986 to 7.36 percent in 1989, and then reached the peak of 9.54 percent in 1995 However, under the effect of Asian financial crisis in 1997, it dropped down to the lowest point over the last 30 years at 4.77%, a relatively high in compared with that of many developed countries Since then, the economy has maintained a pretty stable growth at around 6 percent annually In 2018, GDP per capita reached about US$ 2,551 per capita a year Economic sectors have been restructured toward the development of a market-oriented socialist economy whereby private sector is freely established and operates in areas legally approved

Source: World Development Indicators

Figure 2.1 Annual GDP growth rate for the period of 1986 – 2018 (%)

Although being an agricultural country, before the Doi moi Vietnam had an

underdeveloped and underproductive agriculture sector, resulting in a serous shortage

of foods Under the Doi moi policy in agriculture, which initiated by Land Law in

4.77

6.79 6.19

7.54

6.42 5.25

1987 and the well-known Resolution No 10 (issued on April 5, 1988)4 These policies emphasized on fairer equality in land holding, which enhanced farmers’ assessibility to land; applying new and advanced technology in agricultural production, diversifying agricultural products other than rice, increasing competivitness and efficiency for agriculturat input and output markets, etc As a result, agricultural productivity was boosted, shifting Vietnam from a food importer

to one of major exporters in many agricultural products such as rice, peppers, coffee, cashew nuts, rubber, etc

One of major success of the Doi moi program was the control of serious

inflation problem In the early stage of the reform, Vietnam fell into hyperinflation period with the peak was 453.54 percent in 1986, which mainly caused by failure of

the General Adjustment of Price, Wage and Money (1985) policy Figure 2.2 shows

the inflation fluctuations over the period 1986-2018 From the peak of hyperinflation (453.54%) in 1986, the consumer price index (CPI) sharply dropped to two digit and then 1 digit number in 3 to 5 years Since 1990s up to now, Vietnam’s inflation rates have been well controlled at fairly stable rates at below 10 percent annually Inflation

of 2018 was only 3.54 percent

4 The Resolution No 10 refers the official agricultural management renovation which allowed the implementation of the output contract system to household farmers instead of only signing the output contract according to differenqt stages of work in production as had been done since 1981

Source: International Monetary Fund, World Economic Outlook Database, April 2019

Figure 2.2 Vietnam’s Inflation (% change of CPI), 1986-2018

Vietnam used to be considered closed economy in the period before the Doi

moi, when goods and services was not freely traded Foreign trade transactions were

mainly conducted with former socialist counterparts and did not follow the market mechanism Since the reform was launched, Vietnam has been gradually opened its economy to the world Many measures have been done to push up both domestic and international trade such as removing unnecessary trade barriers; engaging in membership of Association of Southest Asian Nations (ASEAN) in 1995, the ASEAN Free Trade Agreement (ATFA) in 2001, World Trade Organization (WTO)

in 2007; signing many bilateral and multilateral economic and trade agreements with foreign countries and organization such as with EU (1992), US-Vietnam Bilateral Trade Agreement (2001), etc As a result, both exports and imports have been constantly increased for the last more than 30 years As shown in the Figure 2.3, the volume of exports of goods and services as a ratio of gross domestic product (GDP) rose from only 6.62% percent in 1986 to 101.59 per cent in 2017, while the ratio of

imports of goods and services to GDP also increase to 98.79 percent in 2017 from a low level of 16.6 per cent in 1986

Source: World Development Indicators

Figure 2.3 Vietnam’s volume of imports and exports (% of GDP), 1986-2018

In the process of opening the economy, Vietnam also issued the Law on Foreign Investment in 1987 and its amendment in 1990 to attract foreign direct investment (FDI) The law has been revised or issued the new versions for several times5 since then to meet the current status of the world and the Vietnamese economy With the advantages of cheap, young, skillful and hard working labors force, rich natural resources, openness of investment laws, etc Vietnam has been an emerging destination for FDI And FDI has also played an important role in the development

of Vietnamese economy Figure 2.4 shows the net inflows as percentage of GDP of FDI into Vietnam since the opening the economy FDI inflows was high during the period of 1993-1997, from 7.03 percent of GDP in 1993, rised to the peak of 11.94

5 The first version of the Law on Foreign Investment was issued in 1987, then amended in 1990 A new version was issued in 1996 to replace the first version, and then amended in 2000

percent and then droped down to 8.27 percent in 1997 Under the impact of the Asian financial ciris in 1997, FDI inflows to Vietnam was low at the level of around 4 percent of GDP for the period of 1998 – 2008, and then slightly rised up again for the period afterward FDI sector has been a major contributor to Vietnam’s GDP, helping creating jobs and boosting the development of the manufacturing sector which supported for the increase of foreign trade as well as the structural changes in exported products In the late 1980s, about 80 percent of exports were accounted for

by primary commodities, such as rice, coffee, crude oil, and coal, but by 2005, along with the expansion of manufactured exports, that share had declined to about 50 percent

Especially, the Ho Chi Minh Stock Exchange (HOSE) and Hanoi Stock Exchange (HNX) was founded in 2000 and 2005, respectively to establish another helpful financing and investing channels for companies and investors Law on Securities was first issued in 2006 and then amended in 2010 in order to make a good environment for the development of stock markets in Vietnam

Source: International Monetary Fund, World Economic Outlook Database, December 2019

Figure 2.4: Vietnam’s Foreign Direct Investment, net inflows (% of GDP)

0.00 0.03 0.03 0.06

2.78 3.90 4.80 7.03

11.94

8.59 9.71

8.27

6.14

4.92 4.16 3.98 3.99

3.67 3.54 3.39 3.62

8.65 9.66

In terms of investment, the introduction of Law on Domestic Investment in

1998, which aimed to stimulate the investment of domestic investors, set forth the initial formation of private sector in Vietnam This sector has been expanded and strengthened by the equitization of state owned enterprises (SOEs) which will be discussed more in details in following part

Table 2.1 Main Economic Indicators of Vietnam, 1986 – 2018

$US)

GDP per capita ($US)

Total investment (% of GDP)

Inflation (%

change

in CPI)

Imports

of goods and services (%

change)

Exports

of goods and services (%

change)

Current account balance (bil.$US)

Current account balance (% of GDP)

FDI, net inflows (% of GDP)

2.2 Overview on equitization of state owned enterprises of Vietnam

Vietnam used to be a centrally planned economy entirely dominated by owned enterprises (SOEs) which had large inefficiency regardless of much favourable privilege Vietnam began to transform its economy from a socialist to a

state-market economy by lauching a comprehensive reform, namely Doi moi policy in

1986, in which corporate restructuring scheme was one of the major components of the reform The corporate restructuring scheme aimed to transform state owned enterprises into the form of multiple owners, in which it is unnecessary for the state

to own 100% capital; to mobilize capital from both domestic and foreign investors;

to increase financial capacity; and, to renovate technology and managerial methods

in order to raise the efficiency and competitiveness of the economy (Article 1 of Decree 59) With this scheme, the government would accept the existence of various forms of business organizations other than SOEs and collective enterprises, and hope

to create a more equal play field for all economic players The heart of the scheme was a so-called SOE equitization (privatization per-se) program which has been transforming a number of SOEs into joint-stock companies in a slow and gradual manner

A pilot SOE restructuring program6 was launched in early 1990s, which started with profitable but not strategic small and medium size SOEs to be equitized, and then expanded to larger and more difficult ones Employees of equitized companies should be priorited in purchasing the shares Besides, the government continued to hold tight control role over some key important industries such as banking, oil and gas, electricity, etc via controlling ownership In these companies, the government plays a dual role – regulator and owner These state controlled companies have to perform not only business but also non-business functions such as being in charge of

6 The pilot scheme was launched in 1992 based on a resolution of the tenth session of the Eighth National Assembly and the Prime Minister Decision 202-CT on equitization programs on 8 June 1992

ensuring social security and poverty alleviation Therefore, state-ownership does play

an important role in company’s financial decisions

Generally, the process of equitization in Vietnam could be divided into stages

as decribled in the Table 2.2 below:

Table 2.2 Stages of SOE equitization in Vietnam (1992 – 2018)

Pilot stage 1992 to 1996 Decision 202_CT; Direction 84 (1993);

Nguyen Van Tan (2018) Equitization and Firm Performance in Vietnam: Theory and Practice,

International Research Journal of Finance and Economics ISSN 1450-2887 Issue 169 September,

2018

The pilot stage was enforced by Decisions No 202/CT dated on June 8th 1992 and the Direction 84 dated August 4th 1993 In the pilot stage of 4 years, only 5 SOEs (3 central SOEs and 2 local SOEs) were equitized, which were Transportation Service Company, Refrigeration and Electrical Engineering Company, Hiep An Shoe Company, Animal Food Processing Company and Long An Export Product Processing Company After the equitization, state held only 30 percent of total ownership except Transportation Services Company (18 percent) Besises, in this period, 18 general corporations and 64 large comglomeates (special corporations) specializing in various industries and areas which are fully state-owned were formed

Source: Author’s compilation based on statistics ISEAS report (Le Hong Hiep (2017), Vietnam’s New Wave of SOE Equitization: Drivers and Implications, Perspective, No 57, Ministry of Finance

Nguyen Van Tan (2018) Equitization and Firm Performance in Vietnam: Theory and Practice,

International Research Journal of Finance and Economics ISSN 1450-2887 Issue 169 September,

2018

Figure 2.5 Progress of SOE equitization, 1992 – 2018

Then, the pilot stage was extended for 2 more years from 1996 to 1998 with the issuance of Decree No, 28/CP dated May 7th 1996, which also ended the pilot program This Decree gave systematic guidances to SOEs on purposes of equitization, criteria of SOEs selection, equitization methods, employment and investment incentives for equitized enterprises With this Decree, the government officially allowed non-strategic profitable small and medium sized SOEs into joint stock companies, consequently pushing up the process of equitization with 130 companies SOEs equitized during this two years, of which there were only 125 SOEs being equitized in 1998

123

251

212 206 164

537

753 813

359

118134 142 144

60 13 66 143 213

55 69 12 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20%

The accelerated stage which were from 1999 to 2010 were guided by Decrees

of 44 issued in 1998; 64 issued in 2002; 187 issued in 2004 and 109 issued in 2007 With the opening of the Vietnam Stock Mark in Ho Chi Minh City in 2000 and espectially constant rise in stock market index under the positive expectation of being the 150th WTO member in early 2007 truly affected the process of equitization acceleration The number of equitized SOEs steadily increased from year to year since 2002 with 164 to the peak of 813 in 2005 As of 2006, more than 3,433 companies having being equitized, in which 3,295 had been equitized since 1999 However, most of equitized companies up to 2006 were still small and medium size Some large SOEs were planed to be equitized in 2007 but the plan was slower due to some reasons, including the concerns on oversupply in the stock market after the earlier rocketed stage of acceleration As initially planed, 1,500 SOEs should be equitized in the period 2007 – 2010, in which most of subsidiaries of general corporations were planed to be equitized in 2008; decreasing to more than 500 SOEs left However, there were only two big names - Bao Viet Insurance and Vietcombank – out of 118 being equitized SOEs in 2007, leaving more than 20 big SOE names to

be implemented in the period 2008 – 2010 The acceleration stage of 10 year period concluded with 3,983 SOEs being equitized, comprising 84.59 percent of total number of equitized SOEs

Vietnam’s process of equitization has been in economic restructuring stage (2012 – now) Under the negative impact of the global financial crisis and the crash

of the stock market, speed of equitization has been sharply dropped at early of this stage (2010 – 2012) In addition, general economic and stock market conditions have not been in favourable shape for SOEs especially big ones to be equitized Several policies have been made to stimulate the SOE equitization such as Decision 929 issued in 2012; decrees of 59 (2011), 189 (2013), 16 (2015) and Decision 1232 (2017) This lead to a sharp increase in number of equitized SOEs in the following

years 2012 – 2015 However, the process seems to be slow down for the last couple

of years

Thanks to the equitization program, a number of SOEs has gradually decreased for the last more than 20 years, to 1,204 enterprises from more than 6,000 enterprises

in 1995, proving the effort of the government in corporate restructuring

Source: Author’s compilation from Nguyen (2017) for period of 1995 – 2008, Vietnam’s

GSO, various years for period of 2009 – 2017

Figure 2.6 Number of SOEs, 1995 - 2017

2.3 Overview on Vietnam’s banking system reform

Over the past thirty years, as a part of the comprehensive economic reforms, the Government of Vietnam has initiated many banking reforms to improve the efficiency and competitiveness of the national banking system Moreover, the reforms have also been motivated by Vietnam’s commitments in the process of growing participation in international agreement as well as adopting international

standards such as Basel capital framework The primary objectives of the reforms were restructuring banking system, gradually opening doors for foreign investors, partially equitizing state owned banks, and improving competitiveness of the Vietnamese banks The major banking system reform was the removal of the commercial functions from the State Bank of Vietnam (SBV) in 1990 which have been followed by several reforms such as equitizing state owned banks, opening the financial market for foreign banks, etc

Before 1990, the Vietnamese banking system was a one-tier banking system,

in which the State Bank of Vietnam (SBV) played both central bank and commercial bank functions There were neither private nor foreign bank operating in the economy Following the Ordinance on Banks, Credit Cooperatives, and Financial Companies issued in early 1990, SBV was reconstructed by removing the commercial functions from SBV so that SBV only governed the whole banking system and performed the traditional role of central banks the such as managing the country’s foreign exchange reserves; formating of monetary polities; licensing and supervising credit organizations, etc., while commercial banking functions such as funds mobilization and lending were delegated to separated commercial banks As such, SBV’s four functional departments were separated to establish four new state-owned commercial banks (SOCBs) 7, each targeting a specific sector of the economy At the same time, a number of joint-stock commercial banks (JSCBs) have been founded and quicky increased both in bank numbers and size

In the process of interating with the world, to open the economy in general and financial sector in particular as well as to meet the requirements of membership from international trade and investment organizations, Vietnam has been gradually

7 Specificallly, the current Bank for Foreign Trade of Vietnam (VCB), Vietnam Bank for Agriculture and Rural Development (Agribank), Bank for Investment and Development of Vietnam (BIDV) and Vietnam Industrial and Commercial Banks (Vietinbank) were established from the splits of SBV’s former International Trade Department; Agricultural Department, Infrastructure Department, and Industrial and Commercial Lending Department, respectively

removing barriers to allow the entry of foreign banks in Vietnam In 2008, SBV for the first time granted the licences for 100% foreigned owned banks to do business in Vietnam In April 2014, the cap for a single and total foreign ownership in local commercial banks and credit organizations was leveled up to 20% and 30%, respectively Table 2.3 presents Vietnam’s structure of credit institutions (by December 31, 2017)

Table 2.3 Credit institutions of Vietnam, 2010 - 2017

Source: Author’s compilation from SBV Annual reports of various years;

(*) Including 3 zero dong repurchased banks

As shown in the Table 2.3, number of SOCBs is limited in compared with JSCBs but SOCB account for more than 40% of market share, therefore they have still played a dominant role in the credit market In addition, presence of foreign banks

in Vietnam has been slightly increased over the last decade Foreign bank’s branches