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

[Company name][Document title] TU THI KIM THOA [Document subtitle] Firms’ Investment – Cash Flow Relationship In The Context Of State Ownership And Banking System Reform In Vietnam DOCTO

[Company name]

[Document title]

TU THI KIM THOA

[Document subtitle]

Firms’ Investment – Cash Flow Relationship

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

DOCTORAL THESIS

Kim Thoa Tu Thi

Ho Chi Minh City, June 2020

[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

DOCTORAL THESISSpecialization: Finance and Banking

Code: 9340201

Supervisors:

VU VIET QUANG, Ph.D

NGUYEN THI UYEN UYEN, Ph.D

Kim Thoa Tu Thi

[Date]

Ho Chi Minh City or any other education institution.

Tu Thi Kim Thoa

June 2020

First and foremost, I would like to express deepest gratitude to mysupervisors, Dr Vu Viet Quang and Dr Nguyen Thi Uyen Uyen, for their continualguidance 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 preciousadvice to expedite my thesis completion

I would like to thank the University of Economics Ho Chi Minh City for itsgenerous financial support of my PhD studies I also wish to thank all the colleagues atthe UEH School of Finance, School of UEH Graduates and others for their great andcontinuing encouragement and full support during my PhD candidature

My gratitude also goes to my colleagues at UEH who have constantly given agreat help, support and encouragements to me not only during but also before thecompletion of my thesis

Finally and most importantly, I would like to thank my friends and family fortheir unconditional love, immense, constant and endless support andencouragements during my life I would have been unable to finish the thesiswithout 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

Vietnam Bank for Agriculture and Rural Development

Association of Southest Asian NationsASEAN Free Trade Agreement

Bank for Investment and Development of VietnamComsumer Price Index

Foreign direct investmentGross Domestic Products

Ho Chi Minh CityHanoi Stock Exchange

Ho Chi Minh City Stock ExchangeJoint-stock commercial bankJoint – venture bank

Modigliany and Miller TheoremState Bank of Vietnam

State-owned commercial bankState owned enterprise

United States of AmericaBank for Foreign Trade of VietnamVietnam Industrial and Commercial BanksWorld Trade Organization

LIST OF TABLES

Table 2.1 Main economic indicators of Vietnam, 1986 – 2018 19

Table 2.2 Stages of SOE equitization in Vietnam (1992 – 2018) 21

Table 2.3 Credit institutions of Vietnam, 2010 - 2017 26

Table 3.1 Summary of Financial Constraint Proxies 47

Table 4.3 Differences between non state-owned and state-owned 70

enterprisesTable 4.4 Analysis of relation between investment and cash flow 73

Table 4.5 Impact of state ownership on investment – cash flow 76

relationTable 4.6 Impact of state ownership on relation between investment 78

and cash flow under different growth opportunitiesTable 4.7 Impact of state ownership on the investment and leverage 81

relationsTable 4.8 Impact of state ownership on the relations between 82

investment - leverage under different growth opportunities

Table 4.9 State ownership and relations between investment and cash 84

flow under different growth opportunities: GMMestimation method

Table 4.10 Classification of state-owned and non-state-owned 87

enterprises using the threshold of 33.15 percentTable 4.11 State ownership and relations between investment and cash 90

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

Table 5.3 Pearson and Spearman correlation matrix 110

Table 5.4 Analysis of investment - cash flow relation 115

Table 5.5 Effect of banking system reform on investment – cash flow 119

relationTable 5.6 Effect of banking system reform on investment –cash flow 122

relation of state – controlled listed companies by differentgrowth opportunities

Table 5.7 Effect of banking system reform on investment –cash flow 124

relation of non state – controlled companies by differentgrowth opportunities

Table 5.8 Effect of banking system reform on investment – leverage 126

relationTable 5.9 Effect of banking system reform on investment – leverage 128

relation for both low and high growth opportunitiesTable 5.10 GMM estimates of investment – cash flow sensitivity 129

LIST OF FIGURES

Figure 2.1 Annual GDP growth rate for the period of 1986 – 2018 (%) 13

Figure 2.2 Vietnam’s Inflation (% change of CPI), 1986-2018 15

Figure 2.3 Vietnam’s volume of imports and exports (% of GDP), 16

1986-2018Figure 2.4 Vietnam’s Foreign Direct Investment, net inflows (% of 18

GDP)Figure 2.5 Progress of SOE equitization, 1992 – 2018 22

Figure 5.1 Fitted value of investment (IK) on cash flow (CFK) on a 112

full sample of Vietnamese listed firms for the period of

2009 – 2014Figure 5.2 Fitted value of investment (IK) on cash flow (CFK) on a 113

subsample of Vietnamese State controlled firms for theperiod of 2009 - 2014

Figure 5.3 Fitted value of investment (IK) on cash flow (CFK) on a 114

subsample of Vietnamese Non - state controlled firms forthe period of 2009 - 2014

The second essay examines the effect of banking system reform, which isdefined by the presence of foreign banks, on investment-cash flow relation in acontext of a small transition economy I find evidence that the presence of foreignbanks in Vietnam results in decreasing in firm’s dependence on local banks and haschanged their financial constraint Company investments are less reliant on internalcash flow in the post reform period Although overinvestment of state controlledfirms can not be reduced but underinvestment problem of non- state -controlledlisted firms is mitigated due to better accessibility to bank loans The investigatedrelation 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 corporatefinance, which mainly composes of the two stand-alone essays This chaptersummarizes the content of the thesis, which brieftly presents the thesis’ motivations,objectives, methodologies, contributions and structure Section 1.1 presents thethesis motivations on impact of financial constraints, particularly state ownershipand banking system reform on firm’s investment – cash flows of a transitioneconomy, Vietnam Section 1.2 introduces the research objectives Section 1.3 andSection 1.4 respectively summarize the two essays: firm’s investment – cash flowrelation 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 financialdecisions The company managers will make all of efforts to conduct positive NPVinvestment opportunities because these investmens are expected to increase the firmvalue Beside availability of positive NPV investment opportunities, the availability offinancing funds (internal or/and external) is another important factor affecting thefirm’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 flowsensitivities because of higher cost of external funds in compared with that ofinternal funds Different types of the relationhip between investment and cash flowhave been found in financial literatures Fazzari et al (1988) find the linearrelationship 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 noconsistent 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 usedmeasures of financial constraint which is defined as a limit in capital accessibility,either internally or externally In the context of transition economy like China andVietnam, the role of state ownership on financial constraints has been unclear Manystudies shows evidence that state-ownership does have impact on firm financialconstraints, 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 thestate-controlled banking system

Vietnam used to follow the centrally-planned economy which was entirelydominated by state-owned enterprises (SOEs) This mechanism led the country intocrisis 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 intojoint-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 atmany equitized SOEs In the literatures, the impact of state ownership on firmperformance as well as financial decisions is still controversial Sun and Tong(2003) report that the privatization program in China improved earnings, sales, andworkers’ productivity at Chinese SOEs but not profitability Du and Boateng (2015)assert that shareholder value is significantly affected by state ownership, formalinstitutional distance, and reforms in the foreign currency approval system.However, G Chen, Firth, and Xu (2009) find that firm performance is enhanced bycertain types of state ownership SOEs have slow, even negative growth whereas therapidly growing private sector significantly contributes to economic growth (Allen,Qian, & Qian, 2005) It finds that SOEs with a soft budget constraint can easilyaccess 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 betweeninvestment and cash flow R R Chen, El Ghoul, Guedhami, and Nash (2018) assertthat an increase in state ownership leads to an increase in corporate cash holdings,which means a positive relation between government ownership and corporate cashholdings More specifically, SOEs have higher investment–cash flow sensitivitythan privately owned firms, especially when cash flow is negative So, whether stateownership 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, besideinternal cash flows, bank loans have been main financing sources of funds for firm’sinvestments However, credit market is not a fair play ground for private companiesdue to some historical reasons1 although Vietnam has done several efforts to improve

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

state-the situation Nhung and Okuda (2015) show that Vietnamese SOEs have anadvantage over privately owned firms in accessing bank loans as well as making aprofit, even after economic booms The higher accessibility to bank loans, the lessfinancially constrained the firm is, meaning the lower investment – cash flowsensitivity Therefore, banking system reform is proved to have an impact oninvestment – cash flow relation (Tsai et al., 2014) In the process of transforming theeconomy from centrally – planned to market oriented, Vietnam also has conducted anumber 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 doesnot only come from the reality but from entrance requirements of international freetrade agreements such as WTO also The presence of foreign banks on one sidewould increase competition in credit market, and on the other side put pressures ondomestic banks to improve their transparancy, effeciency and profitability to besurvival 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 havecertain impact on companies accessibility to external funds to finance theirinvestment, 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 infinancial 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 relationshipbetween investment and cash flows, especially in the context of state – ownership andforeign bank entry has still not investigated for the case of a small transition economylike Vietnam Furthermore, in spite of sharing some cutural, social and politicalsimilarities with China, Vietnam also has many differences such as size of economy,history of the transformation, openness to the world economy, development of financialmarket, etc Studying the Vietnamese context is believed to be worthwhile and valuablefor international finance literatures because results form

the rather specific case of China may not be generalizable for other small emergingmarkets Therefore, I choose to examine the impact of banking system reform, andstate 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 financialconstraints, which are measured by state ownership and banking system reform onthe relation between firm’s investment and internal cash flows in the context ofsmall transitional economy – Vietnam The general objective is implemented by thetwo essays which are separately presented in the following Sections of 1.3 andSection 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 betweeninvestment and cash flow in Vietnam, a small transitional economy The studyobjectives 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 financial companies listed on the two stock exchanges of Vietnam, HOSE and HNXfor the period of 2009 – 20152 Both financial and market data are extracted fromthe Thomson Reuters database Observations with missing data are omitted, andoutliers that may influence the results are also excluded by winsorizing 1% of thetwo tails for each variable

non-1.3.3 Methodology

The study applies quantitative method First, the study tests if investment – cashflow in Vietnam is U-shaped for Vietnamese firms in genternal, state controlled andstate uncontrolled firms, employing two different approaches The first approachfollows Cleary et al (2007) which includes square of cash flow method in the standardinvestment regression equation developed by Fazzari et al (1988), and the secondapproach follows Firth et al (2012) which separates cash flows into positive andnegative 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

2The 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 growthopportunities sub-subsamples Thirdly, the investment-leverage relationship is alsoexamined in the same manner All the regressions are estimated by usingGeneralized Least Squared (GLS) method on a panel data samples to control for theheteroscedasticity 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-ownedand non-state-owned firms is U-shaped In addition, state-owned companies havehigher cash flow sensitivity of investment, which perhaps is due to theirsocioeconomic and political responsibilities, poor corporate governance and agencyproblem Moreover, the investment of high-growth companies, both with andwithout state ownership, has lower dependence on internal cash flow Additionally,low-growth state-owned companies have higher cash flow sensitivity of investmentthan those without state ownership, suggesting inefficient investment by the former

1.3.5 Contributions

The following contributions are added into the current literature fromdifferent perspectives First, I shed further light on the implications of financialconstraints by investigating the association between state ownership and corporateinvestment–cash flow in a small transitional economy such as Vietnam Second,generally previous studies examining this important issue have been conducted inthe 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 ofstate ownership on investment relations in an emerging and transitional countrysuch 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-cashflow relation in a context of a small transition economy The banking system reform

is measured by presence of foreign banks or their branches, outlets, representativeoffices at the location where the company locates its headquarter Followings are thestudy objectives:

- Examine the U-shape relationship between investment and cash flow for Vietnamese companies

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

- Examine impact of banking system reform 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:

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

- Does banking system reform mitigate overinvestment problem at state – controlled companies?

- Does banking system reform mitigates underinvestment problem at non state – controlled companies?

- Does banking system reform has a positive impact on firm’s investment – debt relation?

1.4.2 Data

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

non-1.4.3 Methodology

The study applies quantitative method First, the U-shaped investment – cashflow relations in Vietnam are tested The tests are conducted for the full sample, statecontrolled and state uncontrolled subsamples, employing two different approaches Thefirst 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 investmentrelationship for various groups of business such as state controlled, non statecontrolled, high growth opportunity and low growth opportunity, etc The variableproxied 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 GeneralizedMethod of Moment (GMM) for endogeneitity potential

1.4.4 Empirical findings

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

3The 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 ofstate controlled firms is not reduced but underinvestment problem of non- state -controlled listed firms is mitigated due to better accessibility to bank loans Theinvestigated relation between investment and leverage is robust for this conclusion.

1.4.5 Contributions

This study contributes additional empirical evidence to the financialliterature on the topic of impact of banking system reform on investment – cashflow relation, especially in a context of small transition country Most of myfindings are similar to the previous study results except that overinvestmentproblem 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 owned local banks who are dominating the credit market Moreover, presence andoperation of foreign banks in Vietnam is still limited

state-1.5 Thesis structure

The remaining of the thesis is structured as follows Chapter 2 presents theoverview on Vietnam’s economic reforms Chapter 3 reviews related investmenttheories and literatures on financial constraints, and its impact on investment – cashflow relationship Chapter 4 and Chapter 5 repectively presents two importantstudies of the thesis: impact of state ownership and banking system reform on thefirm’s relationship between investment and cash flows Finally, the thesis isconcluded by Chapter 6

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

policy, including economic, financial, corporation etc… reforms The policy aims attransforming the economy from centrally planned, which lacks motivations fordevelopment, to market-oriented which allows the multiple forms of businessorganizations, and openning the door to the world The policy has made a greatimpact on the economy as a whole Economic structure has significantly changedwith the birth and increasing role of private sector in the economy, including foreigninvestors Two – tiered banking system was established, together with an increase inentry 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, mergerand aquistion, deinvestitures, ownership transfer, etc The equitization

program have borne a number of joint stock companies, which have been one of thedeterminants 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 systemreform as a part of financial reform Both the reforms have greatly contributed tothe well-known success of the Vietnam’s economy so far

Chapter 2 is structured as follow Section 2.1 highlights an overview aboutVietnam’s economy for the last more than 30 years Section 2.2 presents theequitization program in Vietnam and Section 2.3 describles an overview of theVietnam’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 thecentrally-planned mechanism, in which all important decisions must be made by thecentral governmental bodies The period of 1976 – 1985 can be described by thelow 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 Thefailure of this model led the economy to the edge of economic crisis Therefore, theSixth Party Congress in December 1986 made an important decision to launch acomprehensive 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’sindustrialization and modernization objectives, as well as opened-door, globalintegration 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 of9.54 percent in 1995 However, under the effect of Asian financial crisis in 1997, itdropped 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 hasmaintained a pretty stable growth at around 6 percent annually In 2018, GDP percapita reached about US$ 2,551 per capita a year Economic sectors have beenrestructured toward the development of a market-oriented socialist economywhereby 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

1987 and the well-known Resolution No 10 (issued on April 5, 1988)4 Thesepolicies emphasized on fairer equality in land holding, which enhanced farmers’assessibility to land; applying new and advanced technology in agriculturalproduction, diversifying agricultural products other than rice, increasingcompetivitness and efficiency for agriculturat input and output markets, etc As aresult, 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 hyperinflationperiod 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 ofhyperinflation (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 10percent 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 marketmechanism Since the reform was launched, Vietnam has been gradually opened itseconomy to the world Many measures have been done to push up both domestic andinternational trade such as removing unnecessary trade barriers; engaging inmembership of Association of Southest Asian Nations (ASEAN) in 1995, the ASEANFree Trade Agreement (ATFA) in 2001, World Trade Organization (WTO) in 2007;signing many bilateral and multilateral economic and trade agreements with foreigncountries and organization such as with EU (1992), US-Vietnam Bilateral TradeAgreement (2001), etc As a result, both exports and imports have been constantlyincreased for the last more than 30 years As shown in the Figure 2.3, the volume ofexports of goods and services as a ratio of gross domestic product (GDP) rose fromonly 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 ForeignInvestment 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 sincethen to meet the current status of the world and the Vietnamese economy With theadvantages of cheap, young, skillful and hard working labors force, rich naturalresources, openness of investment laws, etc Vietnam has been an emerging destinationfor FDI And FDI has also played an important role in the development of Vietnameseeconomy Figure 2.4 shows the net inflows as percentage of GDP of FDI into Vietnamsince 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

5The 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 theAsian 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 forthe period afterward FDI sector has been a major contributor to Vietnam’s GDP,helping creating jobs and boosting the development of the manufacturing sectorwhich supported for the increase of foreign trade as well as the structural changes inexported 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 StockExchange (HNX) was founded in 2000 and 2005, respectively to establish anotherhelpful financing and investing channels for companies and investors Law onSecurities was first issued in 2006 and then amended in 2010 in order to make agood 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)

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

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

Table 2.1 Main Economic Indicators of Vietnam, 1986 – 2018

Imports Exports Current FDI, GDP GDP GDP Total Inflation of goods of goods Current account netgrowth per (% and and account

Year rate (Bil. capita investment change services services balance balance inflows

$US) (% of GDP ) (% of (% of (%) ($US) in CPI) (% (% (bil.$US) GDP) 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 muchfavourable 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 ofthe reform The corporate restructuring scheme aimed to transform state ownedenterprises 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 ofDecree 59) With this scheme, the government would accept the existence ofvarious 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 thescheme was a so-called SOE equitization (privatization per-se) program which hasbeen transforming a number of SOEs into joint-stock companies in a slow andgradual manner

A pilot SOE restructuring program6 was launched in early 1990s, which startedwith profitable but not strategic small and medium size SOEs to be equitized, and thenexpanded to larger and more difficult ones Employees of equitized companies should

be priorited in purchasing the shares Besides, the government continued to hold tightcontrol role over some key important industries such as banking, oil and gas,electricity, etc via controlling ownership In these companies, the government plays adual role – regulator and owner These state controlled companies have to perform notonly 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 doesplay 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)

Stage Timeframe Legal Base

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

Extented pilot 1997 to 1998 Decrees 28 (1996) and 25 (1997)

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

The pilot stage was enforced by Decisions No 202/CT dated on June 8th 1992and 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.

No equitized SOEs Percentage

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 withthe issuance of Decree No, 28/CP dated May 7th 1996, which also ended the pilotprogram This Decree gave systematic guidances to SOEs on purposes ofequitization, criteria of SOEs selection, equitization methods, employment andinvestment incentives for equitized enterprises With this Decree, the governmentofficially allowed non-strategic profitable small and medium sized SOEs into jointstock companies, consequently pushing up the process of equitization with 130companies SOEs equitized during this two years, of which there were only 125SOEs being equitized in 1998

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 Withthe opening of the Vietnam Stock Mark in Ho Chi Minh City in 2000 and espectiallyconstant rise in stock market index under the positive expectation of being the 150thWTO member in early 2007 truly affected the process of equitization acceleration Thenumber of equitized SOEs steadily increased from year to year since 2002 with 164 tothe peak of 813 in 2005 As of 2006, more than 3,433 companies having beingequitized, in which 3,295 had been equitized since 1999 However, most of equitizedcompanies 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 theconcerns on oversupply in the stock market after the earlier rocketed stage ofacceleration 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 bignames - 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 periodconcluded with 3,983 SOEs being equitized, comprising 84.59 percent of totalnumber 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 thisstage (2010 – 2012) In addition, general economic and stock market conditionshave 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 graduallydecreased for the last more than 20 years, to 1,204 enterprises from more than 6,000enterprises 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 theefficiency and competitiveness of the national banking system Moreover, thereforms have also been motivated by Vietnam’s commitments in the process ofgrowing participation in international agreement as well as adopting international

standards such as Basel capital framework The primary objectives of the reformswere restructuring banking system, gradually opening doors for foreign investors,partially equitizing state owned banks, and improving competitiveness of theVietnamese banks The major banking system reform was the removal of thecommercial functions from the State Bank of Vietnam (SBV) in 1990 which havebeen followed by several reforms such as equitizing state owned banks, opening thefinancial 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 andcommercial bank functions There were neither private nor foreign bank operating

in the economy Following the Ordinance on Banks, Credit Cooperatives, andFinancial Companies issued in early 1990, SBV was reconstructed by removing thecommercial functions from SBV so that SBV only governed the whole bankingsystem and performed the traditional role of central banks the such as managing thecountry’s foreign exchange reserves; formating of monetary polities; licensing andsupervising credit organizations, etc., while commercial banking functions such asfunds mobilization and lending were delegated to separated commercial banks Assuch, SBV’s four functional departments were separated to establish four new state-owned commercial banks (SOCBs) 7, each targeting a specific sector of theeconomy 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 generaland financial sector in particular as well as to meet the requirements of membershipfrom international trade and investment organizations, Vietnam has been gradually

7Specificallly, 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.