Evaluating intangible asset using panel data, applying for vietnam listed companies

49 Table 11: Association among intangible asset, tangible asset, industrial growth rate and stock price.. New method, indirect approach using panel data method, will be used to calculat

UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES

HO CHI MINH CITY THE HAGUE

VIETNAM THE NETHERLANDS

VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

BY

LAI THANH BINH

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

HO CHI MINH CITY, DECEMBER 2014

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

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

This research tends to investigate the effect of intangible assets to company’s performance In this research, some of methodology to evaluate sum of intangible assets will be represented and panel data will be used in model estimation All firms used in practical examination are chosen from 250 Vietnam listed companies standing for different industries Firms in industries could use these results to allocate investment on sum of all intangible assets other than just constructing new factories or opening new brands

Estimation shows that intangible asset take a huge proportion on total company asset Intangible asset not only take an important part in the past performance but also explain their role as the key factor of future development When interpreting relationship among kinds of asset and firm’s value, we recognize that intangible asset significantly impact on firm’s added value, however it do not show a clarify relationship with firm’s stock price Reason comes from fluctuation of stock market and some external factor affecting to stock price

ABBREVIATION

M&A: Merger and Acquisition

R&D: Research and Development

IAS: International Accounting Standard

EBIT: Earning Before Interest and Tax

CAPM: Capital Asset Pricing Model

GSO: Vietnam General Statistics Office

WTO: World Trade Organization

SBV: State Bank of Vietnam

WACC: Weighted Average Cost of Capital

TABLE OF CONTENTS

CHAPTER 1 INTRODUCTION 9

1.1 Problem Statement 9

1.2 Research Objective 10

1.3 Research Questions 11

1.4 Structure of Thesis 11

CHAPTER 2 LITERATURE REVIEW 12

2.1 What Are Intangible Assets 12

2.2 Types Of Intangible Assets 12

2.3 Intangible Asset Valuation Approaches 14

2.3.1 Cost Approach 14

2.3.2 Market Approach 15

2.3.3 Income Approach 15

2.3.4 Panel Data Approach 16

2.4 Conceptual Framework 17

CHAPTER 3 ECONOMETRIC MODEL 18

CHAPTER 4 EMPIRICAL RESEARCH 22

4.1 Data Sources 22

4.2 First estimation: Calculate α and β 25

4.2.1 Consumption 30

4.2.2 Banking 34

4.2.3 Steel Industry 37

4.3 Estimate Cost Function 40

4.4 Compute Firm’s Equity Value 42

4.5 Compute Firm’s Equity Value with Non Intangible Asset 44

4.6 Evaluating Firm’s Intangible Asset 45

4.7 Examine Relationships among Firm’s Revenue, Intangible Asset and Tangible Asset 45

4.8 Firm’s Intangible Asset and Policy Implications 51

CHAPTER 5 CONCLUSION 59

REFERENCE 65

LIST OF TABLES

Table 1: Category of Intangible Asset 13

Table 2: Categorized Intangible Assets 22

Table 3: Result of equation 5 using fixed-effects and random-effects model27 Table 4: Hausman test 27

Table 5: Testing for heteroskedasticity using Wald test 27

Table 6: Testing for multicollinearity using VIF index 28

Table 7: Effect of Industry on Firm’s Output 28

Table 8: Estimation with all variables 48

Table 9: Effect of intangible asset and industry development on firm’s added value 48

Table 10: Effect of intangible asset on firm’s added value 49

Table 11: Association among intangible asset, tangible asset, industrial growth rate and stock price 50

Table 12: Association between tangible asset and stock price 50

Appendix 1: Fixed effect estimation without industrial dummy variables 61

Appendix 2: Random effect estimation without industrial dummy variables61 Appendix 3: Random effect estimation with industrial dummy variables 61

Appendix 4: Random effect estimation with industrial dummy variables after adjusted heteroskedasticity 62

CHAPTER 1 INTRODUCTION

1.1 Problem Statement

The fantastic merger and acquisition (M&A) stories of famous Vietnam brands make a lot of financial researchers actually confuse According to Kinhtedautu magazine (April 2014), foreign companies bargained these acquisitions at unexpected price, more higher than total tangible assets of these companies, such as Phở 24 (about

20 million dollar) or ICP (higher than 60 million dollar) These businesses raised a question about original source of firm’s intrinsic value Firms are unable to fully evaluate benefit of intangible assets or misunderstood about importance of devoting money on invisible assets Because of these distortions, calculation about operation efficiency and payback period of project or firms could be inaccurate For instant, brand is one of intangible asset and it could make firm’s product sell at higher volume with higher price If analysts do not evaluate strength of brand, he could get stuck in some problem with forecasting future revenue

There are some reasons why intangible assets have to be correctly evaluated One of these reasons is about unstable characteristic of economy and it is the most important information not only for company’s management board but also for investor’s decision Companies always change themselves, from operating activities to expanding activities, to appropriate with market, if they don’t want to narrower their market share and to lower their income However, general financial statement might be unable to tell us all of company’s effort to change their business According to a research of Baruch Lev and Paul Zarowin (1999), our current report-system such as balance sheet, income statement or cash flow statement deteriorated their usefulness over the past several years A lot of money spends on R&D activities or advertising were not be showed on these statement and just record as expense Secondly, economic situation changes day by day and the firms will hard to keep their customers buying their product if it does not create any interesting thing By this reason, spending money on intangible asset seems to allocate fund on innovative activities Finally, if

companies couldn’t appropriately assess value of intangible asset, they might be violated matching concept in accounting standard Each earned revenue need to suitable with expense creating it

In addition, valuating intangible asset used to apply on some important sectors including financial reporting, commercial strategy and strategy for development It come to financial purpose, shareholders do concentrate on company’s financial position and corporation’s expectation When these factors could be presented clearly, shareholder will be more loyalty with company and cost of equity could be lower also Beside financial purpose, some intangible assets such as brand or intellectual capital also help firm create differential rate of return via increasing customer loyalty and creating differential margin on sale (according to Parble Fernandez (2013)) A famous brand can sell their product at higher price and reduce their cost by negotiating price of input with suppliers In sense of strategy development, according to Mike Rocha (2014), manager of company could plan their investment strategy, how much for factory constructing and what proportion for marketing…

After all, demand for measuring value of intangible assets is very clear Furthermore, finding an appropriate method places an important role in intangible asset research As Parble Fernandez (2013) said, we are just at the begin point on the way to evaluating intangible assets Up to now, there are three methods to calculate total value of these assets This research will apply a new method to do this job

1.2 Research Objective

Specially, this research measures magnitude of intangible asset effect on company performance in different industries This result will help firms decide to allocate their resources in different kind of asset New method, indirect approach using panel data method, will be used to calculate total value of intangible assets for Vietnam selected companies

This thesis also solves another objective related to development policies It rises a problem about supporting policies between small and medium enterprise (SME) and larger companies

1.3 Research Questions

Base one research objectives above, this research will solve two questions:

 Why should companies allocate their resources in both tangible and intangible assets?

 What policies control market power of both SME and large companies?

1.4 Structure of Thesis

The study will consist of four main components, include: literature review, conceptual framework, econometric model and empirical study The first section will present the preliminary studies of previous authors on the subject of intangible assets

In this section, we will go through the different approaches to evaluate intangible assets The strengths and weaknesses of each method will be analyzed in detail, thereby, highlighting the advantages of T.Yamaguchi (2014) The second part explains the improvement in model of Yamaguchi paper, and generalizes the idea that makes the valuation method of the author Next, evaluation process will be visualized the diagram in section two In part about econometric model, it will raise qualitative methods used in the study and interpretation of the calculation method This section will interpret specific econometric model is applied in the study The final section expresses the process applying the evaluation method of intangible assets for businesses in Vietnam stock market The specific calculation is applied to illustrate the value of intangible assets for each business and each industry Section 4 also studies the relationship between intangible assets affect the performance of the business

CHAPTER 2 LITERATURE REVIEW

2.1 What Are Intangible Assets

Because of different perceptions about intangible assets, so that definition about them also different In accounting point of view, prudent concept keeps definition about these assets more rigorous Besides that, in investor or manager point of view, they will assess and define intangible asset broader

According to International Accounting Standard Board, Standard 38 (IAS 38) defines an intangible asset as: "an identifiable non-monetary asset without physical substance." Besides that, this standard also requires future certain economic benefit as

an important characteristic of intangible asset

According to OECD project (2011), with a different perspective, OECD defines

“intangible assets are assets that do not have a physical or financial embodiment” In addition, OECD also identifies the difference between intangible asset and intellectual asset Base on OECD definition, intellectual assets are a part of intangible asset Besides that, intangible asset include three different: “computerized information”;

“innovative property”; “and economic competencies"

In this research, we will follow OECD’s definition to estimate aggregate value of intangible asset It means that we will use the word “intangible asset” instead of

“intellectual property” or “intellectual asset” This definition allows us not to have problem with matching concept and undervaluation of current financial reporting system

2.2 Types Of Intangible Assets

There is a lot of way to categorize intangible asset Researchers usually separately study kinds of intangible assets such as brand name, lists of customers, company’s atmosphere etc One of these intangible asset categories is paper of Petros A Kostagiolas and Stefanos Asonitis (2009) They listed types of intangible assets as below:

Table 1: Category of Intangible Asset

Source: P.A.Kostagiolas and S.Asonitis (2009)

Despite of a lot types of intangible assets, this research just concentrate on effect of

total intangible asset on company’s income However, understanding categorizing of

intangible assets will use to choose Valuation approach and help to interpret root of industrial growth rate in later sections

2.3 Intangible Asset Valuation Approaches

According to the book Valuing Intangible Assets of Reilly, R F., and Schweis, R P

(1999), these are three approach to evaluate intangible asset, include cost approach, market approach and income approach Each approach uses different data sources and has to go through a lot of procedures In addition, each approach also includes different methods and creates a range of reasonable value of intangible assets Usually, researchers only apply one of these valuation approaches due to limitation of collected information and cost of collecting data

2.3.1 Cost Approach

According to Lev and Sougiannis (1996), cost approach evaluate intangible asset base on total amount of money to recreate this intangible asset or to build a similar one which has the same function Lev and Sougiannis interpret value of R&D activities in relationship with company’s earning To examine this relationship, authors have to calculate value of intangible asset, and they solve it base on total cost spend on the past R&D activities This method might record an accurate value of some intangible assets such as R&D expense or advertising expense However, it is actually difficult to value other intangible assets such as brand name, staff’s experience or lists of users

On the other hand, determining the useful life of intangible assets is an actual

challenge because it is repeatedly examined to find out suitable lag term of R&D expense affecting operating earnings

2.3.2 Market Approach

Market approach appraises value of intangible asset by market price of a similar asset which is selling on the same market In a paper of Kossovsky (2002), market approach were used to indirectly determine value of intellectual assets base on different between book value and market value of firm’s equity This approach could objectively measure value of intangible asset due to compare with market price of company Nevertheless, price of company’s stock reflects not only current intrinsict value but also shareholder perception about future of firm’s prospective In addition, sometime, stock price also distort by temporary speculation Furthermore, if appraiser estimates value of intangible asset depending only on a comparable asset, this approach couldn’t implement if appraiser is not able to find out any similar asset In reality, it is essentially hard to identify two similar intangible assets

2.3.3 Income Approach

Income approach gauges value of intangible asset base on extreme benefit between having intangible asset situation and disappearing intangible asset situation More clearly, intangible asset value equal subtraction between net present values of two cash flows in these situations

Interbrand’s valuation method is one of income approach based on methods used to calculate brand’s worth They calculate different earning associating with a new variable, brand’s strength However, Paulo Fernandez showed some problems related

to Interbrand’s method in his paper, Valuing intangible asset and intellectual property (2013) First, Interbrand identifies extreme benefit of intangible asset by difference of

EBITs between a famous brand and a private label company The problem is how to determine private label company? Because private label company is the firms which don’t have any market power from their brand name, it is obviously hard to recognize

this factor Second, with Paulo Fernandez, the procedures to calculate brand’s strength are subjective and it could be manipulate by appraisers

2.3.4 Panel Data Approach

The panel data approach bases uses panel data analysis to compute invisible effect Unobservable firm effects were interpreted in Motohashi (2005) as management ability, labor’s motivation and R&D expense Even though, because R&D expense could be exactly identified, Motohashi added it as an independent variable in his model Motohashi’ method used components in production function to examine effect of labor, capital and internet network on firm’s value added However,

firm-in this model, Motohashi just firm-interprets firm-internet network effects, other firm-intangible assets are parts of error term He also recommended estimation using cross-section data, fix effect and random effect

Ramirez and Hachiya (2006) presented other method, used fix effect to calculate value of intangible assets He used sale growth rate as explained variable and some production factors as explaining variable such as R&D expense, sale and general administrative expenses This method still relate to market value of firm and might be biased as market approach, although it began with production function and used production factors

Other method using panel data is research of Sadowski and Ludewig (2003) In this paper, authors used added value as explained variable instead of market value of equity Explainatory variable included capital and labor, human capital and social capital In paper of Tomohiro Yamaguchi (2014), panel data also use and intangible assets will be measured by firm’s fixed effects His paper differs from previous research due to method to value company’s assets This method will use both production function and cost function to gauge firm’s added value with and without intangible asset

2.4 Conceptual Framework

Through the studies, we found that each study was caught in specific matters However, study of T.Yamaguchi (2014) provided a more reasonable approach when using panel data and indirect approaches to solve the limitations of the previous studies His research went through many intermediate calculations to come to the intangible value of the company First, production function and cost function were used as origin of calculations about firm’s equity Then, he calculated the equity of firm excluded the impact of intangible assets Finally, value of intangible assets was got from enterprise’s value minus total value of firm’s tangible assets This approach is more practical and indirect method based on relizable data It eliminates speculative assumptions about future economic value of intangible value The final step to check the scope of intangible assets is the regression about relationship between enterprise value (revenue or stock price) and kinds of asset According to the results, we could evaluate the importance of intangible assets with businesses

Cost Function

withour Intangible Asset

Intangible Asset

Subtract

Firm’s Added Value

Production Function

Calculate α and β in production

CHAPTER 3 ECONOMETRIC MODEL

This research bases on Tomohiro Yamaguchi’s method to calculate value of intangible assets After that, it will examine effects of these assets on firm’s added value (and value of firm’s equity) in comparison with tangible assets

The formula of growth of company is based on Cobb and Douglas production function (1928):

𝑄𝑖𝑡 = 𝑎𝑖𝐾𝑖𝑡𝛼𝐿𝛽𝑖𝑡𝑒𝜀𝑖𝑡𝑄 (1) Where: 𝑄𝑖𝑡 is added value of firm i in year t,

𝐾𝑖𝑡 stands for capital of firm i in year t,

𝐿𝑖𝑡 is labor of firm i in year t

The parameter 𝑎𝑖 in equation 1 indicates effects of total factor productivity (TFP) These factors include advantage of internet using, power of buyer, power of seller, intellectual capital, staff’s motivation etc In total, they are effect of intangible assets

on company’s growth rate However, growth rate of company’s value not only base on firm’s total assets but also changing firm’s value overtime (Hulten, 2000) By this reason, intangible asset effects 𝑎𝑖 include firm-specific effects 𝐴𝑖 and growth rate λ of industry h in time t

𝑄𝑖𝑡 = 𝐴𝑖𝑒∑ λ𝑀ℎ ℎ𝐷ℎ(𝑖)𝑡𝐾𝑖𝑡𝛼𝐿𝛽𝑖𝑡𝑒𝜀𝑖𝑡𝑄, ℎ = 1, … , 𝑀 (2) Where: λℎ presents growth rate λ of industry h

𝑎𝑖 = 𝐴𝑖𝑒∑ λ𝑀ℎ ℎ𝐷ℎ(𝑖)𝑡

𝐷ℎ(𝑖) is dummy variable of firm i in industry h

𝐷ℎ(𝑖) = { 1 𝑖 𝜖 𝑉0 𝑖 ≠ 𝑉ℎ

ℎ

To estimate this function, we have to take logarithm form of equation 2 According

to T.Yamaguchi (2014), he replaced β by 1-α to make equation less complicated To

do this replacement, his paper assumes that the researched companies have constant

economies of scale However, in this paper, αand β will be estimated separately to study aggregate market with assumption that we could bot primarily identify type of economic of scale

𝑙𝑛𝑄𝑖𝑡 = 𝑙𝑛𝐴𝑖+ ∑ λ𝑀 ℎ𝐷ℎ(𝑖)𝑡

ℎ + 𝛼𝑙𝑛𝐾𝑖𝑡+ 𝛽𝑙𝑛𝐿𝑖𝑡+ 𝜀𝑖𝑡𝑄 (3) The ith firm’s added value is directly calculated from its financial statements, starting at operating profit The firm’s value added includes depreciation and personnel expense and operating profit In addition, firm’s added value has also to remove from effect of inflation, since, firm’s added value will be used in deflator form

𝑝𝑡𝑄𝑖𝑡 = 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑃𝑟𝑜𝑓𝑖𝑡 + 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝐶𝑜𝑠𝑡 + 𝑃𝑒𝑟𝑠𝑜𝑛𝑛𝑒𝑙 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠 (4)

With pt is deflator in year t

Because value of sum of intangible assets is achievement of this research, we are not able to regress equation 3 without value of 𝐴𝑖 The first step will be estimation of equation 3 to get two parameters αand β We will take difference form of variables in this equation and expectation of 𝑙𝑛𝐴𝑖 will be zero, fixed effects will be extracted

𝑑(𝑙𝑛𝑄𝑖𝑡) = ∑ λ𝑀 ℎ𝐷ℎ(𝑖)𝑑(𝑡)

ℎ + 𝛼𝑑(𝑙𝑛𝐾𝑖𝑡) + 𝛽𝑑(𝑙𝑛𝐿𝑖𝑡) + 𝑑(𝜀𝑖𝑡𝑄) (5) Where d(…) is difference form of variables

Because firm’s added value includes cost of production factors, we couldn’t compute value of company by discount just firm’s added value flow Instead, we will use company’s profit

= Operating Profit – Interest Rate – Tax (6)

= 𝑝𝑡𝑄𝑖𝑡– (Depreciation Cost + Personnel Expense + Interest + Tax) (7)

We also have the firm’s total cost C excluding cost of goods sold:

𝐶 = 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝐶𝑜𝑠𝑡 + 𝑃𝑒𝑟𝑠𝑜𝑛𝑛𝑒𝑙 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 + 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 + 𝑇𝑎𝑥 (8)

So that, firm’s profit is available to compute via formula:

𝜋𝑖𝑡 = 𝑝𝑡𝑄𝑖𝑡− 𝐶𝑖𝑡 (9)

Cost of company will be identified base on duality approach which is a principal concept in microeconomics to approach for production function and cost function, and has been debated by Samuelson (1947), Shephard (1953, 1970), Uzawa (196) etc In duality approach, a certain product could be manufactured by combining production factors at which manufacturer ensures that cost is minimized Cost function will be estimated follow production function

𝛼 𝛼+𝛽𝑊𝑖𝑡

𝛽 𝛼+𝛽𝑄𝑖𝑡

1 𝛼+𝛽𝑒𝜀𝑖𝑡𝐶 (10) Where 𝑅𝑖𝑡 is nominal cost of capital of firm i in year t

𝑊𝑖𝑡 is nominal wage of firm i in year t

We will calculate cost function through equation 10 After that, firm’s added value

𝑄𝑖𝑡 and α, β will be obtained from estimating equation 5

𝐸𝑖𝑡 =𝑝𝑟𝑡𝑄𝑖𝑡𝑒λℎ

𝑖 (12) Where: 𝑝𝑡 is deflator

𝑟𝑖 is cost of equity of firm i in year t

However, 𝐸𝑖𝑡 includes value of intangible assets To compute value of intangible assets, we will subtract value of tangible asset from 𝐸𝑖𝑡 Nominal value of equity without intangible assets 𝐸𝑖𝑡𝑛𝑜𝑛𝐼 will be obtained by below formula:

Where: 𝑅𝑖𝑡𝑛𝑜𝑛𝐼 is nominal cost of capital without intangible assets

𝑊𝑖𝑡𝑛𝑜𝑛𝐼 is nominal wage of labor without intangible assets

𝑅𝑖𝑡𝑛𝑜𝑛𝐼 and 𝑊𝑖𝑡𝑛𝑜𝑛𝐼 are able to be identified by:

𝐼𝑖𝑡 = 𝐸𝑖𝑡 − 𝐸𝑖𝑡𝑛𝑜𝑛𝐼 (16) From equation 16, we could interpret proportion of intangible assets in firm’s total asset Base on this result, we will compare intangible asset effect and tangible assets effect on firm’s market value and firm’s performance

𝑌𝑖𝑡 = ∑ λ𝑀 ℎ𝐷ℎ(𝑖)𝑡

ℎ + 𝑐1𝑇𝑖𝑡+ 𝑐2𝐼𝑖𝑡 + 𝜀𝑖𝑡 (17) Where: 𝑇𝑖𝑡 is value of firm’s tangible assets,

𝑌𝑖𝑡 is firm’s stock price or firm’s added value

CHAPTER 4 EMPIRICAL RESEARCH

4.1 Data Sources

This research will be conducted for Vietnam listed companies in different industries These are 214 chosen companies and data are collected from 2008 to 2012

We chose this time range to lower effect of economic recession from previous period

Table 2: Categorized Intangible Assets

Secondly, Capital K and Labor L could be collected from VEC database According

to B Lev and S Radhakrishnan (2003), net plant, property and equipment (PP&E) stand for capital K Account of construction in process does not included because this unfinished asset could not be used to make profit currently It come to labor, they use number of labor in firm to present labor component T Yamaguchi (2014) used the same data of labor and capital as B Lev and S Radhakrishnan’s research Based on these papers, this research will do one more calculation in which total expense for labor will stand for L The number of labor more appropriately presents effect of labor factor to firm’s added value when Cobb-Douglas function is in derivative of logarithm form In the other words, this approach is suitable to interpret change of labor factor and capital factor in relating to EBIT In this research, K and L in Cobb-Douglas function were also used to evaluate equity values, so that it will be more appropriate to use total expense of labor instead of number of labor Data related to K and L will be collected from some accounts in VEC database including TS11, TS12 (capital K); LD11, LD13, TN11, TN12 (labor L)

It comes to nominal cost of capital R; it will be calculate from Capital Asset Pricing Model Calculating firm’s rate of return (r) is the first step before compute R “r” is the return that common shareholders expecting firm’s operations could create, it is also called as cost of equity This rate of return is different from nominal cost of capital R; because R is weighted average among capital flows include equity, debts, and liabilities Calculating firm’s rate of return is a challenge due to uncertain future cash flow We are unable to exactly forecast future inflow and outflow of company because they always fluctuate in term of amount and timing To solve this problem, we could use one of the common approaches such as capital asset pricing model, the dividend discount model, and the bond yield plus risk premium method In this research, we will use the first one, capital asset pricing model

Base on CAPM approach, William Sharpe (1964) find out expected firm’s rate of return from relationship between risk-free rate and premium from bearing the stock’s market risk (beta*(rm-rf))

𝑟 = 𝑟𝑓 + 𝑏𝑒𝑡𝑎 ∗ (𝑟𝑚− 𝑟𝑓) With: 𝑟 is firm’s cost of capital,

𝑟𝑓 is risk-free rate,

𝑟𝑚 is market rate

Risk-free rate could be collected from risk-free assets that almost have no default risk Treasury bond or government debt instrument is the common proxy for risk-free asset The problem now is which kind of bond is appropriate for calculate firm’s rate

of return In general, we will select risk-free rate of Treasury bond which has the same duration with firm’s stock However, basing on accounting assumption about going-concern, firm’s stock has infinitive duration, so that we will use a long-term treasury bond, ten years bond, to stand for risk-free asset

In term of risk premium, we have to realize and cover all risks in this component such as inflation, business cycle, credit risk and so on One of researches try to capture multiple-risk is the three factor Fama-French model (Fama & French, 1992) However, the historical equity risk premium approach is the good indicator to estimate risk premium using data observed over long period This method calculate risk premium via historical data of average country’s market return and risk free rate of this country The most important requirement for database is that collecting period need to enough to cover almost economic cycle, both expansion phase and recession phase In paper of Dimson, Mask and Stauton (2003), they used this method to compute risk premium for 16 countries, include United State over period 1900-2002 This paper show transparent result of equity risk premium relative to Treasury Bond and help reader more understand about existing of risk premium

In this research, historical equity risk premium approach will be used to calculate equity’s risk premium However, we need to deeply understand some limitations of this method The first limitation is that stock index always changes, so that, return of stock market fluctuates over time The second limitation is unstable risk aversion of investors Finally, historical period cover of the data is also one of limitation Despite these limitation, this approach still prove it appropriation overtime and was employed

by a lot of researchers Finally, IFS database will be used to get deflator data for studying years

4.2 First estimation: Calculate α and β

We will use equation 5 to determine α and β Before regressing to this equation, form of data would be taken derivative The difference of this regression is large number of company in three industry categories It is actually hard to sort and process time series data of listed companies following their tax ID number I used both SPSS and Excel to solve this problem In the first step, necessary data will be gathered and categorized in some industries The next step, each firm will be taken derivative separately and be created dummy for company’s industries After having derivative form of K, L, Q and dummy variable D (we have 50 industries so that the number of dummy variable is 49), equation 5 could be conducted

According to T Yamaguchi (2014), panel data fixed-effect model will be applied to regress equation 5 after conducting Hausman’s test We will use Hausman test in this research to compare efficiency between fixed-effect and random-effect model After taking Hausman’s test, result show that fix-effect model will be more appropriate Cross-section in this model will be firm level, because we could not make the same industry ID and the same time period After that, industrial dummy variable will be added to test effect of industry growth rate on firm’s performance To regress this equation with industry’s dummy variable D, T.Yamaguchi used Panel Least Square Method with Fixed Effects Model In this research, we will test relationship among added value and other input include capital, labor, industrial growth rate using fixed

effect model and random-effects model Hausman test will help us to choose appropriate model Heteroskedasticity testing and multicollinearity testing will be conduct to interpret and correct heteroskedasticity problems if it really exist Serial-correlation will not be tested because this is just micro panels (with just five years) First we will compare equation 5 using fixed effects model and using Random-effects model Table 3 shows regression result In the whole results, coefficients of labor and capital are nearly similar However, we will use Hausman test to identify the most appropriate model Hausman testing result is showed in table 4, indicate that random-effects model give us better explaination about relationship among labor, capital and firm performance However, we should ensure that result in table 3 free from heteroskedasticity and multicolinearity Testing for heteroskedasticity will rely

on Wald test and result of this test is show in table 5 Base on result of table 5, our regression model express a presence of heteroskedasticity Appendix 4 is the regression after solving hetero-skedasticity problem Another problem we need to solve is multicolinerity VIF index is used to investigate multicollinerity Testing result

is show in table 6; indicate that regression do not present multicollinearity problem The regression using random-effects model (Appendix 4) presents an interesting result that is sum of α and β less than 1 (estimation of α equal 0.63 and of β equal 0.24) This result indicates that Vietnam listed companies have decreasing return to scale In other world, when firms increase number of labor and spend more money on capital to expand their business, operating profit turnover will be lower

Table 3: Result of equation 5 using fixed-effects and random-effects model

(1) Fixed effect model without

industrial dummy variables

0.62 (11.63)

0.24

(2) Random effect model without

industrial dummy variables

0.63 (14.30)

0.24

(3) Random effect model with

industrial dummy variables

0.63 (14.03)

Table 5: Testing for heteroskedasticity using Wald test

Modified Wald test for groupwise heteroskedasticity in fixed effect regressionmodel

H0: sigma(i)^2 = sigma^2 for all i

chi2 (214) = 3.4e+37

Prob>chi2 = 0.0000

Table 6: Testing for multicollinearity using VIF index

Variable | VIF 1/VIF

Furniture 0.026 15

Source: Own calculation

Although sum of αand β is less than one, dummy variable of industries show that growth rates of many industries are larger than zero This is an optimistic sign for Vietnam economic, because it indicates development of listed companies relies not only on tangible asset but also on intellectual input According to perspective of T.Yamaguchi (2014), we expect main resource for long-term and high growth rate come from intangible assets Table 9 shows growth rate of Vietnam industries We will interpret some industries which have impressive growth rate in the past period to find out apparent reasons

There are five high-light industries presenting high growth rate include consumption, industrial machine, chemical, banking and steel industry These industries showed impressive development from 2008 to 2012, the reasons come from some different factors We will express about this factors to deeply understand about business environment of firms in these industries Recognizing forces of industrial growth will help us interpret scope of intangible asset related to company’s activities

4.2.1 Consumption

Vietnam consumption market is one of the most developing markets in comparing with other neighbor countries and maintains high growth rate in previous period Depending on Global Retail Development Index (GRDI), Vietnam retail market was ranked from 23st in 2011 drop down to 32st in 2012 and at 28st in 2014 It is a clearly clue for potential development of this industry in the next period There are some factors affecting in the past progression of consumption industry:

- Population: The growth rate of Vietnam population is the most important

factors supporting for development of Vietnam retail market While size of Vietnam population increases year by year, demand for retail products rise up at

the same time According to Vietnam General Statistics Office (GSO), Vietnam population was about 87.84 million people in 2011, increased 1.04% in comparing with 2010 Number of citizen was about 26.88 million people; take into account about 30.6% in total population Vietnam population in 2012 comes

to around 90 million people These number partly help us image about

expanding of this market and its potential

- Spending on consumption: Average income per capita in 2002-2007 periods

was about 7.3% per year and lead to 10.3% per year in the next period from

2008 to 2012 Earning more money improves purchasing power of customers and improves revenue of consumption industry in the future Proportion of consumption in total personal income was about 14.8% in period 2002-2007 and slightly increased to 14.8% in period 2008-2012 and created 89.7 billion dollar

at last 2012

- Economic development: Recovery of economics takes an important part in

growth of retail market Vietnam is one of Asia developing economics, GDP’s growth rate per year is about 6-7% Vietnam’s GDP increased from 31 billion dollar in 2000 up to 140 billion dollar in 2011 In spite of recession of the world

economic, Vietnam’s growth forecasting is still about 5%

- Urbanization: One of reasons of high-growth economic is high speed of

urbanization This factor will create more demand and higher level of demand Almost retail model focus on urban, the reasons are not only from bigger market size, but also citizen characteristic Citizen usually absorbs new products more easily than villager This trend shows a great chance to strong development of Vietnam retail market According to World Bank Report, speed of Vietnam

urbanization is about 3.4% per year

- Labor force: Young population structure is the main factor to earn more money

and create permanent demand for economic According to GSO report, Vietnam

labor force is about 46.48 million people in 2013, and will maintain its growth in

the next few years

- Travel: Travel is another supporting factor of retail market, specially food,

beverages and clothes segments In low-growth economic situation, Vietnam still attracts about 6 million foreigners per year Besides that, Vietnam travel also serve for about 30 million domestic travelers Total profit of travel industry

is about 130.000 billion Vietnam dong in 2010

- Market Openness: Although Vietnam government strictly controls foreign

companies in retail market, openness of market will more expand follow WTO engagement From 01/01/2009, foreigner was permitted to establish firm which has 100 percentage foreign capitals to work in retail industry After 11/01/2010, foreign companies working in service segment were allowed to open new brands and new franchises at Vietnam market More competition force is an important effort for domestic retailers to upgrade technology, increase productivity, upgrade company’s control system and change business strategy with more focus on advertising, after-purchasing services

- Development of Banking System: Having more payment facilities helps

Vietnam to attract foreign retailers According to State Bank of Vietnam, Vietnam has about 11 thousand ATM at the end of 2010 and more than 24 million banking cards Nowaday, proportion of cash payment on total payment quickly decreases year by year and this trend will continue (from 31.6% in 1991

to 15% in 2010)

Distribution channel is the key factor or key intangible asset to success of firms in

consumption industry Any firm owns strong distribution channel could easily increase their revenue and rise successful proportion when they want to launch a new product However building a distribution channel at Vietnam requires some factors and devotes a lot of money This activity will increase distribution and administration expense and lower company’s profit We could recognize firms with large distribution

channel via high ratio between distribution and administration expense with revenue, usually about 15% to 33% (according to HSC analysis report)

There are four main distribution channels at Vietnam, include packaging products, milk, frozen products and beverages Beverages have two sub-channels include alcohol beverages and light beverage Each channel has two forms: modern distribution and traditional distribution Super markets, shopping malls and convenient stores are modern distribution It has just developed at Vietnam in a few years; however, its growth is very impressive Traditional distribution still takes 85% market but slows down in current period According to Ho Chi Minh Stock Company, traditional distribution will decrease 1% market share each year For instance, the number of supermarket in Vietnam is about 71 in 2009 and 163 in 2012 This number

is forecasted increasing to 240 in 2015

In the future, achievement of leading companies in consumption industry such as Vinamilk, Masan or Kinhdo will be increase their revenue base on their distribution channel For example, Massan rise their EBITDA and their market share due to increasing their point of sale as showed in figure 1.They will choose to increase their productivity or expand more new product lines This strategy is only for big companies

because they were create abundance intangible assets include strong brand name, strong distribution channel and strong control system Whenever they want to launch

more products, they will pay less distribution and administration expanse than small and middle companies There are two ways to make use of current distribution channel: M&A activity and out sourcing Out sourcing is cheaper and economical answer because it using waste productivity of small companies However, M&A is a long-term choice to get more market share and maintain high supplying power